Q2 2023 FB Financial Corp Earnings Call
Okay.
Good morning, and welcome to the FB Financial Corporation's second quarter 2023 earnings Conference call.
Hosting the call today from FB financial or Chris Holmes, President and Chief Executive Officer, and Michael <unk>, Chief Financial Officer.
Also joining the call for question and answer section, it's 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 Dot first bank online dotcom.
And on the Securities and exchange Commission's website at Www Dot FCC Dot 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 opened for questions. After the presentation.
During this during this presentation FB financial May make comments, which constitute forward looking statements under the federal Securities law.
Statements are based on management's current management's current expectations and assumptions and are subject to risks 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.
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 FB financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K.
Except as required by law FB 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 FCC regulations.
A presentation of the most directly comparable GAAP financial measures and a reconciliation of non-GAAP measures to comparable GAAP measures is available in FB 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 Dot first bank online dot com and on the SEC's website at Www Dot FCC that park.
I would now like to turn the presentation over to Chris Holmes, FB Financial's, President and CEO .
Alright. Thank you Anthony good morning, Thank you for joining us this morning, and we always appreciate your interest in the company.
For the quarter, we reported EPS of <unk> 75 cents and adjusted EPS of <unk> 77, and since we've grown our tangible book value per share excluding the impact of the Aoc I at a compound annual growth rate of 14, 4.4% since we became a public company.
As of 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 and the 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 in 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.
Behind these dual focuses as a desire to be able to act aggressively.
To be able to.
Sure.
Act aggressively sorry for that when we feel more comfort and clarity around the overall economic and credit environment.
Yeah.
Our first priority.
Our balance sheet strength.
We feel very comfortable position with our current capital levels are.
Our continued priorities for capital use our organic growth burst and acquisitions second.
Given our current caution around organic.
Our growth in the general lack of M&A activity industry wide right now we're content to build capital until we have an attractive use for it.
Credit, but we continued to derisk, our balance sheet this quarter as our C and D and non owner occupied CRE balances declined by $118 million, leading to a decline in total loans held for investment of $40 million or unfunded commitments in those categories also continued to decline and are now.
But down 500, 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. We anticipate that this will be the last quarter, where that's the case.
C N D in CRE loans, the remainder of our portfolio was up slightly at 5.5% annualized overall.
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.
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 quarter, we feel it's prudent to take care of the existing clients and focus on rifle shot approach is new business right now as a result.
When you consider additional reductions in our C and 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 declared by $463 million during the quarter.
Some of which we backfill with broker funds, which are actually have a lower cost and provide more unencumbered liquidity than the public funds that ran at all.
Outside of public funds and broker deposits deposits were down slightly for the quarter, while deposit pressure remain very real there 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 Kurt.
On balance sheet liquidity and contingent sources of funding. So we're just walking a tightrope of paying customers market rates on their deposits.
They're 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 a slow growth.
Which is the primary focus of our first bank wide initiative that I've talked about in the past couple of calls this has been a time, where we've been reevaluating our community Bank business model following our.
Bad acquisitions.
Quadrupling the size of the company since our IPO in cost of crossing the $10 billion asset.
Thresholds.
We spent time refocusing on customer and associate experiencing experiences streamlining our corporate structure, eliminating redundancies and enhancing accountability.
The implementations associated with first bank wide project, we're also limiting outside.
Hiring with exception of revenue producers and we're also making reductions.
Discretionary expenses like travel and contributions will continue to make some structural and operational improvements that will help us.
Work on efficiency in late two additional expense reductions.
The reductions that we will provide updates on our plans along the way.
So to summarize.
Before I hand, the call over to Michael.
We are focused on strengthening the balance sheet and improving the company internally and sell 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.
And then I'll, let Mike will go into our financial results in more detail.
Yeah.
Thank you, Chris and good morning, everyone.
I'll start first with the 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 as growth in banking segment core noninterest expense of 12%.
