Earnings Call Transcript
Pinnacle Financial Partners, Inc. (PNFP)
Earnings Call Transcript - PNFP Q2 2023
Operator, Operator
Good morning, everyone, and welcome to the Pinnacle Financial Partners' Second Quarter 2023 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Mr. Harold Carpenter, Chief Financial Officer. Please note, Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of their website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. At this time, all participants have been placed on a listen-only mode. The floor will be opened for your questions following the presentation. During this presentation, we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Many such factors are beyond Pinnacle Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial's annual report on Form 10-K for the year ended December 31, 2022, and its subsequently filed quarterly reports. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of non-GAAP measures to comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com. With that, I'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.
Terry Turner, CEO
Thank you, Paul. Those of you that have followed us for a while know and expect I am going to begin every quarterly earnings call with this dashboard of what we believe are the primary things that matter over time in terms of bank performance, GAAP measures first, followed by the non-GAAP measures, which provide the best insight into what I focus on and consequently what we focus on at Pinnacle. My guess is that as 2Q earnings continue to roll out, we'll see some pretty wide variability in performance among the banks; but for us, 2Q was a really good quarter. On an adjusted basis, we grew revenues 11.7% linked-quarter annualized, EPS 10.8% linked-quarter annualized, and pre-tax pre-provision net income 24.8% linked-quarter annualized. We continued the dramatic growth in loans and deposits at 11.3% and 9.1% linked-quarter annualized respectively, which are generally the best predictors of our ability to continue growing revenue and earnings going forward. Tangible book value per share grew meaningfully during the quarter, aided by a sale leaseback transaction that Harold will review in greater detail shortly. And the key asset quality metrics like NPAs, classified assets, and net charge-offs continue to hold up extremely well. So, in summary, the second quarter was a great quarter for us. Now I'm going to let Harold review the quarter in greater detail, and I'll come back and give some thoughts on the shares later.
Harold Carpenter, CFO
Thanks, Terry. Good morning, everybody. We will again start with deposits. Reporting linked quarter average growth of 12% in the second quarter was again a real positive for us. As we've mentioned previously, growing deposits in 2023 is a key focus, and the second quarter was another indication that obtaining deposits in an environment where competitors can be fairly unpredictable is very much doable for this franchise. Several factors contributed to increased deposit rates in the second quarter. Competitive pressures were heightened during the quarter, primarily from large regional banks offering rate specials at some fairly incredible rates and an apparent effort to achieve funding goals. We also have an important public funds client base with much of these balances being tied to Fed funds. Lastly, the mix shift of reduced noninterest-bearing to interest-bearing continued in the second quarter, albeit at a lesser pace. All of these factors contributed to average deposit cost increasing to 2.52% with a spot rate at quarter end of 2.77%. We're optimistic about the pace of deposit rate increases as we head into the third quarter. Several factors to consider. Over the last few weeks, our costs do not appear to be moving up at the same pace as we experienced through the end of the first quarter and most of the second quarter, a contributor to the slower pace is the slowing of the mix shift of deposits from noninterest-bearing to interest-bearing. Also, we intend to reduce the absolute size of our more expensive wholesale funding base in the third quarter by absorbing some of the added liquidity, which has been acquired over the last few months. In other words, we do not believe we need to be nearly as aggressive on gathering funding as we have been over the last few months. Deposit rates will continue to increase in the second half of this year as we hopefully approach a terminal value for Fed funds. We just believe with all the liquidity noise in the first half of the year, a more deliberate stance for gathering deposits is available to us as we move into the third quarter. Lastly, in the supplemental slides, there's more information on uninsured deposits, which are down to 28% of total deposits at quarter end. We won't go into this on the call, but just making sure everyone knows the information is there. The second quarter was another strong loan growth quarter for us. That said, our line leadership successfully managed our loan growth down to the 11% linked-quarter annualized rate. We are maintaining our loan guidance for 2023 at low to mid-teens growth. As we mentioned over the last several quarters, we've tightened the credit box for construction and deployed more discipline on loan pricing, which should serve to reduce our normally outsized growth. Spreads on floating and variable-rate loans have continued to be very respectful. We also are seeing spreads on fixed-rate lending improve given emphasis by our line leadership. Our loan line thus far is essentially the same as the deposit beta, which we believe reflects a great deal of effort on the part of our relationship managers. Our aim with respect to loan pricing is to maintain our spreads on floating and variable-rate loans and achieve 7% to 8% plus yields on both new and renewed fixed-rate paper.
Terry Turner, CEO
As the top chart reflects, our GAAP NIM decreased 20 basis points, which is more than we anticipated at the start of the quarter. As we noted last quarter, out of an abundance of caution, our average liquidity increased by approximately $1.2 billion in cash during the second quarter, and our quarter end liquidity is slightly higher. So we have a lot of cash going into the third quarter, which should help us eliminate some wholesale funding as well as provide for loan growth in the second half of the year. Contributing to the cash build this quarter was the impact of the sale leaseback transaction we mentioned in the press release last night. We received approximately $199 million from the sale of non-earning fixed assets. We also sold $174 million from the sale of investment securities. These two transactions allowed us to reposition under-earning assets into interest-bearing cash in order to eliminate the negative near-term impact from increased lease costs.
