FB Financial Corporation (NYSE:FBK) Q2 2023 Earnings Call Transcript

FB Financial Corporation (NYSE:FBK) Q2 2023 Earnings Call Transcript July 18, 2023

Operator: Good morning and welcome to the FB Financial Corporation’s Second Quarter 2023 Earnings Conference Call. Hosting the call today from FB Financial, are Chris Holmes, President and Chief Executive Officer; and Michael Mettee, Chief Financial Officer. Also joining the call for the question-and-answer section, is Greg Bowers, Chief Credit Officer. Please note FB Financial’s earnings release, supplemental financial information and this morning’s presentation are available on the Investor Relations page of the company’s website at www.firstbankonline.com and on the Securities and Exchange Commission’s website at www.sec.gov. Today’s call is being recorded and will be available for replay on FB Financial’s website approximately an hour after the conclusion of the call.

At this time, all participants have been placed on listen-only mode. The call will be open for questions after the presentation. During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities law. Forward-looking statements are based on management’s current expectations and assumptions and are subject to 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. Many of such factors are beyond FB Financial’s ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements.

A more detailed description of these and other risks that may cause actual results to materially differ from expectations is contained in 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 SEC 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.firstbankonline.com and on the SEC’s website at www.sec.gov.

I would now like to turn the presentation over to Chris Holmes, FB Financial’s President and CEO.

Chris Holmes : All right. 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 $0.75 and adjusted EPS of $0.77. We’ve grown our tangible book value per share, excluding the impact of AOCI, at a compound annual growth rate of 14.4% since we became a public company. As of quarter end, we had tangible common equity to tangible assets of 9%, common equity Tier 1 capital of 11.7%, total risk-based capital of 13.9%. If we include unrealized losses on securities in those regulatory capital ratios, common equity Tier 1 capital would be approximately 10.6% and total risk-based capital would be approximately 12.9%. As we’ve discussed on the last few calls, our two current priorities are maintaining the strength of the balance sheet and improving internal processes and procedures to become more effective and efficient.

Behind these dual focuses is a desire to be able to act aggressively — sorry for that. And we feel more comfort and clarity around the overall economic and credit environment. Our first priority of balance sheet strength. We feel very comfortable positioned with our current capital levels. Our continued priorities for capital use are organic growth first and acquisition second. Given our current caution around organic growth and 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. On credit, we continue to derisk our balance sheet this quarter, as our C&D and non-owner occupied CRE balances declined by $118 million, leading to a decline in total loans held for investment of $40 million.

Our unfunded commitments in those categories also continued to decline, and are now down $454 million or 27% from March of 2022, which is about the time we began limiting our new commitments on those products. We’re intent on limiting our exposure to construction and commercial real estate even in a geography that’s among the best given the risk inherent in these products. We’ve also had a concentration in construction that exceeded regulatory guidance of 100% of risk-based capital, and we anticipate that this will be the last quarter where that’s the case. Excluding our C&D and CRE loans, the remainder of our portfolio was up slightly at 5.5% annualized. Overall, the current credit environment remains benign, as reflected in our continued strong credit metrics of 3 basis points of net charge-offs to average loans and 47 basis points of NPLs to loans held for investment.

Demand for loans is still out there if you’re seeking growth, and the credits actually look reasonably good. However, given the uncertainty of the coming quarters, we feel it’s prudent to take care of the existing clients and focus on rifle-shot approaches to new business right now. As a result, when you consider additional reductions in our C&D and non-owner occupied CRE balances, we would expect overall loan growth to be relatively flat for the second half of the year. On liquidity, the seasonal decline in public funds that Michael telegraphed on our prior call began in May, and public funds ultimately declined by $463 million during the quarter, some of which we backfill with broker funds, which actually have a lower cost and provide more unencumbered liquidity than the public funds that read off.

Outside of public funds and broker deposits, deposits were down slightly for the quarter. While deposit pressures remain very real, they continue to be more interest rate-driven than the fear-driven exodus that many forecasted for regional and community banks at Silicon Valley. From a safety incentive perspective, we feel great about where we are between the current on balance sheet liquidity and contingent sources of funding. So we’re just walking the tightrope of paying customers market rates on their deposits while also trying to defend the margin. Moving to our second priority of internal improvements. We’re focused on improving our processes and procedures during this time of slow growth, which is the primary focus of our FirstBank Way initiative that I’ve talked about over the past couple of calls.

This has been a time where we’ve been reevaluating our community bank business model following our five acquisitions, quadrupling the size of the company since our IPO and crossing the $10 billion asset threshold. We spent time refocusing on customer and associate experiences, streamlining our corporate structure, eliminating redundancies and enhancing accountability. During the implementations associated with the FirstBank Way project, we’re also limiting outside hiring with the exception of revenue producers, and we’re also making reductions of discretionary expenses like travel and contributions. We’ll continue to make some structural and operational improvements that will help us work on efficiency and lead to additional expense reductions, and we will provide updates on our plans along the way.

