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spk00: Good morning and welcome to the FB Financial Corporation's second quarter 2023 earnings conference call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer, and Michael Metis, Chief Financial Officer. Also joining the call for the question and answer section is Greg Bowers, Chief Credit Officer. Please note, FB Financial's earnings release, supplemental financial information, and this morning's presentation are available on the investor relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation. During this presentation, FP Financial may make comments which constitute forward-looking statements under the Federal Securities Law. Forward-looking statements are based on management's current expectations and assumptions and are subject to risk and uncertainties and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB 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 that may cause actual results to materially differ from expectations is contained in FP Financial's periodic and current reports filed with the SEC, including FP Financial's most recent form, 10-K, except as required by law. FP Financial disclaims any obligation to update or revise any forelooking 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 regulations. A presentation of the most directly comparable gap in financial measures and a reconciliation of non-gap measures to comparable gap measures is available in FP Financial's earnings release. Supplemental financial information and this morning's presentation, which are available on the investor relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov. I would now like to turn the presentation over to Chris Holmes, FP Financial's President and CEO.
spk07: All right. Thank you, Anthony. Good morning. Thank you for joining us this morning, and we always appreciate your interest in the company. For a quarter, we reported EPS of 75 cents and adjusted EPS of 77 cents. We've grown our tangible book value per share, excluding the impact of AOCI at a compound annual growth rate of 14.4% since we became a public company. As a quarter end, we had tangible common equity to tangible assets of 9%, common equity tier one capital of 11.7%, total risk-based capital of 13.9%. If we include unrealized losses on securities in those regulatory capital ratios, common equity tier one capital would be approximately 10.6%, and total risk-based capital would be approximately 12.9%. As we've discussed on the last few calls, our two current priorities are maintaining the strength of the balance sheet and improving internal processes and procedures to become more effective and efficient. Behind these dual focuses is a desire to be able to act aggressive, to be able to act, sorry, act aggressively, sorry for that, when we feel more comfort and clarity around the overall economic and credit environment. Our first priority of balance sheet strength, we feel very comfortable positioned with our current capital levels. Our continued priorities for capital use are organic growth first and acquisition second. Given our current caution around organic growth, growth and the general lack of M&A activity industry ride right now, we're content to build capital until we have an attractive use for it. On credit, we continue to de-risk our balance sheet this quarter as our C&D and non-owner-occupied CRE balances declined by 118 million dollars, leading to a decline in total loans held for investment of 40 million dollars. Our unfunded commitments in those categories also continue to decline and are now down 454 million, or 27%, from March of 2022, which is about the time we began limiting our new commitments on those products. We're intent on limiting our exposure to construction and commercial real estate, even in a geography that's among the best, given the risk inherent in these products. We've also had a concentration in construction that exceeded regulatory guidance of 100% of risk-based capital, and we anticipate that this will be the last quarter where that's the case. Excluding our C&D and CRA loans, the remainder of our portfolio was up slightly at 5.5% annualized. Overall, the current credit environment remains benign as reflected in our continued strong credit metrics of three basis points of net charge-offs, to average loans, and 47 basis points of NPLs to loans held for investment. Demand for loans is still out there if you're seeking growth, and the credits actually look reasonably good. However, given the uncertainty of the coming quarters, we feel it's prudent to take care of the existing clients and focus on rifle-shot approaches to new business right now as a result. when you consider additional reductions in our C&D and non-owner-occupied CRE balances, we would expect overall loan growth to be relatively flat for the second half of the year. On liquidity, the seasonal decline in public funds that Michael telegraphed on our prior call began in May, and public funds ultimately declined by $463 million during the quarter, some of which we backfilled with broker funds, which actually have a lower cost and provide more unencumbered liquidity than the public funds that ran off. Outside of public funds and broker deposits, deposits were down slightly for the quarter. While deposit pressures remain very real, they continue to be more interest rate driven than the fear-driven exodus that many forecasted for regional and community banks after Silicon Valley. From a safety and soundness perspective, we feel great about where we are between the current on balance sheet liquidity, and contingent sources of funding. So we're just walking the tightrope of paying customers market rates on their deposits while also trying to defend the margin. Moving to our second priority of internal improvements, we're focused on improving our processes and procedures during this time of slow growth. which is the primary focus of our First Bank Way initiative that I've talked about on the past couple calls. This has been a time where we've been reevaluating our community bank business model following our five acquisitions, quadrupling the size of a company since our IPO and crossing the $10 billion asset threshold. We spent time refocusing on customer and associate experiences, streamlining our corporate structure, eliminating redundancies, and enhancing accountability. During the implementations associated with the First Bank Way project, we're also limiting outside hiring with exception of revenue producers, and we're also making reductions of discretionary expenses like travel and contributions. We'll continue to make some structural and operational improvements that will help us work on efficiency and lead to additional expense reductions, and we will provide updates on our plans along the way. So to summarize, before handing the call over to Michael, we are focused on strengthening the balance sheet and improving the company internally until the current environment changes. We were early in taking our foot off the gas in April of last year, And our goal right now is to be in a position to be able to match the accelerator when we feel comfort in the economic and credit outlook. I'll now let Michael go into our financial results in more detail.
