FB Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 18, 2023

There are 11 speakers on the call.

Operator

Morning, and welcome to the FB Financial Corporation's 2nd Quarter 2023 Earnings Conference Call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer and Michael Mette, 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.

Operator

At this time, all participants have been placed in a listen only mode. The call will be opened for questions after the presentation. During this 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.

Operator

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

Speaker 1

All right. Thank you, Anthony. Good morning. Thanks 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 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 percent.

Speaker 1

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 2 current priorities are maintaining the Strength of the balance sheet and improving internal processes and procedures to become more effective and efficient. Behind these Dual focuses is a desire to be able to act aggressive to be able to I act aggressively, sorry for that. I mean, 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.

Speaker 1

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 and A activity industry ride right now, we're content to build capital until we have an attractive use for it. On credit, we continue to de risk our balance sheet this quarter As our C and D and non owner occupied CRE balances declined by $118,000,000 leading to a decline in total loans held for investment $40,000,000 Our unfunded commitments in those categories also continued to decline and are now Down $454,000,000 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.

Speaker 1

Excluding our C and 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 The 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 and D and non owner occupied CRE balances, we would expect overall loan growth to be relatively flat for the second half of the year.

Speaker 1

On liquidity, the seasonal decline in public funds that Michael telegraphed on our prior call began in May and public funds ultimately declined by $463,000,000 during the quarter, some of which we backfilled with broker funds, which actually have a lower And provide more unencumbered liquidity than the public funds that ran off. Outside of public funds and broker deposits, deposits were down Slightly for the quarter. While deposit pressures remain very real, they continue to be more interest rate driven than the fear driven exodus that many forecasted Regional and Community Banks after Silicon Valley. From a safety and sound 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 tight rope of paying customers market rates on their deposits, while also trying to defend the margin. Moving to our second priority of internal improvements.

Speaker 1

We're focused on improving our processes and During this time of slow growth, which is the primary focus of our First Bank Way initiative that I've talked about on the past couple of calls. This has been a time where we've been reevaluating our community bank business model following our 5 acquisitions, Quadrupling the size of the company since our IPO and crossing the $10,000,000,000 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 First Bank Way We're also limiting outside hiring with exceptional 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.

Speaker 1

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 We were early in taking our foot off the gas in April of last year and our goal right now is to be in I'll now let Michael go into our financial results in more detail.

Speaker 2

Thank you, Chris, and good morning, everyone. I'll start first with adjusted pretax pre provision trends from the bank. For the quarter, we showed adjusted banking segment pre tax pre provision of $46,000,000 That's slightly up from the prior quarter of $45,800,000 and down 17% from the Q2 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 Q2 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.

Speaker 2

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 $1,400,000,000 We have an additional 6 $400,000,000 in unsecured borrowing capacity available, including broker deposits, Federal Home Loan Bank and discount window. For tax purposes, we have $2,200,000,000 of real estate loans held at our REIT. Were we to fill the need, we could move those loans back The bank overnight to create additional Federal Home Loan Bank borrowing capacity.

Speaker 2

We feel comfortable in our current and available sources of liquidity. I'll touch very briefly on our securities portfolio. As a reminder, we have no held to maturity securities. The portfolio is Currently around 11% of total assets, which is in our desired range of 11% to 13% 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.

Speaker 2

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 Moving to deposits. In total, our deposits declined by $311,000,000 versus the prior quarter. Outflows of public funds accounted for $463,000,000 of that decline and were partially offset by $238,000,000 in new brokered CDs, Leaving non public, non brokered funds down roughly $86,000,000 As a reminder, those public funds balances tend to begin building in November and decline in June through October, so we'd expect another $200,000,000 to $400,000,000 decline in public funds in the Q3. 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 $89,000,000 or 14% annualized.

Speaker 2

However, after a decline in April, non interest bearing deposit Balances remained fairly constant through May June. So we are hopeful that we can continue to hold NIBs relatively flat in the Q3. On the cost of interest bearing deposits, competition remains fierce in our markets and was really not helped by the termination of the First Horizon merger. Moving on to our net interest margin. The margin was 3.4% for the quarter, down 11 bps from the 1st quarter.

Speaker 2

We expect some continued compression in the margin due to funding pressures. However, the margins for each of April, May June respectively We're 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 8 weeks.

Speaker 2

In June, we had a cost of interest bearing deposits of 3.22 percent 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 $11,000,000 was in line with our expectations and we expect to continue to hover in that 10,000,000 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 $66,700,000 compared to $68,400,000 in the prior quarter.

