FB Financial Corp (FBK) 2022 Q2 法說會逐字稿

Good morning, everyone, and welcome to FB Financial Corporation's Second Quarter 2022 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mettee, Chief Financial Officer. Please note, FB Financial's earnings release, supplemental financial information and this morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov.

Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call.

(Operator Instructions)

With that, I'd like to turn the call over to Robert Hoehn, Director of Corporate Finance.

Thanks, Jamie. During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other facts 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 are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks 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 Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the 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 say we've heard that the presentation up in the core call app is the prior quarter's presentation. The current presentation is available on EDGAR as well as our Investor Relations website. At that point, I'll now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO.

All right. thank you, Robert. Good morning, everybody. Thank you for joining us this morning. As always, we do appreciate your interest in FB Financial. For the quarter, we reported EPS of $0.41, an ROAA of 0.62% and an RO -- return on average tangible common equity of 7.1%. Adjusted for $12.5 million of mortgage restructuring charges and $2 million of negative mark-to-market adjustment on our commercial loans sale portfolio. We delivered adjusted EPS of $0.64 a share, adjusted ROAA of 0.97%, adjusted return on average tangible common equity of 11.0%. Those returns are a little below our standard, but it was some good reasons.

In the quarter signals some momentum that has us cautiously optimistic. We've grown our tangible book value per share, an important measure for us excluding the impact of AOCI at a compound annual growth rate of 15.2% since our IPO in 2016. The bank had a very strong quarter of balance sheet and core profitability growth. While mortgage had a challenging quarter, they continue to adjust for expected future market conditions.

A few items that I want to highlight for the quarter. At $619 million or 31% annualized loan growth was historically strong. While our markets and relationship managers with our markets and relationship managers, asset generation is not a problem. In the last 12 months, we've grown loans by $1.4 billion or 20% while not loosening our underwriting standards or expanding our credit box. In fact, in the second quarter, we became more selective in our credit process. In the second quarter alone, we estimate that we passed on well over $400 million in construction loan opportunities and not for projects that we viewed as responsible credit opportunities that generally met our underwriting standards, but we passed as we manage our construction concentration down in the current economic environment.

We also continued to see good activity in our noninterest-bearing deposits, excluding our mortgage escrow related deposits, we grew 16% linked quarter annualized. Year-over-year, excluding mortgage escrow deposits, we've grown our noninterest-bearing deposits by 19%. Growing noninterest bearing operating account relationships, a strong focus for us, and our relationship managers continue to execute well on that goal. While we saw another good quarter noninterest-bearing growth, we saw pressure on our interest-bearing deposits, which declined by $565 million in the quarter.

Of that $565 million, we estimate that just over $200 million in -- of that -- $200 million of that was in seasonal public funds decline, it should come back into the bank as part of the annual business cycle. We had an additional $325 million in larger balances move for higher rate that we chose not to match and $120 million of that was also public funds relationships. We have another $400 million in high-rate public funds that we expect to exit in the second half of the year since we don't intend to renew at the current terms.

We went into 2022 with the goal of growing noninterest-bearing deposits and holding our cost of deposits down, understanding that this would cause our total deposit balances to move lower. We've executed on those goals and 82% of loans held for investment to deposits at the end of the second quarter, we rightsized the balance sheet while improving the composition of our deposit portfolio as deposit balances have moved lower and assets, particularly loans have grown faster than we expected, we will need to read deposits in order to fund loan growth.

But as we've historically done, we'll increase our customer relationship deposit balances and have little reliance on wholesale funding and select use of public fund relationships. Our asset quality remains strong as our NPAs to assets and NPLs to loans HFI remained effectively flat at 46 basis points and 51 basis points, respectively. Despite the lack of issues that we see in our portfolio, we do remain cautious in our outlook of future economic conditions. As a result, we maintained our 1.46% allowance for credit losses to loans held for investment. Paired with our loan growth, this resulted in a provision expense of $12.3 million for the quarter, which compares with a release of $4.2 million in the prior quarter. That difference of $16.5 million between the 2 quarters accounted for a delta of $0.26 in earnings per share this quarter.