spk06: Thank you, Chris, and good morning, everyone. I'll start first with adjusted pre-tax, pre-provision trends from the bank. For the quarter, we showed adjusted banking segment pre-tax, pre-provision of $46 million. That's slightly up from the prior quarter of $45.8 million and down 17% from the second quarter of 2022. The primary driver of the year-over-year decline is growth in banking segment core non-interest expense of 12%. While funding pressures have certainly hurt as well, segment net interest income is down less than 1% from the second quarter of 2022. As loan growth and balance sheet remixing pair with increases in yields on earning assets, have offset much of the funding pressure of the past year. We expect funding pressures to continue in the near term and are taking steps to address our expense load. Moving to our liquidity position and deposit base, we have on balance sheet liquidity consisting of cash and unpledged securities of $1.4 billion. We have an additional $6.4 billion in unsecured borrowing capacity available, including broker deposits, federal home loan bank, and discount window. For tax purposes, we have $2.2 billion of real estate loans held at our REIT. Were we to fill the need, we could move those loans back to the bank overnight to create additional federal home loan bank borrowing capacity. We feel comfortable in our current and available sources of liquidity. I'll touch very briefly on our securities portfolio. As a reminder, we have no held to maturity securities. The portfolio is currently around 11% of total assets. which is in our desired range of 11 to 13 percent of assets, and the current duration is roughly 5.4 years. With net loan growth being generally flat, given our ongoing construction and CRE rebalancing, paired with our continued strong capital build, we have considered getting out of some of our securities that are in a lost position, and we have the potential to apply a portion of our excess capital towards an opportunity trade in the portfolio. Moving to deposits, in total, our deposits declined by $311 million versus the prior quarter. Outflows of public funds accounted for $463 million of that decline and were partially offset by $238 million in new brokered CDs, leaving non-public, non-brokered funds down roughly $86 million. As a reminder, those public funds balances tend to begin building in November and decline in June through October, so we'd expect another $200 million to $400 million decline in public funds in the third quarter. We continue to experience increased cost of deposits due to both deposit mix and pricing pressures. On the deposit mix, non-interest-bearing accounts were down by $89 million, or 14% annualized. However, after a decline in April, non-interest-bearing deposit balances remained fairly constant through May and June, so we are hopeful that we can continue to hold NIBs relatively flat in the third quarter. On the cost of interest-bearing deposits, competition remains fierce in our markets and was really not helped by the termination of the First Horizon merger. Moving on to our net interest margin, the margin was 3.4% for the quarter, down 11 bps from the first quarter. We expect some continued compression in the margin due to funding pressures. However, the margins for each of April, May, and June, respectively, were 3.4% 3.38%, and then back up to 3.41% in June. So we hope to limit the size of that compression over the next couple of quarters. That said, margin continues to be difficult to predict. For some monthly trends, our yields on newly originated loans left the cost of new interest-bearing deposits has been in the 3.4% range as well over the past eight weeks. In June, we had a cost of interest-bearing deposits of 3.22%. and a contractual yield on loans held for investment at 6.24% versus a cost of interest-bearing deposits at 3.06% and a contractual yield of 6.16% for the quarter. Our cost of interest-bearing non-public, non-brokered deposits was 2.59% in June versus 2.39% for the quarter. Core banking non-interest income of $11 million was in line with our expectations, and we expect to continue to hover in that $10 million per quarter plus or minus range in 2023. Non-interest expense is top of mind for the company as we expect the margin to continue to struggle. For the quarter, core banking segment expense was $66.7 million compared to $68.4 million in the prior quarter. As Chris mentioned, we have halted hiring outside of revenue producers and have cut back on more discretionary expenses such as travel and contributions. We continue to work through what an optimized level of expenses will look like for us as we implement some identified efficiency projects from our First Bank Way initiative, and we would expect to be able to get more guidance there by the end of the year. In the third quarter, outside of the FDIC insurance assessment related to the recent bank failures, we would expect controllable expenses to be down slightly to flat as compared to the second quarter due to the measures we already have put in place. Closing with our allowance for credit losses, economic forecasts deteriorated modestly during the quarter, and we added a further three basis points to the allowance as a result. However, provision expense ended up being a release rather than a build as our reserves on unfunded commitments came down once more. This was primarily due to the decline in our unfunded construction and development commitments. We will continue to be cautious on our reserves. At this point, there are no industries that we are qualitatively assigning additional reserves to, but we will continue to monitor our portfolio to see if some additional protection is warranted. I'll now turn the call back over to Chris.
spk07: Thanks, Michael, for that color. And just to summarize, a fairly straightforward second quarter, and we think that's a good reflection of the company's current priorities of capital, credit, and liquidity. Continued good earnings has left us with strong capital buffers, which we intend to maintain through this period of uncertainty. Our work over the last five quarters to reduce our exposure to construction and commercial real estate also became evident in our numbers this quarter, and we'll continue to de-risk the balance sheet over the near term. Additionally, we feel very comfortable with our current on-balance sheet and available sources of liquidity given the stability that we've seen in our non-public funds deposits. We believe our conservative risk management today is putting us in a tremendous position to execute on future opportunities. Operator, that concludes our prepared remarks. Thank you again, everyone, for your interest in FB Financial, and we'll open the line for questions.