Harold Carpenter, CFO
Our rate forecast is consistent with most rate forecasts out there. We are optimistic that a July raise by the Fed is the terminal point for Fed funds, but we may be slightly more pessimistic in that we don't see rate decreases occurring until mid to late 2024. With that, our forecast for the rest of 2023 is that quarterly net interest income will likely be flat to slightly up from the second quarter results. As for credit, we again are presenting our traditional credit metrics. Pinnacle's loan portfolio continued to perform very well in the second quarter. Our belief is that credit should remain fairly consistent for the remainder of this year. We did increase the ratio of our allowance for credit losses to total loans during the quarter to 1.08%. We reworked several of our CECL models during the quarter and are implementing these changes this quarter. We don't anticipate seller increases during the second half of 2023. Any increases from this point should be fairly modest, dependent, we believe, primarily on macro trends. As noted for the last few quarters, we continue to have a very limited, if any, appetite for new construction. Also, the CRE appetite chart on the bottom right is basically unchanged from the prior quarter but does give you a real perspective on how we have reduced our appetite in commercial real estate over the last year or more. In summary, our outlook for our loan portfolio from a credit perspective remains strong. So if negative macro trends begin to develop, we believe we are advantaged as we enter any potential recession from a position of strength.
Terry Turner, CEO
Again, and consistent with last time, more information around credit, the top left chart deals with trends in construction originations. We began reducing, eliminating our appetite for new construction originations last summer, which is consistent with the chart. The chart would indicate that our limited appetite is largely concentrated in warehouse, multifamily, and residential. A quick note about new residential commitments. The gold bars on the chart are new lines for new homes under old guidance lines for a limited set of long-time residential builders. We continue to support our residential builders under guidance lines that have been in place, in some cases, for years. As you likely know, residential builders are very busy right now given the state of the housing market and the lack of existing home inventories, which is especially relevant in our markets, which have a lot of in-migration from around the country.
Harold Carpenter, CFO
We are providing updates and information about the status of maturities for commercial real estate and construction fixed-rate loans. Our yield target for these loans has increased to the 7% to 8% range. Regarding this update, the total amount of fixed-rate loans due for renewal remains manageable, and with rental increases over the last three to five years and strong occupancy levels, we believe our borrowers will be able to handle the additional interest costs. Furthermore, for several years, our underwriting has mandated that any new commercial real estate or construction commitment be assessed at rates higher than the contract rate, typically by 200 to 300 basis points. We are confident that our borrowers can manage these increased rates, supported by their rising revenues and our earlier assessments from our underwriting practices.
Terry Turner, CEO
Now on the fees. And as always, I'll speak to BHG in a few minutes. Excluding BHG, the impact of the gain on the sale of fixed assets and the loss on the sale of investment securities, fee revenues were up slightly from the first quarter. That said, we're pleased with the effort of our fee-generating units to turn what is proving to be a challenging banking environment. We continue to anticipate that fee revenues, excluding BHG and all these other items, will come in at around a high single-digit growth rate for 2023 over 2022. Linked quarter expenses were essentially flat as personnel costs were down and other expenses were up by similar amounts. Seasonal decreases in payroll taxes and other benefit categories from the first quarter were the cause for the reduced personnel cost, while the sale leaseback lease expense offset in part by reduced depreciation costs was the primary contributor to the increased occupancy costs. Additionally, we reduced our anticipated annual cash incentive payout from 70% to approximately 67% of target awards at the end of the second quarter. So not much change quarter-over-quarter with respect to our outlook for incentive costs for either cash or equity incentives.
Harold Carpenter, CFO
Again, the reduced incentive accruals speaks to the variable cost nature of our incentives, which are all substantially performance-based. Additionally, along with deferring projects and slowing our hiring, we feel like we have enough leverage to throttle back on expenses should we need to. We have again lowered our expense growth forecast for this year and have incorporated that into our updated outlook. As it stands, our expense guidance was previously low to mid-teens growth for 2023; we have lowered it to high single digits to low teens growth for 2023 over 2022. Our tangible book value per common share increased to $48.85 at quarter end, up 16%. The influence of this increase was the sale leaseback transaction, which provided almost $86 million in pretax gains, offset in part by $10 million in securities losses. In view of the macro environment, we anticipate retaining this incremental capital at least through the end of this year. We believe the actions we've taken to preserve tangible book value and our tangible capital ratio have served us well, and have no plans currently to alter our Tier 1 capital stack via any sort of common or preferred offering.
Terry Turner, CEO
The chart on the bottom left of the slide compares several capital ratios as of the end of March to our peers. Although we don't anticipate significant changes to the capital rules, we are pleased with these results and our ability to withstand any changes to the capital rules that potentially could come our way. Now a few comments about BHG before we look at the outlook for the rest of the year. The top right chart is consistent with various calls and details that production has been consistent over the last several quarters at $1 billion to $1.2 billion per quarter. Placements to the bank network were less in the second quarter while placements to institutional investors were at the highest level ever and signaled that demand for BHG paper by some of the most respected asset managers in the country is really strong.
Harold Carpenter, CFO
BHG has been able to penetrate a very liquid channel over the last few years, which during some of these times has proven to be somewhat fickle for some of BHG's competitors. Over the last several years, BHG has made periodic calls to pivot between on-balance sheet investor paper and off-balance sheet bank placements. Historically, as institutional investors come to the table, their orders may receive a level of priority as to funding, which BHG has to manage. That said, BHG's unique bank network, which we believe can't be replicated by any other BHG competitor, continues to grow and provide the necessary liquidity to BHG. This is a new slide where we're trying to provide additional clarity with regard to the significant funding channels available to BHG in replacement of their loan production. What's new to the funding channel list is that in the second quarter, BHG successfully negotiated two private whole loan sales with $550 million of capacity. These are slightly different in that in both cases, these were large purchases structured similar to the bank network. Gain on sale treatment has afforded these sales as the investors acquired the loan with no recourse. BHG has negotiated three warehouse lines with three well-known and respective asset managers private equity firms. Performance of BHG's loans sold to the capital markets have been such that many of the firms that have participated in the past are in constant contact to acquire more loans in the future.