We also further reduced our commercial loans held for sale portfolio this quarter, our exposure is down to 4 relationships and $37.8 million. Each of the remaining relationships are sponsor-backed healthcare companies. 3 of those 4 relationships are performing well while one has been written down to 10% of par and has only $1.3 million of credit exposure remaining. We had a negative mark-to-market of $2 million in the quarter with that -- I'm sorry, with that 1 nonperformer.

I just mentioned accounting for $3.6 million -- $3.6 million loss and the remainder of the portfolio delivering a $1.6 million gain for the net of $2 million for the quarter. As we're close to being completely out of this portfolio and we provided updates on it each quarter, it's important to note that since the close of the Franklin merger, we realized gains of $12.2 million above our initial mark to market.

Outside of the large provision expense and the mark-to-market on the commercial loans held-for-sale portfolio, profitability for the banking segment this quarter was exceptional. We saw our year-over-year growth in adjusted banking segment, PTPP up 36.1%. That growth has been driven by strong loan growth and our margin benefiting from our asset sensitivity. We see those underlying trends largely continuing over the coming quarters, which should deliver continued strong loan growth and core profitability or -- and core profitability for our banking segment.

Mortgage continues to face a difficult environment and delivered an adjusted operating loss of $2.7 million during the second quarter. We've materially completed the wind down of our direct-to-consumer channel and made initial structure changes to our retail channel. However, the market -- with the market conditions that we anticipate over the foreseeable future, our remaining retail channel will need to continue to make adjustments over the coming months.

Lastly, we were more active in our share repurchase this quarter than we have been historically. With our stock trading at what we believe were attractive valuations, we repurchased $26 million during the quarter. We were glad to retire those shares when we did. But with loan growth that we are experiencing and the economic uncertainty of coming quarters, we're not likely to be active in our repurchase program in the near term.

As we look to the second half of the year, we anticipate loan growth slowing from the extreme levels that we've seen in the first half of the year to a more reasonable high single-digit, low double-digit range over the last 2 quarters of the year. Our local economies continue to be very strong, and we see continued demand from our customers, but we intend to be disciplined on pricing given inflation and the general economic headwinds anticipated in the near term. We expect mortgage originations to decline from the already low current levels, and we're further reducing the size of our mortgage division to reflect the new market realities.

We don't expect the positive net interim contribution from mortgage in the second half of the year. Strategically, we continue to focus on bringing in talent that's been disrupted by the recent consolidation across our footprint. We've been able to upgrade our risk and compliance and finance and accounting teams with numerous associates that have leadership positions of larger public banks across the Southeast that have been recently acquired or going through the process of being acquired. Michael and I continue to be impressed when we call the quality of resumes coming across our desks, and we continue to put people in place that will allow us to double or even triple the size of the company.

We also continue to have positive conversations with the relationship managers across our footprint that are evaluating new homes. We've hired 32 revenue producers through the first 2 quarters of the year, and those have been in every region across our footprint with our younger executive team, our $12 billion asset balance sheet and strong organic growth prospects we provide exceptional runway for relationship managers to come and spend the rest of their careers FirstBank. As an update on M&A, right now, we have too many impactful internal initiatives to distract the team with broad auction processes at this point. And with the pullback in the market and bank valuations, that activity has slowed anyway. We do continue to have dialogue with high-quality banks across our geography and in contiguous geographies that have indicated they may be seeking a partner over the coming months or years. We don't control that timing, but we do have active conversations. And anything we're considering at this point would be with banks we know well and geographies that we know well.

Finally, our innovations group continue to have discussions with fintech and other technology companies. as customers. We look for vendors that can provide the standard technology benefits of improved back-office efficiencies while making sure we're up-to-date with table stakes for our customer experience. As investors, we focus on areas where we have deep niche knowledge and can provide value in a partnership above and beyond what other investors would be able to provide such as mortgage or manufactured housing. We're also interested in deposit strategies that can supplement our traditional local bank customer base.

With that, I'll now turn it over to Michael to discuss our financial results in some more detail.