spk00: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we will pause momentarily to assemble our roster. First question will come from Steven Skouten with Piper Sandler. You may now go ahead.
spk08: Hey, thanks. Good morning, everyone. Good morning. Good morning, Steven. I guess I'm really encouraged, Michael, by what you said and what you put in the release around non-inspiring deposits. That's one of the biggest questions I have probably industry-wide these days. I mean, other than what you're seeing in May and June, which is great, what do you think? Is there anything structural around maybe the size of your non-inspiring deposit accounts or the type of account that would lend that to be maybe more stable or And, you know, I guess it was 25%, 1Q22, we're down to like 22% of deposits today. Do you guys have a feel for where you think that could maybe stabilize, if not at these current levels?
spk06: Yeah, good morning, Stephen. So, you know, 22%-ish is where we are. You know, that's where we ended the first quarter. Expected to be in this range, if you remember back in It seems like a lifetime ago. 2020, when we did the combination with Franklin Financial, they were about 9% to 10% non-interest-bearing. First Bank was probably 26%, 27%. So Proforma is around 20%. So I think that even if you go back pre-pandemic, that's where you'd expect that range to kind of play out. We do continue to add core checking accounts, accounts up a couple thousand During the quarter, I think 256,000 accounts from 254 in the first quarter. So the team continues to add core customers, be it commercial or retail, and that's spread pretty good throughout our footprint. Remember, we have a rural community footprint and a commercial as well. So I think that diversity helps, and, you know, average balance is fairly consistent there. We think that that's a benefit to the company.
spk07: Yeah, and Stephen, I just add this. A couple things that probably help that number a little is the fact that actually a slight majority of our deposits would be consumer versus commercial, which is different than some other banks our size. And so And we've also got that, what we call our community component with that, that again helps some stability there. But what we were trying to project, we thought it would be in the 20, 21, 22% going back to looking at pre-COVID numbers.
spk08: Okay, great. That's really helpful. And then you guys mentioned the possibility maybe of security sales, some of these things in a lost position. How are you guys thinking about that math today? Is there a specific earn-back period you're targeting, or kind of how do you think about that balance sheet management and the math behind it?
spk06: Yeah, it's a constant point of debate, quite frankly, because any loss is a loss, right? But our capital ratios have grown pretty strong, and so it just opens to possibility. We'll look at it, and we have looked at multiple tranches anywhere from We have nine months of payback to 27 months. And so it would be in between that. We haven't established a target, but there's a lot to consider, and there's other uses of capital as well. And so we're evaluating all options.
spk08: Okay, great. And maybe just last thing for me, you guys talked about in the release kind of the ability to take advantage of inevitable future opportunities. I guess I'm wondering – what you think those inevitable opportunities might look like? Do you think we'll see more distressed kind of M&A throughout your markets? And as you think about the potential for opportunities, is there kind of a stack rank in your mind of kind of what you'd optimally like to pursue if it came about?
spk07: Yeah, there is. Optimally, we'd like to pursue really strong bankers and banking teams in our geography and in contiguous geographies is really what we'd love to do first. If we can move those over at the right times when things are, when they're maybe experiencing some unsettledness at other places, that's probably the biggest opportunity. And then, of course, acquisitions are always also an opportunity. That being said, acquisitions are hard and so we've done four since we became a public company one right before we became a public company and they take your eye off the ball sometimes operationally so we prefer the teams first but if you project out there's probably going to be at some point a lot more acquisition activity, we do want to make sure that we're at least in position to participate and be in a preferred position to participate when that comes about. So that's really our first two. And then, as Michael said, when we think of using capital, that right now balance sheet restructuring is also top of mind.
spk08: Great. That's super helpful. Appreciate all the color and congrats on the quarter.
spk07: Thanks, David.
spk00: Our next question will come from Catherine Melor with KBW. You may now go ahead.
spk01: Thanks. Good morning.
spk07: Good morning, Catherine.
spk01: I wanted to ask on expenses. I know you've given a little bit of a forward look as to how you're thinking about that. I think last quarter you had talked about core bank expenses being in the 280 to 285 million range for the year, and it feels like that's going to be a lot lower. Do you have any sense as to where that could land for 2023, given some of the initiatives that you've been working on this quarter?
spk06: Yeah. Good morning, Catherine and Michael. I wouldn't start it a lot lower. You know, we're still working through some of the levers. We've created some optionality and some levers there as well, and so... it focused on 23 back half 23, but really 24 and creating a launchpad from there for 25, 26, putting the company in a really good spot. So, um, you know, we'll have more to come on that, but I would say steady state for now and we're, we're working on some things.
