Q2 2023 Pinnacle Financial Partners Inc Earnings Call
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Good morning, everyone and welcome to the Pinnacle financial Partners second quarter 2023 earnings conference call hosting the call today from Pinnacle Financial partners is Mr. Terry Turner, Chief Executive Officer, and Mr. Harold Carpenter, Chief Financial Officer.
Please note pinnacle's earnings release, and this morning's presentation are available on the Investor Relations page of their website at.
W. P M F P dot com <unk>.
Today's call is being recorded and will be available for replay on pinnacle's website for the next 90 days.
At this time, all participants have been placed on a listen only mode. The floor will be open for your questions. Following the presentation.
If you'd like to ask a question at that time. Please press star one on your Touchtone phone.
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During this presentation, we may make comments, which may constitute forward looking statements. All forward looking statements are subject to risks uncertainties and other facts that may cause the actual results performance.
Financial to differ materially from any results expressed or implied by such forward looking statements.
Many of such factors are beyond pinnacle financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward looking statements.
A more detailed description of these and other risks is contained in Pinnacle Financial's annual report on Form 10-K for the year ended December 31st 2022, and subsequently filed quarterly reports pinnacle financial disclaims any obligation to update or revise any forward looking statements contained in this presentation.
Whether as a result of new information future events or otherwise.
In addition, these remarks may include certain non-GAAP financial measures as defined by SEC regulation G. A presentation a presentation of the most directly comparable GAAP financial measures and a reconciliation of non-GAAP measures at the comparable non-GAAP measures will be available on pinnacle Financial's website.
Www Dot P N F P dot com.
With that I'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's, President and CEO .
Thank you Paul those of you that.
Followed us for a while no one likes banked I'm Gonna again every quarterly earnings call with this dashboard, we blame it the primary things that matter over time in terms of bank performance Yeah.
<unk> measures first.
Followed by the non-GAAP measures, which provide the best insight into what I focus on and consequently, what we focus on at Pinnacle.
<unk> earnings continue to roll out we will see some pretty wide variability in performance among the banks.
For us to get.
Really good quarter on an adjusted basis, we grew revenues 11, 7% linked quarter annualized EPS 10, 9% linked quarter annualized and pretax pre provision net income 24, 8% linked quarter annualized we continue to see dramatic growth in loans and deposits at 11 three.
Nine 1% linked quarter annualized respectively.
Generally the best predictors by our ability to continue growing revenue and earnings going forward.
Book value per share grew meaningfully during the quarter aided by a sale leaseback transaction that Harold will review in greater detail shortly and the key asset quality metrics like MBA classified assets net charge offs continue to hold up extremely well. So in summary, second quarter was a great quarter for us now.
Let's review the quarter in greater detail.
And I'll come back and give some thoughts on the shares later.
Yes.
Thanks, Jerry and good morning, everybody, we will again start with deposits reporting linked quarter annualized average growth of 12% in the second quarter was again, a real positive for us as we've mentioned previously grown deposits in 2023 is a key focus in the second quarter was another indications on obtaining deposits in an environment where competitors.
Can be fairly unpredictable, there's very much doable for this franchise.
Several factors contributed to increased deposit rates in the second quarter competitive pressures were heightened during the quarter, primarily large regional banks offered rate specials at some fairly incredible rates in an apparent effort to achieve funding goals. We also have an important public bonds client base with much of these balances being tied to fed funds lastly.
The mixed shift of reduced noninterest bearing to interest bearing continued in the second quarter, albeit at a lesser pace.
All of these factors contributed to the average deposit cost increased to 2.52% with a spot rate at quarter end up 277% were optimistic about the pace of deposit rate increases as we head into the third quarter. Several factors to consider over the last few weeks our costs do not appear to be moving.
Up at the same pace as we experienced at the end of the first quarter and most of the second quarter a contributor to the slower pace in the slowing of the mixture of deposits from noninterest bearing to interest bearing but also we intend to reduce the absolute size of our more expensive wholesale funding base in the third quarter, while absorbing some of the added liquidity.
<unk>, which has been acquired over the last few months in other words, we do not believe we need to be nearly as aggressive all gathering funding as we have been over the last few months.
Reis will continue the increase in the second half of this year as we hopefully approach of terminal value that Budd.
We just believe with all the liquidity noise in the first half of the year, a more deliberate stance for gathering deposits and available to us as we move into the third quarter.
Lastly in the supplemental slides, there's more information on uninsured deposits, which were down to 28% of total deposits at quarter end, we won't go into this on the call, but just making sure everyone knows the information is there.
The second quarter was another strong loan growth quarter for us that said our line leadership successfully managed our loan growth down to the 11% linked quarter annualized rate, we are maintaining our loan guidance for 2023 at low to mid teens growth as we mentioned over the last several quarters, we've tightened the credit box for construction and deployed more does.
Supply of low pricing, which should serve to reduce our normally outsize growth spreads all floating and variable rate loans have continued to be very respect.
We also are seeing spreads all fixed rate lending improved but emphasis by our aligned leadership.
Our loan thus far is essentially the same as the deposit beta which we believe reflects a great deal of effort on the part of our relationship managers. Our aim with respect to loan pricing is to maintain our spreads on floating and variable rate loans and achieved 7%, 8% plus yields on both new and our new fixed rate paper.
Yeah.
As the top chart reflects our GAAP NIM decreased 20 basis points, which is more than we anticipated at the start of the quarter.
As we noted last quarter out of an abundance of caution our average liquidity increased by approximately $1 2 billion in cash during the second quarter and our quarter end liquidity is slightly higher. So we have a lot of cash going into the third quarter, which should help us eliminate some wholesale funding as well as to provide for loan growth in the second half of the year contributing to the cash.
Bill this quarter was the impact of the sale leaseback transactions, we mentioned in the press release last night, we received approximately $199 million from the sale of non or in fixed assets. We also sold $174 million from the sale of investment securities. They used to transaction allowed us to reposition under earning asset.