Thank you, Chris, and good morning, everyone. I'll speak first to this quarter's results in our banking segment. Our baseline run rate pretax pre-provision income for the banking segment was $53.9 million in the second quarter. Pointing to the segment core efficiency ratio reconciliations, which are on Page 19 of the slide deck and Page 19 of the financial supplement, we had $102.9 million in segment tax equivalent net interest income this quarter. Along with that $102.9 million in net interest income, we had $12.8 million in core banking segment noninterest income.

Finally, we had $59.3 million in banking segment noninterest expense. This quarter, due to our lower level of taxable income, we had a geography shift of $1.4 million as tax credits were moved from a reduction in our tax expense to instead be a reduction in noninterest expense. We also had a true-up that resulted in a $1.1 million reduction in reported noninterest expense this quarter. Adjusting for those shifts, core Banking segment noninterest expense would have been $61.8 million. Together, that comes to our $53.9 million in run rate segment PTPP, which has grown 30.5% over the comparable $41.3 million that we delivered in the second quarter of 2021.

Moving on to our net interest margin. With summary detail on Page 5 of the slide deck, our net interest margin of 3.52% showed significant improvement from the 3.04% that we reported in the first quarter. Part of that improvement was due to our accretion and nonaccrual collection interest returning to a de minimis impact of positive 2 basis points in the quarter compared to negative 7 basis points in the first quarter. Another driver was our balance sheet mix is declining deposit balances and strong loan volume led interest-bearing cash to be a smaller percentage of our balance sheet. We estimate that excess liquidity had only a 14 basis point negative impact on our margin in the second quarter compared to 29 basis points in the first quarter. The remaining 20 or so basis points of expansion was due to assets repricing faster than our liabilities as our cost of total deposits increased by only 5 basis points, while our yield on loans, excluding nonaccrual and purchase accounting, increased by 25 basis points.

Our securities portfolio increased by 12 basis points, and our interest-bearing cash increased by 42 basis points. Looking forward, for our margin, we had a run rate margin, excluding the impact of liquidity for the month of June in the 3.7% range. We have only $239 million of our approximately $4 billion in variable rate loans above their floors as of June 30 and that $239 million should be roughly cut in half after the next rate hike later this month.

We get a pretty sizable bump in the yield on our variable rate loans on the day of a rate hike and they get a lingering benefit as loans to their various contractual repricing days. As an example, for the last 75 basis point increase, we saw roughly a 30-basis point increase immediately. And from June 16 to July 7, we saw another roughly 20 basis point increase in yields on our variable rate loans.

We've also intentionally kept our securities portfolio smaller as a percentage of our overall balance sheet and have kept our duration fairly short. We have around $200 million of cash flows coming off the portfolio and available for reinvestment annually. Offsetting some of that sensitivity going forward will be higher deposit costs. In the month of June, we had a cost of interest-bearing deposits of 41 basis points compared to 33 basis points for the quarter, and we've done a good job so far of keeping our beta low.

However, we expect cost to accelerate over the second half of the year as competition for deposits increases. For Banking segment noninterest income with the Durbin cap on interchange beginning to impact us as of the July 1, we expect for our banking noninterest income to be in the $10 million to $11 million from quarter-to-quarter over the foreseeable future. As I mentioned earlier, we view our run rate core banking segment noninterest expenses being $61.8 million versus reported $59.3 million due to the $1.1 million of true-up and $1.4 million of state tax credits that were shifted by the line and reduced noninterest expense this quarter. We expect continued growth in our Banking segment noninterest expenses.

As Chris mentioned, we have tremendous opportunity to add talent in both customer-facing and back-office roles, and we are continuing to build the infrastructure that will allow us to capitalize on these opportunities in front of us and achieve strong organic growth. Those opportunities have us planning to add approximately $2 million to $2.5 million in expense in each of the next 2 quarters. In addition to expected growth from the $61.8 million over the remainder of the year, we also expect our segment noninterest expense elevated in either the third or fourth quarter as we create enough taxable income to move the state tax credit back to the tax law.

Once we hit that threshold, we would reverse the $1.4 million benefit we saw in noninterest expense this quarter. As you would expect, that $1.4 million of movement of the tax credit was also the culprit for a higher tax rate this quarter. For the year, we expect our effective tax rate to be in the 22% to 23% area. When the tax credit reverses out of noninterest expense and makes that line item higher, it will reduce our tax rate below normalized levels in the same quarter.