Terry Turner, CEO
The bank auction platform remains very liquid and able to meet the necessary funding that BHG requires of it. All in, these funding channels collectively provide several billion dollars in capacity and the flexibility to manage liquidity risk effectively between the various channels. This is the usual information we've shown in the past detailing spread trends just in a slightly different format. The top chart represents the gain on sale of the off-balance sheet bank network, and the bottom chart is a blended chart of all balance sheet funding strategies, which incorporates the historical buildup of balances. As anticipated, spreads have come in with higher rates, with the bank auction rates being consistent with pre-COVID spreads. During the second quarter, the blended spreads for on-balance sheet were slightly higher than the bank network given the balance sheet loans reflecting a buildup of balances over the last three years. And as it stands today, BHG expects spreads to be fairly consistent going into the second half of 2023.
Harold Carpenter, CFO
As we've noted in previous quarters, BHG has tightened its credit box over the last several quarters, particularly with respect to the lower tranches of its borrowing base. This will have an impact on both production and spreads. Average FICO scores in 2023 have increased to 743. As we've stated in prior quarters, BHG has been modifying their credit models towards originated less risky assets. Production volumes remained strong even with tighter credit underwriting. BHG refreshes its credit score monthly, always looking for indications of weakness in its borrowing base. Credit scores are up from previous years. Additionally, approximately 22% of BHG's production is with repeat borrowers adding to the quality of their loan base. This slide details reserves and losses for both off-balance sheet and on-balance sheet loans.
Terry Turner, CEO
As we mentioned in previous quarters, BHG determined that loss rates in several lower tranches of their production were exceeding internal tolerances and elected to stop lending into these lower tranches. Their conclusion was that for loans written in 2021 and for most of 2022, several contained an element of reinflation which require remediation. As a result, we believe outsized losses could occur over the next couple of quarters at a similar pace as the last two quarters. Typically for BHG, approximately 70% of the lost content is incurred within the first three years of origination. But with great inflation, losses should come to light sooner. As a result, BHG has expended significant resources to bulk up collection activities, including hiring more loggers and will be instituting in-person closings for new borrowers, which was suspended during COVID.
Harold Carpenter, CFO
BHG had another strong quarter with approximately $1.1 billion in originations and is on track to achieve $3.8 billion to $4 billion originations this year, which is slightly less than last year. Thus far, through two quarters, production is slightly more than the prior year even with efforts to tighten the credit box. BHG has a conservative bias that production in the last half of the year will likely be lower than the first half, but should be close to what they had last year. Net earnings are being forecasted at $175 million to $190 million, which is a tighter forecast from last quarter's production of a 30% to 40% reduction from prior year's results. The numbers now work out to be a 35% to 40% reduction.
Terry Turner, CEO
Quickly, again, the usual slide detailing our current financial outlook for 2023. We continue to plan for a recession, but how severe it will be neither we nor anyone else really knows. Our job is to manage the risk that faces this franchise every day. What we know is that our business model is relationship-based, nimble, and resilient. Our management team has significant experience and has tackled the economic downturn before. We have great confidence that we'll be able to manage the high-quality binding franchise that our shareholders have come to expect from us and can currently handle whatever curveballs get thrown at us. And with that, I'll turn it back over to Harold.
Harold Carpenter, CFO
Thanks, Terry. I mentioned that I said that I have come back to offer my thoughts on the shares. Obviously, the primary goal of the call is to have an in-depth review of quarterly performance, which we've now completed. But beyond that, we work hard to make sure that investors have an opportunity to understand more than just what went up and what went down during the quarter, but to get to a better understanding of our approach for producing long-term shareholder value, aka, total shareholder returns or TSR. So perhaps the best place to begin is just examine what kind of total shareholder return we've produced historically.
Terry Turner, CEO
As you can see here over the last decade, PNFP has produced the single best total shareholder return among peers. And I'd invite you, if you get a chance, to go back and look at it since our inception in 2000, look at it over our first decade, look at it over our second decade, over the last 15 years, over the last 20 years, I think you'd find us at or near the top in all those time segments. Absolutely consistent performance irrespective of the various economic rate cycles over the last 23 years. And so what I want to examine now is how that happened. The analyses of a number of bank stock experts, and I suspect that of yours, would show that there are three primary metrics that are highly correlated to TSR over time, and they're revenue growth, reported EPS growth, and tangible book value accretion. I suppose that there are an infinite number of metrics that bear little or no correlation with TSR over time. But they include metrics like net interest margin percentage, cost of funds, deposit cost beta, loan yields, noninterest-bearing deposits, total deposits, operating leverage, and efficiency ratios, just to name a few. In fact, you've already seen our track record for total shareholder returns over the last decade, yet I'm confident that our NIM percentage has rarely been above $1 million. Our cost of funds has likely never been better than median. Our deposit beta is always high, both when rates go up and when they come down. Loan yields have generally been no better than median, and our noninterest-bearing deposits to total deposits ratio has generally been less than most of our peers. There's nothing wrong with any of those metrics. In fact, we measure and study all of them. It'd be hard to build a model without many of those inputs. But I'm just making the point that we focus much more on growing revenues, growing EPS, and accreting tangible book value than we do standard model inputs like the NIM percentage or the cost beta or the percentage of noninterest-bearing deposits to total deposits because historically, revenue growth, EPS growth, and tangible book value accretion have been more highly correlated with TSR, which honestly is the main thing I care about. When I say we focus much more tightly on growing revenues, growing EPS, and accreting tangible book value, here's what I mean. Most of you know, 100% of our sales and associates participate in our annual cash incentive pool, 100%. No annual cash incentive is paid virtually to any salaries associated with this firm if our classified asset ratio exceeds a certain level. But the second we had made a bunch of bad loans, the metrics that determine virtually every salaried associate's payout, including mine, are the revenue growth and the EPS growth rate.
