FB Financial - Q2 2023
July 18, 2023
Transcript
Operator (participant)
Good morning, and welcome to the FB Financial Corporation's Second Quarter 2023 Earnings Conference Call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer, and Michael Mettee, Chief Financial Officer. Also joining the call for the question and answer section is Greg Bowers, Chief Credit Officer. Please note, FB Financial's earnings release, supplemental financial information, and this morning's presentation are available on the investor relations page of the company's website at www.firstbankonline.com, and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a 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 and financial measures and a reconciliation of non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release. Supplemental financial information and this morning's presentation, which are available on the investor relations page of the company's website at www.firstbankonline.com, and on the SEC's website at www.sec.gov. I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO.
Chris Holmes (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 a quarter, we reported EPS of $0.75 and adjusted EPS of $0.77. We've grown our tangible book value per share, excluding the impact of AOCI, at a compound annual growth rate of 14.4% since we became a public company. As of quarter end, we had tangible common equity to tangible assets of 9%, common equity tier 1 capital of 11.7%, total risk-based capital of 13.9%. If we include unrealized losses on securities in those regulatory capital ratios, common equity tier 1 capital would be approximately 10.6%, and total risk-based capital would be approximately 12.9%.
As we've discussed on the last few calls, our two current priorities are maintaining the strength of the balance sheet and improving internal processes and procedures to become more effective and efficient. Behind these dual focuses is a desire to be able to act aggressively, sorry for that, when 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 industrywide right now, we're content to build capital until we have an attractive use for it.
On credit, we continue to de-risk our balance sheet this quarter as our C&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 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. 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 ran off. Outside of public funds and broker 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 after Silicon Valley.
From a safety and soundness 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 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. 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 in a position to be able to mash the accelerator when we feel comfort in the economic and credit outlook. I'll now let Michael go into our financial results in more detail.
Michael Mettee (CFO)
Thank you, Chris. Good morning, everyone. I'll start first with the adjusted pre-tax, pre-provision trends from the bank. For the quarter, we showed adjusted banking segment pre-tax, pre-provision of $46 million. That's slightly up from the prior quarter of $45.8 million and down 17% from the second quarter of 2022. The primary driver of the year-over-year decline is growth in banking segment core non-interest expense of 12%. While funding pressures have certainly hurt as well, segment net interest income is down less than 1% from the second quarter of 2022, as loan growth and balance sheet remixing, paired with increases in yields on earning assets, have offset much of the funding pressure of the past year. We expect funding pressures to continue in the near term and are taking steps to address our expense load.
Moving to our liquidity position and deposit base, we have on-balance sheet liquidity consisting of cash and unpledged securities of $1.4 billion. We have an additional $6.4 billion in unsecured borrowing capacity available, including broker deposits, Federal Home Loan Bank, and discount window. For tax purposes, we have $2.2 billion of real estate loans held at our REIT. Were we to fill 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 have no held-to-maturity securities.
The portfolio is currently around 11% of total assets, which is in our desired range of 11%-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-$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 3.4% for the quarter, down 11 bips from the first quarter. We expect some continued compression in the margin due to funding pressures. 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. 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 a 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 ± 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 expenses will look like for us as we implement some identified efficiency projects from our FirstBank Way initiative, and we would expect to be able to give more guidance there by the end of the year. In the third quarter, outside of the FDIC insurance assessment related to the recent bank failures, we would expect controllable expenses to be down slightly to flat as compared to the second quarter due to the measures we already have put in place.
Closing with our allowance for credit losses, economic forecasts deteriorated modestly during the quarter, and we added a further 3 basis points to the allowance as a result. However, provision expense ended up being a release rather than a build, as our reserves on unfunded commitments came down once more. This was primarily due to the decline in our unfunded construction and development commitments. We will continue to be cautious on our reserves. At this point, there are no industries that we are qualitatively assigning additional reserves to, but we will continue to monitor our portfolio to see if some additional protection is warranted. I'll now turn the call back over to Chris.
Chris Holmes (President and CEO)
Thanks, Michael, for that color. Just to summarize, a fairly straightforward second quarter, we think that's a good reflection of the company's current priorities of capital credit and liquidity. Continued good earnings has left us with strong capital buffers, which we intend to maintain through this period of uncertainty. Our work over the last five quarters to reduce our exposure to construction and commercial real estate also became evident in our numbers this quarter, we'll continue to de-risk the balance sheet over the near term. Additionally, we feel very comfortable with our current on-balance sheet and available sources of liquidity, given the stability that we've seen in our non-public funds 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.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star then one your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. First question will come from Stephen Scouten with Piper Sandler. You may now go ahead.