Moving to mortgage. The environment continues to be exceptionally difficult as retail channel lock volume was down 18% in the second quarter compared to the first quarter and is expected to be down an additional 20% to 25% in the third quarter compared to the second quarter. We have made structural changes to our remaining mortgage operations to capture lower volumes, but with a continued decline, we will need to make further changes to reposition ourselves. We do not expect a positive pretax contribution from mortgage in the second half of the year.

Moving to our allowance for credit losses. We saw our ACL to loans declined by only 4 basis points this quarter after sizable releases previously. Economic forecast for the second quarter did not move materially from those that we utilized in the first quarter. However, they did get more negative in the July release and our optimism about our local economies is being tempered by uncertainty due to the inflation that we're experiencing and the general national narrative that we will soon enter into a recession if we're not already in one. If conditions do not change, we would anticipate maintaining a similar level of ACL loans held for investment over the near term.

I'll close my section by speaking about our manufactured housing portfolio. For those that are unfamiliar with our manufactured housing portfolio, we acquired that business line with our Clayton Bank merger in 2017. If you recall, Clayton Bank & Trust, who is named for its owner, Jim Clayton who is considered by many to be the father of manufactured housing and the founder of Clayton Homes, which was acquired by Berkshire Hathaway for $1.7 billion in 2003.

That background to say, our manufactured housing team has a long history in the industry and learned the business from the best. Today, our MH business has 3 revenue streams. And at quarter end, it had roughly $520 million in total loans or 6% of the overall portfolio. The first line is our communities portfolio, which has $265 million of the $520 million in loans. The communities business is a strong portfolio of sophisticated operators who sometimes we refer to as multifamily investors but with a horizontal apartment design. These are loans with significant cash equity positions, long-term seasoned operators who have been and continue to be the beneficiaries of an upward trend in affordable housing across the country.

The second piece of our MH business is our portfolio of loans to the owners of the manufactured homes themselves, which we call our MH retail portfolio. We have approximately $245 million in MH retail or just less than 3% of our total loans. Typically, these are classified as chattel loans, and the majority of those balances sit in our consumer and other category. The average FICO for these portfolios is 663 and average note size is about $50,000. But the size of new origination has been increasing is manufactured home to -- same material cost increases as site-built homes.

As you might expect, past dues and charge-offs are higher in the segment than the rest of our portfolio with delinquencies ranging anywhere from the 4% to 8% in a given month. In a normal credit environment, we're accustomed to seeing annual charge-offs in the 50-basis point area. In bad markets, that can move to around 1%. However, during the pandemic, we put a qualitative reserve of 5% on this portfolio, so we feel well protected and with yields in excess of 8%, this is a very profitable portfolio for us, and we're excited for it to grow.

Our third revenue stream for MH is our servicing book where we service the retail loan portfolio at some of our MH community customers. This is strictly a fee-based business, no balance sheet risk, no credit risk, just servicing portfolios.

And with that, I will turn the call back over to Chris.

All right. Thanks, Michael, for that color. We're pleased with our results for the quarter, particularly proud of the team for the loan growth. And that conclude our prepared remarks. And operator at this point, we'd like to take questions.

(Operator Instructions)

Our first question today comes from Matt Olney from Stephens.

I want to ask more about the construction portfolio. I think it's now around 18% of the loan mix, which would put the bank at the higher end of the range in terms of just the mix, but I think you also said you passed on quite a few construction loans this quarter. So just trying to appreciate if you're trying to manage this down from this 18% or trying to prevent this from moving higher? And then I guess, within that segment, would love to hear any commentary you have about which construction segment you're keeping an eye on in this environment?