Harold Carpenter, CFO
Since revenue growth and EPS growth have been highly correlated with TSRs, we have literally focused every single salaried associate in this firm on those two variables. And I believe that's one of the critical reasons our firm continues to compound revenue and earnings growth like few others can. My personal incentive along with every other salaried associate with this firm depends on those two growth rates. In terms of long-term equity incentive plan, 100% of our associates are granted shares. For most associates, those shares are time-vested, but for the leadership team, the top 150 or so leaders in this firm, including me, the substantial majority of our recurring annual award vesting is performance-based, and the two primary measurements are peer-relative tangible book value accretion and peer-relative ROATCE. In other words, for the leadership of this firm to maximize the vesting of the restricted share grants from our long-term incentive plan beyond clearing an asset quality threshold, which in this case is an NPA ratio, we have to outrun 75% of the banks in our peer group in terms of tangible book value accretion and ROATCE. Parenthetically, that may give you a little insight on why despite the extraordinary liquidity that we and virtually every other bank had on our balance sheet following the pandemic, leadership of this firm did not load the bond book when yields were at near all-time lows.
Terry Turner, CEO
So here's how that plays out. Within the last five calendar years, we've seen a COVID pandemic, quantitative easing, a mammoth influx of liquidity from all the government stimulus in response to the pandemic, inflation or CPI as high as 9%, the most precipitous increase in Fed funds rates in recent history in addition to quantitative tightening and a dramatic decrease in money supply and associated deposits, an inverted yield curve and a number of failures at otherwise stable banks. And through all that, on the upper right, you can see the dramatic outperformance of our five-year EPS growth versus peers. On the lower left, you can see that the primary driver of that EPS growth was the dramatic growth in revenue per share regardless of all the macroeconomic volatility. And then on the lower right, you see the very dramatic compounding of tangible book value. So I believe that continual compounding of revenue, EPS, and tangible book value has been the primary contributor to producing the peer-leading total shareholder return you saw several slides back. So now when you begin to think about what the TSR chart is going to look like over the next five years or over the next 10 years or over the next 20 years, you might begin here. The Southeastern markets we serve have a dramatically different growth profile than the rest of the nation, which has the potential to turbocharge our revenue and EPS growth. I'd hate to think I had to compound earnings and revenue at the pace we intend to in some of the other regions in this country. But even more important than the dynamic growth in the markets we serve are likely to enjoy is the competitive advantage that we've built. We're a market share taker. We've been one of the fastest-growing banks over the last 23 years, and certain vibrant markets have certainly been a tailwind. But you can be sure, the substantially more important contributor to our growth has been our ability to take market share from vulnerable competitors. What you're looking at here is market data produced by Greenwich Associates, the foremost provider of research to U.S. banks on the commercial market segment. This is from their client satisfaction dashboard. Down the left side of the chart, you see critical satisfaction variables based on their research, things like ease of doing business, being trustworthy, valued long-term relationships, creative insights, the digital experience, the quality of the relationship manager, cash management capabilities, and so forth. As you can see by the scale, at the bottom, elements that are colored dark green are market-leading; elements that are colored red would be trailing or at the bottom of the market; and elements colored all the various shades from lighter green to yellow to orange are all scores in between the best and the worst. So in the three rightmost columns you see Pinnacle scores for all these important satisfaction metrics for small businesses. That's companies with sales from $1 million to $10 million. Middle market businesses that's $10 million to $500 million in sales segment. And then on the far right, the combined score for the $100 million to $500 million in sales segment throughout our multistate footprint. I've studied the chart very long to see that Pinnacle's a market leader for virtually every single one of these metrics. And this is critically important to understand. These charts cover our entire footprint and compare the five or six market share leaders in addition to Pinnacle, including Truist, Bank of America, Wells Fargo, P&C, First Citizens and First Horizon. I obviously don't know if Greenwich could identify any other banks that dominate their markets as overwhelmingly as we do, but I'd be surprised. Across our footprint, we're far and away the market leader in terms of overall client satisfaction and all-important Net Promoter Score. It seems to me the most important scoreball is the Net Promoter Score. Most of you know that it's a comparison to the number of clients that are so engaged with your brand that they fully intend to advocate for you with their friends and colleagues, less the clients that are so disengaged with your brand that they're detracting from your reputation in the community. And you can see here our Net Promoter Score is a league-leading 86 among small businesses, companies from sales from $1 million to $10 million; and a league-leading 82 in the middle market, companies with sales from $10 million to $500 million. Connecting this slide with the last, regardless of all the money spent by our largest regional and national competitors on technology and on the digital experience, our clients rate our digital experience more highly than their clients rate theirs throughout our footprint. So much has been said about a potential migration of regional bank clients to the national providers. When you look at these scores, it should be apparent why we lost virtually no large clients following the Silicon Valley failure. And while we continue to grow deposits at a dramatic pace in the aftermath. Look at the dramatic difference in Net Promoter Scores between us at the top and our large national competitors at the bottom. It'd be very hard to leave a bank you absolutely love. And honestly, it's not hard to leave a bank you hate. Some banks compete on price. Some just wait for a yield curve that sets your balance sheet. But for us, it's this relentless pursuit of creating raving fans that explains our ability to grow revenue and EPS almost regardless of the economic ups and downs.
Harold Carpenter, CFO
So not surprisingly, when Greenwich surveyed businesses in our footprint about which banks are likely to earn a share of their business over the next 12 months, Pinnacle is far and away the most frequent response. As you can see, at year-end, 42% of small business respondents named Pinnacle, and 50% of middle market business respondents named Pinnacle as the bank most likely to receive a share of their business. That's an incredibly strong momentum. And when Greenwich probed clients regarding which banks are most at risk for losing the share of their business, Pinnacle was far and away the least frequently mentioned response. Consequently, our net momentum among businesses in our markets is market-leading at 38 in 42 in the two segments, is further substantiation of the point I've been making about our relative lack of vulnerability versus the large national banks in our markets, a thesis that regional banks are more vulnerable to the large national banks might be true for undifferentiated banks.
