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spk00: Good morning everyone and welcome to the Pinnacle Financial Partners second quarter 2023 earnings conference call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer, and Mr. Harold Carpenter, Chief Financial Officer. Please note Pinnacle's earnings release and this morning's presentation are available on the investor relations page of their website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touch-tone phone. Analysts will be given preference during the Q&A. We ask that you please pick up your handset to allow for optimum sound quality. During this presentation, we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties, and other facts that may cause the actual results performed by Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond Pinnacle Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial's annual report on Form 10-K for the year ended December 31, 2022, and its subsequently filed quarterly reports. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation GA presentation. A presentation of the most directly comparable GAAP financial measures and a reconciliation of non-GAAP measures at the comparable non-GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com. With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.
spk02: Thank you, Paul. Those of you that have followed us for a while know and expect I'm going to begin every quarterly earnings call with this dashboard of what we believe are the primary things that matter over time in terms of bank performance. Gap measures first, followed by the non-gap measures, which provide the best insight into what I focus on and consequently what we focus on at Pinnacle. My guess is that as 2Q earnings continue to roll out, we'll see some pretty wide variability in performance among the banks. But for us, 2Q was a really good quarter. On an adjusted basis, we grew revenues 11.7% linked quarter annualized, EPS 10.8% linked quarter annualized, and pre-tax, pre-provision net income 24.8% linked quarter annualized. We continued the dramatic growth in loans and deposits at 11.3% and 9.1% link quarter annualized respectively, which are generally the best predictors of our ability to continue growing revenue and earnings going forward. Tangible book value per share grew meaningfully during the quarter, aided by a sell-leaseback transaction that Harold will review in greater detail shortly. And the key asset quality metrics like NPAs, classified assets, and net charge-offs continue to hold up extremely well. So in summary, second quarter was a great quarter for us. Now I'm going to let Harold review the quarter in greater detail, and I'll come back and give some thoughts on the shares later.
spk03: Thanks, Terry. Good morning, everybody. We will again start with deposits, reporting late quarter annualized average growth of 12% in the second quarter was again a real positive for us. As we've mentioned previously, growing deposits in 2023 is a key focus, and the second quarter was another indication that obtaining deposits in an environment where competitors can be fairly unpredictable is very much doable for this franchise. Several factors contributed to increased deposit rates in the second quarter. Competitive pressures were heightened during the quarter, primarily from large regional banks offering rate specials at some fairly incredible rates and an apparent effort to achieve funding goals. We also have an important public funds client base, with much of these balances being tied to Fed funds. Lastly, the mixed shift of reduced non-interest bearing to interest bearing continued in the second quarter, albeit at a lesser pace. All of these factors contributed to average deposit costs increasing to 2.52%, with a spot rate at quarter end of 2.77%. We're optimistic about the pace of deposit rate increases as we head into the third quarter. Several factors to consider. Over the last few weeks, our costs do not appear to be moving up at the same pace as we experienced through the end of the first quarter and most of the second quarter. A contributor to this slower pace is the slowing of the mixed shift of deposits from non-interest-bearing to interest-bearing. Also, we intend to reduce the absolute size of our more expensive wholesale funding base in the third quarter by absorbing some of the added liquidity which has been acquired over the last few months. In other words, we do not believe we need to be nearly as aggressive on gathering funding as we have been over the last few months. Deposit rates will continue to increase in the second half of this year as we hopefully approach a terminal value for Fed funds. We just believe with all the liquidity noise in the first half of the year, A more deliberate stance for gathering deposits is available to us as we move into the third quarter. Lastly, in the supplemental slides is more information on uninsured deposits, which are down to 28% of total deposits at quarter end. We won't go into this on the call, but just making sure everyone knows the information is there. The second quarter was another strong long growth quarter for us. That said, our line leadership successfully managed our long growth down to the 11% linked quarter annualized rate. We are maintaining our loan guidance for 2023 at low to mid-teens growth. As we mentioned over the last several quarters, we've tightened the credit box for construction and deployed more discipline on loan pricing, which should serve to reduce our normally outsized growth. Spreads on floating and variable rate loans have continued to be very respectable. We also are seeing spreads on fixed rate lending improve given emphasis by our line leadership. Our loan data thus far is essentially the same as the deposit data, which we believe reflects a great deal of effort on the part of our relationship managers. Our aim with respect to loan pricing is to maintain our spreads on floating and variable rate loans and achieve 7% to 8% plus yields on both new and renewed fixed rate paper. As the top chart reflects, our gap NIM decreased 20 basis points, which is more than we anticipated at the start of the quarter. As we noted last quarter, out of an abundance of caution, our average liquidity increased by approximately $1.2 billion in cash during the second quarter, and our quarter-end liquidity is slightly higher, so we have a lot of cash going into the third quarter, which should help us eliminate some wholesale funding as well as provide for loan growth in the second half of the year. Contributing to the cash bill this quarter was the impact of the sale-leaseback transaction we mentioned in the press release last night. We received approximately $199 million from the sale of non-earning fixed assets. We also sold $174 million from the sale of investment securities. These two transactions allowed us to reposition under-earning assets into interest-bearing cash in order to eliminate the negative near-term impact from increased lease costs. Our rate forecast is consistent with most rate forecasts out there. We are optimistic that a July raise by the Fed is the terminal point for Fed funds, but we may be slightly more pessimistic in that we don't see rate decreases occurring until mid to late 2024. With that, our forecast for the rest of 2023 is that quarterly net interest income will likely be flat to slightly up from the second quarter results. As for credit, we again are presenting our traditional credit metrics. Pinnacle's loan portfolio continued to perform very well in the second quarter. Our belief is that credit should remain fairly consistent for the remainder of this year. We did increase the ratio of our allowance for credit losses to total loans during the quarter to 1.08%. We reworked several of our CECL models during the quarter and are implementing these changes this quarter. We don't anticipate similar increases during the second half of 2023. Any increases from this point should be fairly modest dependent we believe primarily on macro trends. As noted for the last few quarters, we