Yes, Matt, Chris, I'll go first. And first on just managing the overall concentration, we do look at the guideline or we certainly pay attention to the guideline of 100% of risk-based capital. And today, we're over that, we've been signaling that we would go over that because -- as you know, most of these construction loans you will make, and you might not have draws on them for quite some time. And so there's -- you're always trying to project where that balance is going to be. You don't know exactly when the projects will complete either and you get a certificate out of occupancy, which is when they roll out construction. So it's a constant monitoring process. And so we have been looking at that actually for several quarters. And if you look at our availability of undistributed funds, our commitments that are not drawn on point, it's actually moved down for us each of the last couple of quarters. And so we've been monitoring what goes into that. So yes, we monitor that. We -- just as a general -- it's kind of difficult. And I alluded to that in my comments, we're seeing good projects, but we just have to manage the concentration down because we see, given our geography and given the attractiveness of what's going on in the growth and the in-migration in our geography, we continue see some good projects, but we're just managing that down to limit the concentration is really what's happening there.

And then on other -- you guys have comments on anything. And then you did ask what are we particularly keeping an eye on. If there was anything that I've probably got the closest eye on I'd say it's office, just in the geography, I think it's still not quite known how the office segment handles COVID work.

We did just have an announcement. There was a national announcement, but it was -- we were one of the markets that had an impact from the Amazon announcement where they said they were halting construction. I think it was on fixed buildings, fixed office buildings where they were reconsidering the layout of the office buildings. And one of those is here where they've just said, not -- they've said, "Hey, we're continuing to bring on the people. We just want to take a breath and look at how we're going to reconfigure that for the new work-from-home work environment. So that's one that we have been watching closely. I'd say the other is -- the others actually have been pretty good for us. We've seen project -- we've seen good projects and pretty much all the segments. So you guys, anything that you want to add further, Okay. Does that help?

Yes. That's great, Chris. I appreciate that. Good color. And then I guess, switching gears. I also going to ask more about deposit balances I think you mentioned part of that deposit balance contraction in 2Q, there were some seasonal pressures there. But I guess, beyond seasonal pressures, would love to hear more about kind of what you're seeing with deposit balances. And it sounds like we should anticipate additional public funds coming down again in the third quarter. I think you mentioned that. Just would love to get your take on expectations total deposit balances in the back half of the year, those should contract incrementally? Or do you expect those to turn positive?

Yes, sure. So on public funds, the public funds out there and it's been really cheap over the last couple of years as municipalities as states, as all the government entities have been flooded with money our federal government, then those positive hit bank balance sheets.

You have -- they've been cheap for banks. And so they basically have set on the balance sheet, sometimes break it at a loss by the time you collateralize it. We've let them sit on the balance sheet. You saw where our margin was last quarter compared to this quarter. But frankly, we knew that once rates moved up that we weren't going to be keeping a lot of those because we were frankly, in keeping a lot of those. We also had a couple of larger public funds relationships that came to us that were not very profitable for us. And so those were also ones that we said when the time was right, we would those go. And so we've been filtering through that. That's also the comment in my -- that I made in my prepared remarks about the composition of our deposit book being improved. And so that's where that comes from as we -- and so we've still got a little bit of money sitting on the balance sheet, say, a little bit. I mean, it's close to $300 million to $400 million that we think will probably exit. And again, it's as a result of rate. But historically, look at our deposit amount as we place almost no reliance on wholesale funds. And then when we do have public funds, it's usually operating relationships got a reasonable price reasonably priced. And so just some remix there is what rolled down to. And also, as noted, it does come at a time. It's pretty good for us in terms of where we are from a loan-to-deposit ratio. But you also heard me say, you're going to see slower loan growth luckily for us, lower loan growth means 10% or 12%. And so that will allow us to sort of continue to remix and reprice on the deposit side.

And Chris, that's helpful. And I guess the other part of that would be just the overnight liquidity position has come down a little bit over the last few quarters. Would love to hear more commentary about how you expect to fund loan growth the back half of the year, whether it's deposit growth or excess liquidity? And then kind of longer term, where do you see that position going.

Matt, this is Michael. Yes. I mean, yes, we did see a large drop in excess liquidity due to the funds funding of the loan growth of $619 million and then also the deposit runoff that Chris just mentioned. I think you'll see a little bit more pressure on liquidity as Chris has mentioned some public funds rolling back out. But I would say that would normalize relative to the last couple of years. We've been running excess for a good 2, 3 years here. And so kind of back to limits that we would expected back in the 2019 range.