Stephen Scouten (Managing Director)
Hey, thanks. Good morning, everyone.
Chris Holmes (President and CEO)
Good morning, good morning, Stephen.
Stephen Scouten (Managing Director)
I guess, I'm, like, really encouraged, Michael, by what you said, and what you put in the release around non-interest-bearing deposits. That's one of the biggest questions I have, probably industry-wide these days. What, I mean, other than what you're seeing in May and June, which is great, what do you think, is there anything structural around maybe the size of your non-interest-bearing deposit accounts or the type of accounts that would lend that to be maybe more stable? And, you know, I guess it was 25%, Q1-2022. We're down to, like, 22% of deposits today. Do you guys have a feel for where you think that could maybe stabilize, if not at these current levels?
Michael Mettee (CFO)
Good morning, Stephen. 22% is where we are. You know, that's where we ended the first quarter. Expect it 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, yeah, they were about 9%-10% non-interest-bearing. FirstBank was probably 26%-27%, so pro forma is around 20%. 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, you know, core checking accounts. You know, accounts up a couple thousand during the quarter. I think 256,000 accounts from 254,000 in the first quarter.
The team continues to add core customers, be it commercial or retail, and that's spread pretty good throughout our footprint. You remember, we have a rural community footprint and a commercial as well. I think that diversity helps and, you know, average balance is fairly consistent. Yeah, and we think that's a benefit to the company.
Chris Holmes (President and CEO)
Yeah, Stephen, I'd just add this, a couple things that probably help that number a little is the fact that actually, a slight majority of our deposits would be consumer versus commercial, which is not, which is different than some other banks our size. We've also got that, what we call our community component with that again, helps some stability there. When we were trying to project, we thought it would be in the 20%-21%-22%, going back to looking at pre-COVID numbers.
Stephen Scouten (Managing Director)
Okay, great. That's really helpful. Then you guys mentioned the possibility maybe of security sales, some of these things in a loss position. How are you guys thinking about that math today? Is there a specific earn back period you're targeting? Kind of how do you think about that balance sheet management and the math behind it?
Michael Mettee (CFO)
Yeah, it's a constant point of debate, quite frankly, because, you know, any loss is a loss, right? Our capital ratios have grown pretty strong. It just opens the possibility. We'll look at it, and we have looked at multiple tranches, anywhere from, you know, nine months of payback to 27 months. It would be in between that. We haven't established a target. There's a lot to consider, and there's other uses of capital as well. We're evaluating all options.
Stephen Scouten (Managing Director)
Okay, great. Maybe just last thing for me, you guys talked about in the release, kind of the ability to take advantage of inevitable future opportunities. I guess I'm wondering what you think those inevitable opportunities might look like? Do you think we'll see more distressed kind of M&A throughout your markets? As you think about the potential for opportunities, is there kind of a stack rank in your mind of kind of what you'd optimally like to pursue if it came about?
Chris Holmes (President and CEO)
Yeah, there is, Stephen. Optimally, we'd like to pursue really strong bankers and banking teams in our geography and in contiguous geographies. That is really what we'd love to do first. If we can move those over at the right times when things are when they're maybe experiencing some unsettledness at other places, that's probably the biggest opportunity. Of course, acquisitions are always also an opportunity. That being said, you know, acquisitions are hard, we've done four since we became a public company, one right before we became a public company, and they take your eye off the ball sometimes operationally. We prefer the teams first.
If you project out, there's probably gonna be, at some point, a lot more acquisition activity. We do want to make sure that we're at least in position to participate and be in a preferred position to participate when that comes about. That's really our first. As Michael said, when we think of using capital, that right now, balance sheet restructuring is also top of mind.
Stephen Scouten (Managing Director)
Great. That's super helpful. Appreciate all the color and congrats on the quarter.
Chris Holmes (President and CEO)
Thanks, David.
Operator (participant)
Our next question will come from Catherine Mealor with KBW. You may now go ahead.
Catherine Mealor (Managing Director of Equity Research)
Thanks. Good morning.
Chris Holmes (President and CEO)
Good morning, Katherine.
Michael Mettee (CFO)
Good morning.
Catherine Mealor (Managing Director of Equity Research)
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-$285 million range for the year, and it feels like that's gonna be a lot lower. Do you have any sense as to where that could land for 2023, given some of the initiatives that you've been working on this quarter?
Michael Mettee (CFO)
Yeah. Good morning, Catherine, it's Michael. I wouldn't start it a lot lower. You know, we're still working through some of the levers. We've created some optionality and some leverage there as well. We're focused on 2023, back half of 2023, but really 2024 and, you know, creating a launchpad from there for 2025, 2026, putting the company in a really good spot. You know, we'll have more to come on that, but I would say steady state for now, and we're working on some things.