continue to have a very limited, if any, appetite for new construction. Also, the CRE appetite chart on the bottom right is basically unchanged from the prior quarter, but does give you a real perspective on how we have reduced our appetite in commercial real estate over the last year or more. In summary, our outlook for our loan portfolio from a credit perspective remains strong. So if negative macro trends begin to develop, We believe we are advantaged as we enter any potential recession from a position of strength. Again, and consistent with last time, more information around credit. The top left chart deals with trends in construction originations. We began reducing, eliminating our appetite for new construction originations last summer, which is consistent with the chart. The chart would indicate that our limited appetite is largely concentrated in warehouse, multifamily, and residential. A quick note about new residential commitments. The gold bars on the chart are new lines for new homes under old guidance lines for a limited set of long-time residential builders. We continue to support our resi-builders under guidance lines that have been in place in some cases for years. As you likely know, residential builders are very busy right now given the state of the housing market and the lack of existing home inventories, which is especially relevant in our markets, which have a lot of in-migration from around the country. Secondly, the chart on the top right, we are providing updated information about the status of maturities for CRE and construction fixed rate loans. Our yield target for these loans has increased into the 7% to 8% range. Two comments regarding this chart. The absolute size of the fixed rate volumes coming up for renewal remains manageable, and that with rental increases over the last three to five years and occupancy levels remaining we believe that our borrowers will continue to be able to afford the incremental interest costs. Additionally, our underwriting for several years has required that any new commercial real estate or construction commitment be underwritten at higher rates than the contract rate, which in most cases is 200 to 300 basis points higher. Again, we believe our borrowers have the resources to afford these increased rates, both due to increased revenues on their part and based on our previous conclusions from our underwriting practices. Now on to fees, and as always, I'll speak to BSG in a few minutes. Excluding BSG, the impact of the gain on sale of fixed assets and the loss on the sale of investment securities, fee revenues were up slightly from the first quarter. That said, we're pleased with the effort of our fee-generating units during what is proving to be a challenging banking environment. We continue to anticipate that fee revenues, excluding BSG and all these other items, will come in at around a high single-digit growth rate for 2023 over 2022. Link core expenses were essentially flat as personnel costs were down and other expenses were up by similar amounts. Seasonal decreases in payroll taxes and other benefit categories from the first quarter were the cause for the reduced personnel costs, while the sale leaseback lease expense, all set in part by reduced depreciation costs, was the primary contributor to the increased occupancy costs. Additionally, we reduced our anticipated annual cash incentive payouts from 70% to approximately 67% of target awards at the end of the second quarter, so not much change quarter over quarter with respect to our outlook for incentive costs for either cash or equity incentives. Again, the reduced incentive accrual speaks to the variable cost nature of our incentives, which are all substantially performance-based. Additionally, along with deferring projects or slowing our hiring, we feel like we have enough leverage to throttle back on expenses should we need to. We have again lowered our expense growth forecast for this year and have incorporated that into our updated outlook. As it stands, our expense guidance was previously low to mid-teens growth for 2023. We have lowered to high single digits to low teens growth for 2023 over 2022. Our tangible book value per common share increased to $48.85 a quarter and up 16%. Influence of this increase was the sale leaseback transaction, which provided almost $86 million in pre-tax gains, offset in part by $10 million in securities losses. In view of the macro environment, we anticipate retaining this incremental capital at least through the end of this year. We believe the actions we've taken to preserve tangible book value and our tangible capital ratio have served us well and have no plans currently to alter our Tier 1 capital stack via any sort of common or preferred offering. The chart on the bottom left of the slide compares several capital ratios as of the end of March to our peers. Although we don't anticipate significant changes to the capital rules, we are pleased with these results and our ability to withstand any changes to the capital rules that potentially could come our way. Now a few comments about DSG before we look at the outlook for the rest of the year. The top right chart is consistent with various calls and details that production has been consistent over the last several quarters at $1 to $1.2 billion per quarter. Placements to the bank network were less in the same quarter, while placements to institutional investors were at the highest level ever and signaled that demand for BSG paper by some of the most respected asset managers in the country is really strong. BSG has been able to penetrate a very liquid channel over the last few years, which during some of these times has proven to be somewhat fickle for some of the BSG's competitors. Over the last several years, BHG has made periodic calls to pivot between on-balance sheet investor paper and off-balance sheet bank placements. Historically, as institutional investors come to the table, their orders may receive a level of priority as to funding which BHG has to manage. That said, BHG's unique bank network, which we believe can't be replicated by any other BHG competitor, continues to grow and provide the necessary liquidity to BHG. This is a new slide where we're trying to provide additional clarity with regard to the significant funding channels available to BHG for placement of their loan production. What's new to the funding channel list is that in the second quarter, BHG successfully negotiated two private whole loan sales with $550 million of capacity. These are slightly different in that in both cases, these were large purchases structured similar to the bank network. Gain on sale treatment is afforded these sales as the investors acquire the loans with no BSG has negotiated three warehouse lines with three well-known and respected asset managers' private equity firms. Performance of BSG's loans sold to the capital markets have been such that many of the firms that have participated in the past are in constant contact to acquire more loans in the future. The bank auction platform remains very liquid and able to meet the necessary funding that BSG requires of it. All in, these funding channels can collectively provide several billion dollars in capacity and the flexibility to manage liquidity risk effectively between the various channels. This is the usual information we've shown in the past, detailing spread trends just in a slightly different format. The top chart represents the gain on sale of the off-balance sheet bank network, and the bottom chart is a blended chart of all balance sheet funding strategies, which incorporates the historical buildup of balances. As anticipated, spreads have come in with higher rates, with the bank auction rates being consistent with pre-COVID spreads. During the same quarter, the blended spreads for on-balance sheet was slightly higher than the bank network, given the balance sheet loans reflect the buildup of balances over the last three years. As it stands today, BSU expects spreads to be fairly consistent going into the second half of 2023. As we noted in