FB Financial Corp Q2 FY2023 Earnings Call

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

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 act aggressively as 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 backfilled with broker funds, which actually have a lower cost and provide more unencumbered liquidity than the public funds that were drawn 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 and 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.

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 the 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 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. The 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.

All right. Thanks, Michael, for that clarity. And 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 have 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 we've seen in our non-public funds deposits. We believe our conservative risk management today is putting us in a tremendous position to execute on future opportunities. Operator, that concludes our prepared remarks. Thank you again, everyone, for your interest in FB Financial, and we'll open the line for questions.

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

Hey, thanks. Good morning, everyone.

Good morning, Stephen.

I'm really encouraged by what you said and what you put in the release about non-interest bearing deposits. That's one of the biggest questions I have, probably industry-wide these days. Other than what you're seeing in May and June, which is great, do you think there is anything structural regarding the size of your non-interest bearing deposit accounts or the type of accounts that might contribute to greater stability? It was 25% in the first quarter of 2022, and now it's down to about 22% of deposits. Do you have any insight on where that might stabilize, if not at these current levels?

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 are fairly consistent. We think that that's a benefit to the company.

Yeah. And Stephen, I'd like to add that a couple of factors likely contributed to that number. A slight majority of our deposits are from consumers rather than commercial clients, which sets us apart from some other banks of similar size. Additionally, our community component provides further stability. We were projecting the figures would fall within the 20%-21%-22% range, based on our pre-COVID data.

Okay. Great. That's really helpful. And then you guys mentioned the possibility maybe of security sales, with 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?

It's a topic of ongoing discussion because any loss is still a loss. However, our capital ratios have improved significantly, which opens up possibilities. We have evaluated various options ranging from a payback period of nine months to 27 months, and we are considering something in between. While we haven't set a specific target, we have a lot to take into account and there are other uses for our capital as well. Therefore, we are currently assessing all available options.

Okay. Great. And maybe just one last thing from me. You mentioned in the release the potential to capitalize on future opportunities. I’m curious about what you think those opportunities might look like. Do you anticipate seeing more distressed mergers and acquisitions in your markets? Also, as you consider possible opportunities, do you have a ranking in mind of what you would ideally like to pursue?

We would ideally focus on attracting strong bankers and banking teams within our area and surrounding regions first. If we can transition them at the right moments when they're facing challenges elsewhere, that represents a significant opportunity. Additionally, acquisitions remain a potential avenue, although they can be challenging and may divert attention from daily operations. Since going public, we've completed four acquisitions, with one occurring just prior to our IPO. While we prefer to prioritize teams initially, we anticipate an increase in acquisition activity in the future and aim to be well-positioned to take part when those opportunities arise. Finally, as Michael mentioned, we are also considering balance sheet restructuring as a key focus at the moment.

Great. That's super helpful. Appreciate all the color, and congrats on the quarter.

Thanks, Stephen.

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

Thanks, good morning.

Good morning, Catherine.

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?

Good morning, Catherine, it's Michael. I wouldn't begin at a significantly lower point. We're still evaluating various options and have generated some flexibility and leverage. Our focus is on the latter half of 2023, but we are also looking ahead to 2024 and establishing a strong foundation for 2025 and 2026, positioning the company well. We'll have more information on this soon. For now, I would say we are maintaining a steady state while we explore some initiatives.

Yes, Catherine, we are indeed evaluating the quarter, the results, and this call, so your question is not unexpected. Our strategy involves several improvement initiatives that are already generating efficiencies. I have mentioned before that our main focus is on achieving efficiency rather than setting specific expense targets for these initiatives. However, it's becoming clear that these efforts will lead to some efficiencies and a reduction in expenses, which we expect to continue. That said, we are not in a position to provide exact figures on expected outcomes for the next two or three quarters. We understand that with margin compression and decreased mortgage originations, achieving revenue growth is more challenging. Consequently, reducing expenses has become essential, and we anticipate that continuing. This summarizes our current operational approach.

Okay. That's helpful. And then maybe just for clarity, you mentioned earlier, Michael, that you anticipate expenses will decrease next quarter, excluding the FDIC assessment. Do you have any estimate on how much that might be?

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.