So to summarize, before handing the call over to Michael, we are focused on strengthening the balance sheet and improving the company internally until the current environment changes. We were early in taking our foot off the gas in April of last year. And our goal right now is to be positioned to be able to mash the accelerator when we feel comfort in the economic and credit outlook. I’ll now let Michael go into our financial results in more detail.

Michael Mettee : Thank you, Chris. And good morning, everyone. I’ll start first with the adjusted pretax, pre-provision trends from the bank. For the quarter, we showed adjusted Banking segment pretax pre-provision of $46 million. That’s slightly up from the prior quarter of $45.8 million and down 17% from the second quarter of 2022. The primary driver of the year-over-year decline is growth in Banking segment core non-interest expense of 12%. While funding pressures have certainly hurt as well, segment net interest income is down less than 1% from the second quarter of 2022 as loan growth and balance sheet remixing paired with increases in yields on earning assets have offset much of the funding pressure of the past year. We expect funding pressures to continue in the near term and are taking steps to address our expense load.

Moving to our liquidity position and deposit base. We have on balance sheet liquidity consisting of cash and unpledged securities of $1.4 billion. We have an additional $6.4 billion in unsecured borrowing capacity available, including broker deposits, Federal Home Loan Bank and discount window. For tax purposes, we have $2.2 billion of real estate loans held at our REIT. Were we to feel 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. The portfolio is currently around 11% of total assets, which is in our desired range of 11% to 13% of assets, and the current duration is roughly 5.4 years.

With net loan growth being generally flat given our ongoing construction and CRE rebalancing, paired with our continued strong capital build, we have considered getting out of some of our securities that are in a loss position. And we have the potential to apply a portion of our excess capital towards an opportunity trade in the portfolio. Moving to deposits. In total, our deposits declined by $311 million versus the prior quarter. Outflows of public funds accounted for $463 million of that decline and were partially offset by $238 million in new brokered CDs, leaving non-public, non-brokered funds down roughly $86 million. As a reminder, those public funds balances tend to begin building in November and decline in June through October, so we’d expect another $200 million to $400 million decline in public funds in the third quarter.

We continue to experience increased cost of deposits due to both deposit mix and pricing pressures. On the deposit mix, non-interest bearing accounts were down by $89 million or 14% annualized. However, after a decline in April, non-interest bearing deposit balances remained fairly constant through May and June, so we are hopeful that we can continue to hold NIBs relatively flat in the third quarter. On the cost of interest-bearing deposits, competition remains fierce in our markets and was really not helped by the termination of the First Horizon merger. Moving on to our net interest margin. The margin was down — was 3.4% for the quarter, down 11 bps from the first quarter. We expect some continued compression in the margin due to funding pressures.

However, the margins for each of April, May and June, respectively, were 3.4%, 3.38% and then back up to 3.41% in June. So we hope to limit the size of that compression over the next couple of quarters. That said, margin continues to be difficult to predict. For some monthly trends, our yields on newly originated loans less the cost of new interest-bearing deposits has been in the 3.4% range as well over the past eight weeks. In June, we had a cost of interest-bearing deposits of 3.22% and a contractual yield on loans held for investment at 6.24% versus cost of interest-bearing deposits at 3.06% and a contractual yield of 6.16% for the quarter. Our cost of interest-bearing non-public, non-brokered deposits was 2.59% in June versus 2.39% for the quarter.

Core banking non-interest income of $11 million was in line with our expectations, and we expect to continue to hover in that $10 million per quarter plus or minus range in 2023. Non-interest expense is top of mind for the company as we expect the margin to continue to struggle. For the quarter, core banking segment expense was $66.7 million compared to $68.4 million in the prior quarter. As Chris mentioned, we have halted hiring outside of revenue producers and have cut back on more discretionary expenses such as travel and contributions. We continue to work through what an optimized level of expenses will look like for us as we implement some identified efficiency projects from our FirstBank Way initiative. And we would expect to be able to give more guidance there by the end of the year.

In the third quarter, outside of the FDIC insurance assessment related to the recent bank failures, we would expect controllable expenses to be down slightly to flat as compared to the second quarter due to the measures we already have put in place. Closing with our allowance for credit losses. Economic forecast deteriorated modestly during the quarter, and we added a further 3 basis points to the allowance as a result. However, provision expense ended up being a release rather than a build as our reserves on unfunded commitments came down once more. This was primarily due to the decline in our unfunded construction and development commitments. We will continue to be cautious on our reserves. At this point, there are no industries that we are qualitatively assigning additional reserves to, but we will continue to monitor our portfolio to see if some additional protection is warranted.

I’ll now turn the call back over to Chris.

Chris Holmes : All right. Thanks, Michael, for that color. And 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 strong capital buffers, which we intend to maintain through this period of uncertainty. Our work over the last five quarters to reduce our exposure to construction and commercial real estate also became evident in our numbers this quarter, and we’ll continue to derisk the balance sheet over the near term. Additionally, we feel very comfortable with our current balance sheet and available sources of liquidity given the stability that we’ve seen in our non-public funds deposits.