spk07: Yeah. Uh, and so, uh, Catherine, of course we, we, we're thinking through the quarter and we're thinking through the results, we're thinking through the call, not an unanticipated question. And we, so our approach to it is we, I made reference to some of the initiatives we have going on that are improvement initiatives and they're yielding some efficiencies. And I think I've said this on a previous call, the, The goal is efficiency. It's not necessarily – we haven't set expense targets out there for these various initiatives. But as we are implementing them, it's clear that there's going to be some efficiencies gained and some expenses, and expenses will go down. And so we expect that to continue, but we aren't prepared to go put some number out that says, hey, here's where we'll be or here's what we're going to – going to achieve over the next two or three quarters. But I would say we recognize that with margin compression and with mortgage originations both being down, revenue growth is tougher to achieve. When revenue growth is tougher to achieve, expense reductions are a mandate. And so we expect that. So that's kind of the way that we're operating the company right now.
spk01: Okay, that's helpful. And then maybe just for you were talking a little bit about next quarter, Michael, that you thought that the linked quarter expenses would be down outside of the FDIC assessment. Any idea of the size of that?
spk06: Yeah, I kind of do Chris's point. It's a little bit marginal at this point until we have some more plans solidified, but I'd say it's down slightly.
spk07: Yeah, it's not too much unlike this quarter, I'd say.
spk01: Okay. All right. Great. And then maybe on the margin, what's your forward thought on the margin? It feels like you're coming – originally the goal had been about $345.50. You're a little bit below that, but not significantly below that. So do you see stabilization in the margin in the back half of the year from current levels, or do you just think the outlook for deposit costs is just too tough to make that call right now?
spk06: The outlook for deposit calls is very difficult. I actually think the team did pretty well holding in in this 340 range. There's a couple of headwinds that were unanticipated on our first quarter call that came up in the second quarter with competitive price. There wasn't a whole lot of rate movement in the second quarter, so there was some stability in that, but there was some aggressive competitive pricing and pending how some of the larger institutions play out and if they enter the market and start getting super aggressive, it could obviously put pressure on us. So that is a concern on forward deposit pricing. That being said, you know, we kind of remixed the balance sheet. We're continuing to do that. And again, you know, optionality is a common theme here that we want to be able to restructure the balance sheet and get out of some of the higher costs deposits, especially if they're encumbered, to free up liquidity. So that can create a lever to offset some of that margin pressure.
spk07: Yeah. And so I think your phrase was you're going to be tough to hold in for the rest of the year. It'll be tough to hold in for the rest of the year. I mean, if you just look at the last three months, and Michael went through our three margins in April, May, June, It was actually relatively flat, which we're glad to see. We don't look at that and go, well, I guess that means it's going to be flat for the rest of the year. And so we do see it continuing to squeeze some, although if you look at the first half of the year versus the second half of the year, it feels like, and again, this is feel, and our internal projections don't necessarily reflect it yet, that it may be softening some for us anyway. We went out and moved some deposits up early. I think we've gotten maybe a little bit of benefit from that, but deposits are going to be tough the second half of the year from our view.
spk01: Very helpful. Thank you.
spk03: Thanks, Catherine.
spk00: Our next question will come from Kevin Fitzsimmons with D.A. Davidson. You may now go ahead.
spk05: Hey, good morning, everyone. Good morning, Kevin. Good morning, Kevin. Just curious, you mentioned the de-risking, and that was very intentional in construction and non-owner-occupied commercial real estate. Just wondering, Chris, you mentioned you're going to continue to focus on that, but in terms of magnitude and what that's going to mean, for overall loan growth? I know you said flattish loan growth over the past half of the year, but are you looking at like for this being like a several quarter headwind for growth, but the right thing to do for balance sheet strength in terms of the amount of runway that you have to, will be taking those segments down, or is it more of a shorter term thing that you're just really over the next few quarters? Thanks.
spk07: Yeah, so in terms of, I think, affecting net loan growth, I think it's shorter term. It's the next couple quarters. But we don't want to run the company. And, look, regulatory thresholds are always important, and we pay attention to those. But we don't live by – We live by our own risk management standards, and we don't want to be over 100% of risk-based capital in construction. Again, that is the regulatory guidance, but we don't want to live with that level of balance sheet risk on a continuing basis, even if the regulatory threshold was 200 or 300. We're going to live below that 100% threshold on construction and development. And so... You know, we had a period, and there were some reasons why that we went over that. And, look, we're in fantastic geographies. And, again, some reasons why we, coming off COVID, you know, depending on – we had a lot of deposits, and we made a conscious decision there. And we're making a conscious decision to back away from that. And so you'll see us run continuously at a – at a percent of risk-based capital in C&D that's certainly less than 100. But we should be beneath that by the end of the quarter. And, look, when I say by the end of the quarter, I'm sure Greg Bowers, our chief credit officer, is flinching over there because there's a lot of projections that go into that in terms of what people draw down. As you know, you've got a bunch of unfunded commitments. It depends on how much people – When they draw and if they draw according to schedule, but by our math, we think we'll be under that at the end of this present quarter now, Q3. And then we'll operate under that. So once we're under that, you'll continue to see us. That gives us a little more room to do something besides make sure we're taking care of customers. When you limit those commitments... The way we view that is we're basically reserving our capacity for customers. We have to make sure that we can take care of good long-standing relationship customers, and that's what we're doing. We're still having new things hit, but they're new things from existing customer relationships. So that's a long way to say it's really more we're talking about a couple of quarters as opposed to something longer term.