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

Okay. Great. Regarding the margin, what are your thoughts moving forward? Initially, the target was around 345-350, and while you are slightly below that, it’s not a significant difference. Do you anticipate stabilization in the margin during the latter half of the year from the current levels, or do you believe the outlook for deposit costs makes it difficult to make that prediction right now?

The outlook for deposit cost is very difficult. I actually think the team did pretty well holding 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.

It will be difficult to maintain performance for the rest of the year. Looking at the last three months, the margin in April, May, and June was relatively flat, which is encouraging. However, we can't assume it will remain flat throughout the year. We anticipate continued pressure on margins, and while our internal projections are not fully aligned with this, it appears there might be some softening. We have moved some deposits forward, which has provided some benefits, but we expect deposit challenges in the second half of the year.

Very helpful. Thank you.

Thanks, Catherine.

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

Hey, good morning, everyone.

Good morning, Kevin.

Good morning, Kevin.

I'm curious about the derisking you mentioned, particularly in the construction and non-owner occupied commercial real estate sectors. Chris, you indicated that you will keep focusing on that. In terms of the impact on overall loan growth, I understand you expect loan growth to remain flat in the latter half of the year. Are you anticipating this will act as a headwind for several quarters, even though it is the appropriate strategy for enhancing balance sheet strength? Or is this more of a short-term situation that you see resolving in the next few quarters? Thank you.

In terms of net loan growth, I believe it will be impacted in the short term, specifically over the next couple of quarters. However, our goal is not to operate the company solely based on regulatory thresholds, which are important but not the only guiding factor. We prioritize our own risk management standards and aim to keep our risk-based capital in construction below 100%. Although we have sometimes exceeded this level, we are in strong markets, and there have been specific reasons for that increase. Coming out of COVID, we received a significant amount of deposits, leading us to intentionally reduce our exposure. Moving forward, we expect to operate with a percentage of risk-based capital in construction and development that is well below 100% by the end of this quarter. I understand there are many variables involved, such as customers drawing from their commitments, but based on our calculations, we anticipate meeting this target by the end of Q3. Once we are below this level, we will have more flexibility to serve our customers effectively. We view limiting commitments as a way to reserve our capacity for long-standing customers. We are still engaging in new opportunities, but they are primarily from existing relationships. In summary, this situation is more of a short-term issue rather than a long-term concern.

Thank you for the information. I would like to go back to something you mentioned earlier, Michael, regarding the intense competition in deposit pricing. You mentioned FHN's merger potentially not occurring, and I am uncertain if you meant that this competition increase includes that situation or if it is independent of it. I would appreciate some clarification on that. Additionally, considering your recent observations, what are your expectations regarding this competitive landscape?

Pardon me, we now have management reconnected.

Kevin, sorry, we're back. That was a difficult question. So we acted like we disconnected.

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

I did. I'm not sure what happened, but my point about FHN is that it actually created additional deposit pricing pressures for us and other banks in the Southeast. They were expecting to be acquired, and as things progressed, it led to increased competition in our area. This meant that other banks needed to step up their marketing efforts, and we saw more people visiting branches. As a result, our competitive pressure increased during the quarter, especially since we believed that deal was likely to go through in Q1, even in a tough environment.

Yeah. So basically, Kevin, for us in the Southeast, when that deal fell through, they introduced some special offers and other promotions that influenced the market.

Do you think that's already expected at this point, or is it more about an increasing pace of pricing competition coming from them, as far as you can tell?

It's difficult to determine, and we certainly don't want to speak for our colleagues, many of whom are both competitors and friends. My assumption is that they likely needed to secure some funding, which might stabilize things a bit, and it seems like it has calmed down somewhat. However, as we look ahead to the second half of the year, we see that larger regional banks and even some national banks, including one of the major players in our market, are offering rates above 5%. They are promoting these offers through targeted advertising rather than broad campaigns, but they are actively marketing these rates. This trend is coming from both large regional and national banks that are exceeding 5% on their deposit offers.

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

Thank you.

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

Thank you, good morning. Continuing with the discussion on deposit costs, you mentioned a shift away from some public funds that began in May. We might see more of this in the third quarter. Can you provide any insights on the pricing levels of the public funds you are moving away from and the alternative funding you are using to replace them? I'm trying to understand if this represents a significant change in pricing. Thank you.