We believe our conservative risk management today is putting us in a tremendous position to execute on future opportunities. Operator that concludes our prepared remarks. Thank you, again, everyone, for your interest in FB Financial, and we’ll open the line for questions.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] First question will come from Stephen Scouten with Piper Sandler. You may now go ahead.

Stephen Scouten : Hey, thanks. Good morning, everyone.

Chris Holmes : Good morning, Stephen.

Stephen Scouten : I guess I’m really encouraged, Michael, by what you said and what you put in the release around non-interest bearing deposits. That’s one of the biggest questions I have, probably industry-wide these days. What — I mean other than what you’re seeing in May and June, which is great, what do you think — is there anything structural around maybe the size of your non-interest bearing deposit accounts or the type of accounts that would lend that to be maybe more stable? And I guess it was 25% 1Q ’22 were 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?

Michael Mettee : Yeah. Good morning, Stephen, so 22%-ish is where we are. That’s where we ended the first quarter, expected to be in this range. If you remember back in, it seems like a lifetime ago, 2020 when we did the combination with Franklin Financial, they were about 9% to 10% non-interest bearing. FirstBank was probably 26%, 27%, 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 do continue to add core checking accounts. Accounts up a couple of thousand during the quarter, I think, 256,000 accounts from 254 in the first quarter. So the team continues to add core customers, be it commercial or retail. And that’s spread pretty good throughout our footprint. Remember, we have a rural community footprint and commercial as well. So I think that diversity helps, and average balances is fairly consistent. We think that that’s a benefit to the company.

Chris Holmes : Yeah. And Stephen, I’d just add to this, a couple of things that 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 — and so we’ve — and we’ve also got that what we call our community component with that, that again helps some stability there. But what we were trying to project, we thought it would be in the 20%-21%-22%, going back to looking at pre-COVID numbers.

Stephen Scouten : Okay. Great. That’s really helpful. And then you guys mentioned the possibility maybe of 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?

Michael Mettee : Yeah. It’s a constant point of debate, quite frankly, because any loss is a loss, right? But our capital ratios have grown pretty strong. It just opens the possibility. We’ll look at it — and we have looked at multiple tranches anywhere from — we had nine months payback to 27 months. And so it would be in between that. We haven’t established a target, but there’s a lot to consider and there’s other uses of capital as well. And so we’re just — we’re evaluating all options.

Stephen Scouten : 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. And I guess I’m wondering what you think those 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 kind of a stack rank in your mind of kind of what you’d optimally like to pursue that came about?

Chris Holmes : Yeah. There is, Stephen. Optimally, we’d like to pursue really strong bankers and banking teams in our geography and in contiguous geographies is really what we’d love to do first. If we can move those over at the right times when things are — when they’re may be experiencing some unsettledness at other places, that’s probably the biggest opportunity. And then, of course, acquisitions are always also an opportunity. That being said, acquisitions are hard. And so we’ve done four since we became a public company, one right before we became a public company. And they take a lot — they take your eye off the ball sometimes operationally. So we prefer the teams first. But if you project out, there’s probably going to be at some point a lot more acquisition activity.

We do want to make sure that we’re at least in position to participate and be in a preferred position to participate when that comes about. So that’s really our first. And then Michael — as Michael said, when we think of using capital that — right now, balance sheet restructuring is also top of mind.

Stephen Scouten : Great. That’s super helpful. Appreciate all the color, and congrats on the quarter.

Chris Holmes : Thanks, Stephen.

Operator: Our next question will come from Catherine Mealor with KBW. You may now go ahead.

Catherine Mealor : Thanks, good morning.

Chris Holmes : Good morning, Catherine.

Catherine Mealor : I wanted to ask on expenses. I know you’ve given a little bit of a forward look as to how you’re thinking about that. I think last quarter, you had talked about core bank expenses being in the $280 million to $285 million range for the year, and it feels like that’s going to be a lot lower. Do you have any sense as to where that could land for 2023 given some of the initiatives that you’ve been working on this quarter?

Michael Mettee : Yeah. Good morning, Catherine, it’s Michael. I wouldn’t start it a lot lower. We’re still working through some of the levers. We’ve created some optionality and some leverage there as well. And so we’re focused on ’23 — back half of ’23, but really ’24 and creating a launchpad from there for ’25-’26, putting the company in a really good spot. So we’ll have more to come on that. But I would say steady state for now and what — we’re working on some things.

Chris Holmes : Yeah. And so, Catherine, of course, we’re thinking through the quarter and we’re thinking through the results, we’re thinking through the call, not an unanticipated question. And we — so our approach to it is we — I made reference to some of the initiatives we have going on that are improvement initiatives, and they’re yielding some efficiencies. And I think I’ve said this on a previous call, the goal is efficiency. It’s not necessarily — we don’t — we haven’t set expense targets out there for these various initiatives. But as we are implementing them, it’s clear that there’s going to be some efficiencies gained and some expenses — and expenses will go down. And so we expect that to continue. But we have — we aren’t prepared to go put some number out that says, hey, here’s where we’ll be or here’s what we’re going to achieve over the next two or three quarters.