In the interest bearing cash in order to in order to eliminate the negative near term impact from increase lease calls our rate forecast is consistent with most rate forecasts out there. We are optimistic that the July raise about bad is the terminal point for fed funds, but we may be slightly more pessimistic.
Domestic and that we don't see rate decreases occurring until mid to late 2024 with that our forecast for the rest of 2023 is our quarterly net interest income will likely be flat to slightly up from the second quarter results.
As for our credit again are presenting our traditional credit metrics pinnacle's loan portfolio continued to perform very well in the second quarter. Our belief is that credit should remain fairly consistent for the remainder of this year. We did increase the ratio of our allowance for credit losses to total loans during the quarter to one point of weight per cent, we rework.
Several of our seasonal models during the quarter and are implementing these changes this quarter, we don't anticipate accelerating prices during the second half of 'twenty any increases from this point should be fairly modest dependent we believe primarily on macro trends as noted for the last few quarters. We continue to have a very limited if any appetite for new <unk>.
Construction also the CRE appetite chart on the bottom right is basically unchanged from the prior quarter, but does give you a real perspective on how we have reduced our appetite in commercial real estate over the last year or more.
In summary, our outlook for loan portfolio from a credit respective remains strong so with negative macro trends begin to develop we believe we are advantaged as we enter any potential recession from a position of strength.
Again, and consistent with last time more information around credits the top left chart deals with trends in construction originations, we began reducing eliminating our appetite for new construction originations last summer, which is consistent with the chart. The chart would indicate that our limited appetite is largely concentrated in warehouses.
Multifamily and residential.
A quick note about new residential commitments gold bars on the chart, our new loans for new homes under old Guy.
The old guidance lines for a limited set of longtime residential builder.
We continue to support our RASM builders under guidance lines that had been in place in some cases for years.
As you likely know residential builders are very busy right now given the state of the housing market and the lack of existing home inventories, which is especially relevant in our markets, which have a lot of in migration from around the country.
Secondly, the chart on the top level top right. We are providing updated information about the status of maturity for CRE and construction fixed rate loans.
Our yield target for these loans has increased into the 7% to 8% range. Two comments regarding this chart the absolute size of the fixed rate volumes coming up for renewal remains manageable and that with rental increases over the last three to five years and occupancy levels remained strong we believe that our borrowers will continue to be able to afford the incremental interest cost.
Additionally, our underwriting for several years has required that any new commercial real estate or construction commitments.
And at higher rates than the contract rate, which in most cases is two to 300 basis points higher again, we believe our borrowers have the resources to afford these increased rates both due to increased revenues on their part and based on our previous conclusions from our underwriting practices.
Now on the CS and as always I'll speak to BHG in a few minutes, excluding BHG the impact of the gain on sale of fixed assets and the loss on the sale of investment Securities fee revenues were up slightly from the first quarter.
That said, we're pleased with the effort of our fee generating units during what is proving to be a challenging banking environment.
We continue to anticipate that the revenues, excluding BSG and all these other items.
We will come in at around a high single digit growth rate for 2023 over 2022.
Okay.
Linked quarter expenses were essentially flat as personnel costs were down.
Other expenses were up by similar amounts.
Decreases in payroll taxes, and other benefits categories from the first quarter with the calls but to reduce personnel costs, while the sale leaseback lease expense offset in part by reduced depreciation cost was the primary contributor to the increased occupancy costs. Additionally, we reduced our anticipated annual cash incentive payout of 70%.
Approximately 67% of target awards at the end of the second quarter, so not much change quarter over quarter with respect to our outlook for incentive costs for either cash or equity incentives again, the reduced incentive accruals speaks to the variable cost nature of our incentives, which are all substantially performance based additionally, along with deferring projects or.
Slowing our hiring we feel like we have enough levers to throttle back on expenses should we need to we have again lowered our expense growth forecast for this year and have incorporated that into our updated outlook.
As it stands our expense guidance was for was previously low teens low to mid teens growth for 2023, we have lowered to high single digits to low teens growth for 2023 over 2022.
Our tangible book value per common share increased to $48 95 since quarter end up 16%.
Influences. This increase was the sale leaseback transaction, which provided almost $86 million in pre tax gains offset in part by $10 million in securities laws.
View of the macro environment, we anticipate retaining this incremental capital at least through the end of this year. We believe the actions we've taken to preserve tangible book value at our tangible capital ratio have served us well and have no plans currently to alter our tier one capital stacks, the any sort of common or preferred offerings.
Chart on the bottom left of this slide compares several capital ratios as of the end of March to our peers. Although we don't anticipate significant changes to the capital rules. We are pleased with these results and our ability to withstand any changes to the capital rules that potentially could come our way now.
Now a few comments about DSG before we look at the outlook for the rest of the year.
The top right chart is consistent with various calls and details that production has been consistent.
Over the last several quarters at one to $1 $2 billion per quarter placements to the bank network were less in the second quarter, while placements to institutional investors worth the highest level ever and signal that demand for BHG paper about some of the most respected asset management in the country is really strong.
BHG has been able to penetrate a very liquid channel over the last few years, which during some of these times as proven to be somewhat sickle for Soma bsg's competitors over the last several years BHG has made periodic calls to pivot between on balance sheet investor paper and off balance sheet bank placements historically.
As institutional investors come to the table there orders may receive any level of priority as to funding, which BHG has to manage that said Bhg's unique bank network, which we believe can't be replicated by any other BHG competitor continues to grow and provide the necessary liquidity to BHG.
This is a new slide where we're trying to provide additional clarity with regard to the significant funding channels available the BHG replacement of their loan production.
What's new to the funding channel list is that in the second quarter BHG successfully negotiated two private whole loan sales with $550 million of capacity.
We're slightly different in that in both cases these were large purchases structure similar to the bank network.
Gain on sale treatment has afforded these sales as the investors acquired alone with no recourse.
She has negotiated three warehouse lines with three well known and respected asset managers private equity firms.
Performance of Bhg's loans sold to the capital markets have been such that many of the firms that have participated in the past are in constant contact to acquire more loans in the future.
The bank auction platform remains very liquid and able to meet the necessary funding that DHT requires on at all in these funding channels collectively provide several billion dollars in capacity and the flexibility to manage liquidity risk effectively between the various channels.