the previous quarters, BSU has tightened its credit box over the last several quarters, particularly with respect to the lower tranches of its borrowing base. This will have an impact on both production and spreads. Average FICO scores in 2023 have increased to 743. As we've stated in prior quarters, BSU has been modifying their credit models to originate less risky assets. Production volumes remain strong, even with tighter credit underwriting. BSU refreshes its credit score monthly, always looking for indications of weakness in its borrowing base. Credit scores are up from previous years. Additionally, approximately 22% of BSU's production is with repeat borrowers, adding to the quality of their loan base. This slide details reserves and losses for both off-balance sheet and on-balance sheet loans. As we mentioned in previous quarters, BSU determined that loss rates in several lower tranches of their production was exceeding internal tolerances and elected to stop lending into these lower tranches. Their conclusion was that for loans written in 2021 and for most of 2022, several contained an element of grade inflation which required remediation. As a result, we believe outsized losses could occur over the next couple of quarters at a similar pace as the last two quarters. Typically for BHG, approximately 70% of the loss content is incurred within the first three years of origination, but with grade inflation, losses should come to light sooner. As a result, BHG has expended significant resources to bulk up collection activities, including hiring more lawyers, and will be instituting in-person closings for new borrowers, which was suspended during COVID. BSG had another strong quarter with approximately $1.1 billion in originations and are on track to achieve $3.8 to $4 billion in originations this year, which is slightly less than last year. Thus far, through two quarters, production is slightly more than the prior year, even with efforts to tighten the credit box. BSG has a conservative bias that production in the last half of the year will likely be lower than the first half, but should be close to what they had last year. Net earnings are being forecasted at $175 million to $190 million, which is a tighter forecast from last quarter's reduction of a 30% to 40% reduction from prior year's results. The numbers now work out to be a 35% to 40% reduction. Quickly, again, the usual slide detail on our current financial outlook for 2023. We continue to plan for a recession, but how severe it will be neither we nor anyone else really knows. Our job is to manage the risks that face this franchise every day. What we know is that our business model is relationship-based, nimble, and resilient. Our management team has significant experience and have tackled economic downturns before. We have great confidence that we will be able to manage the high-quality banking franchise that our shareholders have come to expect from us and can currently handle whatever curveballs get thrown at us. And with that, I'll turn it back over to Terry.
spk02: Thanks, Harold. I mentioned at the outset that I'd come back and offer my thoughts on the shares. Obviously, the primary goal of the call is to have an in-depth review of quarterly performance, which we've now completed. But beyond that, we work hard to make sure that investors have an opportunity to understand more than just what went up and what went down during the quarter, but to get to a better understanding of our approach for producing long-term shareholder value, a.k.a. total shareholder returns, or TSR. So perhaps the best place to begin is just to examine what kind of total shareholder return we've produced historically. As you can see here, over the last decade, PNFP has produced the single best total shareholder return among peers. And I'd invite you, if you get a chance, to go back and look at it since our inception in 2000, look at it over our first decade, look at it over our second decade, over the last 15 years, over the last 20 years, I think you'd find us at or near the top in all those time segments, absolutely consistent performance irrespective of the various economic rate cycles over the last 23 years. And so what I want to examine now is how that happened. The analyses of a number of bank stock experts, and I suspect that of yours, would show that there are three primary metrics that are highly correlated to TSR over time. And there are revenue growth, reported EPS growth, and tangible book value accretion. I suppose that there are an infinite number of metrics that bear little or no correlation with TSR over time, but they include metrics like net interest margin percentage, cost of funds, deposit cost betas, loan yields, non-interest bearing deposits, total deposits, operating leverage, and efficiency ratios, just to name a few. In fact, you've already seen our track record for total shareholder returns over the last decade, yet I'm confident that our NIM percentage has rarely, if ever, been above median. Our cost of funds has likely never been better than median. Our deposit beta is always high, both when rates go up and when they come down. Loan yields have generally been no better than median, and our non-interval bearing total deposits ratio has generally been less than most of our peers. There's nothing wrong with any of those metrics. In fact, we measure and study all of them. It'd be hard to build a model without many of those inputs. But I'm just making the point that we focus much more on growing revenues, growing EPS, and creating tangible book value than we do standard model inputs like the NIM percentage or the cost beta or the percentage of non-interest-bearing deposits to total deposits. Because historically, revenue growth, EPS growth, and tangible book value accretion have been more highly correlated with TSRs, which honestly is the main thing I care about. When I say we focus much more tightly on growing revenues, growing EPS, and creating tangible book value, here's what I mean. Most of you know 100% of our salaried associates participate in our annual cash incentive pool, 100%. No annual cash incentive is paid to virtually any salaried associate in this firm if our classified asset ratio exceeds a certain level. But assuming we hadn't made a bunch of bad loans, the metrics that determine virtually every salaried associate's payout, including mine, is the revenue growth and the EPS growth rate. Since revenue growth and EPS growth have been highly correlated with TSRs, we have literally focused every single salaried associate in this firm on those two variables. And I believe that's one of the critical reasons our firm continues to compound revenue and earnings growth like few other can. My personal incentive, along with every other salary associated with this firm, depends on those two growth rates. In terms of long-term equity incentive plan, 100% of our associates are granted shares. For most associates, those shares are time-vested, but for the leadership team, the top 150 or so leaders in this firm, including me, the substantial majority of our recurring annual award vesting is performance-based, And the two primary measurements are peer-relative tangible book value accretion and peer-relative ROATCE. In other words, for the leadership of this firm to maximize the vesting of the restricted share grants from our long-term incentive plan, beyond clearing an asset quality threshold, which in this case is an MPA ratio, we have to outrun 75% of the banks in our peer group in terms of the tangible book value accretion and ROATCE. Parenthetically, that may give you a little insight on why, despite the extraordinary liquidity that we and virtually every other bank had on our balance sheets following the pandemic, leadership of this firm did not load the bond book when yields were at near all-time lows. So here's how that plays out. Within the last five calendar years, we've seen A COVID pandemic, quantitative easing, a mammoth influx of liquidity from all the government stimulus in response to the pandemic, inflation, or CPI, as