While funding pressures that certainly hurt as well segment net interest income was down less than 1% from the second quarter of 2022 as loan growth and balance sheet remixing paired with increases in yields on earning assets have offset much of the funding pressure over 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, where 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 had no held to maturity Securities Securities.
Portfolio is currently around 11% of total assets, which is in our desired range of 11% to 13% of assets.
The current duration is roughly five four years.
With net loan growth being generally flat given our ongoing construction and CRE rebalancing paired with our continued strong capital build we have consider getting out of some of our securities that are in a loss position and we have the potential to apply a portion of our excess capital towards an opportunity to 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.
Nonpublic 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 would expect another 200 million to $400 million decline in public funds in the third quarter.
We continue to experience increased cost of deposits stayed about deposit mix and pricing pressures on.
On the deposit mix noninterest bearing accounts were down by $89 million or 14% annualized.
However, after a decline in April noninterest bearing deposit balances remained fairly constant through may and June .
So we are hopeful that we can continue to hold in ibs 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 down it was three 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 three 4%, 338% and then back up to 341% 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 less the cost of new interest bearing deposits has been in the three 4% range as well over the past eight weeks.
In June we had a cost of interest bearing deposits of $3, two 2% and a contractual yield on loans held for investment at $6 two 4%.
Cost of interest bearing deposits.
At 3.0% to 6% and a contractual yield of 616 for the quarter.
Our cost of interest bearing non public non brokered deposits was 2.59% in June 1st to three 9% for the quarter.
Core banking noninterest 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.
Noninterest expenses are top of mind for the company as we expect the margin to continue to struggle for.
For the quarter core banking segment expense was $66 7 million compared to $68 4 million in the prior quarter.
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 wide initiative, and we would expect to be able to give more got it 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 forecast deteriorated modestly during the quarter and we added a further three basis points to the allowance as a result.
However, provision expense and that 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 too, but we will continue to monitor our portfolio to see if some additional protection is warranted.
I'll now I'll turn the call back over to Chris.
Alright, thanks, Michael for that color to 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 a strong capital buffers, which we intend to maintain through this.
Period of uncertainty.
Work over the last five.
Five quarters to reduce our exposure to construction and commercial real estate also became evident.
Evident in our numbers this quarter.
We will continue to derisk the balance sheet over the near term. Additionally, we feel very comfortable with our current one balance sheet date 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.
We will now begin the question and answer session.
To ask a question you May Press Star then one your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys.
To withdraw from the question queue. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
First question will come from Stephen Scouten with Piper Sandler you.
You May now go ahead.
Hi, Thanks, good morning, everyone.
Good morning, David I guess, I'm really encouraged Michael by what you said and what you put in or at least around non interest bearing deposits. That's one of the biggest questions I have probably industry wide. These days, what I'm 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 noninterest bearing deposit accounts, where the type of accounts that would.
Lynn that to be maybe more stable.
And I guess it was 25% <unk> 22, 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.
Yeah, Good morning, Stephen.
So yes, 22% ish is where we are and that's where we ended the first quarter.
Expect it to be in this range if you remember back in.
It seems like a lifetime ago.
2020, when we did the combination with with Franklin financial.
Yeah, they were about 9%, 10% noninterest bearing.
<unk>.
First bank was probably 26, 27% that pro forma 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.
We do continue to add.
Core checking accounts accounts up a couple thousand.
During the quarter I think 256000 accounts from $2 54 in the first quarter said so the team continues to add core customers are bad commercial or retail and that's spread pretty good throughout our footprint you remember we have a a rural.
Community footprint add a commercial as well.
That diversity helps and.
Average average balance is fairly consistent.
Yeah, we think that that's a benefit.
To the company.
Yes, David I would just add this a couple of things that are probably helped that number a little is the fact that.
Actually a slight majority of our deposits would be consumer versus commercial.
Which is not.
Which is different than some other banks our size.
And then.
So we.
We bought and we've also got that what we call our community component with that again helps some stability there, but what we were trying to project we thought it would be in the 2021, 22%.
Going back to look at it pre COVID-19 numbers.