This is the usual is information we've shown in the past they tell me spread trends just in a slightly different format. The top chart represents the gain on sale of the off balance sheet Bank network in the bottom chart is our blended chart of all balance sheet funding strategies, which incorporates the historical buildup of balances as anticipated spreads have come in with.
Higher rates with the bank auction rates being consistent with pre COVID-19 spreads.
During the second quarter, the blended spreads for on balance sheet was slightly higher than the bike network given the balance sheet loans reflect the buildup in balances over the last three years and as it stands today do you expect spreads to be fairly consistent going into the second half of 2020.
As we've noted in previous quarters, because she has tightened spreads box over the last several quarters, particularly with respect to the lower tranches of its borrowing base.
This will have an impact on both production and spreads average FICO scores in 2023 has increased to 743 as we've stated in prior quarters <unk> had been modifying our credit models towards originating less risky asset production volume remained strong even with tighter credit underwrite.
She refreshes his credit score monthly always looking for indications of weakness in this borrowing base credit scores are up from previous years. Additionally, approximately 22% a bcf production is with repeat borrowers adding to the quality of their loan base.
This slide details reserves and losses for both off balance sheet and all of the balance sheet models as we mentioned in previous quarters <unk> determined that loss rates in several lower tranches of their production was exceeding internal tolerances and elected to stop lending into these lower projects.
Their conclusion was that for loans written in 2021 and for most of 2022 several contained an element of brand inflation, which required remediation as.
As a result, we believe outside of losses could occur over the next couple of quarters at a similar place similar pace as the last two quarters.
Typically for BHG, approximately 70% of the loss content is incurred within the first three years of origination, but with grade inflation losses should come in come to light sooner.
As a result, BHG has expended significant resources to bulk up collection activities, including hiring more lawyers and we'll be instituting in person closings for new borrowers, which was suspended during COVID-19.
BHG had another strong quarter with approximately $1 1 billion in originations and are on track to a treat to achieve 384 billion in originations this year, which is slightly less than last year. Thus.
Thus far through two quarters production is slightly more than the prior year, even with efforts to tighten the credit box.
She has a conservative bias that production in the last half of the year will likely be lower than the first half, but should be close to what they had last year.
Net earnings are being forecasted at 175 million to $190 million, which is a tiger forecast from last year's last quarter's production of a 30% to 40% reduction from prior year's results. The numbers now work out to be a 35% to 40% reduction.
Quickly again, the usual slide on our current financial outlook for 2023, we continue to plan for a recession, but how severe it will be neither we nor anyone else really knows our job is to manage the risk faced this franchise every day, what we know is that our business model is relationship based nimble and.
Our management team has significant experience and have tackled the economic downturn before we have great confidence that we will be able to manage the high quality banking franchise that our shareholders have come to expect from us and concurrently handle whatever curve balls get thrown out and with that I'll turn it back over to Terry.
Thanks Harold.
I mentioned at the outset I'd come back to offer my thoughts on the shares obviously the primary goal of the calls to have an in depth review of quarterly performance, which we've now completed but beyond that we work hard to make sure that investors have an opportunity to understand more than just what went up what went down during the quarter, but to get to a better understanding.
<unk> of our approach for producing long term shareholder value.
Total shareholder returns our T S L.
So perhaps bad place began it just examine what kind of total shareholder return we've produced historically.
As you can see here over the last decade, and it feeds per day from the single best total shareholder return among peers.
And I invite you if you get a chance to go back and look at it since our inception in 2000 and look at it over our first decade look at it over our second decade over the last 15 years over the last 20 years.
Thank you find us at or near the top in all of those time segments, absolutely consistent performance irrespective of the various economic rate cycles over the last 23 years, and so what I won't examine that as how that happened.
Analyses of a number of bank stock Exburbs, an aspect that yours would show that there are three primary metrics that are highly correlated to T. S. Our overtime and their revenue growth reported EPS growth and tangible book value accretion.
Accretion.
I suppose that there are an infinite number of metrics that bear little or no correlation with DSR overtime, but they include metrics like net interest margin percentage cost of funds deposit cost betas loan yields noninterest bearing deposits to total deposits operating leverage and efficiency ratios just to name a few in fact you've already.
Saying our track record of total shareholder returns over the last decade, yet I'm confident that our NIM percentage is rarely if ever been above median our cost of funds is likely never been better than median our deposit beta is always high both when rates go up and when they come down loan yields have generally been though better than median in our non interest bearing.
Total deposits ratio has generally been less than most of our peers, there's nothing wrong with any of those metrics in fact, we measure and study all of them it.
It would be hard to build a model that many of those inputs, but I'm just making the point that we focus much more on growing revenues growing EPS and creating tangible book value than we do standard model inputs like the NIM percentage of cost beta or the percentage of noninterest bearing deposits to total deposits because historically.
Likely revenue growth EPS growth and tangible book value accretion and then more highly correlated with DSR, which honestly is the main thing I care about.
When I say, we focus much more tightly on growing revenues growing EPS and creating tangible book value Here's what I mean, most of you know a 100% of our salaried associates participate in our annual cash incentive.
100% no annual cash incentive is paid in virtually any salaried associates in this firm if our classified asset ratio and say, it's a certain level, but at the same way I've made a bunch of bad loans the metrics that determined virtually every salaried associates pay out include mine is the revenue growth and EPS growth rate.
Since revenue growth and EPS growth has been highly correlated with T. S hours, we have literally focused every single salary and associated in this firm on those two variables and I believe that's one of the critical reasons. Our firm continues to compound revenue and earnings growth like few others can.
My personal and saying it along with every other salaries associated this firm depends on those two growth rates in <unk>.
Terms of long term equity incentive plan, a 100% of our associates for granted chairs for most associates those shares a time vested but for the leadership team.
The top 150 yourself later than this firm including me this.
Substantial majority of our recurring annual award vesting is performance based and the two primary managements are peer relative to tangible book value creation and peer relative ROA TCE in other words for the leadership of this firm to maximize the vesting of the restricted share grants from our long term incentive plan.