high as 9%, the most precipitous increase in Fed funds rates in recent history, in addition to quantitative tightening and a dramatic decrease in money supply and associated deposits, an inverted yield curve, and a number of failures at otherwise high-flying banks. And through all that, on the upper right, you can see the dramatic outperformance of our five-year EPS growth versus peers. On the lower left, you can see that the primary driver of that EPS growth was the dramatic growth in revenue per share, regardless of all the macroeconomic volatility. And then on the lower right, you see the very dramatic compounding of tangible book value. So I believe that continual compounding of revenue, EPS, and tangible book value has been the primary contributor to producing the peer leading total shareholder return you saw several slides back. So now when you begin to think about what the TSR chart is going to look like over the next five years or over the next 10 years or over the next 20 years, you might begin here. The southeastern markets we serve have a dramatically different growth profile than the rest of the nation. which has the potential to turbocharge our revenue and EPS growth. I'd hate to think I had to compound earnings and revenue at the pace we intend to in some of the other regions in this country. But even more important than the dynamic growth that the markets we serve are likely to enjoy is the competitive advantage that we've built. We're a market share taker. We've been one of the fastest growing banks over the last 23 years, and serving vibrant markets has certainly been a tailwind. But you can be sure the substantially more important contributor to our growth has been our ability to take market share from vulnerable competitors. What you're looking at here is market data produced by Greenwich Associates, the foremost provider of research to U.S. banks on the commercial market segment. This is from their client satisfaction dashboard. Down the left side of the chart, you see critical satisfaction variables based on their research, things like ease of doing business, being trustworthy, valuing long-term relationships, creative insights, the digital experience, the quality of the relationship manager, cash management capabilities, and so forth. As you can see by the scale, at the bottom, elements that are colored dark green are market-leading. Elements that are colored red would be trailing or at the bottom of the market. And elements colored all the various shades from lighter green to yellow to orange are all scores in between the best and the worst. So in the three rightmost columns, you see pinnacle scores for all these important satisfaction metrics for small businesses. That's companies with sales from $1 to $10 million. Middle market businesses, that's $10 to $500 million in sales segment. And then on the far right, the combined score for the $1 to $500 million in sales segment throughout our multi-state pool. You know, I've studied the chart very long to see that Pinnacle is the market leader for virtually every single one of these metrics. And this is critically important to understand. These charts cover our entire footprint and compare the five or six market share leaders in addition to Pinnacle, including Truist, Bank of America, Wells Fargo, PNC, First Citizens, and First Horizons. I obviously don't know if Greenwich could identify any other banks that dominate their markets as overwhelmingly as we do, but I'd be surprised. Across our footprint, we're far and away the market leader in terms of overall client satisfaction and the all-important net promoter score. It seems to me the most important score of all is the net promoter score. Most of you know that it's a comparison of the number of clients that are so engaged with your brand that they fully intend to advocate for you with their friends and colleagues. less the clients that are so disengaged with your brand that they're detracting from your reputation in the community. And you can see here our net promoter score is a league-leading 86 among small businesses, companies with sales from 1 to 10 million, and a league-leading 82 in the middle market, companies with sales from 10 to 500 million. Connecting this slide with the last, regardless of all the money spent by our largest regional and national competitors on technology and on the digital experience, Our clients rate our digital experience more highly than their clients rate theirs throughout our footprint. So much has been said about a potential migration of regional bank clients to the national providers. When you look at these scores, it should be apparent why we lost virtually no large clients following the Silicon Valley failure and why we continue to grow deposits at a dramatic pace in the aftermath. Look at the dramatic difference in net promoter scores between us at the top and our large national competitors at the bottom. It'd be very hard to leave a bank you absolutely love, and honestly, it's not hard to leave a bank you hate. Some banks compete on price. Some just wait for a yield curve that suits your balance sheet. But for us, it's this relentless pursuit of creating raving fans that explains our ability to grow revenue in EPS almost regardless of the economic ups and downs. So not surprisingly, when Greenwich probes businesses in our footprint about which banks are likely to earn a share of their business over the next 12 months, Pinnacle's far and away the most frequent response. As you can see at year end, 42% of small business respondents named Pinnacle and 50% of middle market business respondents named Pinnacle as the bank most likely to receive a share of their business. That's incredibly strong momentum. And when Greenwich probe clients regarding which banks are most at risk for losing a share of their business, Pinnacle was far and away the least frequently mentioned response. Consequently, our net momentum among businesses in our markets is market leading at 38 and 42 in the two segments. It's further substantiation of the point I've been making about our relative lack of vulnerability versus the large national banks in our markets, the thesis that Regional banks are more vulnerable to the large national banks, might be true for undifferentiated banks, but business clients in these segments within our footprint might suggest otherwise, given our net business momentum score. So really to sum it up, what I've tried to say is it's our belief that revenue growth, EPS growth, and tangible book value accretion have historically been most highly correlated with TSR. That's why we focus our entire firm on it through our short-term and long-term incentives. We believe our relationship-based model has historically produced strong TSR with more manageable risk than many. The proof's in the pudding. When you think about the fact that the markets that we serve are likely to outperform the nation and the fact that we've got a demonstrably differentiated high-touch and tech model that generally attracts more and attracts less clients, That's the key to compounding earnings over time irrespective of economic volatility. We'll stop there, operator, and take questions.
spk00: Thank you, Mr. Turner. The floor is now open for your questions. If you would like to ask your question at this time, please press star 1 on your touchtone phone. Analysts will be given preference during the Q&A. Again, we do ask that when you ask your question, you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. And the first question today is coming from Jared Shaw from Wells Fargo. Jared, your line is live.
spk07: Hey, good morning. Hi, Jared. Thanks for taking the questions. I guess the deposit growth is great, seeing that we've seen some deposit growth and some of your peers today as well. Where is that coming from? Is that really just the biggest national players, or are you taking more wallet share from your existing customers? I guess maybe just a little more detail on where that money is coming from and how much more runway you think there is to take that market share.