Chris Holmes (President and CEO)
Yeah. Catherine, of course, as we're thinking through the quarter and we're thinking through the results, we're thinking through the call, not an unanticipated question. Our approach to it is I made reference to some of the initiatives we have going on that are improvement initiatives, and they're yielding some efficiencies. I think I've said this on a previous call, the goal is efficiency. It's not necessarily we haven't set expense targets out there for these various initiatives. As we are implementing them, it's clear that there's gonna be some efficiencies gained and some expenses will go down.
we expect that to continue, but we aren't prepared to go put some number out that says, "Hey, here's where we'll be, or here's what we're gonna achieve over the next 2 or 3 quarters." I would say we recognize that with margin compression, and with mortgage originations both being down, revenue growth is tougher to achieve. When revenue growth is tougher to achieve, expense reductions are a mandate, and so we expect that. That's kind of the way that we're operating the company right now.
Catherine Mealor (Managing Director of Equity Research)
Okay, that's helpful. Maybe just for, you were talking a little bit about next quarter, Michael, that you thought that the linked quarter expenses would be down outside of the FDIC assessment. Any idea of the size of that?
Michael Mettee (CFO)
Yeah, I kinda to Chris's point, it's a little bit marginal at this point until we have some more plans solidified, but I'd say it's down slightly.
Chris Holmes (President and CEO)
It's not too much unlike this quarter, I'd say.
Catherine Mealor (Managing Director of Equity Research)
Okay. All right, great. Then maybe on the margin, what's your forward thought on the margin? It feels like, you know, you're coming out originally, the goal had been about 3.40%, 3.50%. You know, you're a little bit below that, but not significantly below that. Do you see stabilization in the margin in the back half of the year from current levels? Or do you just think the outlook for deposit costs is just too tough to make that call right now?
Michael Mettee (CFO)
The outlook for deposit costs is very difficult. You know, I actually think the team did pretty well holding in this 3.40% range. You know, 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, there was some stability in that, but there was some aggressive competitive pricing. Pending how some of the larger institutions play out, and if they enter the market and start getting super aggressive, it could obviously put pressure on us. That is the concern on forward deposit pricing. That being said, you know, we kind of remixed the balance sheet. We're continuing to do that.
Again, you know, optionality is a common theme here, that we wanna be able to restructure the balance sheet and get out of some of the higher cost, deposits, especially if they're encumbered, to free up liquidity. That can create a lever to offset some of that margin pressure.
Chris Holmes (President and CEO)
Yeah. I think your phrase was, "Is it gonna be tough to hold in for the rest of the year?" It'll be tough to hold in for the rest of the year. I mean, if you just look at the last three months, and Michael went through our three margin in April, May, June, it was actually relatively flat, which we're glad to see.
We don't look at that and go, "Well, I guess that means it's gonna be flat the rest of the year." We do see it continuing to squeeze some, although, if you look at the first half of the year versus the second half of the year, it feels like, and again, this is feel, and our internal projections don't necessarily reflect it yet, that it may be softening some for us anyway. You know, we went out and moved some deposits up early. We got some I think we've gotten maybe a little bit of benefit from that, but deposits are gonna be tough the second half of the year from our view.
Catherine Mealor (Managing Director of Equity Research)
Very helpful. Thank you.
Chris Holmes (President and CEO)
Thanks, Catherine.
Operator (participant)
Our next question will come from Kevin Fitzsimmons with D.A. Davidson. You may now go ahead.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Hey, good morning, everyone.
Chris Holmes (President and CEO)
Morning, Kevin.
Michael Mettee (CFO)
Good morning, Kevin.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Just curious, you mentioned the de-risking, and that was very intentional in construction and non-owner occupied commercial real estate. Just wondering, Chris, like, you know, you mentioned you're gonna continue to focus on that, but in terms of magnitude and what that's gonna mean for overall loan growth? I know you said flattish loan growth over the back half of the year, but are you looking at, like, for this being, like, a several quarter headwind for growth, but, you know, but the right thing to do for balance sheet strength in terms of the amount of runway that you have to will be taking those segments down? Or is it more of a shorter term thing, that you're just really over the next few quarters? Thanks.
Chris Holmes (President and CEO)
Yeah. In terms of affecting net loan growth, I think it's shorter term. It's next couple of quarters. We don't want to run the company [down]. Look, regulatory thresholds are always important, and we pay attention to those, but we live by our own risk management standards, and we don't want to be over 100% of risk-based capital and construction. Again, that is the regulatory guidance, but we don't want to live with that level of balance sheet risk on a continuing basis, even if the regulatory threshold was 200 or 300, we're gonna live below that 100% threshold on construction and development.