Clearing and asset quality ratio, which in this case as an NPA ratio, we have to out run 75% of the banks in our peer group in terms of the tangible book value accretion.
ROA TCE.
Parents Daddy play that might give you a little insight on why despite the extraordinary liquidity that we in virtually every other bank had on our balance sheet. Following the pandemic leadership of this firm did not load the bond book with when yields were at near all time lows. So.
Here's how that plays out within the last five calendar years, we've seen a COVID-19 pandemic quantitative easing a mammoth influx of liquidity from all the government stimulus and response to the pandemic inflation or see be as high as 9% the model per.
We're saying that this increase in fed funds rates in recent history. In addition to quantitative tightening in a dramatic dramatic increase excuse me a dramatic decrease in money supply and associated deposits and inverted yield curve and a number of failures and otherwise have land banks and through all of that on the upper right you can see the dramatic out.
Most of our five year EPS growth versus peers on the lower left you can see that the primary driver of that EPS growth was the dramatic growth in revenue per share regardless of all the macroeconomic volatility and then on the lower right you see the very dramatic compounding of tangible book value. So I believe that continual com.
I think our revenue EPS and tangible book value has been the primary contributor to produce in the peer leading total shareholder return you saw several slides bags.
So now when you begin to think about what <unk> is going to look like over the next five years or over the next 10 years or over the next 20 years you might begin here the southeastern markets. We serve have a dramatically different growth profile than the rest of the nation, which has the potential to turbocharge, our revenue and EPS growth I'd hate to think I hadn't gone.
Bound earnings and revenues the pace, we intend to do and some of the other regions in this country.
But even more important than the dynamic growth in the markets. We serve are likely to enjoy is the competitive advantage that we built where our market share Tiger. We've been one of the fastest growing banks over the last 23 years and sovereign vibrant markets have certainly been a tailwind.
But you can be sure of the substantially more important contributor to our growth has been our ability to take market share from vulnerable competitors, what you're looking at here is market data for these back granted yourselves foremost provider of research to U S banks on the commercial market segment.
This is from their client satisfaction dashboard down the left side of the chart you see critical satisfaction variables based on their research things like ease of doing business being trustworthy value long term relationships creative insides, the digital experience the quality of the relationship manager cash management capabilities and so forth.
You can say by the scale at the bottom element centered colored dark green are markedly elements that are colored red would be trailing or at the bottom of the market and elements color at all the various shades from lighter green yellow to Orange are all scores in between the best and the worst.
So in the three rightmost column, you see pinnacle's scores for all of these important satisfaction metrics for small businesses as companies with sales from $1 million to $10 million middle market businesses, that's $10 million to $500 million in sales segment and then on the far right. The combined school for the one to 500 million dollar in sales.
Throughout our multistate footprint.
You don't have to study the chart very long to say that the pinnacle's market later for virtually every single one of these metrics and this is critically important to understand these charts cover our entire footprint and compare the five or six market share leaders. In addition to pinnacle, including through is bank of America Wells Fargo PNC first citizens.
And first horizon.
Obviously don't owe a greenwich could identify any other banks that dominate their markets is overwhelmingly as we do but I'd be surprised across our footprint, we're far and away. The market later in terms of overall client satisfaction and the all important net promoter score.
It seems to me the most important score of all is the net promoter score. Most of you know that it's a comparison to the number of clients that are so engaged with your brand that they fully intend to advocate for you with their friends and colleagues last the glass that are so disengaged with your brand that they are detracting from the reputation in the community.
You can see here our net promoter score is a league leading 86, among small businesses companies from sales from $1 million to $10 million in a league leading 82 in the middle market companies with sales from $10 million to $500 million.
Connecting this slide when the last regardless of all the money spent by our largest regional national competitors on technology and on the digital experience our clouds right our digital experience more highly than their clients right there throughout our footprint.
So much has been said about a potential migration regional bank clients to the national providers. When you look at the scores should be apparent while we lost virtually no large clients following the silicon valley failure, and while we continue to grow deposits at a dramatic pace in the aftermath.
The dramatic difference in net promoter scores between us at the top in our large national competitors at the bottom it'd be very hard to leave a bank, you're absolutely love and honestly, it's not hard to land bank you paid some banks compete on price. So I'm just wait for yield curve and since your balance sheet, but for US. It's this really.
This pursuit of creating raving fans. It explains our ability to grow revenue and EPS, almost regardless of economic ups and downs, so not surprisingly when British proud of the businesses in our footprint about which banks are likely to earn a share of their business over the next 12 months pinnacle's far and away. The most frequent response.
And you can see at year end and 42% of small business respondents named panicle, 50% of middle market business respondents named vehicle as the bank most likely to receive a share of their business, that's incredibly strong momentum and when granted from clients regarding which banks are most at risk for losing share of their business.
<unk> was far and away the least frequently mentioned response.
Consequently, our net momentum among businesses in our markets as market, leading at 38 and 42 in the two segments.
As further substantiation of the point I've been making about our relative lack of vulnerability versus the large national banks in our markets. The thesis that regional banks are more vulnerable to the large national banks might be trained for a differentiated banks, but business clients in these segments within our footprint might suggest otherwise given our knit.
<unk> momentum scores, so really to sum it up what I've tried to say is it's our belief that revenue growth EPS growth and tangible book value accretion have historically been most highly correlated with T. S are that's why we focus our entire firm on it through our short term and long term incentives we believe our.
Our relationship based model has historically produced strong T S or with more manageable risks and many places in the pudding.
When you think about the fact that the markets that we serve are likely to outperform the nation and the fact that we've got a demonstrably differentiated high touch and tech model. It generally attracts more than triple last class. That's the key to compounding earnings overtime irrespective of economic volatility.
We'll stop there operator and take questions.
Thank you Mr. Turner. The floor is now open for your questions. If you would like to ask a question at this time. Please press star one on your Touchtone phone.
This will be given preference during the Q&A again, we do ask that when you ask your question you pick up your handset to provide optimum sound quality. Please hold while we poll for questions.