spk03: Yeah, Jared, that's a great question. I'll give you several things to think about. One is we've got a lot of people we've hired over the last couple of years that They're still out there bringing their clients to our firm. I think also that when you get into this time of the year, we start seeing seasonality play into our deposit book. And so consequently, we fully anticipate that we'll see swell here in the third quarter and the fourth quarter. And then lastly, our public funds, we've won, call it a handful of public fund clients here over the last, quarter or so, and they're also building their balances in a more outsized way and in a more costly way. I'll say it that way.
spk02: Jared, I might add to Harold's comments. I think, you know, in terms of getting to where it comes from, I think his first point's important. You know, the folks that we have hired, the largest contributor of revenue producers to us has been Truist. The second largest has been Wells Fargo. And so they are about consolidating relationships here based on their ability to serve clients better and so forth. So anyway, I think that's a big part of it. But I wouldn't want it to be unsaid that I think if you were to come inside this firm and talk to people, you would hear them say, hey, we're about to transition this firm from being one of the best asset generators to being one of the best deposit generators. And so There's a lot of energy inside the firm on a number of different specialties that we've built. I've mentioned them in the past, deposit verticals that attack large pools of money where we have some value-added product offering for things like property managers, homeowners associations, etc. you know, a variety of pools of money like that where we've got a value-added product that we've introduced over the last couple of years. So those things have really good minimum, and there are a number of other of those verticals that are being rolled out literally as we speak. So, again, my hope and belief is you'll see a little bit of a transition in our ability to gather beyond just the relationship approach that Harold and I both commented on, but also through those specialties.
spk07: That's great, Keller. Thanks. And then, you know, looking at the pace of hiring, you know, you've done a great job hiring people in market expansion. How should we be thinking about your pace of hiring new revenue producers at this point? And can you give an update on maybe some of the expansion markets that you've recently targeted?
spk02: Yeah, I guess maybe start with the second part of it, comment on the expansion markets that we're in. I think we've already given indications for the Atlanta market that I think their commitments are about $1.6 billion, north of $1 billion in loan outstandings. The more recent large market, D.C., I believe that... they have generally been a net provider of funding, if you can believe that. And generally, in pretty short order, approaching $700 million in funding, I think maybe about $650 million in loan outstandings. Commitments are well above that. And the momentum is really strong in both those markets. I think if you were to talk to Rob Garcia or Caroline Pelton that lead our effort in those markets. They would say they're enjoying great success both recruiting people and recruiting clients in a large measure based on the strength of our treasury management capabilities and so forth. So at any rate, we continue to be excited about those expansions. I think in terms of hiring people, we're We continue to recruit. I think we continue to do well. My guess is we might not hire quite as many people this year as we did last year, but we'll hire a lot. There's still a lot of hiring momentum, and I always try to hold out as a possibility. that it's conceivable to me we might find our way to a market extension or two. In the event, we feel like we've got a team that could build us a big bank. You've heard us talk about that in the past. We're not just hiring anybody and we're not trying to build an LPO, but if we had the opportunity to build a big bank, we would proceed with that. And so anyway, I hope I'm responding to your question there.
spk07: Yeah, that's great. That's great. And then just finally for me, Maybe for Harold, you know, how should we be thinking about or where cash balances go in the near term? And then I guess from what you said, we should just assume that any reduction in cash either goes directly to loan growth or GSF HLB reduction? Any target?
spk03: Yeah, that's right. It's probably going to be around broker deposits. We've got about, call it upwards of $2 billion. that we think that we can use to help fund loan growth here over the year and also help reduce the size of our wholesale book.
spk12: Great, thank you.
spk03: And it won't all happen at once. It'll happen consistently through the next six months and probably into the first part of next year.
spk00: Great, thank you. Thank you. The next question is coming from Stephen Scouten. from Piper Sandler. Steven, your line is live.
spk08: Hey, good morning. Thanks, guys. I guess one of the things I'm curious about is just the strength of the deposit base. And you've spoken a lot about how you incent your people and noted that you feel like this has really been a shift. But I'm guessing, I guess I'm asking, how has this shift really occurred? Have you had to change your incentives to drive that kind of culture shift towards deposits? Or Is it really continuing to focus on revenue growth and telling these people, if you want to book your loans, you've got to book the deposits first? How can we think about that cultural migration I guess that's occurred?
spk02: Yeah, Stephen, that's a great question, and I appreciate it because it's important to me. We've not changed our incentive at all, and as you know, I'm a believer. I'm hoping I'm going to convince you to be a believer that when you get all the associates of this firm aimed at revenue growth, and EPS growth, it's not hard to illustrate at all. Guys, you know, we got to buy more money or we can't book our loans. Guys, we got to buy more money at a lower price. You know, it is so easy to move our company to whatever really is important in order to grow the revenues and EPS. I think it would shock you how easy it is to illustrate how that works. I think in the last quarterly all-associates meeting, you know, we just put a slide up there and show what the financial performance is and, you know, you show them, okay, look, we're off on our margin here and it's largely a function of cost of funds. And so then you go down and show on the expenses, we're right on track, but don't miss the reason we're on track is because we've reduced our incentive accrual. And so, guys, to be clear, What just happened here in this quarter is we took money out of mine in your pocket and our incentive accrual, and we put it in our client's pocket in terms of the rates we paid them on deposits. And so, again, we have not altered the incentive. I doubt that we're going to. It is how we're able to move people back and forth, not that we're constrained by it.
spk08: That's very helpful. Thanks, Terry. And then I guess in terms of the margin outlook, I think, Harold, you guys give the cost of deposits at June 30. I'm not sure if you give like a June or end of period kind of margin relative to where the margin was for the quarter as a whole. But how do you think about incremental progression and compression from here? And can you speak to the amount of floors you might have in the loan book if and when we get rates lower?