But I would say we recognize that with margin compression and with mortgage originations both being down, revenue is tougher to — revenue growth is tougher to achieve. When revenue growth is tougher to achieve, expense reductions are mandate. And so we expect that. So that’s kind of the way that we’re operating the company right now.

Catherine Mealor : Okay. That’s helpful. And then maybe just for — you were talking a little bit about next quarter, Michael, that you thought that the linked quarter, expenses would be down outside of the FDIC assessment. Any idea of the size of that?

Michael Mettee : Yeah. Kind of to Chris’s point, it’s a little bit marginal at this point until we have some more plans solidified, but that’s down slightly.

Chris Holmes : Yeah. It’s not too much unlike this quarter, I’d say.

Catherine Mealor : Okay. All right. Great. And then maybe on the margin, what’s your forward thought on the margin? It feels like you’re coming — originally, the goal had been about 345-50. You’re a little bit below that, but not significantly below that. So do you see stabilization in the margin in the back half of the year from current levels? Or do you just think the outlook for deposit costs is just too tough to make that call right now?

Michael Mettee : The outlook for deposit cost is very difficult. I actually think the team did pretty well holding in, in the 340 range. There’s a couple of headwinds that were unanticipated on our first quarter call that came up in the second quarter with competitive price. 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 pending how some of the larger institutions play out and that they enter the market and start getting to progressive, it could obviously put pressure on us. So that is the concern on forward deposit pricing. That being said, we kind of remixed the balance sheet. We’re continuing to do that. And again, optionality is a common theme here that we want to be able to restructure the balance sheet and get out of some of the higher-cost deposits, especially for encumbered to free up liquidity.

So that can create a lever to offset some of that margin pressure.

Chris Holmes : Yeah. And so it — I think your phrase was is it 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, and Michael went through our three– the margin in April, May, June, it was actually relatively flat, which we’re glad to see. We don’t look at that and go, well, I guess, I mean it’s going to be flat for the rest of the year. And so we do see it continuing to squeeze some. Although if you look at the first half of the year versus the second half of the year, it feels like, and again, this is feel and our internal projections don’t necessarily reflect it yet, that it may be softening some, for us anyway. We went out and moved some deposits up early. We got some — I think we’ve gotten maybe a little bit of benefit from that, but deposits are going to be tough in the second half of the year from our view.

Catherine Mealor : Very helpful. Thank you.

Chris Holmes : Thanks, Catherine.

Operator: Our next question will come from Kevin Fitzsimmons with D.A. Davidson. You may now go ahead.

Kevin Fitzsimmons : Hey, good morning, everyone.

Chris Holmes : Good morning, Kevin.

Michael Mettee : Good morning, Kevin.

Kevin Fitzsimmons : Just curious, you mentioned the derisking, and that was very intentional in construction and non-owner occupied commercial real estate. Just wondering, Chris, like what — you mentioned you’re going to continue to focus on that. But in terms of magnitude and what that’s going to mean for overall loan growth, I know you said flattish loan growth over the back half of the year. But are you looking at like for this being like a several quarter headwind for growth? But the right thing to do for balance sheet strength in terms of the amount of runway that you have to will be taking those segments down. Or is it more of a shorter-term thing that you’re just really over the next few quarters? Thanks.

Chris Holmes : Yeah. So in terms of, I think, affecting net loan growth, I think it’s shorter term. It’s next couple of quarters. But we don’t want to run the company. And look, regulatory thresholds are always important, and we pay attention to those. But we don’t live by — we live by our own risk management standards, and we don’t want to be over 100% of risk-based capital in construction. Again, that is the regulatory guidance, but we don’t want to live with that level of balance sheet risk on a continuing basis. Even if the regulatory threshold was 200 or 300, we’re going to live below that 100% threshold on construction and development. And so we had a period, and there were some reasons why that we went over that. And look, we’re in fantastic geographies and some — again, some reasons why we coming off COVID, depending on — we had a lot of deposits, and we’ve made a conscious decision there, and we’re making a conscious decision to back away from that.

And so you’ll see us run continuously at a — percent of risk-based capital in C&D that’s certainly less than 100, and — but we should be beneath that by the end of the quarter. And look, when I say by the end of the quarter, I’m sure Greg Bowers, our Chief Credit Officer, is flinching over there because there’s a lot of projections that go into that in terms of what people draw down. As you know, you’ve got a bunch of unfunded commitments. It depends on how much people — when they draw and if they draw according to schedule, but by our math, we think we’ll be under that at the end of this present quarter now Q3. And then we’ll operate under that. So once we’re under that, you’ll continue to see us — that gives us a little more room to do something besides to make sure we’re taking care of customers.