Hey, Matt. Good morning. A significant part of Q2 was seasonal, as we discussed. The deposits are generally linked to Fed funds plus a spread, although some are modestly tied to Fed funds. The ones we've moved away from usually have a spread of Fed funds plus 5 to 15 basis points. We're noticing competition with those prices above that level, so we have allowed some to slip away, especially if it was locking up the investment portfolio. The strategy there is to let some of those go, freeing up our securities for other uses. We talked about brokered deposits. As you know, we are a customer-funded bank; that's our philosophy, and we tend to prioritize that. We're still heavily focused on customer-funded deposits but did add some brokered ones this quarter, which amounted to about $50 million. We moved away from Fed funds plus 5-10, gaining around 30 basis points on a similar dollar volume. Additionally, we're always striving for core operating accounts that include a mix of non-interest bearing and interest-bearing deposits, which theoretically allows us to replace some deposits at a much lower cost. However, as Chris pointed out, new interest-bearing rates are coming in at 5% or more, reflecting current market conditions.

Good morning, Matt. I noticed Michael mentioned that we acquired some funds at a cost of 5-10 and reduced our expenses. If you review our balance sheet history, the only brokered funds we've held in recent years were those obtained through the Franklin synergy transaction. We do not typically use brokered funds to finance our balance sheet or loan portfolio. Instead, we utilize them in situations where we can temporarily lower costs. This strategy does not generally apply to our loan growth. Additionally, we experienced a $463 million decrease in public funds, which we consider seasonal, and this period sees a natural decline. Managing liquidity includes bringing in temporary brokered funds. This $463 million reduction resulted from two factors: a seasonal drop and the exit from a high-cost, nine-figure account.

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?

Yeah. They're 8%-plus, Matt. So we're still getting 300 basis points 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.

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?

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.

This is a frustrating conversation, Matt. It's a little difficult. We have chosen to follow the economic forecast and the committee that manages that. Therefore, we don't heavily rely on qualitative factors like some others do. This quarter could have been a good opportunity to build the reserve. We may have other quarters where it would be beneficial to build the reserve. We collaborate with our auditors and internal teams to ensure accuracy. I wish I could provide a specific answer to that question, but it's always unclear to me until a couple of days after the quarter ends. I do not expect our HTM to drop much below 1.5% at this stage. We might see a slight increase, especially if the economy declines further. However, if the current situation continues, I expect it to remain around 1.5 to 1.55. Our Chief Accounting Officer is likely quite stressed about this.

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

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

I appreciate, guys.

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

Hey, guys. Good morning.

Good morning, Brett.

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?

So the answer is no. Those good customers are at the same rate or at least at a competitive rate. That’s partly why our cost is where it is.

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?

Yes, that's the answer. When you consider our CET1 position, we don't have any held-to-maturity varied losses, which puts us in a strong position and allows for balance sheet restructuring opportunities. In theory, we could sell our entire investment portfolio of $1.4 billion after the mark, convert it into cash at 5.25%, and gain over a 2% spread on that difference, potentially about 220 basis points on the $1.4 billion to $1.5 billion. We're considering that, but we also need to think about a buyback. We're excited about the flexibility and options available to us given our capital levels. Once we get to a CET1 near 12% and a tangible after AOCI approaching 9%—and likely exceeding that by the end of July—we'll have that flexibility. However, we must also consider the possibility of significant credit issues that may arise in the coming quarters. It's important to note that we are maintaining a 1.5% reserve as well, so overall, we believe we have a strong balance sheet.

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?

I think we share the same concerns reflected in the headlines, but my conversations with our customers give me a more optimistic outlook. You were here during our recent investor presentation where we observed many cranes and high-rise projects. Some of those will likely be targeted towards central business districts and priced higher. Our clients have been very successful in suburban markets and continue to experience strong activity. I recently spoke with one of our clients who has a project under contract, and the numbers exceed appraisals significantly, indicating strong performance. We have projects structured with contracts that are close to completion, indicating good activity overall. While we can't predict vacancy rates with certainty, our discussions with clients still leave us feeling positive. When we assess a project, we do it with a long-term perspective, ensuring we secure substantial cash equity and guarantees. We're conscious that an overly perfect project may attract competition, but we believe we are well-positioned with solid cash equity and strong relationships. Hence, we're still optimistic about the outlook.