You know, we had a period, and there were some reasons why that we went over that. Look, we're in fantastic geographies, and, some reasons why we, coming off COVID, you know, we, we had a lot of deposits, and, we made a conscious decision there. We're making a conscious decision to back away from that. You'll see us run continuously at a percentage of risk-based capital in C&D, that's certainly less than 100. But we should be beneath that by the end of the quarter.
Look, when I say by the end of the quarter, I'm sure Greg Bowers, our Chief Credit Officer, is flinching over there because there's a lot of projections that go into that in terms of what people draw down. As you know, you've got a bunch of unfunded commitments. It depends on how much people when they draw and if they draw according to schedule. By our math, we think we'll be under that at the end of this present quarter now Q3. Then we'll operate under that. Once we're under that, we'll continue to see us, that gives us a little more room to do something besides make sure we're taking care of customers.
When you limit those commitments, the way we view that is we're basically reserving our capacity for customers. We have to make sure that we can take care of good, long-standing relationship customers, and that's what we're doing. So we're still having new things hit it, but they're new things from existing customer relationships. So that's a more way to say it's really more we're talking about a couple of quarters as opposed to something longer term.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Okay. Thank you. Helpful. One thing I wanted to circle back on, Michael, I think when you were talking about deposit price competition being fierce, you made some kind of comment about FHN's merger going away. I'm not sure whether you were saying that the competition step up was inclusive of that or really wasn't driven by that. I wanted to clarify that, one, two, based on what you're seeing recently, what your expectations are on that front, if you expect-
Chris Holmes (President and CEO)
[Alicia]?
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
that to get more, competitive.
Chris Holmes (President and CEO)
Of course. Can you hear us?
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Yeah. Yep. Can you hear me?
Operator (participant)
Pardon me, I will put on hold music as I get the speaker line reconnected. Thank you.
Chris Holmes (President and CEO)
Thank you.
Operator (participant)
Pardon me, I now have Brandon reconnected.
Chris Holmes (President and CEO)
Hey, Kevin, sorry, we're back. That was a difficult question, so we had to get the disconnect.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
I guess so. I guess so.
Chris Holmes (President and CEO)
Eh, yeah.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Did you capture it all, Michael?
Michael Mettee (CFO)
I did. Sorry about that. I'm not sure what happened. My point on FHN is it actually created additional deposit pricing pressures for us and for other banks that's in the Southeast because you had a bank that was expecting to be acquired, they kind of woke...
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Right
Michael Mettee (CFO)
... poked the bear there, as they woke up. Their, our footprint is their footprint, so it created a competition, which then creates more competition as other, others are having to come in, and you see their marketing, and they, people walk in the branch and corporate and stuff, corporation, stuff like that. It, it definitely increased our competitive pressure during the quarter, which we thought that deal was likely to go through, I guess, in Q1, even in a different environment, so.
Chris Holmes (President and CEO)
Yeah. So basically, Kevin, for those of us in the, down in the Southeast, once that deal didn't go through, they came out with some special offers and some things like that made the market, that moved the market.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Do you think that's, is that kind of baked in at this point, or is that more an accelerating pace of pricing competition coming out of them, as best you can tell?
Chris Holmes (President and CEO)
Yes. Well, it's hard to tell. We certainly don't want to speak for our friends, and they are, a lot of them are our friends, are competitors, but they're friends, too. My guess is, and it's only a guess, that they probably had to come out and get some funding. That probably settles down a little bit but, but, and feels like it may have settled down a little bit.
However, I would say, one of the things as we think about the second half of the year, is that, we do see larger, regional banks and even some of the national banks, some of the Big Four that's putting some offers out there that are above 5%. They're putting those out there with some advertising. It's more targeted advertising than just blanket advertising, but they're hitting the market with advertising, and it's coming from the largest regionals as well as even national, where they're above 5% on their deposit offers.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Got it. Okay. All right, thanks, guys.
Michael Mettee (CFO)
Thanks, Kevin.
Chris Holmes (President and CEO)
Thank you.
Operator (participant)
Our next question will come from Matt Olney with Stephens. You may now go ahead.
Matt Olney (Research Analyst)
Hey, thanks. Good morning. Sticking with the deposit cost commentary, in the prepared remarks, you mentioned that mix shift away from some of the public funds that started in May. I guess we could see more of that in the third quarter. Any color on the pricing levels of those public funds that you're exiting and the alternative funding that you're replacing this with? Just trying to get a feel for if this is a material shift in the pricing. Thanks.