When you limit those commitments, what we — the way we view that is we’re basically reserving our capacity for customers we have to make sure that we can take care of good long-standing relationship customers, and that’s what we’re doing. So we’re still having new things hit, but they’re new things from existing customer relationships. And 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.

Kevin Fitzsimmons : Okay. Thank you. Helpful. One thing I wanted to circle back on, Michael, I think when you were talking about deposit price competition being fierce, you made some kind of comment about FHN’s merger going away. And I’m not sure whether you were saying that competition step-up was inclusive of that or really wasn’t driven by that. And so I wanted to clarify that, number one. But then number two, based on what you’re seeing recently, what your expectations are on that front, if you — is that to get more competitive —

Operator: Pardon me, we now have management reconnected.

Michael Mettee : Kevin, sorry, we’re back. That was a difficult question. So we acted like we disconnected.

Kevin Fitzsimmons : I guess so. I guess so. Did you answer all that, Michael?

Michael Mettee : I did. And sorry about that. I’m not sure what happened. But — so my point on FHN is it actually created additional deposit pricing pressures for us and for other banks that’s in the Southeast because you had a bank that was expecting to be acquired and then they kind of woken hope there as they woke up and there — our footprint and their footprint. So it created competition, which then creates more competition as others are having to come in and you see their marketing and they — people walk in the branch and corporates — corporations stuff like that. So it definitely increased our competitive pressure during the quarter, which we thought that deal was likely to go through, I guess, in Q1 and even in a difficult environment. So —

Chris Holmes : Yeah. And so basically, Kevin, for those of us in the — down in the Southeast, once that didn’t go through, they had — they came out with some special offers and some things like that, that made the market — that moved the market.

Kevin Fitzsimmons : And do you think that’s — is that kind of baked in at this point? Or is that more an accelerating pace of pricing competition coming out of them, as best you can tell?

Chris Holmes : Yeah. Well, it’s hard to tell, and we certainly don’t want to speak for our friends. And there are — a lot of them are our friends. They’re competitors, but they’re friends too. And my guess is, it’s only a guess, that they probably had to come out and get some funding. That probably settles down a little bit, but — and it feels like it may have settled in a little bit. However, I would say one of the things as we think about the second half of the year is that we do see larger regional banks and even some of the national banks, some of the big — even in our market, one of the big four that’s putting some offers out there that are above 5%. And so — and they’re putting those out there with some advertising. It’s more targeted advertising than just blanket advertising, but it’s — but they’re hitting the market with advertising. And it’s coming from the largest regionals as well as even nationals where they’re above 5% on the deposit offers.

Kevin Fitzsimmons : Got it. Okay. All right, thanks, guys.

Chris Holmes : Thank you.

Operator: Our next question will come from Matt Olney with Stephens. You may now go ahead.

Matt Olney : Hey, thanks. Good morning. Sticking with the deposit cost commentary. In the prepared remarks, you mentioned that mix shift away from some of the public funds that started in May. And we — I guess we could see more of that in the third quarter. Any color on the pricing levels of those public funds that you’re exiting and the alternative funding that you’re replacing this with? Just trying to get a feel for — if this is a material shift in the pricing. Thanks.

Michael Mettee : Hey, Matt. Good morning. So a large portion of Q2 was seasonal as we kind of talked about. They’re generally Fed funds plus a spread on at least a portion of them. There are a portion that’s Fed funds modest and — but they’re generally all tagged to Fed funds. So the ones we’ve cycled out of are typically going to be Fed funds plus 5 to 15 basis points. We’re seeing competition in those price above that. And so we let some of that walk, especially if it was tying up the investment portfolio would be the strategy there is you can let some of those go, unencumber your securities and do something else with that. We mentioned brokered. As you know, we’re customer-funded bank. That’s our philosophy. We always typically lean that direction.

We like to say in that direction, we’re still heavy customer-funded. But we did add some broker this quarter and, I mean, that was probably a cost of about $50 million. So we cycled out of Fed funds plus. It was 5-10. And so you pick up 30 basis points or so on a similar dollar amount, so things like that. And of course, we’re always working for core operating accounts that include a mix of non-interest bearing and interest-bearing. So theoretically, you replace some of those deposits at a significantly lower cost. Although, as Chris mentioned, new interest-bearing are coming on at 5% plus. I mean that’s just where the market is.

Chris Holmes : Yeah. Good morning, Matt. And so yeah, I noticed Michael said, we picked it up at 5-10 and lowered our cost. And so we don’t — and we — if you go back and look at our historical balance sheet, the only brokered funds we’ve had on our balance sheet in years have been what we picked up through the Franklin synergy transaction. And so we don’t use that to fund our balance sheet and to fund our loan portfolio. We only — we use brokered funds in cases like this where we can — we’ve got something temporary and we can use it to lower our cost for whatever reason. And so that — and that’s our strategy there. Again, we don’t use that to typically fund our loan growth. And then I would say this, we had a $463 million reduction in public funds.