Terry Turner, CEO
But business clients in these segments within our footprint might suggest otherwise, given our net business momentum score. So really to sum it up, what I've tried to say is it's our belief that revenue growth, EPS growth, and tangible book value accretion have historically been most highly correlated to TSR. That's why we focus our entire firm on it through our short-term and long-term incentives. We believe our relationship-based model has historically produced strong TSR with more manageable risk than many, the proof's in the pudding. When you think about the fact that the markets that we serve are likely to outperform the nation and the fact that we've got a demonstrably differentiated, high-touch and tech model that generally attracts more and less clients. That's the key to compounding earnings over time, irrespective of economic volatility. We'll stop there, operator, and take questions.
Operator, Operator
The first question today is from Jared Shaw from Wells Fargo. Jared, your line is live.
Jared Shaw, Analyst
I guess the deposit growth is great, seeing that we've seen some deposit growth in some of your peers today as well. Where is that coming from? Is that really just the biggest national players? Or are you taking more wallet share from your existing customers? I guess maybe just a little more detail on where that money is coming from? And how much more runway you think there is to take that market share?
Harold Carpenter, CFO
Yes, Jared, that's a great question. I'll give you several things to think about. One is we've got a lot of people we've hired over the last couple of years. They are still out there bringing their clients to our firm. I think also that when you get into this time of the year, we start seeing seasonality play into our deposit book. And so consequently, we fully anticipate that we'll see a swell here in the third quarter and the fourth quarter. And lastly, our public funds, we won, call it, a handful of public fund clients here over the last quarter or so, and they're also building their balances in a more outsized way and in a more predictable manner.
Terry Turner, CEO
Jared, I might add to Harold's comments, I think in terms of getting to where it comes from, I think the first point's important. The folks that we have hired, the largest contributor of revenue producers has been Truist, the second largest has been Wells Fargo. And so they are about consolidating relationships here based on their ability to serve clients better and so forth. So anyway, I think that's a big part of it. But I wouldn't want it to be unsaid that I think if you were to come inside this firm and talk to people, you would hear them say, hey, we're about to transition this firm from being one of the best asset generators to being one of the best deposit generators. And so there's a lot of energy inside the firm on a number of different specialties that we've built. I've mentioned them in the past, deposit verticals that attack large pools of money where we have some value-added product offering for things like property managers, homeowners associations, a variety of pools of money like that where we've got a value-added product that we've introduced over the last couple of years. So those things have really good momentum in them. And there are a number of other of those verticals that are being rolled out literally as we speak. So again, my hope and belief is you'll see a little bit of a transition in our ability to gather beyond just the relationship approach that we, Harold and I, both commented on, but also through those specialties.
Jared Shaw, Analyst
That's great color. And then looking at the pace of hiring, you've done a great job hiring people in market expansion. How should we be thinking about your pace of hiring new revenue producers at this point? And can you give an update on maybe some of the expansion markets that you've recently targeted?
Terry Turner, CEO
Yes. To address the second part of your question about expansion markets, we have already indicated that in the Atlanta market, our commitments are approximately $1.6 billion, with over $1 billion in loans outstanding. In the more recent large market, Washington D.C., they have generally been a net provider of funding, which is impressive. They are close to achieving around $700 million in funding, with about $650 million in loans outstanding, and commitments are significantly higher. The momentum in both markets is really robust. If you spoke to Rob Garcia or Caroline Pelton, who lead our efforts there, they would share that they are having great success in recruiting both personnel and clients, largely due to the strength of our treasury management. We remain excited about these expansions. Regarding hiring, we continue to recruit effectively. While we may not hire as many people this year as last, we do anticipate strong hiring momentum. It’s also possible that we might consider extending into another market if we believe it can contribute to building a large bank. You've heard us mention this before; we’re not looking to hire indiscriminately or create a loan production office, but if the opportunity to build a large bank arises, we would take it. I hope that answers your question.
Jared Shaw, Analyst
Yes, that's great. That's great. And then just finally for me, maybe for Harold, how should we be thinking about or where cash balances go in the near term? And then, I guess, from what you said, we should just assume that any reduction in cash either goes directly to loan growth or GSF HLB reduction? Any target there?
Harold Carpenter, CFO
Yes, that's right. It's probably going to be around broker deposits. We've got about, call it, upwards of $2 billion that we think that we can use to kind of support loan growth here in the over the year and also help reduce the size of our wholesale book. And it won't all happen at once; it'll happen consistently through the next six months and probably into the first part of next year.
Operator, Operator
The next question is coming from Stephen Scouten from Piper Sandler.
Stephen Scouten, Analyst
I'm curious about the strength of the deposit base. You've mentioned how you motivate your team and indicated that there has been a significant change. I'm wondering how this shift has occurred. Have you modified your incentives to foster a culture focused on deposits, or are you primarily still emphasizing revenue growth and telling your team that to secure loans, they need to first secure deposits? How should we understand this cultural shift that has taken place?
Terry Turner, CEO
Yes. Stephen, that's a great question, and I appreciate it because it's important to me. We've not changed our incentive at all. And as you know, I'm a believer. I'm hoping I'm going to convince you to be a believer that when you get all the associates of this firm aimed at revenue growth and EPS growth, it's not hard to illustrate to all guys. We've got to buy more money or we can't book our loans. Guys, we've got to buy more money at a lower price. It is so easy to move our company to whatever really is important in order to grow the revenues and EPS; I think it would shock you how easy it is to illustrate how that works. I think in the last quarterly all associate meeting, we just put a slide up there and show what the financial performance is. And you show them, okay, look, we're all on our margin here, and it's largely a function of cost of funds. And so then you go down and show on the expenses, we're right on track, but don't miss the reason we're on track because we reduced our incentive accrual. And so guys, to be clear, what just happened here in this quarter is we took money out of mine in your pocket in our incentive accrual, and we put it in our clients' bucket in terms of the rates we paid them on deposits. And so again, we have not altered the incentive. I doubt that we're going to. It is how we are able to move people back and forth, not that we're constrained by it.