Michael Mettee (CFO)
Yeah. Hey, Matt, good morning. Large portion of Q2 was seasonal, as we kinda talked about. They're generally Fed Funds plus a spread on at least a portion of them. There are a portion that's Fed Funds minus, but they're generally all tagged at the Fed Funds. The ones we've cycled out of are typically gonna be Fed Funds plus, you know, 5 to 15 basis points. We're seeing competition in those priced above that, and so we let some of that walk, especially if it was tying up the investment portfolio. Would be the strategy there is, you know, you can let some of those go, unencumber your securities, and do something else with that. You know, we mentioned brokered. As you know, we're a customer-funded bank.
That's our philosophy. We always, or typically lean that direction. We like to stay that direction. We're still heavy, customer funded, but we did add some brokered this quarter. I mean, that was probably at a cost of about $5.10. We cycled out a Fed Funds Plus, you know, it was $5.10, you pick up 30 basis points or so on a similar dollar amount. Things like that, of course, we're always working for core operating accounts that include a mix of non-interest bearing and interest bearing. Theoretically, you replace some of those deposits at a significantly lower cost. Although, as Chris mentioned, new interest bearing are coming on at 5% plus. I mean, that's just where the market is.
Matt Olney (Research Analyst)
Mm-hmm.
Chris Holmes (President and CEO)
Yeah, hey, good morning, Matt. Notice Michael said, we picked it up at $5.10 and lowered our cost. If you go back and look at our historical balance sheet, the only brokered funds we've had on our balance sheet in years have been what we picked up through the Franklin Synergy transaction. We don't use that to fund our balance sheet and to fund our loan portfolio. We use brokered funds in cases like this, where we've got something temporary, and we can use it to lower our cost for whatever reason. That's our strategy there. Again, we don't use that to typically fund our loan growth.
I would say this, we had a $463 million reduction in public funds. Remember, we talked about those being seasonal and how this is part of the season where those go down. Again, when you're managing your liquidity, that was also part of what factored into getting those temporary brokered funds on the books. That $463 million was a combination of two things: One, seasonal reduction, but also, we exited a 9-figure account that was very high priced. Again, that factors into the brokered funds, and that part's not seasonal, and that won't come back.
Matt Olney (Research Analyst)
Okay, that's helpful, Chris. Thanks for the commentary there. Then you mentioned the incremental funding just above 5%. Any more color on the newer origination yields as far as where those have been coming on more recently?
Michael Mettee (CFO)
Yeah, they're 8%+, Matt, so we're still getting 300 basis point plus spread. I think it's 340-ish over the last eight weeks or so. It's healthy. You know, 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. It's healthy yields.
Matt Olney (Research Analyst)
Then moving over to the provision expense, it sounds like that negative provision expense in Q2 was from that reversal of the unfunded loan commitments that you've talked about. Based on the commentary, it sounds like we're gonna see the unfunded construction commitments continue to move down pretty aggressively the back half of the year. Thinking about the provision expense, any more guidance or commentary on that provision expense? Could it remain relatively flattish in the near term, just given the commitments of the construction portfolio continuing to come down?
Michael Mettee (CFO)
I think, you know, good old-fashioned ACL to help for investment. I mean, I think you're somewhere in this range, 145-155ish. 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. Construction reserve percentage went up on both held for investment and unfunded, but the $200 million they rolled out of that unfunded commitment drove that number down. To Chris's point, you know, if you think about going from 113% of risk-based to 100-ish, logic would tell you could see a flattish total reserve to maybe a relief.
I think that's a pretty decent assumption. Not through us lowering our ACL percentage.
Chris Holmes (President and CEO)
Yeah, this is.
Michael Mettee (CFO)
It's not a credit outlook.
Chris Holmes (President and CEO)
This is a frustrating conversation. It's a little bit difficult. Look, we don't, we have chosen the path of pretty much abiding by what the economic forecast and the, our committee that manages that. We don't make a lot of use of a lot of qualitative stuff like some do. I mean, we do, but we have some, but we don't, you know, this would have been a good quarter to frankly build the reserve, probably. We may have other quarters where it'd be good quarters to build the reserve. You know, we work with our auditors, we work with our internal folks, and try to make sure we're getting it right.
I wish I could answer that question very specifically, you know, it's always a mystery to me what it's gonna be until about two days after the end of the quarter. I would not anticipate we would get much below a 1.5 at this point, 1.5%, on terms, in terms of our HTM. You know, we could see a little bit of build, especially if things take a turn for the worst, you'll certainly see a build. If things kind of continue to operate in the haze, which we seem to be operating right now, I would expect it to be, us to continue to be in that 1.5%-1.55%, something like that.