Speaker 2

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 expenses will look like for us as we implement some identified efficiency projects from our First Bank Way initiative, And we would expect to be able to give more guidance there by the end of the year. In the Q3, 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 Q2 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.

Speaker 2

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.

Speaker 1

Thanks, Michael, for that color. And just to summarize, A fairly straightforward second quarter and we think that's a good reflection of the company's current priorities of capital credit and liquidity. Continued good earnings is left with strong capital buffers, which we intend to maintain through this period Our work over the last 5 quarters to reduce our exposure to construction and commercial real estate also became Our numbers this quarter and we'll continue to de risk the balance sheet over the near term. Additionally, we feel very comfortable with our current on balance sheet and available sources of liquidity given the stability that we've seen in our non public funds 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.

Speaker 1

Thank you again everyone for your interest in And we'll open the line for questions.

Operator

We will now begin the question and answer session. First question will come from Stephen Scouten with Piper Sandler. You may now go ahead.

Speaker 3

Hi, thanks. Good morning, everyone.

Speaker 2

Good morning. Good morning, Steve. I guess,

Speaker 3

I mean, 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 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 'twenty two, we're down to like 22% of deposits today. Do you guys have a feel for where you think that could maybe stabilize, if not at these current levels?

Speaker 2

Yes. Good morning, Stephen. So 22% -ish is where we are. That's where we ended the Q1. 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.

Speaker 2

First Bank was probably 26%, 27%. So pro form a 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 1,000 During the quarter, I think 256,000 accounts from 254,000 in the Q1. So the team continues to add Core customers, be it commercial or retail, and that's spread pretty good throughout our footprint.

Speaker 2

You remember, we have a rural Community footprint and commercial as well. So I think that diversity helps and average balances It's fairly consistent. We think that that's a benefit

Speaker 1

to the company. Yes. And Stephen, I'd just add 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 also got that What we call our community component with that, that again helps some stability there.

Speaker 1

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.

Speaker 3

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?

Speaker 2

Yes. 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.

Speaker 2

We have looked at multiple Full tranche is anywhere from 9 months of payback to 27 months. And so it would be in between that. We haven't established a target, but there's a lot to consider and there's other uses of capital as well. And so we're just we're evaluating all options.

Speaker 3

Okay, great. And maybe just last thing for me. You guys talked about in the release kind of The ability to take advantage of inevitable future opportunities. I guess I'm wondering what you think those inevitable opportunities might look like? Is that Do you think we'll see more distressed kind of M and A throughout your markets?

Speaker 3

And as you think about the potential for opportunities, is there kind of a stack rank in your mind of Kind of what you'd optimally like to pursue if it came about?

Speaker 1

Yes. There is, Steve. Optimally, we'd like to pursue To 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 When they're maybe experiencing some unsettledness at other places, that's probably the biggest opportunity. And then of course, acquisitions are always also an opportunity.

Speaker 1

That being said, Acquisitions are hard. And so we've done 4 since we became a public Company won 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 two. And then as Michael said, when we Using capital that right now balance sheet restructuring is also top of mind.

Speaker 1

Great. That's super helpful. Appreciate all

Speaker 2

the color and congrats on the quarter. Thanks, David.

Operator

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

Speaker 4

Thanks. Good morning.

Speaker 2

Good morning, Catherine.

Speaker 4

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 About core big expenses being in the $280,000,000 to $285,000,000 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?

Speaker 2

Yes. Good morning, Catherine. It's Michael. I wouldn't start it a lot lower. We're still working through some of the levers.

Speaker 2

We've created Some optionality and some leverage there as well. And so, they're focused on 'twenty three, back half 'twenty three, but really 'twenty four and creating a launch Bad for 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 we're working on some things.

Speaker 1

Yes. 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. 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.

Speaker 1

But as we are implementing them, it's clear that there 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 2 or 3 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 a mandate. And so we expect that So that's kind of the way that we're operating the company right now.

Speaker 4

Okay. That's helpful. And then maybe just for us 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?

Speaker 2

Yes. I kind of drew Chris' point, it's a little bit Marginal at this point until we have some more plans solidified, but that's down slightly.

Speaker 1

Yes. It's not too much unlike this quarter, I'd say.

Speaker 4

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 3.45%, 50%, you're a little bit below that, But not significantly below that.

Speaker 4

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

Speaker 2

The outlook for deposit costs is very difficult. I actually think the team did pretty well holding in this 3.40 range. There's a couple of headwinds that were unanticipated on our 1st quarter call that came up in the Q2 with competitive price. There wasn't a whole lot of rate movement in the Q2. So There was some stability in that, but there were some aggressive competitive pricing.