Okay, Great that's really helpful.
And then you guys mentioned the possibility maybe a security sales some of these things in a loss 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.
Yes, it's a constant point of debate quite frankly because.
Any losses or loss right, but our capital ratios have grown pretty strong. It's a it just opens the possibility at what we'll look at it and we have looked at multiple tranches anywhere from nine.
Nine months payback at 27 months and so.
It would be in between that.
We have an established as a target, but there's a lot to consider and theres other uses of capital as well and so we're just we're evaluating all options.
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 the inevitable opportunities might look like is that 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 a kind of a stack rank in your mind of kind of what you'd optimally like to pursue that came about.
Yeah.
There is optimally we'd like to pursue a really strong bankers and banking teams are 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 are when they're.
There may be experiencing some unsettled miss at other places.
Probably the biggest opportunity.
And then of course acquisitions are always.
Also an opportunity that being said.
You know acquisitions are hard into we've done.
For since we became a public company one right before we became a public company.
And they take a lot they they take your eye off the ball, sometimes operationally so we prefer the team's first but.
And if you, 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 in.
It would be.
<unk> be a preferred being a preferred position to participate.
It comes when that comes about.
That's really our first and then Michael as Michael said, when we think of using capital.
Right now our balance sheet restructuring is also top of mind.
Okay.
Great. That's super helpful. Appreciate all the color and congrats on the quarter.
Thanks, David.
Our next question will come from Catherine Mealor with <unk> you May now go ahead.
Thanks, Good morning.
Good morning.
I wanted to ask on expenses I know you've.
Given a little bit of a forward look as to how youre thinking about that I think last quarter you had talked about.
Core basic centers being in the $80 million to $285 million range for the year and it feels like that's going to be a lot more where he can 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.
Yeah, Good morning, Catherine Michael.
I Wouldnt started a lot lower we're still working through some of the the.
The levers we've created some optionality and some leverage there as well and so we're focused on.
20 theory back half 'twenty, three, but really 24, and creating a launchpad from there for $25 six splitting the company in a really good spot.
We'll have more to come on that but I would say steady state for now what we're working on some things.
And so.
Catherine.
Of course, we were thinking through the quarter and we think the results that they can do call not unanticipated question.
And we.
So our approach to it is we.
I made reference to some of the initiatives, we have going all that or improvement initiatives and they're yielding some efficiencies.
Yes, I think I said this on a previous call.
The goal is efficiency is not necessarily we don't we haven't set expense targets out there for these these various initiatives.
But as we are implementing them.
Is clear that there will be some some efficiencies gained and some expenses and expenses will go down and so we expect that to continue but we have we arent prepared to go put some number out that says hey here will be or what we're going to.
Got it.
<unk> over the next two or three quarters.
But I would say, we recognize that with margin compression.
With mortgage originations both being down revenue is.
Tougher to revenue growth is tougher to achieve would revenue growth is tougher to achieve expense.
The reductions are our mandate.
We expect that so that's kind of the way that we're operating the company right now.
Okay. That's helpful. And then maybe if you correct for.
You were talking a little bit about next quarter Michael.
We thought that the linked quarter expenses would be down outside of the FDIC assessment any idea of the size of that.
Yeah.
I've got a good Christmas point, it's a little bit.
Marginal at this point until we have some more plan solidified brought that down.
Down slightly yeah.
Not too much. Unlike this quarter that's it.
Okay, Alright, great and then maybe on the on the margin.
Whats your forward guide on the margin it feels like.
Youre coming out originally the goal of that about $3 45 50.
Below that but not significantly below that so D D.
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 cost is just too tough to make that call right now.
The outlook for deposit cost very difficult yeah.
I actually think the team did pretty well holding in in this 30 40 range. Yeah. There's a couple a couple of headwinds that were unanticipated on our first.
First quarter call that they came up in the second quarter with competitive price yeah. There wasn't a whole lot of rate movement in the second quarter. So.