Matt Olney (Research Analyst)
Okay.
Chris Holmes (President and CEO)
Our chief accounting officer is probably rolling over in his office right now. He's probably wallowing in the floor, so.
Matt Olney (Research Analyst)
Well, I.
Chris Holmes (President and CEO)
Anyway.
Matt Olney (Research Analyst)
I think you added enough caveats in your response there, hopefully to to satisfy us.
Chris Holmes (President and CEO)
Right.
Matt Olney (Research Analyst)
Thanks for the got there, guys.
Chris Holmes (President and CEO)
Exactly what I was trying to do, man. I was trying to get the point across, but not getting in any trouble.
Matt Olney (Research Analyst)
I appreciate it, guys.
Chris Holmes (President and CEO)
Yeah.
Operator (participant)
Next question will come from Brett Rabatin with Hovde Group. You may now go ahead.
Brett Rabatin (Managing Director and Head of Equity Research)
Hey, guys. Good morning.
Michael Mettee (CFO)
Good morning, Brett.
Brett Rabatin (Managing Director and Head of Equity Research)
Wanted to go back to deposit pricing. You know, you mentioned new money around 5%. Was curious to hear about the conversation with existing, quote, good customers and how that was going relative to where you're having to add new money. You know, how do you keep your good customers or your existing clientele happy with less than 5%?
Chris Holmes (President and CEO)
You don't, is the answer. Those good customers are at that same rate, or at least, you know, I mean, they're at a competitive rate. That's, and partially why our cost is where it is.
Brett Rabatin (Managing Director and Head of Equity Research)
Okay. I wanted to ask on capital. You mentioned, Chris, just kind of building capital from here, and you're at 11.7% CET1. You know, is there a level where even before you would try and figure out something to do with capital, that would be, you know, quote, "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, you know, we're starting to accumulate too much?
Chris Holmes (President and CEO)
Yes, is the answer. You know, when you get to where we are on a CET1, and again, remember, we don't have any held-to-maturity varied losses out there. So we feel like we're in a pretty strong position, and that opens up the balance sheet, restructuring opportunities, you know, and look, theoretically, we're not gonna do this, okay? Theoretically, we could sell our entire investment portfolio of $1.4 billion after the mark, put it in cash at 4%, and pick up well over 2% spread on that difference. Well over. It'd be 2, 220, probably. We'd pick up probably 220 basis points on that $1.4 billion-$1.5 billion.
Again, those are the kind of things we're thinking about those, but also, you're right, at some point, you're also thinking about a buyback. We are excited about the flexibility and the options it gives us, and we're at a point where we've got to start thinking about that, given the capital levels. You know, once you get to CET1, that's nearing 12%, once you get to, you know, a tangible after AOCI of 9% and, you know, be 9%+, you know, by the end of July. We've got that flexibility given where we are today, I think, in the capital levels.
Brett Rabatin (Managing Director and Head of Equity Research)
Okay.
Chris Holmes (President and CEO)
Let me make sure I present the other side that you're balancing is, you're thinking about what happens if credit, if significant credit problems do actually happen coming in the coming quarters. Remember, we're keeping a 1.5% reserve as well, ACL, on top of that, you know, those numbers. We feel like we have a pretty strong balance sheet all the way around.
Brett Rabatin (Managing Director and Head of Equity Research)
Okay. capital is certainly king. speaking about credit, just one question on the multifamily market. You know, here in Nashville, I know it's a small percentage of the construction portfolio, but 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 you guys view on the multifamily market, you know, particularly here in Nashville?
Chris Holmes (President and CEO)
Greg, do you want to comment?
Greg Bowers (Chief Credit Officer)
Yeah. Hey, Brett. I think, you know, you read the same headlines we read, in talking with our customers, you know, I'm just more positive on it than some of these headlines. You were in town when we did the investor presentation not too long ago, you know, look at a lot of the cranes and a lot of the high rise. I think some of those units will probably tend toward the CBD and be a higher price point. Our clients have been very successful in more of the suburban markets and still seeing lots of good activity, touched base with some of them. You know, we're always touching base with them.
Touched base with one here recently, and he's got a project under contract to sell for numbers that way exceed the appraisals. It's very successful. You know, these, we've got one that was structured with a sales contract, you know, at completion, and so it's near CO. There's a lot of good activity. I think it may be back to normalcy. We don't have a crystal ball to understand and predict what those vacancy numbers are gonna be, but in talking to our clients, we're still very positive and still, you know, when we underwrote the project, we were talking and dealing with our existing clients. We were asking for significant cash equity, we were asking for guarantees.