And the first question today is coming from Jared Shaw from Wells Fargo.
Your line is live.
Hey, good morning.
Hi, Gerard.
Thanks for taking the questions I guess.
The deposit growth as it is it's great seeing that we've seen some deposit growth in some of your peers today as well, where where is that coming from is that really just the biggest national players or are you taking more wallet share from your existing customers I guess, maybe it's a little more detail on.
On where that money is coming from and how much more.
More runway you think there is to take that market share.
Yeah. That's a great question I'll give you several things to think about one is we've got a lot of people we've hired over the last couple of years.
We're still out there, bringing their clients to our firm.
I think also that when you get into this time of the year. We start season, we start seeing seasonality play into our deposit book.
And so consequently, we fully anticipate that we will see swell here in the third quarter and the fourth quarter.
And then lastly, our public bonds, we wait.
One <unk>.
Call. It a handful of public fund clubs here over the last quarter.
Quarter, or so and they're also building their balances.
More outsized way and in a more I call. It sleep I'll say it that way.
Sure and I might add to Harold's comments I think you know in terms of getting to where it comes from I think is first of all it's important you know the folks that we have hired.
The largest contributor of revenue producers does has been true is the second largest spend wells Fargo and so you know they are about consolidating relationships here based on their ability to serve clients better and so forth. So anyway, I think that's a big part of it but.
I wouldn't want it to be on say it that I think if you were to come inside this firm and talk to people you would hear them say, hey, what whereabouts transition is far from being one of the best asset generators to be in one of the best deposit generators and so there's a lot of energy inside the firm on a number of different specialties that we built.
I've mentioned them in.
In the past deposit verticals.
Large pools of money, where we have some value added product offering for things like property managers.
Homeowners associations.
You know.
Variety of pools of money like that where we've got a value added product that we've introduced over the last couple of years. So those things I have really good man them and there are a number of other of those verticals that are being rolled out literally as we speak so again.
Hope and belief is youll see a little bit of a transition in our ability to gather beyond just the relationship approach that we Harold and I. Both commented on but also through those specialties.
That's great color. Thanks, and then looking at the at the pace of hiring you know you've done a great job hiring people and market expansion.
How should we be thinking about your your pace of hiring new revenue producers at this point and can you give an update on maybe some of the the expansion markets.
<unk> that you've recently targeted.
Yeah, I, just I guess, maybe start with the second part of it you know come in on the expansion markets that we're in I think.
<unk> already given indications for the Atlanta market that I think their commitments are about a billion six north of a billion dollars in loan outstandings.
The more recent large market D C.
I believe that.
They have generally been a net provider of funding if you can believe that.
And generally in pretty short order approaching $700 million in funding I think maybe about $650 million in loan outstandings commitments are well above that.
The momentum is really strong in both those markets I think if you were.
To talk to Rob Garcia, Our Carolina Pelton laid our effort in those markets I would say they are enjoying great success, both recruiting people and recruiting clients and a large measure based on the strength of our treasury management capabilities and so forth. So I didnt write where we continue to be excited about those.
Expansions.
I think in terms of hiring people, where we continued to recruit I think we continue to do well, but my guess is.
You know we might not hire quite as many people. This year as we did last year, but we will hire a law, there's still a lot of hiring momentum and I always try to hold out as a possibility that it's conceivable that we might find our way to a market extension or two in there.
We feel like we've got a team that could build us a big Bang you you've heard us talk about that in the past, we're not just hiring anybody and we're not trying to build an LBO, but if we had the opportunity to build a big bank. We would proceed with it and so.
Anyway I hope.
Got into your question there.
Yeah, that's great that's great and then just finally for me.
Maybe for Harold you know, how should we be thinking about or where cash balances go.
In the near term and then I guess from what you said, we should just assume that any reduction in cash either it goes directly to the loan growth or just that H L. B reduction.
Any target yeah that sounds right, it's probably going to be around broker deposits.
We've got about call it upwards of $2 billion.
That we think that we can use to kind of to help fund our loan growth here in the over the year and also a hill.
Reduce the size of our wholesale book.
Great. Thanks, It won't all happen at once it'll have consistently through the next six months and probably into the first part of next year.
Great. Thank you.
Thank you. The next question is coming from Stephen Scouten from Piper Sandler Steven Your line is live.
Hey, good morning, Thanks, guys.
I guess what are the things that I'm curious about is just the strength of the deposit base and you've spoken a lot about how you and your people and and noted that you feel like this has really been a shift but I'm guessing I guess I'm asking how is this shift really occurred have you had to change your incentives to drive that kind of a culture shift towards deposits.
Or is it is it really continuing to focus on revenue growth and telling these people. If you want to book your loans, you've got a book of deposits first how can we think about that cultural migration I guess that's occurred.
Yeah, Stephen that's a great question then.
Appreciate it goes it is important to me.
Not changed aren't seeing them at all and as you know I'm, a believer I'm I'm, hoping I'm unconvinced GWA a believer that when you get all the associates at this firm aimed at revenue growth and EPS growth, it's not hard to illustrate it all gosh you know, we got a buy more money or we can't book.
Allowance God, we got to buy more money at a lower price, but you know it is so easy to move our company.
To whatever really is important in order to grow the revenues and EPS I think it would shock you how easy it is to illustrate.
How that works I think in the last quarterly all associates, making you know, we just put a slide up there and show what the financial performance is and you know you show them, Okay look where.
We're off on our margin here and it's largely a function of cost of funds and so then you go down and show them. The expenses were right on track, but don't Miss the reason, we're on track because we reduced our incentive accrual and so guys to be clear what we just happened to occur in this quarter as we took money out of mine in your pocket.
Incentive grow them, we put it in our clients pocket in terms of the rates, we pay them on deposits and so again.
We have not altered the incentive I doubt that we're going to it is we were able to move people back and forth not that we're constrained but.
That's very helpful. Thank Terry and then I guess in terms of the margin outlook I think you guys give the.
The cost of deposits at June 30, I'm not sure. If you gave like a June or end of period kind of margin relative to where the margin was for the quarter as a whole, but how do you think about incremental progression and compression from here.