There was some stability in that but there were some aggressive competitive pricing and a pending how some of the larger institutions play out and if they enter the market and start getting say progressive it could obviously put pressure on us.
That is a concern on forward.
Is it pricing that being said you know we were kind of remix the balance sheet, we're continuing to do that.
And again optionality that comp.
A common theme here that we want to be able to to restructure the balance sheet and get out of some of the higher cost.
Deposits, especially if they are encumbered.
To free up liquidity, so that that can create a lever to offset some of that margin pressure.
Yeah.
And so it's.
Got it.
I think your phrase was going to be tough to hold in for the rest of the year. It will be tough to hold in for the rest of the year I mean.
If you just look at the last three months of Michael with through our three margin in April May June .
It was actually relatively flat, which which we're glad to see we don't look at that and go boil I guess that means it's going to be flat 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 second half year. It feels like and again this is steel.
And our internal projections don't necessarily reflect it yet it may be softening so for us anyway.
Yes.
Went out and move some deposits up early.
<unk> got some but I think we've gotten maybe a little bit of benefit from that but but deposits are going to be tough second half of the year.
Yeah.
Very helpful. Thank you.
Thanks, Kevin.
Our next question will come from Kevin Fitzsimmons with D. A Davidson you May now go ahead.
Hey, good morning, everyone.
Good morning, Kevin more Kevin.
Just.
Curious.
The derisking and that was very intentional.
Construction in non owner occupied commercial real estate just wondering.
Chris.
You know you you mentioned youre going to continue to focus on that but in terms of magnitude and what that's going to mean.
Overall loan growth I know, you said flattish loan growth over the back half of the year, but are you looking at like.
For this being like a several quarter.
<unk>.
Headwind for growth, but but.
But the right thing to do for balance sheet strength in terms of.
The amount of.
Runway that you have to it will.
We'll be taking those segments down or is it more of a shorter term thing that you just really over the next few quarters. Thanks.
So in terms.
I think it affected affecting net loan growth I think its shorter term next couple of quarters, but we don't want to run the company.
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 and 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 if the regulatory threshold, which was 200 or 300, we were going to live below that 100% threshold on construction and development.
And so you know we.
Had a period in there were some reasons why that we went over that and they look we're in fantastic geographies.
And in.
And so again some reasons why we coming off Covid dip.
Depending on.
We had a lot of deposits.
We've made a conscious decision there.
And we're making a conscious decision to back away from that and so youll see us run continuously.
Adam.
Percent of risk based capital in C and D that certainly less than 100, and but we should be beneath that.
By the end of the quarter.
Look.
What I'll say by the end of the quarter.
Sure, Greg Bowers, our chief credit officers 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 on if they draw according to schedule, but by our math, we think will be under that at the end of this.
PRASM quarter now Q3.
And they will operate under that so once we're under that we'll continue to see us.
That gives us a little more room to two.
Do something besides make sure we're taking care of customers when you limit those commitments.
What we the way we view that as we're basically reserving our capacity for customer we have to make sure that we can take care of good long standing relationship customers and that's what we're doing so we're still having.
New things hit.
But there are new things from existing customer relationships and so so.
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.
Okay. Thank you helpful.
One thing I wanted to circle back on Michael I think when you were talking about deposit price competition being fears you made some kind of comment about fhm's merger going away and I'm not sure whether you were saying that competition.
Up was inclusive of that or or really wasn't driven by that and so I wanted to clarify that number one but then number two based on what Youre seeing recently, what your expectations are on that front, if you lose that.
Got to get more.
Got it.
Do you hear us.
Yep Yep.
Can you hear me.
Yeah.
Pardon me I will put on hold music as I get the speaker line reconnected. Thank you.
Thank you.
Okay.
Yeah.
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Okay.
Yes.
Hum.
Sure.
[music].
Pardon me and Brendan reconnected.
Hey, Kevin sorry, we're back that that was a difficult questions though.
Disconnect.
I guess so.
Yes.
Michael.
I did I am sorry about that I'm not sure what happened, but so my point on <unk> is it.