Stephen Scouten, Analyst
That's very helpful. And then, I guess, in terms of the margin outlook, I think, Harold, you guys give the cost of deposits at June 30. I'm not sure if you give like a June or end of period kind of margin relative to where the margin was for the quarter as a whole. But how do you think about incremental progression and compression from here? And can you speak to the amount of floors you might have in the loan book if and when we get rates lower?
Harold Carpenter, CFO
Yes. We've got floors on loans, and we're pushing for floors on loans. We're also pushing for folks to be very conscious about what rates they're paying on their deposits. I think we can be more deliberate with respect to our deposit rates as we go into the second half of the year. As to margin performance in the third and fourth quarters, it's going to be down in all likelihood. We think there's one more rate increase coming to us that we'll have to support in some way with our depositors. But that said, don't miss. We think our net interest income is likely to be flat to up. So as Terry said, we're going to be focused on the revenue line. And we're going to try to make sure that we don't sacrifice any of the ground that we've gained here over the last couple of quarters with respect to some of these clients that we've gathered. So I'll stop there, Stephen, and see if I've gotten to your point.
Stephen Scouten, Analyst
Yes. No, I think that makes a lot of sense. I think it speaks to that slide you guys set in maybe a year ago where you showed your deposit betas, but your NII outperformance irrespective of those deposit betas. I think that's a good point. Maybe just lastly for me, around the new hires. You had some particular strength in wealth management. Can you give us a view on where kind of those new hires have been concentrated? And I guess, have more of them been into that wealth management platform over time? Has that driven some of the strength there?
Terry Turner, CEO
We have definitely brought on a significant number of people in the wealth management area, particularly in trust, which is experiencing double-digit growth for us. We've also seen hiring in brokerage and with private bankers, who are relationship managers catering to affluent clients. Overall, we've hired across all these areas, and it appears we might have experienced a higher level of hiring in wealth management over the past year or two than usual, though I don't think that was intentional. It's more about the availability of talent. We've tried to attract high producers from other organizations where they may be feeling discontent, and the current environment has heightened that frustration, making it easier for us to recruit them. However, I wouldn’t anticipate that this level of hiring will continue indefinitely. Looking ahead to 2024, I expect the hiring trends to be similar to what they were in 2022.
Operator, Operator
The next question is coming from Steven Alexopoulos from JPMorgan.
Steven Alexopoulos, Analyst
I want to start, so you had favorable commentary in terms of the outflows of non-interest bearing starting to abate, and then even the pace of deposit increase starting to abate. You also cited, Harold, I think you said the competitive environment is unpredictable. Is that a function of the competition lessening that you saw? You're starting to see that abate a bit? Maybe you could drill down a little bit into what gives you comfort here?
Harold Carpenter, CFO
I think the trends we've observed in our deposit book over the past 90 to 120 days suggest a slower pace. The calls coming into our units seem less urgent. Our new hires focused on deposit gathering are presenting more opportunities. Terry and I discussed price-based competitors before we started this call. In my view, price-based competition tends to be a short-term issue. Eventually, these competitors must return to strategies that ensure their profit margins. We expect that much of the recent activity from some regional competitors will be temporary. I believe they won't be able to sustain competitiveness at the rates they're currently offering. Therefore, I hope the highly competitive environment we've experienced will lessen as a result. While I could be wrong, history shows that price competitors cannot maintain their strategies for an extended period.
Steven Alexopoulos, Analyst
Yes, that's helpful, Harold. I appreciate you adjusting the expense guidance and outlook slightly. Given our current situation, what is your perspective on where we might end up? I understand there are many factors, but do you think it will likely fall within the high single-digit to low teens percent increase range?
Harold Carpenter, CFO
I think if you were to just kind of twist my arm and put it behind my back and make me really be in pain, I'd have to go probably to a, call it, 9% to 11%, somewhere in that neighborhood.
Steven Alexopoulos, Analyst
Okay. Perfect. That's helpful. And then final question for me. In terms of the sale leaseback, Harold, could you walk us through the P&L impact on a go-forward basis from the transaction? I just want to make sure.
Harold Carpenter, CFO
Yes. Just from 30,000 feet, lease expense less the depreciation savings from selling those properties is probably over a 12-month period, about a, call it, a $14 million kind of additional run rate increase. But the cash that we were able to generate from moving the $200 million in fixed assets from 0 to now, call it, 5.25%, and the cash we generated from taking investment securities, $174 million of those from, call it, 2% to 2.5% to now 5.5%. That increase in yield basically offset all of the lease expense increase. And just to be completely candid around the sale leaseback, when we started looking at this back in the fourth quarter of last year, the kind of the play was that we would reposition more of the bond book. And consequently, we thought we could probably reposition as much as another, call it, $700 million or $800 million in bonds with the gain we got on the sale leaseback. But with all the activity in the first quarter and now going into the second quarter and whether or not there's going to be a recession or not, we elected just to warehouse the capital that we created from the gain.
Steven Alexopoulos, Analyst
Got it. So the benefit is you create excess capital, and from an overall earnings view, it's fairly neutral moving forward?
Harold Carpenter, CFO
That's exactly the point. And that's basically why we did the sale of the investment securities is to neutralize the impact of the lease expense.
Operator, Operator
The next question is coming from Brandon King from Truist Securities.
Brandon King, Analyst
So, I wanted to get updated assumptions on deposit mix, including your guide. I know, Harold, you mentioned previously that by year-end, we could get to below 20%. So, I wanted to see if you still feel comfortable with that sort of trajectory, just given where things stand today?