Remember, we talk about those being seasonal and how this is part of — this is the season where those go down. And so again, when you’re managing your liquidity, that was also part of what factored into the — getting those temporary brokered funds on the books. But that $463 million was a combination of two things: one, seasonal reduction; but also, we exited a nine-figure account that was very high priced. And so again, that factors into the brokered funds. And so that part is not seasonal and that will come back. So—

Matt Olney : Okay. That’s helpful, Chris. Thanks for the commentary there. And then you mentioned the incremental funding just above 5%. Any more color on the newer origination yields as far as where those have been coming on more recently?

Michael Mettee : Yeah. They’re 8%-plus, Matt. So we’re still getting 300 basis point plus spread. I think it’s 340-ish over the last weeks or so. And so it’s healthy. Chris has said this on multiple occasions. On the asset side, people have adjusted to rates. I mean they’re paying market. And so that’s out there. We just haven’t had as much loan growth, as Chris has already touched on. But it’s healthy yields.

Matt Olney : And then moving over to the provision expense. It sounds like that negative provision expense in 2Q was from that reversal of the unfunded loan commitments that you’ve talked about. And based on the commentary, it sounds like we’re going to see the unfunded construction commitments continue to move down pretty aggressively the back half of the year. So I guess thinking about the provision expense, any more guidance or commentary on that provision expense? I mean, could it remain relatively flattish in the near term just given the commitments of the construction portfolio continuing to come down?

Michael Mettee : Yeah. I think good old-fashioned ACL to held for investment. I mean, I think you’re somewhere in this range, 145 to 155-ish. I think that’s been consistent, pending any economic swings or changes that would change that. I mean the unfunded piece, I mean, the reality is our basis point loss reserve actually went up a couple of basis points. So it’s completely balance-driven. The construction reserve percentage went up on both held for investment and unfunded. But the $200 million that rolled out of that unfunded commitment drove that number down. To Chris’ point, if you think about going from 113% of risk-based to 100-ish, logic would tell you, you could see a flattish total reserve to maybe a release. I think that’s a predication assumption, but not through us lowering our ACL percentage credit outlook.

Chris Holmes : This is a frustrating conversation, Matt. It’s a little bit difficult. Look, we don’t — we have chosen the path pretty much abiding by what the economic forecast and the — 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 have been a good quarter to frankly build the reserve probably. And we may have other quarters where it’d be good quarters to build the reserve. But we work with our auditors. We work with our internal folks and try to make sure we’re getting it right. And so I wish I could answer that question very specifically. But it’s always a mystery to me what it’s going to be until about two days after the end of the quarter.

And so I would not anticipate we would get much below 1.5% at this point, 1.5% in terms of our HTM. But we could see a little bit of build, especially if the economy — if things take a turn for the worst, we’ll certainly see a build. But if things kind of continue to operate in the haze, which we seem to be operating right now, I would expect it to be — to continue to be in that 1.5 to 1.55 or something like that. And our Chief Accounting Officer is probably rolling over on his — in his office right now. He’s probably wallowing in the floor. So —

Matt Olney: Well, I think you added enough caveats in your response there, hopefully, to satisfy others.

Chris Holmes : Exactly what I was trying to do, Matt. I was trying to get the point across but not get into any trouble.

Matt Olney : I appreciate, guys.

Operator: Next question will come from Brett Rabatin with Hovde Group. You may now go ahead.

Brett Rabatin : Hey, guys. Good morning.

Chris Holmes : Good morning, Brett.

Brett Rabatin : 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 good customers and how that was going relative to where you’re having to add new money. How do you keep your good customers or your existing clients still happy with less than 5?

Chris Holmes : So you don’t is the answer. And so those good customers are at the same rate or at least they’re in that — I mean they’re at a competitive rate. And that’s partially why our cost is where it is.

Brett Rabatin : Okay. And I wanted to ask on capital. You mentioned, Chris, just kind of building capital from here. And you’re at 11.7% CET1. Is there a level where even before you would try and figure out something to do with capital that would be the best use of capital, that you might look to do a buyback or something? Is there a level of CET1 total risk-based TCE where you say, hey, we’re starting to accumulate too much?

Chris Holmes : Yes is the answer. And we’re — and when you get to where we are on the CET1 — and again, remember, we don’t have any held-to-maturity varied losses out there. And so we feel like we’re in a pretty strong position, and that opens up the balance sheet restructuring opportunities. And look, theoretically, we’re not going to do this, okay? But theoretically, we could sell our entire investment portfolio of $1.4 billion after the mark, put it in cash at 5.25% and pick up well over 2% spread on that difference. And I say, well, it would be 220 probably. We pick up probably 220 basis points on that on that $1.4 billion, $1.5 billion. Again, those are out — we’re thinking about those, but also you’re right, at some point, you’re also thinking about a buyback.