spk05: Okay. Thank you. Helpful. One thing I wanted to circle back on, Michael, I think when you were talking about deposit price competition being fierce, you made some kind of comment about FHN's merger going away, and I'm not sure whether you were saying that competition – step up was inclusive of that or really wasn't driven by that. And so I wanted to clarify that, number one, but then number two, based on what you're seeing recently, what your expectations are on that front, if you expect that to get more competitive.
spk00: Pardon me, I now have Brandon reconnected.
spk06: Hey, Kevin, sorry, we're back. That was a difficult question, so we accidentally disconnected.
spk05: I guess so.
spk06: I guess so.
spk05: Did you catch it all, Michael?
spk06: I did, and sorry about that. I'm not sure what happened. So my point on FHN is it actually created additional deposit pricing pressures for us and for other banks, I'd say, in the southeast, because you had a bank that was expecting to be acquired, and then they kind of poked the bear there as they woke up. And our footprint is their footprint. So it created competition, which then creates more competition as others are having to come in and you see their marketing and people walk in the branch and corporations, stuff like that. So it definitely increased our competitive pressure during the quarter, which we thought – that deal was likely to go through, I guess, in Q1, even in a difficult environment.
spk07: Yeah, and so basically, Kevin, for those of us down in the southeast, once that deal didn't go through, they came out with some special offers and some things like that that made the market – that moved the market.
spk05: And do you think that's – is that kind of baked in at this point, or is that more an accelerating – pace of pricing competition coming out of them, as best you can tell.
spk07: Yes. It's hard to tell. We certainly don't want to speak for our friends. A lot of them are our friends, our competitors, but they're friends too. My guess is, and it's only a guess, they probably had to come out and get some funding. That probably settles down a little bit, but and feels like it may have settled in a little bit. However, I would say one of the things as we think about the second half of the year is that we do see larger regional banks and even some of the national banks, some of the big, even in our markets, one of the big four that's putting some offers out there that are, you know, that are above 5%. And so they're putting those out there with some advertising. It's more targeted advertising than just blanket advertising, but they're hitting the market with advertising, and it's coming from the largest regionals as well as even national where they're above 5% on the deposit office.
spk05: Got it. Okay. All right. Thanks, guys. Thank you.
spk00: Our next question will come from Matt Olney with Stevens. You may now go ahead.
spk02: Hey, thanks. Good morning. Sticking with the deposit cost commentary and the prepared remarks, you mentioned that mix shift away from some of the public funds that started in May, and I guess we could see more of that in the third quarter. Any color on the pricing levels of those public funds that you're exiting and the alternative funding that you're replacing this with? Just trying to get a feel for this is a material shift in the pricing. Thanks.
spk06: Hey, Matt. Good morning. So a large portion of Q2 was seasonal, as we kind of talked about. They're generally Fed funds plus a spread on at least a portion of them. There are a portion that's Fed Funds minus, but they're generally all tagged to Fed Funds. So the ones we've cycled out of are typically going to be Fed Funds plus, you know, 5 to 15 basis points. We're seeing competition in those priced above that, and so we let some of that walk, especially if it was tying up the investment portfolio would be the strategy there is, you know, you can – you can let some of those go unencumber your securities and do something else with that. You know, we mentioned brokered, as you know, we're customer funded bank. That's our philosophy. We, we always are typically lean that direction. We like to stay that direction. We're still heavy customer funded, but we did add some broker this, this quarter. And I mean, that was probably a cost of about five, 10. So we cycled out a fed funds plus, you know, it was five, 10. And so you pick up 30 basis points or so on a similar dollar amount. So things like that. And, of course, we're always working for core operating accounts that include a mix of non-interest bearing and interest bearing. So theoretically, you replace some of those deposits at a significantly lower cost. Although, as Chris mentioned, new interest bearing are coming on at 5% plus. I mean, that's just where the market is.
spk07: Yeah. Good morning, Matt. And so, yeah, notice Michael said we picked it up at 510 and lowered our cost. And so we don't and we we if you go back and look at our historical balance sheet, the only broker funds we've had on our balance sheet in years have been what we picked up through the Franklin Synergy transaction. And so we don't use that to fund our balance sheet and to fund our loan portfolio. We use brokered funds in cases like this where we've got something temporary and we can use it to lower our cost for whatever reason. And so that's our strategy there. Again, we don't use that to typically fund our loan growth. And then I would say this, we had a $463 million reduction in public funds. Remember, we talked about those being seasonal and how this is a season where those go down. And so, again, when you're managing your liquidity, that was also part of what factored into getting those temporary brokered funds on the books. But that $463 million was a combination of two things. One, seasonal reduction. But also, we exited a – it was a nine-figure account that was very high-priced. And so, again, that factors into the broker funds. And so that part's not seasonal, and that will come back.
spk02: Okay. That's helpful, Chris. Thanks for the commentary there. And then you mentioned the incremental funding just above 5%. Any more color on the – newer origination yields as far as where those have been coming on more recently?