spk03: Yeah. We've got floors on loans and we're pushing for floors on loans. We're also pushing for folks to be very conscious about what rates they're paying on their deposits. I think we can be more deliberate with respect to our deposit rates as we go into the second half of the year. As to margin performance in the third and fourth quarter, it's going to be down. in all likelihood. We think there's one more rate increase coming to us that we'll have to support in some way with our depositors. But that said, don't miss, we think our net interest income is likely to be flat to up. So as Terry said, we're going to be focused on the revenue line, and we're going to try to make sure that we don't sacrifice any of the ground that we've gained here over the last, call it two or three quarters, with respect to some of these clients that we've gathered.
spk08: So I'll stop there, Steven, and see if I've gotten to your question. Yeah, no, I think that makes a lot of sense. I think it speaks to that slide you guys had in maybe a year ago where you showed your deposit betas but your NII outperformance irrespective of those deposit betas. So I think that's a good point. Maybe just lastly for me around the new hires, you had some particular strength in wealth management. Can you give us a view on where kind of those new hires have been concentrated and I guess have more of them been into that wealth management platform over time? Has that driven some of the strength there?
spk02: Well, there's no doubt that we have hired a good number of people in the wealth management segment, and it's really across the wealth management segment. When I say that, I mean a lot of hiring in trust, which, believe it or not, is a double-digit growth business for us, as well as hiring in brokerage. as well as hiring what some might refer to as private bankers. You know, they're relationship managers that are focused on wealthy individuals. So, you know, we've had hiring across all those segments, I think that we probably have had a little more hiring in the wealth management segment over the last year or so, year or two, than is normal. But I don't think that's necessarily by design. I think it is more availability of people. And so, again, we just had, as you know, what we do is try to aim at high producers that are frustrated in the organizations that they work for. And so... I think there's sort of been elevated frustration there, which has fueled our ability to hire their people. I wouldn't look for that to be the ongoing norm at all. I would say I wouldn't expect much different about the hiring mix in 2024, as an example, than I would have expected in 2022.
spk08: Got it. Extremely helpful, guys. Appreciate all the color and keep up the good work. Thanks, sir.
spk00: Thank you. The next question is coming from Steven Alexopoulos from J.P. Morgan. Steven, your line is live.
spk09: Hey, good morning, everyone. Hi, Steve. I want to start. So you had favorable commentary in terms of the outflows of Donatris bearing starting to abate and then even the pace of deposit increase starting to abate. You also cited, Harold, I think you said the competitive environment is unpredictable. Is that a function of... the competition lessening that you saw? Are you starting to see that abate a bit? Maybe you could drill down a little bit into what gives you comfort here.
spk03: Yeah, I think it's primarily around the trends. When we watch our deposit book every day over the last, you know, call it 90 days, 120 days, it feels like the pace is slower. It feels like the calls coming into our units is less anxious. It's more There's a lot more opportunity coming from some of the new hires that we've had around deposit gathering, those sort of things. Terry and I were talking about price-based competitors before we started the call today. What I believe is price-based competitors, generally, that's a short-term phenomenon. Eventually, they have to go back to whatever's necessary to create the profit margins they need to have, and we feel like that a lot of this recent activity from some of these regional competitors will have to be short-lived. I don't think that they can be competitive at the rates they're offering, and so consequently hopefully that competitive kind of environment we've been in will also abate to some extent. I can be completely wrong on that, but I think history is that price competitors can't be price competitors for a long period of time.
spk09: That's helpful, Harold. On the expenses, I appreciate you taking down the expense guidance and outlook a bit, but where we stand today, what's your bias in terms of where you think right now, I know there's a lot of variables, where you'll likely end up in this high single-digit to low teens percent increase range?
spk03: On expenses? Yeah. I think if you were to just kind of twist my arm and put it behind my back and make me really be in pain, I'd have to go probably to a, call it 9 to 11, somewhere in that neighborhood.
spk09: Okay, perfect. That's helpful. And then final question from me. In terms of the sale-leaseback, Harold, could you walk us through the P&L impact on a go-forward basis from the transaction?
spk03: Yeah, just from 30,000 feet, my lease expense less the depreciation savings from selling those properties is probably over a 12-month period, about a call it a $14 million kind of additional run rate increase. But the cash that we were able to generate from moving the $200 million in fixed ISF from zero to now call it five and a quarter, and the cash we generated from taking investment securities, 174 million of those, from call it two to two and a half to now five and a half, that increase in yield basically offsets all of the lease expense increase. And just to be completely candid around the sale-leaseback, when we started looking at this back in the fourth quarter of last year, the play was that we would reposition more of the bond book. And consequently, we thought we could probably reposition as much as another, call it, seven or eight hundred million dollars in bonds with the gain we got on the sale lease back. But with all the activity in the first quarter and now going into the second quarter and whether or not there's going to be a recession or not, we elected just to warehouse the capital that we created from the gain.
spk09: Got it. So the benefit is you create excess capital and from an overall earnings view, it's fairly neutral moving forward.
spk03: Absolutely. That's exactly the point. And that's basically why we did the sale of the investment securities, is to neutralize the impact of the lease expense. Got it. Okay.
spk09: Thanks for taking my questions. Thanks, too.
spk00: Thank you. The next question is coming from Brandon King from Truist Securities. Brandon, your line is live.
spk05: Hey, good morning.
spk12: Hey, good morning, Brandon.
spk05: Hey, so I wanted to get updated assumptions on deposit mix, including your guide. I know Harold, you mentioned previously that by year end, we could get to below 20%. So I wanted to see if you still feel comfortable with that sort of trajectory, just given where things stand today.
spk03: Yeah, I think we still feel like that that's a reasonable kind of number to put on the board. I don't think we or anybody else, Brandon, has any idea where noninterest-bearing deposits are going to go here in this environment. But it does seem like things are feeling better about that and that we're, at the end of the day, two things have to be in play. One is our clients have to get to a level of operating cash where they feel like I need this in an operating cash account. And on our side, our sales force, our people, our treasury management people, have to talk to our clients about this seems to be a reasonable amount for you to keep in this deposit account that you need to manage your business. And so I think those conversations are occurring every day, and I think it just leans into this relationship-based model that we continue to kind of hold on to as why we think this whole non-interest-bearing reduction is feeling better for us.