You know, when you do a project like that, we're thinking through the cycle. We're not thinking about, I don't get too amped about what the specific perfect project is, because if it's so perfect, someone else is gonna put one up across the street soon in that time period. You know, we think that we're well-positioned, a lot of cash equity and good relationships, and we're still seeing good activity. I'm still positive.
Chris Holmes (President and CEO)
Matt, I'm sorry, this is Brett. Greg is not known overly for his positive outlook on things like that as our Chief Credit Officer. He's not, he'll certainly come down on the other side sometimes. I do think that, we're in great geographies. We still are having a lot of population growth all around, and Greg does describe it well, kind of in our thoughts. We are seeing a lot of units go up in the central business district. We're actually not involved in those, but we've got a lot of suburban stuff and continued to see as we talk...
I talked to a different one of our largest multifamily clients a lot over the last month. Man, I mean, he was really bullish on, and this was in Middle Tennessee, but really bullish and just the results are there. I mean, he continues to lease them every day, and is working to get them out there as quickly as he can, and he's leasing them every day.
Greg Bowers (Chief Credit Officer)
Chris, I think you're referencing one that we had the conversation. I'm not sure specifically who he's talking with. There's still a market out there for long-term refinancing. Talking about, you know, 10-year deals, 30-year terms. I think in that five to six range, so pretty sporty.
Chris Holmes (President and CEO)
Yeah.
Greg Bowers (Chief Credit Officer)
I think that ties back to the long-term investment opportunity, that we can all look at ups and downs, but no one disagrees with the footprint and the region.
Chris Holmes (President and CEO)
Yeah, this client's working on a 5.4% refinancing, through the government for, is what he's getting on a long-term refinance. It gives us more capacity to be able to help him do the next one.
Brett Rabatin (Managing Director and Head of Equity Research)
Okay, great. Appreciate the call.
Chris Holmes (President and CEO)
Thanks, Brett.
Greg Bowers (Chief Credit Officer)
Thanks, Brett.
Operator (participant)
Next question will come from Alex Lau with JPMorgan. You may now go ahead.
Alex Lau (VP of Equity Research)
Hi, good morning.
Chris Holmes (President and CEO)
Hey, Alex. Morning, Alex.
Alex Lau (VP of Equity Research)
I wanted to start off with NIM. What are you thinking about the through the cycle interest-bearing deposit beta for the remainder of the year, given the increased deposit competition?
Chris Holmes (President and CEO)
Yeah, I mean, for every writing grade, it's basically one to one, right? It's 100%. We're at 45% all in right now, and interest bearing's obviously above that. You know, we expect rates go up a quarter, interest bearing's going up a quarter. That's just the way it's played out, especially given, as you know, deposits still kind of flocking to different places throughout the economy, whether it's back into equities or treasuries in some aspects, and then the competitive stuff we've already talked about. Specifically in our markets, which, you know, when you're in good economies, good markets, you have a lot of loan growth, and that requires deposits, which puts further pressure on deposit costs.
Alex Lau (VP of Equity Research)
Thanks for that. If we assume that the Fed hikes one or two more times, what's your best guess in terms of timing when net interest margin hits a trough? Is it a quarter or two from now, or is it the first half of next year? Any color or thoughts on that?
Chris Holmes (President and CEO)
Yeah. End of year-ish would probably be my best kind of stab. You know, takes a couple of months for that to play out. You know, loans reset a little bit behind deposits. Yeah, probably year end.
Alex Lau (VP of Equity Research)
Thanks. Just to follow up on the construction commitments, which drove the release in the quarter. 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-$300 million decline in commitments next quarter and then hold from there, given your comments about, you know, reducing your construction exposure through the quarter?
Michael Mettee (CFO)
That commitments number runs in front of your balance decreases, okay? Actually substantially in front. You know, you'll see less decline in the commitments number moving forward and more decline in the balance number moving forward. We'll continue to manage it down a little bit from where it is, but it won't be quite as dramatic as the $400+ million that we've had over the last few quarters. You could see the commitment go down another $100 million, maybe even another $200 million, but I wouldn't see it go down further than that.
Alex Lau (VP of Equity Research)
Great. My last question is you've talked about interest in hiring experienced bankers and teams. Do you see any near-term opportunities to pick up experienced teams, given the disruption in the market? Or are you currently less focused on adding additional teams for now?
Chris Holmes (President and CEO)
No, we're never less focused on adding A-level bankers and A-level banking teams. We'll always do that. Even if, even as we're reducing expenses in other parts of the company, we think that's important. Those opportunities don't come around every day, when you get them, you need to be, make sure you're always in a position to take advantage of them. We've got, we're having conversations this afternoon. I mean, we'll, you know, we've got some conversations there that are current, we think through just market disruption, we'll continue to get opportunities over the balance of the year.