You will see a focus on deposit generation we had Christmas 10% to 12% loan growth, we expect to fund via relationship deposits. So that -- if you think about that, we talked about our deposit cost being relatively low increased quarter to quarter. And so I'd expect to see that accelerate. Our betas will be a bit higher or possibly materially higher to kind of catch up. We've been very fortunate and as we said, it was our plan to let some of these deposits run down, keep our costs low and take advantage of some of that excess liquidity. So in the back half of the year, I think you'll see us move a bit more in line with interest rate increases to not only maintain our current deposits on interest-bearing, but grows as well.

I'll add one thing to that, Matt, and that is that our traditional public funds that we have had on the balance sheet for a long time, bottom out generally in the second quarter and then they begin to build back in the third and fourth. And so we expect those to build back some over the third and fourth as well. So we feel like when we go out with -- I'm not talking about crazy above market rate, but when we go out with pretty good deposit proposition, our customers and relationship managers respond very well.

Our next question comes from Brett Rabatin from Hovde Group.

I just talk about the loan growth, the $620 million, obviously extremely impressive. I wanted to hear any color you could give on how much of that was new versus existing clients? And then how much of that would have been fixed versus floating production.

Yes. Good questions. A strong majority of that would be existing clients. So not sure exactly the percentage that would be existing versus new, but a strong percentage of it would be relationships with existing -- would be existing relationships a strong majority of that. And then fixed versus variable is close to 50-50. We're right at 50-50 and the loan portfolio and what came on in the quarter was right at 50-50 also.

Okay. And just given, Chris, that a lot of that production existing customers. I'm curious to hear your thoughts on the perception or ability to possibly grow through a recession? And there's been some talk with that with larger banks about using a recession as an opportunity to move market share, continue to grow through a recession. And I think Michael mentioned, are we in a recession or not. Assuming we are in a recession next year, what happens to that high single-digit, low double-digit number? How would you change, if anything, how you're doing loan underwriting?

Yes. And so the thing when changing on the loan underwriting and already I'd say it's actually already gotten a little more stringent in terms of and I don't want to send the wrong message there. It's not like we're batting down the hatches or anything like that. We're absolutely open for business and we are -- and we're continuing to do business, but we're certainly also paying attention to the economy. And so you asked a good -- I like the first question a lot, how much of that was to customers and how much of that was not. And in times like this, you make sure that you can take care of your customers and you can allow them to grow when they've got opportunities to grow. And so that's top of mind for us. And so because of that, that makes you be a little more focused on that part of your business.

And so we think we can continue to grow, but frankly, it's as much going to go back to Matt's question, it's much about growing the deposit side as it is the loan side. At the same time, so we got to be able to grow both at the same time. What we don't want to do and I didn't say this expressly, but I talked about use of home sale funds, and I talk about getting over reliant on public fund, what we don't want to do is become overleveraged at a time when we -- our economies are actually, as you know, as well as any of us, but you're right here, our economies are as good as any in the country. And so we can sometimes get blinded to the bigger picture nationally and internationally. And so we're keeping an eye on all that.

But we don't -- we're not feeling it from a business standpoint. Our customers are optimistic our credit continues to look really good particularly our commercial book continues to look really good. And so we're not feeling that. And so we're looking at balanced growth right now. We're looking at keeping strong levels of capital, which we have and we're looking at making sure that we can continue to allow our customers to grow in this environment. So those are the things that we're focused on.

Yes. And Brett, loan growth through a recession or through the cycle. Keep in mind, Chris mentioned we've added 32 revenue producers. We entered into Central Alabama last year. So that seems taken off our North Alabama team is really starting to hit its stride. And then we have the Memphis team that came on board in the last 1.5 years, 2 years or so as well that has market share opportunity and the disruption that we talked about for bank acquisitions, mergers across our footprint provides us opportunity to kind of grow the recession as well if one comes.

Okay. That's helpful. One last one, if I could. The only thing I've been able to get kind of geography-wise in the footprint is maybe in the Carolina some folks that have, I guess, it's adjacent to some markets you're in, some lower in manufacturing -- [original] manufacturing customers, orders really taking a beating here recently or a drop-off in orders. Has there been anything that you guys have seen in any of the markets that suggest a slowdown of this point.