Speaker 2

And pending how some of the larger institutions play out and if they enter the market and start getting super aggressive, it could obviously put pressure on us. But 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 if they're encumbered To free up liquidity, so that can create a lever to offset some of that margin pressure.

Speaker 1

Yes. And so it I think your phrase was, you're 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 If you just look at the last 3 months and Michael went through our 3 margins in April, May, June, it was actually relatively flat, Which we're glad to see. We don't look at that and go, boy, I guess, that means it's going to be flat the rest of the year.

Speaker 1

And so we do see it continuing to squeeze some, although if you look at the first half of the year versus second half of the year, it feels like Again, this is Phil, 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 bit 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.

Speaker 4

Very helpful. Thank you.

Speaker 2

Thanks, Catherine.

Operator

Our next question will come from Kevin Fitz Simmons with D. A. Davidson. You may now go ahead.

Speaker 5

Hey, good morning, everyone. 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 This being like a several quarter headwind for growth, About the right thing to do for balance sheet strength in terms of the amount of runway that you have to We'll 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.

Speaker 1

Yes. 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 percent 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.

Speaker 1

And 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 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 and D that's certainly less than 100. But we should be beneath that By the end of the quarter and look, when I say by the end of the quarter, I'm sure Greg Bowers, our Chief Credit Officer, I'm just 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.

Speaker 1

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, we'll you'll continue to see us That gives us a little more room to do something besides make sure we're taking care of customers. When you limit those commitments, The way we view that is we're basically reserving our capacity for customers. We have to make Sure that we can take care of good long standing relationship customers and that's what we're doing.

Speaker 1

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.

Speaker 5

Okay. Thank you. Helpful. One thing I wanted to circle back on, Michael, I think when you were talking about Positive 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.

Speaker 5

And so I wanted to clarify that, number 1. But then number 2, based on what you're seeing recently, what your expectations are on that front? If you expect That's to get more competitive questions. Can you

Speaker 2

hear us?

Speaker 5

Yes. Yes. Can you hear me?

Operator

Pardon me, I will put on hold music as I get the speaker line reconnected. Thank you.

Speaker 1

Thank you.

Operator

Pardon me, I now have Brandon reconnected.

Speaker 2

Kevin, sorry, we're back. That was a difficult question, so we accidentally disconnect. I guess so. Yes, did you

Speaker 5

touch it all, Michael?

Speaker 2

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, I'd say, in the Southeast, because you had a bank that Was expecting to be acquired and then they kind of woke the poke the bear there as they woke up and their our footprint is their footprint. So it created competition, which then creates more competition as others are having to Come in and you see their marketing and people walking the branch and corporate and stuff like that.

Speaker 2

So it definitely increased our Competitive pressure during the quarter, which we thought that deal was likely to go through, I guess, in Q1, Even in a difficult environment. Yes. And so

Speaker 1

basically, Kevin, for those of us In the down the Southeast, once that deal 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.

Speaker 5

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.

Speaker 1

Yes. It's hard to tell, but we certainly don't want to speak for our friends and they are A lot of them are our friends, our competitors, but they're friends too. And my guess is, it's only a guess, that they probably had to come out and get Funding, that probably settles down a little bit, 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 markets, 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.

Speaker 1

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 National, where they're above 5% on their deposit offers.

Speaker 5

Got it. Okay. All right. Thanks, guys.

Speaker 2

Thanks, Kevin. Thank you.

Operator

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

Speaker 6

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 I guess we Could see more of that in the Q3. Any color on the pricing levels of those public funds that you're exiting and the alternative funding that you're replacing us with just trying to get a feel for this is a material shift in the pricing. Thanks.

Speaker 2

Hey, Matt. Good morning. So large portion of Q2 was seasonal as we kind of talked about. They're generally fed funds plus a spread on at least a portion of them. There are A portion that's Fed Funds minus and but they're generally all tagged to Fed Funds.

Speaker 2

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, unencumbered your securities and do something else with that. Yes. We mentioned brokered.

Speaker 2

As you know, we're a customer funded bank. That's our philosophy. We always Typically lean that direction. We like to say that direction. We're still heavy customer funded, but we did add some broker This quarter and I mean that was probably a cost of about $5.10 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.

Speaker 2

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.

Speaker 1

Hey, good morning, Matt. And so, yes, I noticed, Michael said, we picked it up at $510,000,000 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 use brokered funds in cases like this where we can we've got something temporary and we can use it Lower our cost for whatever reason. And so that's our strategy there.