It actually created additional deposit pricing pressures or for us and for other banks out there in the South east.
Because you had a bank that was expecting to be acquired and then they kind of work.
Hope the Bayer there as they woke up in there.
Foot printed their footprint so it created.
Competition, which then creates more competition as other others are.
Having to come in and you say their marketing and people walk into the branch and corporate.
Corporation and 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 even in a difficult environment.
Yes.
So basically Kevin.
For those of us.
The southeast once that didn't go through they had they came out with some special offers and some things like that that.
It made the market that move the market.
And do you think that's is that kind of baked in at this point or is that more of an accelerating.
Pace of pricing competition coming coming out of them.
As you can tell.
Yes.
It's hard to hard to tell but we certainly don't want to speak for our friends and they are there are a lot of them are our friends our competitor, but their friends to in.
My guess is.
It is only a guess that they probably had to come out and get some funding.
That probably settles down a little bit but but.
It feels like it may have settled out 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 even.
In our markets one of the big four that putting some offers out there that are.
That are above 5%.
And so.
And there they are putting those out there with some advertising, it's more targeted advertising than just blanket advertising, but but.
But they are hitting the market with advertising and it's coming from the largest regionals as well as even national where they are there they are about 5% of the deposit offering.
Yeah.
Got it okay, alright, thanks, guys.
Thanks, Kevin Thank you.
Our next question will come from Matt Olney with Stephens you May now go ahead.
Hi, Thanks, good morning.
Sticking with the deposit cost commentary in the prepared remarks, you you mean.
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 in the alternative funding that you're replacing this with just trying to get a feel for it. This is a material shift in the pricing.
Yeah, Hey, Matt good morning.
So.
Large portion of Q2 was with seasonal seasonal as we kind of talked about.
They are generally fed funds plus a spread on at least a portion of them.
There are.
Portion thats fed funds modest, but they are generally all tagged to fed funds. So the ones. We've cycled out of are typically going to be a fed funds plus.
Yes.
The 15 basis point, we're seeing competition in those price above that and so.
We let some of that work.
Especially if it was tied up.
The investment portfolio would be the strategy there is.
You can you can let some of those go unencumbered securities in and do something else with that.
Yes, we mentioned brokered as you know we're customer funded back that's our philosophy, we always.
Typically lean that direction, we like to say that direction, we're still heavy.
Customer funded but we did add some brokered this this quarter and I mean that was probably the cost of about 510, So we cycled out of fed funds plus.
It was 510, and so you pick up 30 basis points or so on a similar similar.
Dollar amount, so things like that and of course, we're always <unk>.
Working for core operating accounts that include a mix of noninterest bearing and interest bearing side.
Theoretically you replace some of those deposits.
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.
Yes.
No.
Hey, good morning, Matt and so yeah notice as Michael said, we picked it up at 510 and lowered our cost and so.
We do it and we if you go back and look at our historical balance sheet. The only broker funds. We've had on our balance sheet and years had 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 only we use broker.
Funds in cases like this where we can we've got something temporary and we can and we can use it to lower our cost for whatever reason and so.
So that's our that's our strategy there we don't 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.
You talked about those being seasonal and how this is part of that this is the season, where those go down and so again when you're managing your liquidity that was also part of what's factored into the two though that getting those temporary brokered funds on the books, but that 463 million was a combination of two things one.
Our 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 broker tons and so that that part is not seasonal and that will come back so.
Okay. That's that's helpful. Chris. Thanks, 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 were those have been coming up more recently.
Yeah, they're 8% plus Matt So we're still getting through.
300 basis point plus spread.
Three fortyish.
Yes.
Eight weeks or so I'd say, it's healthy yes, Chris I said this on multiple occasions.
On the on the asset side people have adjusted to it.
I mean, they're paying market.
So that's out there we're just.
I haven't had as much loan growth as Chris has already touched on it but its healthy yields.
Okay.