And can you speak to the amount of floors you might have in the loan book, if and when we get rates lower.
Yeah.
Got loans, we've got floors on loans.
We're pushing for floors on loans.
Also pushing for.
You know folks will be very conscious about what rates, they're paying on their deposits I think we can be more deliberate with respect to our deposit rates as we go into the second half of the year as the margin performance in the third and fourth quarter, it's gotta be dial in all likelihood.
There's one more rate increase coming to us that we'll have to support in some way with our depositors.
But that said don't Miss we think our net interest income is likely to be flat to up so as Terry said, we're going to be focused on the revenue line and we're going to try to make sure that we don't sacrifice any of the ground that we've gained here over the last you know call it two or three quarters with respect to some of these Clos are we gathered.
So I'll stop there so you're going to see it gotten to your question.
Yeah, No I think that makes a lot of sense I think it speaks to that slide you got that in maybe a year ago, where you showed your.
Your deposit betas, but your NII outperforming irrespective of this deposit base because I think that's a good point.
Maybe just lastly for me around the new hires and you had some particular strength in wealth management can you give us a view on where kind of those new hires have been concentrated in I guess have had more of them been into that wealth management platform over time is that driven some of the strength there.
Well, there's no doubt that we have hired a good number of people in the wealth management segment and.
It's really across the wealth management segment, when I say that I mean, you know a lot of hiring.
Hiring and trust, which believe it or not.
Double digit growth business for us.
As well as hiring in brokerage.
Well as hiring what so am I referred to as private bankers.
Whether our relationship managers that are focused on wealthy individuals. So you know we've had hiring across all those segments.
<unk> that we probably have had a little more hiring in the wealth management segment over the last year or so year or two.
Than is normal, but I don't think that's necessarily by design I think it is more availability of people and so again, we just had a.
You know what we do is Ah trial.
Producers that are frustrated in the organizations that they work for and so I think there's sort of been elevated frustration, there, which has fueled our ability to hire their people I wouldnt look for that to be the ongoing norm at all I would say I wouldn't expect much different about the hiring mix.
In 'twenty 'twenty four is an example that I would have expected in 2022.
Got it extremely helpful guys I appreciate all the color and keep up the good work.
Thank you Sir.
Thank you. The next question is coming from Steven Alexopoulos from Jpmorgan, Steven Your line is life.
Hey, good morning, everyone.
Steve.
I wanted to start so you had favorable commentary in terms of the outflows of noninterest bearing starting to abate and then even the pace of deposit increase starting to abate.
You also cited Harold I think you said the competitive environment is unpredictable.
That a function of.
The competition lessening they just saw you're starting to see that abate a bit maybe you could drill down a little bit into what gives you comfort here.
Yeah, I think it's primarily around the trends when we watch our deposit book of about every day over the last you know call. It 90 days 120 days.
Feels like the pace is slower it feels like the calls coming into our units is less anxious.
There's a lot more opportunity coming from some of the new hires that we've had around deposit gathering.
Those sort of things.
Turning now we're talking about price based competitors before we'd start before we started the call today, what what I believe is price based competitors generally that's a short term phenomenon. Eventually they have to go back to whatever is necessary to create the profit margins they need to have and we feel like that a lot of this.
Recent activity from some of these regional competitors.
We'll have to be short lived.
I don't think that they can be competitive at the rates they are offering and so consequently, hopefully that competitive.
Kind of environment, we've been in well also abate to some extent.
I can be completely wrong on that but.
I think history is that price competitors can't be priced competitors for a long period of time.
Yeah.
Helpful. Harold.
On the expenses I appreciate taking down the expense.
It's an outlook a bit, but where we stand today, what's your bias in terms of where you think right now I know, there's a lot of variables, where you'll likely end up in this high single digit to low teens percent increase range.
I Wanna expenses.
Yeah, Yeah, I think if you were to just kind of twist my arm and put it behind my back and make me really being paying and not have to go probably to a call at nine to 11 somewhere in that neighborhood.
Okay perfect. That's helpful. And then final question for me.
In terms of the sale leaseback Carl could you walk us through the P&L impact on a go forward basis from the transaction.
I'll make sure I, just just from 30000 feet a lease expense less the depreciation savings from selling those properties is probably over a 12 month period about a call. It a 14 million dollar kind of additional rate run rate increase.
But the the cash that we were able to generate from move in the $200 million in fixed assets from zero to now call. It five in a quarter.
And the cash we generated from taking <unk>.
Investment Securities of 174 million of those from call. It two to two and a half to now five and a half.
That increase in yield basically offset all of the depreciate almost all the lease expense increase.
And just to be completely candid around the sale leaseback. When we started looking at this back in the fourth quarter of last year.
<unk>.
The kind of the play.
Play was that we would reposition more of the bond book.
And consequently, we thought we could probably reposition as much as another call. It <unk>.
Seven or $800 million in bonds with the gain we got on the sale leaseback.
But with all the activity in the first quarter and now going into the second quarter, and whether or not there's going to be a recession or not we elected just to warehouse the capital that create that we created from the game.
Got it so the benefit is you create excess capital and from an overall earnings view, it's fairly neutral moving forward.
That's exactly the point and that's.
That's basically why we did the.
The sale of investment Securities Mr. Neutralize the impact of the lease expense got it.
Okay. Thanks for taking my questions.
Thanks Jay.
Thank you. The next question is coming from Brandon King from Truest Securities Brandon Your line is life.
Hey, good morning.
Hey, good morning, Brandon.
Hey, so I wanted to get.
Updated assumptions on deposit mix included in your guide I know Harold you mentioned previously that.
By year end, we could get to below 20%. So wanted to see if you still feel comfortable with that sort of trajectory.
Just given where things stand today.
Yeah, I think we still feel like that that's a reasonable kind of number to put on the board.
I don't think we or anybody else Brandon has any idea where noninterest bearing deposits are going to go here in this environment, but it does seem like things are feeling better about that and that were at the end of the day.