Speaker 1

Again, we don't use To typically fund our loan growth. And then I would say this, we had a $463,000,000 reduction in public Funds, remember, we talked about those being seasonal and how this is part of the this is a season where those go down. And so again, when you're managing your liquidity, that was also part of what factored To getting those temporary brokered funds on the books. But that $463,000,000 was a combination of 2 things. 1, Seasonal reduction, but also we exited a it was a 9 figure account That was very high priced.

Speaker 1

And so again, that factors into the brokered funds. And so that part is not seasonal and that won't come back.

Speaker 6

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?

Speaker 2

Yes. They're 8% plus, Matt. So we're still getting 300 basis point plus spread. I think it's 3.40 ish over the last 8 weeks or so. And so it's healthy.

Speaker 2

Chris has said this on multiple occasions. On the asset side, people have adjusted You're right. 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, so but it's healthy yields.

Speaker 6

And then moving over to the 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? And could it Remain relatively flattish in the near term, just given the commitments of the construction portfolio continuing to come down.

Speaker 2

Yes. I think good old fashioned ACL to help for investment. I mean, I think you're somewhere in Range, $145,000,000 to $155,000,000 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 Couple of basis points.

Speaker 2

So it's completely balance driven. So construction reserve percentage went up on both held for investment and unfunded, But the $200,000,000 they rolled out of that unfunded commitment drove that number down. To Chris' point, if 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 pretty decent assumption. But not through us lowering our All right.

Speaker 2

The old percentage. Yes. This is a Not a credit outlook.

Speaker 1

This is a frustrating conversation. It's a little bit difficult. Look, we don't we have Chasing the path of pretty much abiding by what the economic forecast and our committee that manages that. And so we don't make a lot of use of a lot of qualitative stuff like some do. I mean, we do, but we have some, but we don't This would have been a good quarter to frankly build the reserve probably.

Speaker 1

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 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 2 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 HTF. But we could see a little bit of build, especially if the economy if things take a turn for the worst, you'll certainly see a build. But if things kind of continue to operate in the haze, which we seem to be operating right now, I would expect it to be Yes. To continue to be in that $1,500,000 to $1,500,000 something like that.

Speaker 1

And our Chief Accounting Officer is probably rolling over In his office right now, he's probably wallowing in the floor.

Speaker 6

So Well, I think you had enough caveats And your response there, hopefully, to satisfy us.

Speaker 2

Thanks for the color there, guys. That's exactly what

Speaker 1

I was trying to do, man. I was trying to get the porta cost, but not getting into any trouble.

Speaker 6

I appreciate it, guys.

Operator

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

Speaker 7

Hey, guys. Good morning. Good

Speaker 2

morning, Brett.

Speaker 7

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 clientele happy with less than 5?

Speaker 1

So you don't is the answer. And so those good customers are at that same rate Or at least, they're in that I mean, they're at a competitive rate. Yes. And partially why our cost is where it is.

Speaker 7

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 Capital that you might look to do a buyback or something, is there a level with CET1, total risk based TCE where you say, hey,

Speaker 1

Yes, is the answer. 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? Theoretically, we could sell our entire investment portfolio of $1,400,000,000 after the mark, put it in cash at 5 And pick up well over 2% spread on that difference.

Speaker 1

And I say well over, it'd be 2.20 probably. We pick up probably 220 basis points on that $1,400,000,000 $1,500,000,000 Again, those are the kind of 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 of 9% and It'll be 9% plus by the end of July.

Speaker 1

And So we've got that flexibility given where we are today, I think, in the capital levels.

Speaker 7

Okay.

Speaker 1

The hesitancy 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 But remember, we're keeping a 1.5% reserve as well, ACL on top of that You know the numbers and so we feel like we're pretty well have a pretty strong balance sheet all the way around.

Speaker 7

Okay. Capital is certainly king. And speaking about credit, just one question on the multifamily market Here in Nashville, I know it's a small percentage of the construction portfolio, but was curious to hear your thoughts on the dynamic We have here in this local market where it's more expensive than 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 Brent, that kind of thing. What did you guys view on the multifamily market, particularly here in Nashville?

Speaker 1

Brett, do you want to comment?

Speaker 8

Yes. Hey, 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 look 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 toward CBD and be a higher price point.

Speaker 8

We've been our clients have been very successful in more of the suburban markets and still seeing lots of good activity, I've touched base with some of them. We're always touching base with them. Touched base with 1 here recently. He's got a project under contract to sell For numbers that way exceed the appraisals, it's very successful. These we've got one that was structured with a sales contract at completion and so it's Neer's CEO.

Speaker 8

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.

Speaker 8

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 1 up across the street soon in that time period. And we think that we're well positioned, a And we're still seeing good activity. So I'm still positive.

Speaker 1

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'll certainly come down on the other side sometimes. And so, but I do think that when 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.