And then moving over to the provision expense it sounds like that negative provision expense in <unk> <unk> 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 continuing to move down pretty aggressively in the back half of the year. So I guess thinking about the provision expense.
Any more guidance or commentary on that provision expense.
It remains.
Relatively flattish in the near term just given the commitments of the construction portfolio continuing to come.
Come down.
Yes, I think.
Good old fashion ACL to help for investment I think is.
Somewhere in this range $1 45 to 155 ish I think thats been consistent.
Pending.
Any economic.
Swings or changes that would that would change that I mean, the unfunded piece I mean, the reality is our basis point loss reserve actually went up a couple of basis points. So it's completely balanced driven.
So construction.
<unk> percentage went up on both held for investment an unfunded, but the $200 million they rolled out of that unfunded commitment drove that number down.
Add to Chris's point.
If you think about going from 113% of risk based.
Hundred ish.
Logic would tell you you could see a flattish total reserve.
Maybe a relief.
I think that that's a pretty decent assumption.
But not the rest lower in our.
Our ICL percentage. This is not a credit outlook. This is a frustrating conversation.
Yes.
[laughter].
It's a it's a little bit difficult, we look we don't.
We we have chosen the path of pretty much abiding by is what what the economic forecast.
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.
This would've been a good quarter to frankly build the reserve probably.
And we may have other quarters, where it would be good quarters to build the reserve, but we work with our our auditor who work with our internal folks are trying to make sure we get it right and so I wish I could answer that question very specifically, but but.
It's always a mystery to me, what it's going to be until until about two days after the end of the quarter.
And so I.
I would not anticipate we would get much below a one five at this point what 5%.
In terms of in terms of our HTM.
But we could see a little bit of build.
Especially if the economy things.
Things take a turn for the worst you'll certainly see a build.
But if things kind of continue to.
Operate in the Hays, which we seem to be operating right now I would expect it to be is to continue to be in that one five to 155 something like that.
And our Chief accounting officer, probably rolling over others.
It is office REIT, nearly as probably wallowing in the floor so well thank.
Thank you added enough caveats and your response, there hopefully to satisfy it.
Thanks, Michael.
What I was trying to do.
To get to pull the cost, but not getting not getting any trouble.
I appreciate it guys.
Yeah.
Yes.
The next question will come from Brett Robinson with hub group.
You May now go ahead.
Hey, guys good morning.
Good morning, Brett good morning.
Wanted to go back to deposit pricing and 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 are having to add new money.
How do you keep your good customers.
<unk> clientele happy with with less than five.
Yeah.
So you Don is the answer and so theres good customers or are at the same rate.
Or at least.
I mean, they're at their at a competitive rate.
Got it.
Partially why our cost is where it is.
Okay.
And then wanted to ask on capital you mentioned.
Chris just kind of building capital from here and your own 11, 7%.
One is there a level, where even before you would try and figure out something to do with capital that would be the best use of capital that you might look to do a buyback or something is there a level of CET, one and total risk based.
TCE, where you say.
We're starting to accumulate too much.
Yes.
Is the answer.
We are.
And.
When you get to where we are on the CET, one and again remember we don't have any held to maturity.
Varied losses out there.
So we feel like we're in a pretty strong position and that opens up the balance sheet restructuring opportunities.
And looking theoretically we're not going to do this okay, but theoretically we could we could sell our entire investment portfolio.
One four.
4 billion after the Mark.
Put it in cash at 5.25% pick up well over 2% spread on that on that difference.
I say, well, where it would be two 220, probably we pick up probably 220 basis points on that on that 141 $5 billion.
Again, those are the kind of things we're thinking about those but also you're right Bob at some point Youre also thinking about our buyback we are excited about the flexibility and the options it gives us.
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 CET, one thats nearly 12% what you get.
A tangible after a OCI.
9%.
9% plus.
By the end of July .
And so.
So we've got that flexibility given where we are today I think in the capital levels.
Okay. The hesitant.
Sure.
The other side that your balance sheet as Youre thinking about what happens is if credit is significant credit problems do.