Alex Lau (VP of Equity Research)
Great. Thanks for taking my questions.
Chris Holmes (President and CEO)
Thanks, Alex.
Michael Mettee (CFO)
Sure. Thank you, Alex.
Operator (participant)
The last question will come from Feddie Strickland with Janney Montgomery Scott. You may now go ahead.
Feddie Strickland (VP of Equity Research)
Hey, good morning.
Chris Holmes (President and CEO)
Good morning, Feddie.
Feddie Strickland (VP of Equity Research)
Chris, I think you touched on this a little bit earlier, but just regarding the securities restructure, would you consider a wholesale revamp of the securities book, or are you more inclined to be sort of opportunistic and tweak around the edges?
Chris Holmes (President and CEO)
Yeah. I'm going to let Michael talk mostly about that, but I'll say this. You know, we'll consider anything. You know, we'll consider whatever makes sense for all of our constituencies, including, especially including our shareholders. We'd consider it. I think I would say it'd be unlikely that we just flush the entire portfolio. I did use that as a example of what is possible, but I think it's unlikely that we would just get out of the entire portfolio because we, you know, we use that for collateral and other things. Of course, you replace it in cash, you can use cash as collateral, too.
It's actually surprising that we've had to get not every place, counts cash the same way they count a mortgage-backed security, and actually prefer the mortgage-backed security, strangely enough. They need to update their guidelines. It does give us the opportunity to look at doing some different things, even with, you know, maybe some pieces of the loan portfolio and some pieces of the investment portfolio. Michael, you?
Michael Mettee (CFO)
Yeah, I mean, I think that's really well said. I mean, we're running scenarios that is the entire portfolio down to tranches of munis, mortgage backs, whatever, what have you. I think Chris's 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, you know, opportunities and other things we could be doing. It's probably a segment of it, TBD a little bit.
Feddie Strickland (VP of Equity Research)
Understood, that's helpful. That's funny, some places don't consider cash things, yeah, it's just goes to show how long we were in a low rate environment.
Michael Mettee (CFO)
Exactly.
Feddie Strickland (VP of Equity Research)
Just one last one for me. You talked about lift outs down the road or even, you know, potential M&A in the longer term, and adjacent geographies. Are there any specific areas you'd be more interested in getting into, whether it's Western North Carolina or even Atlanta, for example? Just looking at your footprint, was curious if there was some specific geographies you're more interested in.
Chris Holmes (President and CEO)
Yeah. You know, geographically, we consider, of course, our footprint, well, the way we think of it is. We're basically kind of Birmingham North, we're North Georgia. We're really not in Western Carolina at this point, but we'd love to be in North Carolina. We'd love to be maybe in even in South Carolina. That's a little. It's not a contiguous state, so it's a little further, but it's, you know, those are very attractive places to us. We're currently in Southern Kentucky. We'd love to, you know, get additional opportunities in in-state.
You know, Tennessee recently hit, you know, it was number three on CNBC's list of the best states for business, we wanna continue to do more and continue to grow our presence and share inside the state. We also want to grow in those areas. Currently, it's Birmingham North, we'd go Alabama all the way down to the coast, the same way with, you know, Georgia, we'd go further into there or the Carolinas, those would be the most attractive places to us. You know, we're not in that Northeast corner of Tennessee, which is an area that we think is a beautiful part of the state with a nice, steady economy.
That would also lead you into West Virginia, which again, is contiguous state as well. Those are kind of areas that we like all of those areas.
Feddie Strickland (VP of Equity Research)
No, that makes sense. Super helpful.
Chris Holmes (President and CEO)
Can I add one other non-geographic point. What we're really thinking about, if we're thinking about an acquisition, we are thinking about geography. The second thing. Actually this would be the first thing, that would be the second thing. The first thing we're really thinking about is, you know, culture of, matching a culture. You don't want a culture that doesn't match. We also think about the liability side of their balance sheet. That's really big for us. Is what does the liability side of the balance sheet look like? Does it really have good core deposits and good core customers? That's really key to us as we think about even any possibility of an acquisition. That's critical for us.
Feddie Strickland (VP of Equity Research)
Got it. Appreciate you taking my questions. That's super helpful.
Chris Holmes (President and CEO)
All right, Feddie, we appreciate it.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Mr. Holmes for any closing remarks.
Chris Holmes (President and CEO)
Okay, thank you all very much. We appreciate your support. We appreciate everyone participating. Good questions, and we look forward to speaking to you throughout the quarter and doing this again next quarter. Thanks, everybody.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.