We are excited about the flexibility and the options it gives us. And we’re at a point where we’ve got to start thinking about that given the capital levels. And once you get to CET1 that’s nearing 12%, once you get to a tangible after AOCI up 9% and it’d be 9% plus by the end of July. And so we’ve got that flexibility given where we are today, I think, in the capital levels. I’d be hesitant — let me make sure I present the other side that you’re balancing is you’re thinking about what happens if credit — if significant credit problems do actually happen coming in the coming quarters. But remember, we’re keeping a 1.5% reserve as well, ACL on top of that — those numbers. And so we’re — we feel like we’re pretty well — have a pretty strong balance sheet all the way around.

Brett Rabatin : Okay. Capital is certainly king. And speaking about credit, just one question on the multifamily market. Here in Nashville, I know it’s a small percentage of the construction portfolio, but I was curious to hear your thoughts on the dynamics we have here in this local market where it’s more expensive than many places in the country, but we have a large amount of inventory coming online. And we’re starting to see maybe some incentive pricing, so to speak, months off rent, that kind of thing. What is your guys view on the multifamily market, particularly here in Nashville?

Chris Holmes : Greg, do you want to comment?

Greg Bowers : Yeah. Brett, I think you read same headlines we read. But in talking with our customers, I’m just more positive on it than some of these headlines. It seems like — and you were in town when we did the investor presentation not too long ago and looked at a lot of the cranes and a lot of the high rise. I think some of that — some of those units will probably tend towards CBD and be at a higher price point. We’ve been — our clients have been very successful in more of the suburban markets and still seeing lots of good activity. Touch base with some of them, we’re always such in base with them, touch base with one here recently. He’s got a project under contract to sell or numbers that way exceed the appraisals, very successful.

These — we’ve got one that was structured with a sales contract at completion. And so it’s near CO. So there’s a lot of good activity. I think it may be back to normalcy. We don’t have a crystal ball to understand and predict what those vacancy numbers are going to be. But in talking to our clients, we’re still very positive and still — 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 you do a project like that, 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 if it’s so perfect, someone else is going to put one across the street soon in that time period.

And we think that we’re well positioned, a lot of cash equity and good relationships. And we’re still seeing good activity. So I’m still positive.

Chris Holmes : And Matt — I’m sorry, this is Brett, Greg is not known overly for his positive outlook on things like that as our Chief Credit Officer. So he’s not — he 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 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 actually not involved in those. But we’re — we’ve got a lot of suburban stuff and continue to see, as we talk — I talk to a different — one of our largest multifamily clients a lot over the last month. And I mean it just — he was really bullish on — and this was in Middle Tennessee, but really bullish and just — and the results are there. I mean he continues to lease them every day and is working to get them out there as quickly as he can, and then he’s leasing them every day.

Greg Bowers: Chris, I think you referenced in one that we had the conversation. He was — I’m not sure specifically where — who he’s talking with, but there’s still a market out there for long-term refinancing and talking about 10-year deals, 30-year terms, I think in that five to six range. So pretty sport. I think that ties back to the long-term investment opportunity that we can all look at ups and downs, but no one disagrees with the footprint and the region.

Chris Holmes : Yeah. This client is working on a 5.4% refinancing through the government for — is what he’s getting on a long-term refinance. So it gives us more capacity to be able to help him do the next one.

Brett Rabatin : Okay. Really appreciate the color.

Chris Holmes : Thanks, Brett.

Greg Bowers: Thanks, Brett.

Operator: Next question will come from Alex Lau with JPMorgan. You may now go ahead.

Alex Lau : Hi, good morning.

Chris Holmes : Yeah, good morning, Alex.

Alex Lau : 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?

Michael Mettee : Yeah. I mean for every rate increase, it’s basically one for one, right? It’s 100%. So we’re at 45% all in right now, and interest-bearing is obviously above that. We expect rates go up quarter, interest-bearings going up the quarter. So — and that’s just the way it’s played out, especially given — as you know, deposits still kind of flocking to different places throughout the economy, whether it’s back into equities or treasuries in some aspects and then the competitive stuff we’ve already talked about. Specifically in our markets, which when you’re in good economies, good markets, you have a lot of loan growth. And that requires deposits, which puts further pressure on deposit costs.

Alex Lau : Thanks for that. So if we assume that the Fed hikes one or two more times, what’s your best guess in terms of tying when net interest margin hits a trough? Is it a quarter or two from now? Or is it first half of next year? Any color or thoughts on that?

Michael Mettee : Yeah. In the yearish would probably be my best kind of stab. It takes a couple of months for that to play out. Loans reset a little bit behind deposits. So yes, probably year-end.

Alex Lau : Thanks. And then just a follow-up on the construction commitments, which drove the release in the quarter. So your commitments were $1.1 billion as of the recent quarter. What is the level that you’re more comfortable with in terms of exposure here? Could we see another $200 million to $300 million decline in commitments next quarter and then hold from there given your comments about reducing your construction exposure through the quarter?