Do actually happened coming in the coming quarters.
But remember, we're keeping a one 5% reserve as well ACL.
On top of that that you know those.
The numbers and so we're we feel like we're pretty well have a pretty strong balance sheet all way around.
Okay.
Certainly king.
Thinking about credit.
One question on the multifamily market here 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.
In 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 right that kind of thing what is your guys' view on the multifamily market.
Particularly here in Nashville.
Craig Your comment, yes, Hey, Brett.
I think you read saying headlines we read.
But in talking with our customers.
I'm just more positive on it than.
Some of these headlines seems like and you were in town. When we did the investor presentation, not too long ago and look at a lot of the cranes a lot of high rise I think some of that some of those units will probably tend toward CBD and b, a higher higher price point we've been.
Our clients have been very successful in more of the suburb in markets and still seeing lots of good activity or touch base with some of them will always touching base with them touch base with one.
Here recently scatter project under contract to sale or numbers that way exceed.
Appraisals.
Very successful.
These.
We've got one that was.
Was structured.
With a sales contract completion.
Completion and so it's.
<unk> CEO .
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.
<unk> very positive and still.
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 when.
When you do a project like that where we're thinking through the cycle, we're not thinking about what the I don't get too amped about what the specific perfect project is because of its so perfect someone else is going to put one up across the street soon in that time period.
We think we're well positioned a lot of cash equity and good relationships and we are still seeing good activity. So I'm still pause.
And Matt.
I'm sorry, this is bret.
Greg is not known overly for us positive outlook on things like that is our chief credit officer. So he is not.
It will certainly come down on the other side, sometimes and so.
But I do think that.
One we're in great geographies, we still are having a lot of population growth are all around and Greg does describe it well kind of in kind of our thoughts we are seeing a lot of units go up in the central business District, we're not actually not involved in.
<unk>.
But we are.
We've got a lot of suburban stuff and continued to see as we talked I.
<unk> talked to a different.
One of our largest.
Multifamily clients.
A lot over the last month.
Man.
Just.
Really bullish on.
And this was in middle, Tennessee, but but really bullish and just and the results are there I mean, it continues to lease them.
Every day.
And.
Is working to get them out there as quickly as you can at least the way every day, Chris I think you referenced and one that we had the conversation he was I'm not sure specifically, where he who use talking with but.
There is still a market out there for long term refinancing.
And talking about 10 year 10 year deals 30 year terms I think in that five to six range so pretty sporty.
And I think it's I think that that ties back to the long term investment opportunity.
We can all look at ups and downs, but no one no one disagrees with the footprint in the region. Yes. This clients working on.
Five 4% refinancing.
Uh huh.
So the government for.
What he's getting on a long term refinance so.
It gives us more capacity to be able to help them do the next one.
Okay, great appreciate the color.
Thanks, Brett.
Yep.
The next question will come from Alex Lau with Jpmorgan you May now go ahead.
Good morning.
Alex Good morning, Alex.
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.
Yeah.
Okay.
For every right and grades basically one for one right.
100%, so we're at 45% all in right now and obviously above that.
We expect.
Rates go up quarter.
Bearings going up the quarter.
And that's just the way it's played out especially given.
As you know.
That's still kind of flocking to different places throughout the economy, whether it's back into equity there.
Treasury and 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.
Lot of loan growth and that requires deposits, which puts further pressure on deposit costs.
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 win.
Margin hits, a trough is it a quarter or two from now or is it first half of next year any color or thoughts on that.
Yeah.
In the year ish would probably be my best best stab.
Yeah.
Next couple of months for that to play out, yes loans reset a little bit behind deposits.
So you got probably probably year end.
Thanks, and then just a follow up on the construction commitments, which drove the release in the quarter.
So your commitments were billing one as of the recent quarter what is the level that you're more comfortable with in terms of exposure here could we see another $2 million to $300 million decline in commitments next quarter and then hold from there given your comments about reducing your construction exposure.
Yeah, so that commitments number.
Runs in front of your balance.