spk05: Got it. Got it. Makes sense. And then I wanted to talk about the allowance. There's an increase in the quarter. And I understand the increase in commercial real estate, but I saw that consumer real estate had a pretty sizable jump as well. So just wanted to see if there's any context around that increase.
spk03: Yeah, I think the increase in the consumer real estate allocation is primarily related to the macro case and the duration of those assets. So, you know, we're not going to argue about whether or not we're a big fan of CECL or not, but at the end of the day, when rates go up and those assets extend out, then the CECL model automatically penalizes those loans and the decisions you made on those loans back several years ago. Does that make sense to you, Brandon?
spk05: Yep, yep. So nothing kind of qualitative there, just purely quantitative.
spk03: To be honest, I can't remember the last time we had any kind of loss on a one-to-four residential fixed-rate mortgage.
spk05: Okay. Got it. Just confirmed me. Thanks for taking my questions.
spk00: Thank you. Thank you. The next question is coming from Catherine Mailer from KBW. Catherine, your line is live.
spk01: Thanks. I want to circle back to the margin and extend questions. just your thoughts into next year, and it's helpful to think about, or you've given guidance that you think NII is still flat to up in the back half of the year, but as we think about 24, and let's just say we get a hike in July and then we're at that level of Fed funds, but we don't get rate cuts as we move into next year, how do you think about how your NII might look next year in kind of a higher for longer scenario?
spk03: Yeah, well, I think one big factor in that assumption would be what does the intermediate long end of the curve do? As you know, no banker is a fan of an inverted curve. And so it's going to require a lot more work on our part in front of our sales force and how we price with clients and all that sort of stuff. So far, we don't think credit's going to be, you know, we don't see that moving, you know, going into 2024. We think we're well positioned there. But as far as our ability to grow net interest income in kind of a mid-teens level, it would be very hard as we look at 2024. But, you know, it all depends on what we believe is going to happen at the intermediate and long end of the curve.
spk01: And as you get to a point where you think your NII growth might pull back, to maybe the low-team, maybe the high single-digit kind of pace in that scenario, how quickly do you think you'll reconsider the expense growth going into next year to be at a lower pace, kind of like what we saw this quarter?
spk12: Yeah, that's a great question.
spk03: We'll have to consider a lot of things going into the expense book next year. One would be replenishment of our incentive costs. whatever that ends up being for 2023 and going back to trying to figure out how to achieve a full incentive again next year. And then where we are with respect to hiring, today we are, call it very conservative on our, what we would call our support level positions. We're not, as far as revenue producers, We still are out there actively looking for revenue producers. We've asked our support units to kind of hold it in and do what they need to do in order to meet whatever objectives they have internally, but not to get a dress on their hiring. I'll just leave it with that, Catherine.
spk01: Okay. Yeah, that's great. That's very helpful. And then maybe just want to follow up on credit. It seems like The guidance, it feels like loan growth should still be strong, but slow a little bit in the back half of the year relative to the first half. And it didn't feel like you expect a big increase in the reserve ratio, maybe just a modest. And so is it fair to assume outside of some unexpected change in what you're seeing on the credit front that the absolute dollar number of the provision expense should be lower in the back half of the year relative to the 37 million number we saw this quarter?
spk03: Yes. Yeah, we don't anticipate provision being that high in the second half as it was in the second quarter.
spk01: Okay. Great. Thanks for taking my question.
spk00: Sure. Thank you. The next question is coming from Matt Olney from Stevens. Matt, your line is live.
spk10: Thank you. I want to make sure I understand the strategy on liquidity. It sounds like the excess liquidity amount, as you view this, is around $1. $2 billion, and you want to be patient deploying this, could take up to a year. Did I get that right? And then I guess kind of part two, the broker deposits that could be paid down that you mentioned, Harold. Any more color on these products? Are these CDs? And when do these start to roll? Thanks.
spk03: Yeah, they'll roll off over the, call it the next six months. I've got some public fund money that I think we'll also be paying off over the next six months. So it'll be those kind of things. I don't think it'll take a year. I think it's more like probably six to seven, eight months. Matt, if I remember my maturity schedule, it's kind of where we're looking at on this liquidity number.
spk10: Okay. That's helpful. And then I guess kind of part two of that, And thinking about the interest rate sensitivity on that, I think it's on slide 49 of your deck there. Where do you see that migrating over the next year, especially as we get closer to any kind of Fed funds cut? I would assume as you deploy that liquidity, the bank would become more rate neutral, but just curious kind of how you see that moving over the next year.
spk03: No, I think you're exactly right on that. I think once we get to a terminal value on Fed funds, I think our sensitivity will get you know, kind of go back to historical norms. There will likely be deposit creep, but it won't be in leaps and bounds. It'll be in small numbers, but we'll also have the advantage of repricing fixed rate loans going into kind of a stabilized rate environment if there is such a thing. Yep.
spk10: Okay. Okay. That's helpful. And then just lastly on the loan growth front, You've talked about managing the growth lower in recent months and being more selective and very careful. I'm a little surprised that you didn't take down a long growth guidance this quarter. It looks like the full year guidance implies we'll be flattish from what we saw in 2Q. Can you just kind of speak to the pipelines as far as what you're seeing today and currently versus a few months ago?
spk02: Yeah, Matt, I think you know our approach well. So much of the loan growth is generated by the consolidation of banking relationships by new hires. And that phenomenon occurs sort of irrespective of whatever other economic factors exist. And some people say, well, why don't you just take it to zero? Well, that's no good for anybody. I mean, we hire... People that have clients, they need to move them or otherwise they won't be their clients anymore, you know. And so, at any rate, that fuels some of the growth. What we do, I think, to Harold's point is we use pricing, which, you know, curves things on the margin. We've said as an asset class constructions asset class, we want less obvious things like HLTs and Those kinds of things. And so there are marginal changes that are really what tamp down the growth. But in terms of what the economic loan demand looks like, I would say that the Fed is having an impact. I do believe that the pure economic loan requests that we see today would be easily less than what they would have been a quarter or two ago.