Speaker 1

We're actually not involved But we're we've got a lot of suburban stuff and continue to see as we talk I talked to a different one of our largest multifamily clients A lot over the last month and, man, I mean, it just it was really bullish And this was in Middle Tennessee, but really bullish and just and the results are there. I mean, he continues to lease them Every day and is working to get them out there as quickly as he can and he's leasing them every day.

Speaker 8

Chris, I think you referenced in one that we had the conversation. He was I'm not sure specifically where he who he is 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 5 to 6 range, so pretty sporty. Yes. 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.

Speaker 1

Yes. This client is working on a 5.4% refinancing Through the government for what he's getting on a long term refinance. So Gives us more capacity to be able to help him do the next one.

Speaker 7

Okay, great. Appreciate the color.

Speaker 2

Thanks, Brett. Thanks, Brett.

Operator

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

Speaker 9

Hi, good morning.

Speaker 2

Hey, Alex. Good morning, Alex.

Speaker 9

I wanted to start off with NIM. How are you thinking about the through the cycle interest

Speaker 2

Yes. I mean, for every rate increase, it's basically 1 for 1, 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 bearing is going up the quarter.

Speaker 2

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

Speaker 9

costs. Thanks for that. So if we assume that the Fed hikes 1 or 2 more times, What's your best guess in terms of timing when net interest margin hits a trough? Is it a quarter or 2 from now? Or is it first half of next year?

Speaker 9

Any color Our thoughts on

Speaker 2

that? Yes. End of year ish Would probably be my best kind of stab. It takes a couple of months for that to play out. Yes, loans reset a little bit behind deposits.

Speaker 2

So yes, probably year end.

Speaker 9

Thanks. And then just a follow-up on the construction commitments, which drove the release in the quarter. So Could we see another $200,000,000 to $300,000,000 decline in commitments next quarter and then hold from there, given your comments about reducing your construction exposure through the quarter.

Speaker 1

Yes. So that commitments number runs in front of your balance decreases, Okay. And so, actually substantially in front. And 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 $400,000,000 plus that we've had over the last few quarters.

Speaker 1

And so, but you could see the Commitment go down another $100,000,000 maybe another maybe even another $200,000,000 but I wouldn't see it go down further than that.

Speaker 9

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.

Speaker 1

No, we're not we're never less focused on adding A level bankers and A level banking teams. And so we'll always do that even if 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 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.

Speaker 9

Great. Thanks for taking my questions.

Speaker 1

Thanks, Alex.

Operator

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

Speaker 10

Hey, good morning.

Speaker 1

Good morning, Betty.

Speaker 10

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

Speaker 1

Yes. So I'm going to let Michael talk mostly about that, but I'll say this. So we'll consider anything. We'll consider whatever makes sense for all of our constituencies, including Especially including our shareholders. And so we consider it, I think I would say it'd be unlikely that we just flush 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.

Speaker 1

Of 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 securities strangely enough. They need to update their guidelines. But we and so but it does give us the opportunity to look at doing some different things even with Maybe some pieces of the loan portfolio and some pieces of the investment portfolio. Michael?

Speaker 1

Yes.

Speaker 2

I mean, I think that's Really well said. So we're running scenarios that is the entire portfolio down the tranches of Munis, mortgage backed, 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.

Speaker 10

Understood. That's helpful. And that's funny some places don't consider cash, same as India. It's just it was to show how long we were in a low rate environment. Exactly.

Speaker 10

Just one last one for me. You talked about lift outs down the road or even potential M and A in the longer term and 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's some specific geographies you're more interested in?

Speaker 2

Yes.

Speaker 1

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

Speaker 10

We'd love to be in

Speaker 1

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. And then we're in we're currently in Southern Kentucky. And so we'd love to get additional opportunities in state.

Speaker 1

Tennessee recently hit, it was number 3 on CNBC's list of the best stage 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 actually currently it's Birmingham North, but we 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.

Speaker 1

And so those are Kind of areas that we like all of those areas.

Speaker 10

No, that makes sense. Super helpful.

Speaker 1

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 some match 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.

Speaker 1

What does the liability side of the balance sheet look like? And does it really have Good core deposits and good core customers, and that's really Key to us as we think about even any possibility of an acquisition that's critical for

Speaker 10

Got it. Appreciate you taking my questions. That's super helpful.

Speaker 1

All right, Betty. 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.

Speaker 1

Okay. Thank you all very much. We appreciate your support. We appreciate everyone participating. Good questions.

Speaker 1

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.

Powered by Quartr
Earnings Conference Call
FB Financial Q2 2023
00:00 / 00:00