Chris Holmes : Yeah. So that commitment number runs in front of your balance decreases, okay, and so actually substantially in front. And so you’ll see less decline in the commitments number moving forward and more decline in the balance number moving forward. And so we’ll continue to manage it down a little bit from where it is, but it won’t be quite as dramatic as the $400 million plus that we’ve had over the last few quarters. And so — but you could see the commitment go down another $100 million, maybe another — maybe even another $200 million, but I wouldn’t see it going down further than that.

Alex Lau : Great. And then my last question is, you’ve talked about interest in hiring experienced bankers and teams. Do you see any near-term opportunities to pick up experienced teams given the disruption in the market? Or are you currently less focused on adding additional teams for now?

Chris Holmes : No, we’re not — we’re never less focused on adding A-level bankers and A-level banking team. And so we’ll always do that. Even as we’re reducing expenses in other parts of the company, we think that’s just — that’s important. And you don’t get — those opportunities don’t come around every day. And so when you get them, you need to be — make sure you’re always in a position to take advantage of them. And so we’ve got — we’re having conversations this afternoon. I mean — so we’ve got some conversations there that are current. And we think through just market disruption, we’ll continue to get opportunities over the balance of the year.

Alex Lau : Great. Thanks for taking my questions.

Chris Holmes : Thank you, Alex.

Operator: The last question will come from Feddie Strickland with Janney Montgomery Scott. You may now go ahead.

Feddie Strickland : Hey, good morning.

Chris Holmes : Good morning, Feddie.

Feddie Strickland : Chris, I think you touched on this a little bit earlier, but just regarding the securities restructure. Would you consider a wholesale revamp on the securities book? Or are you more inclined to be sort of opportunistic and tweak around the edges?

Chris Holmes : Yeah. So I’m going to let Michael talk mostly about that, but I’ll say this, so we’ll consider anything. It would be — we’ll consider whatever makes sense for all of our constituencies, including — especially including our shareholders. And so we consider — I think I would say it’d be unlikely that we just flush the entire portfolio. I did use that as an example of what is possible. But I think it’s unlikely that we would just get out of the entire portfolio because we use that for collateral and other things. Of course, you replace it in cash. You can use cash as collateral too. It’s actually surprising that we’ve had to get some — not every place counts cash the same way they count mortgage-backed security and actually prefer the mortgage-backed security, strangely enough.

They need to update their guidelines. But we — and so — but it does give us an opportunity to look at doing some different things even with maybe some pieces of the loan portfolio and some pieces of the investment portfolio. Michael, do you?

Michael Mettee : Yeah. I mean, I think that’s really well said. So I mean we’re running scenarios that is the entire portfolio down to tranches of munis, mortgage backs, what have you. I think Chris’ point, right, is from a capital perspective, if you just isolate that, we have the capacity to do it, just unlikely, as he said, given all the other opportunities and other things we could be doing. So it’s probably a segment of it, but TBD a little bit.

Feddie Strickland : Understood. That’s helpful. And that’s funny some places don’t consider cash things MBS. Just goes to show how long we’re in a low rate environment.

Chris Holmes : Exactly.

Feddie Strickland : But just one last one for me. You talked about list-outs down the road, or even potential M&A in the longer, longer term in adjacent geographies. Are there any specific areas you’d be more interested in getting into, whether it’s Western North Carolina or even Atlanta, for example? Just looking at your footprint, was curious if there is some specific geographies you’re more interested in.

Chris Holmes : Yeah. So geographically, we consider our footprint — the way we think of it is we’re basically kind of Birmingham North, we’re North Georgia. We’re really not in Western Carolina at this point, but we’d love to be in North Carolina. We’d love to be maybe even in South Carolina. That’s a little — it’s not a contiguous state. So it’s a little further, but it’s — those are very attractive places to us. We’re — and then we’re in — currently in Southern Kentucky. And so we’d love to get additional opportunities in state. Tennessee recently hit — it was 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.

We also want to grow in those areas. So currently, it’s Birmingham North, but we’d like — we’d go Alabama all the way down to the coast in the same way with Georgia, we’d go further into there or the Carolinas. And those would be the most attractive places to us. We’re not in that northeast corner of Tennessee, which is an area that we think is a beautiful part of the state with a nice, steady economy. And then that would also lead you into Western Virginia, which again is contiguous state as well. And so those are kind of areas that — we like all of those areas.

Feddie Strickland : No, that makes sense. That’s super helpful.

Chris Holmes : And I have one other non-geographic point. And then what we’re really thinking about if we’re thinking about an acquisition, we are thinking about geography. The second thing — and actually, this would be the first thing. That would be the second thing. The first thing we’re really thinking about is culture of — so matching the 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 core deposits and good core customers? And that’s really key to us as we think about even any possibility of an acquisition. That’s critical for us.

Feddie Strickland : Got it. Appreciate you taking the question. That’s super helpful.

Chris Holmes : All right, Feddie. We appreciate it.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Holmes for any closing remarks.

Chris Holmes : Okay. Thank you all very much. We appreciate your support. We appreciate everyone participating. Good questions, and we look forward to speaking to you throughout the quarter and doing this again next quarter. Thanks, everybody.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.