spk06: They're 8% plus, Matt. We're still getting 300 basis point plus spread. I think it's 340-ish over the last eight weeks or so. It's healthy. Chris has said this on multiple occasions. On the asset side, people have adjusted to rates. They're paying market. That's out there. We're just haven't had as much loan growth as Chris has already touched on. But it's healthy yields.
spk02: And then moving over to the provision expense, it sounds like that negative provision expense in 2Q was from that reversal of the unfunded loan commitments that you've talked about. And based on the commentary, it sounds like we're going to see the unfunded construction commitments continue to move down pretty aggressively the back half of the year. So I guess thinking about the provision expense, any more guidance or commentary on that provision expense? I mean, could it remain relatively flattish in the near term, just given the commitments of the construction portfolio continuing to come down?
spk06: Yeah, I think, you know, Good old-fashioned ACL to help for investment. I mean, I think you're somewhere in this range, 145 to 155-ish. I think that's been consistent pending any economic swings or changes that would change that. I mean, the unfunded piece, I mean, the reality is our basis point loss reserve actually went up a couple basis points, so it's completely balance-driven. So construction... reserve percentage went up on both health for investment and unfunded. But the $200 million they rolled out of that unfunded commitment drove that number down. To Chris's point, you know, if you think about going from 113% of risk base to 100-ish, logic would tell you you could see a flattish total reserve to maybe a release. I think that's a pretty decent assumption. But not through us lowering our RACL percentage.
spk07: Not a credit outlook. This is a frustrating conversation. It's a little bit difficult. Look, we don't we have chosen the path of pretty much abiding by what the economic forecast and the and our committee that manages that. And so we don't make a lot of use of a lot of qualitative stuff like some do. I mean, we do, but we have some, but we don't, you know, this would have been a good quarter to frankly build the reserve probably. And we may have other quarters where it'd be good quarters to build the reserve. But, you know, we work with our auditors, we work with our internal folks and try and make sure we're getting it right. And so I wish I could answer that question very specifically, but, you know, it's always a mystery to me what it's going to be until about two days after the end of the quarter. And so I would not anticipate we would get much below a 1.5 at this point, 1.5% in terms of our HTM. But, you know, we could see a little bit of build. especially if the economy, if things take a turn for the worst, you'll certainly see a build. But if things kind of continue to operate in the haze, which we seem to be operating right now, I would expect it to continue to be in that 1.5 to 1.55, something like that. Okay. Our chief accounting officer is probably rolling over in his office right now. He's probably wallowing in the floor.
spk02: Well, I think you added enough caveats in your response there, hopefully, to satisfy others. Thanks for the comment there, guys.
spk07: That's exactly what I was trying to do, man. I was trying to get the point across but not getting any trouble.
spk02: I appreciate it, guys. Okay.
spk00: Next question will come from Brett Rabaton with Hovde Group. You may now go ahead.
spk10: Hey, guys. Good morning.
spk06: Morning, Brett.
spk10: Wanted to go back to deposit pricing, and, you know, you mentioned new money around 5%. Was curious to hear about the conversation with existing, quote, good customers and how that was going relative to where you're having to add new money. You know, how do you keep your good customers? Are your existing clientele happy with less than five?
spk07: So you don't is the answer, and so those good customers are at that same rate, or at least, you know, they're in that. I mean, they're at a competitive rate, and that's partially why our cost is where it is.
spk10: Okay. Okay. And I wanted to ask on capital, you mentioned, Chris, just kind of building capital from here, and you're at 11.7% CET1. Is there a level where even before you would try and figure out something to do with capital that would be, quote, the best use of capital that you might look to do a buyback or something? Is there a level with CET1, total risk-based TCE, where you say, hey, you know, we're starting to accumulate too much?
spk07: Yes, is the answer. And we're... And, you know, when you get to where we are on the CET1, and again, remember, we don't have any held to maturity, varied losses out there. And so... we feel like we're in a pretty strong position and that opens up the balance sheet restructuring opportunities, you know, and it can look theoretically, we're not going to do this. Okay. But theoretically we could, we could sell our entire investment portfolio of, um, 1.4 billion after the mark. Um, put it in cash at 5.25% and pick up well over 2% spread on that difference. I say well over. It'd be 220 probably. We'd pick up probably 220 basis points on that $1.4, $1.5 billion. Again, those are the kind of things. We're thinking about those, but also you're right. At some point, you're also thinking about a buyback. We are excited about the flexibility and the options it gives us, and We're at a point where we've got to start thinking about that given the capital levels. And, you know, once you get to CET1 that's nearing 12%, once you get to, you know, a tangible after AOCI of 9% and, you know, be 9% plus, you know, by the end of July. And so we've got that flexibility given where we are today, I think, in the capital levels. Okay. Let me make sure I present. The other side that you're balancing is you're thinking about what happens if credit, if significant credit problems do actually happen coming in the coming quarters. But remember, we're keeping a 1.5% reserve as well, ACL, on top of that, you know, those numbers. And so we're We feel like we have a pretty strong balance sheet all the way around.