Two things have to be in play one is our clients have to get to a level of operating cash where they feel like I need this and an operating cash account and on our side are our sales force our people our treasury management people have to talk to our clients about this seems to be a real a reasonable amount for you to keep in this in this deposit account.
You need to manage your business and so I think those conversations are occurring every day and I think it just lanes into this relationship based model that we continue to kind of hold on to as why we think this whole noninterest bearing a reduction.
Feeling better for us.
Got it got it.
It makes sense and then I wanted to talk about the allowance there was increase in the quarter and I understand the increase in commercial real estate, but I saw that because consumer real estate had a pretty sizeable jump as well. So just wanted to see if there's any context around that increase.
Yeah I think.
The increase in the consumer real estate.
Allocation is.
Primarily related to the macro case.
And the duration of those assets.
So you.
You know, we're not going to argue about whether or not we're a big fan of seasonal or not but.
At the end of the day when rates go up in those assets extend out then the seasonal model automatically penalizes those loans and the decisions you made on those loans back several years ago.
That makes sense, Hey, Brandon Yep, Yep, so nothing kind of qualitative there just through the quantity you know.
To be honest I can't remember the last time, we had any kind of loss on our one to four residential fixed rate mortgage.
Okay got it just confirm me thanks for taking my questions.
Thank you.
Yeah.
Thank you. The next question is coming from Katherine Miller from K B W. Catherine Your line is live.
Thanks, I want to circle back to the margin and just your thoughts into next year and it's helpful to think about are you, giving guidance you think NII is scale.
Flat to up in the back half of the year, but as we think about 'twenty four and let's just say we will.
We get a hike in July and then where we're at that level of fed funds that we don't get rate cut as we move into next year, how do you think about.
How how your NII might look next year and kind of a higher for longer scenario.
Yeah, well I think one big factor in that assumption would be what does the intermediate long into the curve.
As you know no bankers a fan of an inverted curve.
And so it just going to it's going to require a lot more work on our part in front of our sales force and how we price with clients and all of that sort of stuff. So so far we don't think.
Credit is gonna be.
<unk>.
We don't see that moving.
You know going into 2024.
We think we're well positioned there, but as far as our ability to grow net interest income and kind of a mid teens level it would be very hard.
As we look at 2024, but you know it all depends on what we believe is going to happen.
At the intermediate and long into the curve.
And as you get to a point, where you think your NII growth might pull back to maybe the mid teens, maybe even high single digit kind of pacing that scenario.
How quickly do you think you'll reconsider your expense grants going into next year. It could be at a member piece kind of like what we saw this quarter.
Yeah. That's a great question, we'll have to we'll have to consider a lot of things going into the expense book next year.
One would be you know a replenishment of our incentive cost.
Whatever that ends up being for 2023 and going back to trying to figure out how to achieve a full incentive again next year.
And then you know where we are with respect to hiring.
Today, we are.
Call it very conservative on our what we would call our support level positions.
Where we're not.
As far as revenue producers, we still are out there actively looking for revenue producers.
We've asked our support units to kind of to kind of hold it in.
And do what they need to do in order to meet whatever objectives, they have internally, but not to get a grasp on their hiring.
Hum.
I'll just leave it with that Kathryn.
Okay, Yeah, that's great that's very helpful.
Just one follow up on credit it seems like.
The guidance it feels like I'm, Gretchen there'll be strong, but well have a little bit in the back half of the year relative to the first half and it didn't feel like you would expect a big increase in the reserve ratio, maybe just commodities.
Here too we've seen outside of some unexpected change in what youre seeing on the credit front that the absolute dollar number and provision expense should be lower in the back half of the year relative to that 37 million I remember we saw this quarter.
Yes.
Yeah, we don't anticipate provision being that huh.
In the second half as it was in Singapore.
Okay great.
Great. Thanks for taking my question.
Sure.
Thank you. The next question is coming from Matt Olney from Stephens.
Matt Your line is live.
Thank you I want to make sure I understand the strategy on liquidity.
It sounds like the excess liquidity amount as you view this as around $2 billion and you Wanna be patient appointments.
It could take up to a up to a year.
Did I get that right and then I guess kind of part two to the broker deposits that could be paid down that you've mentioned Harold any more color on these product are these C DS and end and when do they start to roll.
Yeah, they will roll off over the call. It the next six months.
I've got some public fund money that I think will also be paying off over the next six months.
So it'll be those kind of things I don't think it'll take a year I think is more like probably a six to seven eight months Mad if I remember my maturity schedule.
It's kind of where we're looking at on this liquidity number.
Okay.
That's helpful. And then I guess kind of part two of that and thinking about the interest rate sensitivity on that I think it's on slide 49 of your deck, there where do you see that migrating over the over the next year, especially as we get closer to any kind of fed funds cut I would assume as you point out liquidity the bank would become more rate rate neutral, but just.
Curious kind of how you see that maybe over the next year no I think you're exactly right on that.
Once we get to a terminal value on fed funds.
Thank our sensitivity we will get.
No kind of go back to historical norms.
There will likely be deposit creep, but it won't be in leaps and bounds it'll be in small numbers.
But we'll also have the advantage of repricing fixed rate loans.
Going into kind of a kind of a stabilized rate environment. If there is such a thing.
Yep Okay.
Okay. That's helpful. And then just lastly on the loan growth front, you've talked about managing the growth lower in recent months and being more selective and very careful.
I'm surprised if you didn't take down our loan growth guidance. This quarter. It looks like the full year guidance implies we'll be flattish from from what we saw in <unk> can you just kind of speak to the pipeline as far as what you're seeing today and are currently versus a few months ago.
Yeah, Matt I think you you know.
Approach well so much of the loan growth is generated by the consolidation of banking relationships by new hires and that phenomenon occurs you know sort of irrespective of whatever other.
Economic factors exist.
You know, sometimes say well why don't you just take it to zero well that's no. Good for anybody I mean, you know we hire our.
People that have clients they need.
Need to move them otherwise they won't be their clients anymore, you know and so at any rate that that fuels are some of the growth.
What we do I think Harold born is we use pricing.
Which you know curbs things on the margin, we've said as an asset class constructions asset class.