Harold Carpenter, CFO
Yes, I think we still believe that it's a reasonable number to consider. None of us, including you, Brandon, can predict where noninterest-bearing deposits will trend in the current environment. However, it appears that the situation is improving, and ultimately, two factors need to be in play: first, our clients must reach a level of operating cash where they feel it’s necessary to maintain this in an operating cash account; second, our sales team and treasury management staff must communicate with our clients about what seems like a sensible amount to keep in that deposit account for managing their business. I believe these discussions are happening daily, reinforcing our relationship-based model, which is why we think the decline in noninterest-bearing deposits is becoming more favorable for us.
Brandon King, Analyst
Got it. Got it. Makes sense. And then I wanted to talk about the allowance, there was an increase in the quarter. And I understand the increase in commercial real estate, but I saw that consumer real estate had a pretty sizable jump as well. So just want to see if there's any context around that increase?
Harold Carpenter, CFO
Yes. I think the increase in the consumer real estate allocation is primarily related to the macro case and the duration of those assets. So we're not going to argue about whether or not we're a big fan of CECL or not, but at the end of the day, when rates go up and those assets extend out, then the CECL model automatically penalizes those loans and the decisions you made on those loans back several years ago. Does that make sense to you, Brandon?
Brandon King, Analyst
Yes. So nothing kind of qualitative here, just purely quantitative?
Harold Carpenter, CFO
To be honest, I can't remember the last time we had any kind of loss on a one to four residential fixed rate mortgage.
Operator, Operator
The next question is coming from Catherine Mealor from KBW.
Catherine Mealor, Analyst
I want to revisit the topic of margins and share your thoughts for next year. It's useful to consider that you have indicated NII is likely to remain flat or increase in the latter half of the year. Looking ahead to 2024, if we assume a rate hike in July leading to a stable level of Fed funds without any rate cuts as we progress into next year, how do you anticipate your NII might appear under a scenario of prolonged higher rates?
Harold Carpenter, CFO
Yes. Well, I think one big factor in that assumption would be what does the intermediate long end of the curve do. As you know, no banker is a fan of an inverted curve. And so it's going to require a lot more work on our part in front of our sales force and how we price with clients and all that sort of stuff. So far, we don't think credit is going to be we don't see that moving going into 2024. We think we're well positioned there. But as far as our ability to grow net interest income in kind of a mid-teens level, it would be very hard as we look at 2024. But it all depends on what we believe is going to happen at the intermediate and long end of the curve.
Catherine Mealor, Analyst
And as you get to a point where you think your NII growth might pull back to maybe the low teens, maybe the high single-digit kind of pace in that scenario, how quickly do you think you'll reconsider the expense growth going into next year to be at a lower pace count like what we saw this quarter?
Harold Carpenter, CFO
Yes, that's a great question. We will need to take several factors into account when planning our expenses for next year. One of those factors will be the replenishment of our incentive costs for 2023 and figuring out how to achieve full incentives again next year. Additionally, we need to consider our hiring strategy. Currently, we are very conservative regarding our support positions. While we are actively searching for revenue-generating roles, we have asked our support teams to hold off on hiring and focus on meeting their internal objectives. I'll leave it at that, Catherine.
Catherine Mealor, Analyst
Okay. That's very helpful. I have a follow-up on credit. It appears that while loan growth should remain strong, it might slow down a bit in the latter half of the year compared to the first half. It also seems that you don't anticipate a significant increase in the reserve ratio, just a modest one. So, could we assume that barring any unexpected changes in credit conditions, the total provision expense should be lower in the second half of the year compared to the $30-some million we observed this quarter?
Harold Carpenter, CFO
Yes. Yes, we don't anticipate provision being that high in the second half as it was in the second quarter.
Operator, Operator
The next question is coming from Matt Olney from Stephens.
Matt Olney, Analyst
I want to make sure I understand the strategy on liquidity. It sounds like the excess liquidity amount, as you view this, is around $2 billion, and you want to be patient deploying this, could take up to a year. Did I get that right? And then I guess kind of part 2, the broker deposits that could be paid down that you mentioned, Harold, any more color on these products? Are these CDs? And when do these start to roll? Thanks.
Harold Carpenter, CFO
Yes, they'll roll off over the, call it, the next six months. I've got some public fund money that I think will also be paying off over the next six months. So it will be those kind of things. I don't think it will take a year. I think it's more like probably six to seven, eight months, Matt, if I remember my maturity schedule. It's kind of where we're looking at this liquidity number.
Matt Olney, Analyst
Okay. That's helpful. And then I guess kind of part two of that and thinking about the interest rate sensitivity on that, I think it's on Slide 49 of your deck there. Where do you see that migrating over the next year, especially as we get closer to any kind of Fed funds cut? I would assume as you put out liquidity, the bank would become more rate neutral, but just curious kind of how you see that moving over the next year.
Harold Carpenter, CFO
No, I think you're exactly right on that. Once we reach a terminal value on Fed funds, our sensitivity should return to historical norms. There will likely be some gradual deposit growth, but it won't be significant; it will be in small amounts. Additionally, we will benefit from repricing fixed-rate loans as we move into a more stable rate environment, if such an environment exists.
Matt Olney, Analyst
Yes. Okay. Okay. That's helpful. And then just lastly on the loan growth front, you've talked about managing the growth flow in recent months and being more selective and very careful. I'm also surprised that you didn't take down a loan growth guidance this quarter. It looks like the full year guidance implies will be flattish from what we saw in 2Q. Can you just kind of speak to the pipeline as far as what you're seeing today and currently versus a few months ago?