spk10: Okay. Capital is certainly king. And speaking about credit, just one question on the multifamily market. Here in Nashville, I know it's a small percentage of the construction portfolio, but was curious to hear your thoughts on the dynamic we have here in this local market where it's more expensive than than many places in the country, but we have a large amount of inventory coming online, and we're starting to see maybe some incentive pricing, so to speak, months off rent, that kind of thing. What is your guys' view on the multifamily market, particularly here in Nashville?
spk07: Greg, do you want to comment?
spk09: Yeah, hey, Brett. I think, you know, you read the same headlines we read, but in talking with our customers, you know, I'm just more positive on it than some of these headlines. It seems like, and you were in town when we did the investor presentation not too long ago, and, you know, look at a lot of the cranes and a lot of the high-rises. I think some of that, some of those units will probably tend toward CBD and and be a higher price point. We've been, our clients have been very successful in more of the suburban markets and still seeing lots of good activity. Touch base with some of them, you know, we're always touching base with them. Touch base with one here recently, you know, he's got a project under contract to sell for numbers that way exceed the appraisals. Very successful. You know, these, we've got one that was structured with a sales contract, you know, at completion. And so it's near CO. So there's a lot of good activity. I think it may be back to normalcy. We don't have a crystal ball to understand and predict what those vacancy numbers are going to be. But in talking to our clients, we're still very positive and still You know, when we underwrote the project, we were talking and dealing with our existing clients. We were asking for significant cash equity. We were asking for guarantees. And so, you know, when you do a project like that, we're thinking through the cycle. We're not thinking about what the – you know, I don't get too amped about what the specific perfect project is because if it's so perfect, someone else is going to put one up across the street soon in that time period. And – We think that we're well positioned, a lot of cash equity and good relationships, and we're still seeing good activity. So I'm still positive.
spk07: And Matt, I'm sorry, this is Brett. Greg is not. known overly for his positive outlook on uh things like that as our chief credit officer so he he he's not he he'll he'll certainly come down on the other side sometimes and so uh but i do think that when we're in great geographies we still are having a lot of population growth uh all around and Greg does describe it well, kind of in, in kind of our, our thoughts, we are seeing a lot of units go up in the central business district. We're not actually not involved in, in those, uh, but we're, uh, we've got a lot of suburban stuff and, and continued to see as we talk, uh, I talked to a different, uh, one of our largest, uh, multifamily clients, uh, a lot over the last month. And, uh, man, I mean, it just, he was really bullish on, and this was in middle Tennessee, but really bullish and just, and the results are there. I mean, he continues to lease them every day and is working to get them out there as quickly as he can and he's leasing them every day.
spk09: Chris, I think you referenced in one that we had the conversation, he was, I'm not sure specifically where he, who he's talking with, but there's still a market out there for long-term refinancing. And talking about, you know, 10-year deals, 30-year terms, I think in that five to six range. So pretty sporty.
spk07: Yeah.
spk09: And I think that ties back to the long-term investment opportunity that we can all look at ups and downs, but no one disagrees with the footprint and the region.
spk07: Yeah, this client's working on a 5.4% refinancing through the government is what he's getting on a long-term refinance. So it gives us more capacity to be able to help him do the next one.
spk10: Okay, great. Appreciate the caller.
spk07: Thanks, Brett. Thanks, Brett.
spk00: Next question will come from Alex Lau of J.P. Morgan. You may now go ahead.
spk03: Hi, good morning.
spk00: Hey, Alex.
spk07: Morning, Alex.
spk03: I wanted to start off with Nim. How are you thinking about the through-the-cycle interest-bearing deposit beta for the remainder of the year, given the increased deposit competition?
spk06: Yeah, I mean, for every rate increase, it's basically one-to-one, right? It's 100%. So we're at 45% all in right now, and interest sparing is obviously above that. We expect rates to go up a quarter, interest sparing is going up a quarter. And that's just the way it's played out, especially given, as you know, deposits still kind of flocking to different places throughout the economy, whether it's back into equities or treasuries in some aspects, and then the competitive stuff we've already talked about. specifically in our markets, which, you know, when you're in good economies, good markets, you know, a lot of loan growth, and that requires deposits, which puts further pressure on deposit costs.
spk03: Thanks for that. So if we assume that the Fed hikes one or two more times, what's your best guess in terms of tying when net interest margin hits a trough? Is it a quarter or two from now, or is it the first half of next year? Any color or thoughts on that?
spk06: Yeah, end of year-ish would probably be my best kind of stab. It takes a couple months for that to play out. You know, loans reset a little bit behind deposits. So, yeah, probably year-end.
spk03: Thanks. And then just to follow up on the construction commitments, which drove the release in the quarter, So your commitments were 1 billion as of the recent quarter. What is the level that you're more comfortable with in terms of exposure here? Could we see another 200 to 300 million decline in commitments next quarter and then hold from there, given your comments about, you know, reducing your construction exposure through the quarter?