Well, unless we want less obvious things like Haynesville teas, and those kinds of things and so they're marginal changes that are really what tamped down.
Tamped down the growth but.
In terms of what the economic loan demand it looks like I would say that the fed is having an impact I do believe that the pure economics.
Request that we see today would be easily less than what they would've been.
Or two ago.
Yeah.
Okay, well, let's see.
Our a N C a nightmare.
Alright, that's helpful. Terry Thanks for taking my question.
Yep.
Thank you. The next question is coming from Brody Preston from UBS Brody Your line is live.
Hey, good morning, everyone. Thanks for taking my questions.
I wanted to.
I wanted to ask.
Just if I could start on the fixed rate portion of the of the loan portfolio I just wanted to ask if he knew what was the dollar amount of fixed rate loans that were repricing over the next 12 months, where and then when I kind of go back through your your previous tax it looks like fixed rate origination yields were about $4 75 to five five about four four and a half year.
Is that a good yield to use when we think about what's rolling off the book for fixed rate loans right now.
Yeah, I don't have you know, what's the fixed rate maturities in the C&I book are with me Ive just got what's in the commercial real estate and construction book on the slide, but I wouldnt imagine that the yield difference would.
It would be terribly different between what's in what's in the commercial real estate versus the C&I book I, just don't know what the volume would be with respect to that most of them are C&I book is.
Floating.
Our variable and so I mean, it would be it would be slightly higher but I don't know how much more.
Got it okay. So I can just use that that CRE portion.
As a proxy.
Also wanted to ask just on the negotiated deposit book.
Yeah I wanted to ask is what portion of that book has recently renegotiated on rate and for those that have recently renegotiated where are the where are the new rates moving to.
Yeah Mao.
I think that number would be in the mid threes.
Somewhere in that that range.
And I would imagine so.
A substantial amount of that book has been renegotiated.
I've not seen a bell curve of my deposit book are late.
Lately.
What are your track like what the rate is you know the low rates versus the higher rates and all of that.
But substantially all of those deposits have repriced in one way shape or form.
Got it thank you.
On the sale leaseback transaction do you remember what the cap rate was on that transaction for the buyer.
Well I really don't know that would be an interesting thing to know but.
I don't.
Got it Okay and then.
You didn't happen you didn't have 100 million or just under $100 million of fixed rate.
Sorry in construction loans that were maturing in the second corner.
As part of the slide deck last time I wanted to ask just what happened to those loans did they re up with you at your targeted rate you know did any of them leave the bank and I guess did any of them struggle with the increase in rate.
I'll go back and look at my numbers, but I think there was only a small percentage that left the bank.
I think.
Probably a third maybe 25% to a third left the bank.
Went to the permanent market I think the rest are probably still hanging with us.
Got it okay.
And just a couple of last ones on the <unk>.
<unk> portfolio do you happen to know what the effective duration of that portfolio is and what the conditional prepayment rate you're assuming in that duration calculation.
I think the average life of <unk>.
If you're talking about years is that right.
Oh, yes, yes.
Yeah Yeah.
I think the life in Iff's book now somewhere around eight.
And the percentage duration I think is around 5%.
Okay.
Do you do you know what the CPR is in that duration kind of relation I know Harold I don't but I can get that for you Brody I'll get it to you.
Awesome I appreciate it and then just last one just I you know I think you might've touched on it earlier, but I'm I'm sorry, if I misheard you just the increase in the CRE Reserve was there anything like was there any specific kind of metric that drove that increase within your model just because it had been declining for the last several quarters.
No I don't I can't point to any kind of anything specific in the CRE book, There's no individual loans in there that contributed to it or anything like that.
No I don't I don't know of anything.
I was more interested in hearing within the within the ECL modeling. If there was any specific variable where you know maybe there was a.
Yeah.
Larger price decline that you were factoring in within the ACL modeling I just that.
That's what I was more getting at.
So I really I don't know the answer to that question. If there was one I don't think there is one.
Okay, great well. Thank you very much for taking my questions everyone I appreciate it.
Thanks, Brian .
Thank you. The next question is coming from Brian Martin from Janney Montgomery, Brian Your line is live.
Hey, guys. Most of my stuff was just asked on the last couple of questions, but just one thing Harold you gave a spot rate on I think deposits do you have what the spot rate was on the margin at at the end of the quarter.
It sounds as though it's going to you talked about the dollars of net interest income because the.
The margin itself is going to drop.
Dropped the next couple of quarters, maybe stabilize later in the year that based on kind of your outlook on rate today is that that fair.
Yeah, That's fair I don't have a monthly financial information in front of me.
But we think it's got a.
Well decline over the next couple of quarter, but again, our focus is on that net interest income number.
But we think flat to up Yep gotcha, Okay, and then liquidity normalizes by end of year, that's kind of what you are suggesting that six to seven months or so yeah. I think it will be I think will be closed by the end of the year.
Alright, and then just last two just on the I'm BHG, Yeah, just kind of the outlook narrowed a little bit more just as we think about 'twenty for any.
High level you know.
How we should be thinking about BHG next year Hell with depending on how these losses potentially play out or I don't know.
Yeah.
I would not first of all we're not giving guidance on 2020 for but at the same time I think bsg's outside.
Outsized growth rates from all over the last several years and you know depending on which one you look at I think they'll become a lot more normalized.
Going into 2024.
Okay.
Perfect. That's all I had thank you.
Thanks, Brian .
Thank you and we have another question come in from a charter at Shaw from Wells Fargo. Jared Your line is live.
Hey, Thanks, just a quick follow up on the BHG you called out the.
The loan sales to the institutional investors, where those also covered under a substitution agreement or when you say there is no recourse. That's just truly no recourse there off the balance sheet and any losses will be absorbed by those borrowers are purchasers.
That's right.
That's right.
From my understanding is they bought those loans in their layers. So okay.
The gain on those wasn't quite at the same level.
But at the same time, they don't have a recourse.
Okay, great. Thank you.
Thanks, Jerry. Thank you. Thank you there were no other questions in queue. At this time. This does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.