Decreases okay ensue.
I actually substantially in front.
And so.
Yeah.
You'll see less decline in the commitments number moving forward and more decline in the balance number.
Paul.
So we will 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.
So.
But you could see the commitment go down another 100 billion.
Maybe another maybe even another $200 million.
But I wouldn't see it going down further than that.
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 experience teams given the disruption in the market or are you currently less focused on adding additional teams for now.
So we're not we're never less focused on adding a level by acres available banking teams.
So we'll always do that even if even as we're reducing expenses in other parts of the company.
That's just that's important and you don't get.
Those opportunities don't come around every day and so when you get them you need to you need to be make sure you're always in a position to take advantage of them.
We've got.
We're having commerce.
<unk> this afternoon.
So we get.
Some conversations there.
That occurred.
We think through just market disruption.
We will continue to get opportunities over the.
Over the balance of the year.
Great. Thanks for taking my questions.
Thank you Audra. Thank you Alex.
Yeah.
The last question will come from 30, <unk> Strickland with Janney Montgomery Scott.
You May now go ahead.
Hey, good morning.
Good morning, everybody.
Chris I think you touched on this a little bit earlier, but just regarding the securities restructure or would you consider a wholesale revamps on the securities book or are you more inclined to be sort of opportunistic and tweak around the edges.
Yeah. So.
I will let Michael talk mostly about that but I'll say this so we will consider anything.
It would be and we'll consider whatever makes sense for all of our constituencies including.
Specialty, including our shareholders and so we consider city I think I would say it would be unlikely that we just flush the entire portfolio I didn't use that as a as a.
For example, what 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.
It's actually surprising that debt.
We've had to get that not every place.
Accounts cash the same way they count.
Mortgage backed security.
And actually prefer the mortgage backed security strangely enough.
They need to update there.
They need they need to update their guidelines.
We and so but it does give us the opportunity to look at doing some different things even with maybe some pieces of the loan portfolio in some some pieces of the investment portfolio.
I think that's really well said.
So I mean, we're running scenarios that.
It's the entire portfolio down to tranches of Muni and 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 that he said given all of the other.
Opportunities.
Other things, we could be doing it.
Probably a segment of it but TBD a little bit.
Understood that's helpful and that's funny some places don't consider cash things MBS just goes to show how long we were in a low rate environment.
Just Luke.
One last one for me you talked about lift out down the road.
Central M&A in the longer longer term.
And adjacent geographies are there any specific areas you'd be more interested in getting to getting into whether it's western North Carolina. Atlanta. For example, just looking at your footprint.
Was curious if there is some specific geographies you're more interested in.
Yes.
So jia.
Geographically we consider.
We are basically kind of Birmingham north.
We're north Georgia.
In North Carolina.
Donna we'd love to be maybe even in South Carolina.
It's not a contiguous states. So it's a little further but it's you know those are very attractive place to us and then where we're at.
Currently is southern Kentucky.
And so we'd love to get additional opportunities in state.
Tennessee.
Recently hit.
Number three on Cnbc's list of the best State for business and so we want to continue to do more and continue to grow our presence and share inside the state, but we also want to grow in those areas.
Currently its Birmingham, north, but we like.
We'd go Alabama, all the way down to the coast and same way with.
Georgia, We did we would go further into their or the Carolinas and those would be the most attractive places to US we were not in.
That north east corner of Tennessee, which is an area that we think is a beautiful part of the state with us 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 we like all of those areas.
No that makes sense.
Super helpful.
One other non geographic point and then there's what we what we're really thinking about it 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 are really thinking about is culture.
Magic 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 is the liability side of the balance sheet look like and does it really have good.
Good core deposits and good core customers and that's that's really key to us as we think about.
Even any possibility of an acquisition that is critical for us.
Got it I appreciate you taking my questions Thats Super helpful.
Alright, we appreciate it.
This concludes our question and answer session I would like to turn the conference back over to Mr. Holmes for any closing remarks.
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.
Thanks, everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.