spk07: Yeah. So that commitments number, runs in front of your balance decreases. Okay. And so actually substantially in front. And so, you know, you'll see less decline in the commitments number moving forward and more decline in the balance number moving forward. And so we'll continue to manage it. down a little bit from where it is, but it won't be quite as dramatic as the 400 plus million that we've had over the last few quarters. But you could see the commitment go down another 100 million, maybe even another 200 million, but I wouldn't see it go down further than that.
spk03: Great. And then my last question is, you've talked about interest in hiring experienced bankers and teams. Do you see any near-term opportunities to pick up experienced teams given the disruption in the market, or are you currently less focused on adding additional teams for now?
spk07: No, we're not. We're never less focused on adding A-level bankers and A-level banking teams. And so we'll always do that, even as we're reducing expenses in other parts of the company. We think that's just – that's important. And you don't get – you don't – those opportunities don't come around every day. And so when you get them, you need to be – make sure you're always in a position to take advantage of them. And so we've got – we're having conversations this afternoon. I mean, you know, so we've got some conversations there that are current, and we'll – We think through just market disruption, we'll continue to get opportunities over the balance of the year.
spk03: Great. Thanks for taking my questions.
spk07: Thanks, Alex. Thank you, Alex.
spk00: The last question will come from Fetty Strickland with Janie Montgomery Scott. You may now go ahead.
spk07: Hey, good morning. Good morning, Fetty.
spk04: Chris, I think you touched on this a little bit earlier, but just regarding the securities restructure, would you consider a wholesale revamp of the securities book, or are you more inclined to be sort of opportunistic and tweak around the edges?
spk07: Yeah, so I'm going to let Michael talk mostly about that, but I'll say this. So, you know, we'll consider anything. You know, we'll consider whatever makes sense for us. all of our constituencies, especially including our shareholders. And so I think I would say it would be unlikely that we just flush the entire portfolio. I did use that as an example of what is possible, but I think it's unlikely that we would just get out of the entire portfolio because we use that for collateral and other things. Of course, you replace it in cash. You can use cash as collateral, too. It's actually surprising that we've had to get some – not every place counts cash the same way they count mortgage-backed security and actually prefer the mortgage-backed security, strangely enough. They need to update their guidelines. But we – and so – But it does give us the opportunity to look at doing some different things, even with, you know, maybe some pieces of the loan portfolio and some pieces of the investment portfolio. Michael?
spk06: Yeah, I mean, I think that's really well said. So, I mean, we're running scenarios that it's the entire portfolio down the tranches of munis, mortgage backs, what have you. I think Chris's point, right, is from a capital perspective, if you just isolate that, We have the capacity to do it, just unlikely, as he said, given all the other opportunities and other things we could be doing. So it's probably a segment of it, but TBD a little bit.
spk04: Understood. That's helpful. And that's funny some places don't consider cash things in the app. It just goes to show how long we're in a low-rate environment. Exactly. Just one last one for me. You talked about lift-outs down the road or even a potential M&A in the longer, longer term in adjacent geographies. Are there any specific areas you'd be more interested in getting into, whether it's Western North Carolina or even Atlanta, for example, just looking at your footprint? I was curious if there was some specific geographies you're more interested in.
spk07: Yeah, so, you know, geographically, we consider our footprint – way we think of it is we're basically kind of Birmingham North. We're North Georgia. We're really not in Western Carolina at this point, but we'd love to be in North Carolina. We'd love to be maybe even in South Carolina. That's a little, it's not a contiguous state, so it's a little further, but it's, you know, those are very attractive places to us. We're And then we're currently in southern Kentucky. And so we'd love to, you know, get additional opportunities in-state. You know, Tennessee recently hit, you know, it was number three on CNBC's list of the best states for business. And so we want to continue to do more and continue to grow our presence and share inside the states. We also want to grow in those areas. So currently it's Birmingham North, but we'd go Alabama all the way down to the coast. And the same way with, you know, Georgia, we'd go further into there or the Carolinas. And those would be the most attractive places to us. You know, we're not in that north. east corner of Tennessee, which is an area that we think is a beautiful part of the state with a nice steady economy. And then that would also lead you into western Virginia, which again is contiguous state as well. And so those are kind of areas that we like all of those areas.
spk04: No, that makes sense. That's super helpful.
spk07: And I have one other non-geographic point. And then what we're really thinking about, if we're thinking about an acquisition, we are thinking about geography. The second thing, and actually this would be the first thing, that would be the second thing. The first thing we're really thinking about is, you know, matching a culture. You don't want a culture that doesn't match. But then we also think about the liability side of their balance sheet and That's really big for us, is what does the liability side of the balance sheet look like, and does it really have good core deposits and good core customers? And that's really key to us as we think about even any possibility of an acquisition that's critical for us.
spk04: Got it. Appreciate you taking my questions. That's super helpful.
spk07: All right, Betty. We appreciate it.
spk00: This concludes our question and answer session. I would like to turn the conference back over to Mr. Holmes for any closing remarks.
spk07: Okay. Thank you all very much. We appreciate your support. We appreciate everyone participating. Good questions. And we look forward to speaking to you throughout the quarter and doing this again next quarter. Thanks, everybody.
spk00: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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