Greg articulates our perspective accurately. We are observing a significant increase in units in the Central Business District, although we are not participating in those developments. However, we have numerous projects in the suburbs and have been in regular communication with one of our largest multifamily clients over the past month. He expressed strong optimism, particularly regarding developments in Middle Tennessee, and the results support that optimism. He continues to lease units daily and is making efforts to expedite the process, successfully leasing them consistently.

Chris, I think you mentioned that we had a discussion. I'm not exactly sure who he was speaking with, but there is still a market for long-term refinancing, particularly for 10-year and 30-year deals, which I believe fall in the five to six range. It's quite promising. This relates back to the long-term investment opportunities we can all consider, despite market fluctuations, and everyone agrees on the importance of our presence in that region.

This client is working on a 5.4% refinancing through the government for a long-term refinance. This gives us more capacity to assist him with the next one.

Okay. Really appreciate the color.

Thanks, Brett.

Thanks, Brett.

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

Hi, good morning.

Yeah, good morning, Alex.

I wanted to start off with NIM. How are you thinking about the through-the-cycle interest-bearing deposit beta for the remainder of the year given the increased deposit competition?

For every rate increase, it corresponds directly, essentially 100%. Currently, we are at 45% overall, with interest-bearing deposits exceeding that level. We anticipate rates will rise in the upcoming quarter, leading to increases in interest-bearing deposits as well. This trend is particularly evident as deposits are shifting across various sectors of the economy, whether returning to equities or treasuries, along with the competitive landscape we've previously discussed. In thriving economies and strong markets, there tends to be significant loan growth, which necessitates deposits and consequently heightens pressure on deposit costs.

Thanks for that. So if we assume that the Fed hikes one or two more times, what's your best guess in terms of tying 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?

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.

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?

The commitment number will decrease before your balance decreases, and it will decrease significantly ahead of it. You will notice a smaller decline in the commitments number going forward while the balance number will decline more. We will keep managing it down slightly from its current level, but the decrease won't be as significant as the over $400 million we've experienced in the last few quarters. You might see the commitment drop by another $100 million to possibly $200 million, but I don't expect it to go any lower than that.

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

No, we're not less focused on adding top-tier bankers and banking teams. We will always prioritize that. Even as we cut expenses in other areas of the company, we believe this is essential. Such opportunities don’t arise every day, so when they do, it's crucial to be ready to take advantage of them. We are having conversations this afternoon, and we currently have some ongoing discussions. We believe that due to market disruption, we will continue to find opportunities throughout the year.

Great. Thanks for taking my questions.

Thank you, Alex.

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

Hey, good morning.

Good morning, Feddie.

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?

I'm going to let Michael address that mainly, but I want to say that we are open to various possibilities. We will consider what benefits all our stakeholders, particularly our shareholders. It’s unlikely that we would completely divest from our entire portfolio; I mentioned that as a hypothetical. Our portfolio serves as collateral and for other purposes, and while cash can also be used as collateral, it's surprising that not all institutions value cash the same way they value mortgage-backed securities. In fact, some prefer mortgage-backed securities, which is something they should reconsider. This situation does provide us the chance to explore different options, including adjustments to certain parts of our loan and investment portfolios. Michael, your thoughts?

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.

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. 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 are some specific geographies you're more interested in.

We view our geographical footprint as primarily covering the area from Birmingham North through North Georgia. Currently, we are not in Western Carolina, but we would be interested in expanding into North and possibly South Carolina, even though it's a bit farther away. We are also present in Southern Kentucky and are eager to explore more opportunities within the state. Recently, Tennessee was ranked third on CNBC's list of the best states for business, and we aim to enhance our presence there as well. Our focus is on expanding from Birmingham North throughout Alabama and deeper into Georgia and the Carolinas. Additionally, we find the northeast corner of Tennessee appealing due to its steady economy, and this could lead us into Western Virginia, which is also nearby. Overall, these regions are of great interest to us. I have one other point to mention that isn't related to geography. When we consider an acquisition, our primary focus is on cultural alignment; it's essential that the cultures match. Additionally, we evaluate the liability side of their balance sheet, which is significant for us. We need to understand what their liabilities look like, and whether they have strong core deposits and loyal customers. This is a critical factor as we contemplate any potential acquisition.

Got it. Appreciate you taking the question. That's super helpful.

All right, Feddie. We appreciate it.

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

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

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