spk10: Okay.
spk12: Both CRE and CNIMAT.
spk10: All right. That's helpful, Terry. Thanks for taking my questions.
spk00: Yeah. Thank you. The next question is coming from Brody Preston from UBS. Brody, your line is live.
spk06: Hey, good morning, everyone. Thanks for taking my questions. I wanted to ask... Just if I could start on the fixed rate portion of the loan portfolio. I just wanted to ask if you knew what the dollar amount of fixed rate loans that we're repricing over the next 12 months were. And then when I kind of go back to your previous decks, it looks like fixed rate origination yields were about 475 to five, about four, four and a half years ago. Is that a good yield to use when we think about what's rolling off the book for fixed rate loans right now?
spk03: Yeah, Brody, I don't have, what the fixed rate maturities in the CNI book are with me. I just got what's in the commercial real estate and construction book on the slide. But I wouldn't imagine that the yield difference would be terribly different between what's in the commercial real estate versus the CNI book. I just don't know what the volume would be with respect to that. Most of my CNI book is floating or variable. And so I mean, it would be a slightly higher, but I don't know how much more.
spk06: Got it. Okay, so I can just use that CRE portion as a proxy. Also, I wanted to ask this on the negotiated deposit book. You know, I wanted to ask just what portion of that book has recently renegotiated on rate? And for those that have recently renegotiated, where are the new rates moving to?
spk03: Yeah, my... I think that number would be in the mid threes, somewhere in that range. And I would imagine a substantial amount of that book has been renegotiated. I've not seen a bell curve of my deposit book lately, where you track what the rate is, the low rates versus the high rates and all that. but substantially all of those deposits have repriced in one way, shape, or form.
spk06: Got it. Thank you. And on the sale leaseback transaction, do you ever know what the cap rate was on that transaction for the buyer?
spk03: No, I really don't. That would be an interesting thing to know, but I don't.
spk06: Got it. Okay. And then you did You did have 100 million or just under 100 million of fixed rate CRE and construction loans that were maturing in the second quarter, at least for the slide deck last time. I wanted to ask just what happened to those loans. Did they re-up with you at your targeted rate? Did any of them leave the bank? And I guess, did any of them struggle with the increase in rate?
spk03: I'll go back and look at my numbers. But I think there was only a small percentage that left the bank. uh, probably a third, maybe 25% to a third left the bank and went to the permanent market. Uh, I think the rest are probably still hanging with us.
spk06: Got it. Okay. And just a couple of last ones on the, on the AFS portfolio. Do you happen to know what the effective duration of that portfolio is and what the conditional prepayment rate you're assuming in that duration calculation?
spk03: I think the average life of the AFS book, if you're talking about years, is that right? Yeah. Yeah.
spk12: I think the life in the AFS book now is somewhere around eight. And the percentage duration, I think, is around 5%. Okay.
spk06: Do you know what the CPR is in that duration, Coach?
spk03: I don't, but I can get that for you, Brody, and I'll get it to you.
spk06: Awesome. I appreciate it. This last one, I think you might have touched on it earlier, but I'm sorry if I misheard you. Just the increase in the CRE reserve. Was there any specific kind of metric that drove that increase within your CESA model just because it had been declining for the last several quarters?
spk03: No, I can't point to anything specific in the CRE book. There's no individual loans in there that contributed to it or anything like that. I don't know of anything.
spk06: I was more interested, Harold, within the ACL modeling, if there was any specific variable where maybe there was a larger price decline that you were factoring in within the ACL modeling. That's what I was more getting at.
spk03: So I really, I don't know the answer to that question if there was one. I don't think there is one.
spk06: Okay, great. Well, thank you very much for taking my questions, everyone. I appreciate it. Thanks, Brody.
spk00: Thank you. The next question is coming from Brian Martin from Johnny Montgomery. Brian, your line is live.
spk11: Hey, guys. Most of my stuff was just asked your last couple of questions, but just one thing, Harold. You gave a spot rate on, I think, deposits. Do you have what the spot rate was on the margin at at the end of the quarter, or it just sounds as though it's going to, you know, you talked about the dollars of net interest income, but just the margin itself is going to, you know, drop the next couple quarters and maybe stabilize, you know, later in the year. Is that, you know, based on kind of your outlook on rates today, is that fair? Yeah, that's fair.
spk03: I don't have my monthly financial information in front of me, but we think it's going to, you know, the margin will decline soon. over the next couple of quarters. But again, our focus is on that interest income number that we think is flat up.
spk11: Yep, gotcha. Okay, and the liquidity normalizes by end of year. That's kind of what you're suggesting, that six, seven months or so?
spk03: Yeah, I think we'll be close by the end of the year.
spk11: Okay, all right. And then just last two, just on BHG, you know, just kind of, you know, the outlook narrowed a little bit more. Just as we think about 24, any, you know, high-level, you know, how we should be thinking about BHG next year, Harold, with, you know, depending on how these losses potentially play out or, I don't know, Cecil's in there.
spk03: Yeah, I would not. First of all, we're not giving guidance on 2024. But at the same time, I think BHG's outsized growth rates from over the last several years and, you know, depending on which one you look at, I think they'll become a lot more normalized. going into 2024. Okay.
spk11: All right. Perfect. That's all I had. Thank you. Thanks, Brian.
spk00: Thank you. And we have another question come in from Jared Shaw from Wells Fargo. Jared, your line is live.
spk07: Hey, thanks. Just a quick follow-up on the BHG. You know, you called out the loan sales to the institutional investors. Were those also covered under a substitution agreement, or when you say there's no recourse, that's just truly no recourse, they're off the balance sheet, and any losses will be absorbed by those borrowers or purchasers?
spk03: That's right. That's right. My understanding is they bought those loans and they're theirs. Okay. The gain on those wasn't quite at the same level, but at the same time, they don't have the recourse.
spk07: Okay, great. Thank you. Thanks, Jared.
spk00: Thank you. Thank you. There were no other questions in queue at this time, and this does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.
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