Terry Turner, CEO
Yes, Matt, you understand our approach well. A significant portion of our loan growth comes from the consolidation of banking relationships through new hires, which happens regardless of other economic factors. Sometimes I want to minimize this growth, but that wouldn't benefit anyone. When we hire new people, they bring clients, and if we don't manage these relationships well, those clients may leave. This dynamic contributes to some of the growth. Additionally, as Harold pointed out, we implement pricing strategies that influence growth at the margins. We aim for less conventional asset classes like HLTs. Marginal adjustments can dampen that growth. In terms of current economic loan demand, I believe the Federal Reserve is having an impact. The current economic loan requests we see are likely lower than they would have been a couple of months ago, both for commercial real estate and commercial and industrial loans, Matt.
Operator, Operator
The next question is coming from Rudy Preston from UBS.
Rudy Preston, Analyst
Thanks for taking my questions. I wanted to ask, just if I could start on the fixed-rate portion of the loan portfolio. I just wanted to ask if you knew what the dollar amount of fixed-rate loans that we're repricing over the next 12 months were? And then when I kind of go back to your previous deck, it looks like fixed-rate origination yields were about 4.75% to 5% about four, four and a half years ago. Is that a good yield to use when we think about what's rolling off the book for fixed-rate loans right now?
Harold Carpenter, CFO
Yes, Brody, I don't have what the fixed-rate maturities in the C&I book are with me. I just got what's in the commercial real estate and construction book on the slide. But I wouldn't imagine that the yield difference would be terribly different between what's in the commercial real estate versus the C&I book. I just don't know how much more. Most of my C&I book is floating or variable. And so I mean, it would be slightly higher, but I don't know how much more.
Rudy Preston, Analyst
Got it. Okay. So I can just use that CRE portion as a proxy. Also on that just on the negotiated deposit book. I wanted to ask just what portion of that book has recently renegotiated on rate? And for those that have recently renegotiated, where are the new rates moving to?
Harold Carpenter, CFO
I think that number would be in the mid-3s, somewhere in that range. I would imagine a substantial amount of that book has been renegotiated. I haven't seen a recent analysis of my deposit book that tracks the rates, but it seems that most of those deposits have undergone some form of repricing.
Rudy Preston, Analyst
Got it. And on the sale leaseback transaction, do you happen to know what the cap rate was on that transaction for the buyer?
Harold Carpenter, CFO
No, I really don't. That would be an interesting thing to know, but I don't.
Rudy Preston, Analyst
Got it. Okay. And then you did have $100 million or just under $100 million of fixed-rate CRE and construction loans that were maturing in the second quarter, at least per the slide deck last time. I wanted to ask just what happened to those loans? Did they re-up with you at your targeted rate? Did any of them leave the bank? And I guess, did any of them struggle with the increase in rates?
Harold Carpenter, CFO
I'll go back and look at my numbers, but I think there was only a small percentage that left the bank. I think probably one-third, maybe 25% to one-third left the bank and went to the permit market. I think the rest are probably still hanging with us.
Rudy Preston, Analyst
Got it. Okay. And just a couple of last ones. On the AFS portfolio, do you have to know what the effective duration of that portfolio is and what the conditional prepayment rate you're assuming in that duration calculation?
Harold Carpenter, CFO
I think the average length of the AFS book is that in years, or are you referring to a percentage?
Rudy Preston, Analyst
Yes, yes.
Harold Carpenter, CFO
I think the life in the AFS book now is somewhere around 8. And the percentage duration, I think, is around 5%.
Rudy Preston, Analyst
Okay. Do you know what the CPR is in that duration calculation, Harold?
Harold Carpenter, CFO
I don't, but I can get that for you, Brody, and I'll get it to you.
Rudy Preston, Analyst
I appreciate it. I have one last question. I think you may have touched on this earlier, but I apologize if I misheard you. Regarding the increase in the CRE reserve, was there any specific metric that contributed to that increase within your CRE model, especially since it has been declining over the past several quarters?
Harold Carpenter, CFO
No, I can't point to anything specific in the CRE book. There are no individual loans in there that contributed to it or anything like that. I don't know of anything.
Operator, Operator
The next question is coming from Brian Martin from Jonnie Montgomery.
Brian Martin, Analyst
Most of my questions were addressed in the previous discussion. However, Harold, you mentioned a spot rate regarding deposits. Can you tell me what the spot rate was for the margin at the end of the quarter? It seems like you're indicating that while you've discussed the net interest income in dollars, the margin itself is expected to decline in the next couple of quarters and perhaps stabilize later in the year. Is that assessment based on your current outlook on rates?
Harold Carpenter, CFO
Yes, that's fair. I don't have monthly financial information in front of me. But we think the margin will decline over the next couple of quarters. But again, our focus is on that net interest income number that we think is flat to up.
Brian Martin, Analyst
Yes. Got you. Okay. And the liquidity normalizes by end of year. That's kind of what you're suggesting that six to seven months or so?
Harold Carpenter, CFO
Yes. I think we'll be close by the end of the year.
Brian Martin, Analyst
Okay. And then for BHG, the outlook has become a bit more defined. As we consider 2024, could you provide a high-level perspective on BHG for next year, especially in relation to how potential losses might unfold and the impact of CECL?
Harold Carpenter, CFO
Yes. First of all, we're not providing guidance for 2024. However, I believe that BHG's significant growth rates from the past few years will likely become more normalized as we approach 2024.
Operator, Operator
And we have another question coming in from Jared Shaw from Wells Fargo.
Jared Shaw, Analyst
Just a quick follow-up on the BHG. You called out the loan sales to the institutional investors. Were those also covered under a substitution agreement? Or when you say there's no recourse, that's just truly no recourse there off the balance sheet and any losses will be absorbed by those borrowers or purchasers?
Terry Turner, CEO
That's correct. My understanding is that they purchased those loans, so they belong to them. Therefore, the gain on those loans wasn't quite at the same level. However, they also don't have any recourse.
Operator, Operator
There were no other questions in queue at this time. And this does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.