I think what we're kind of concentrating. We haven't seen it brought across kind of commercial or small business, but we are worried about the consumer. Our healthy -- if we look at checking account balances prior to pandemic to today, still elevated in a strong way to see that. But we do have -- we mentioned -- if we mentioned mortgage. You see people come off 4 (inaudible) -- same end the stimulus checks. And so just keeping a close on those consumers and how they're spending habits are and what they're doing on their loan payments on delinquencies. And so that would be where I think a lot of our kind of concern would love, but we haven't seen broad economic slowdown. And like Chris mentioned, really positive from most of our commercial small business plan.

Yes. I agree with all of that in terms of what we see in our portfolio. And I will say this in talking to customers, we have heard and seen in some of our markets. You're now actually seeing for sale signs residential market for sale signs where you just -- frankly, they were selling so fast, they never got the signs in the yard. So you're now seeing a few more sales funds. I don't take that as a sign of distress. I think it is a sign of normalcy. And we have heard from some particularly high-end builders that they have the market slowed, that they have seen it. Again, return to more of in a normalcy, but we've heard from some high builders that they've (inaudible).

Our next question comes from Jennifer Demba from Truist Securities.

Just curious about provision and what your outlook is over the next couple of quarters? I know credit quality has stayed really, really healthy but do you have any thoughts about reserve build or going forward?

Yes. Sure. Jennifer it's Michael. Yes. So for the APL for this quarter and kind of looking out, I kind of mentioned that -- I did mention we're kind of expecting as loan growth continues, both the ACL and the health investment will stay pretty steady. Given our current outlook, I wouldn't expect releases now the economy and outlook moves pretty quickly -- or has moved pretty quickly. So over the kind of second quarter first quarter on the quantitative side, we didn't see a huge change in our Moody's scenarios. We did see kind of a slowing GDP growth. We kept the same scenario in the model. But due to loan growth, we saw an increase. And on the qualitative side, we made a couple of adjustments. We removed our troubled industries from Co that kind of reduced that number, but we had a bit of a kind of stagflation outlook, which was rolled into the quantitative portion. So what we're thinking, and it's -- you can kind of straighten the deck, slower GDP growth kind of picks back up in the out years '23, '24 and some elevated unemployment and '23, but CRE stays pretty stable. So I would expect that, that will be pretty consistent as we look forward to the next couple of quarters.

And so I don't think that we anticipate our ACL percentage moving a lot. And so I think we'd see provisioning as we see loan growth -- I think, and I'm the Michael and the rest of the teams around the table are better on the inputs of CECL than I am, but I think that that's probably going to be -- we follow the model, but I'm nervous about releases right now and frankly, think that at least until we can see through what has been described as the hurricane potentially on the horizon that may have been a whole description. But until we can see through that, we're going to be cautious, at least how we do things on the qualitative side.

So with less loan growth in the second half than you experienced in the second quarter, it follows that you probably see a lesser provisioning than you did in the second quarter, in the third and fourth quarter, assuming the outlook on the economic side doesn't change materially?

Yes, I think that's fair, Jennifer. You're right on.

Okay. Second question is regarding the mortgage operation. You said you're not expecting profitability in the second half of the year. Can you just talk about the overall I know you guys are making changes on the retail side. But can you just talk about the strategy with mortgage over the long term and when you think it could return to profitability?

Yes. So mortgage -- retail mortgage, in particular, feels very important to the kind of core strength of a community bank being well rounded. So we're interested in continuing to grow the business within our branch footprint, maybe right around the outside of that as we've traditionally done. We've had a little bit broader mortgage footprint than the bank footprint. And so very likely that there's a lot of revenue producers that are available coming through the next 6 to 12 months as we see some consolidation or wind down of some other mortgage companies. And so we'll be very opportunistic in picking up loan officers that can generate revenue.

At the same time, we realized that we need to create scale, and we've been working through that, either it be technology, Chris mentioned innovations but just overall process overhaul.

Yes, there are a lot of headwinds in the mortgage industry right now. We're not immune to those higher rates. As Chris mentioned, home prices broadly normalizing is a good thing, but affordability is still significantly higher than where it was a significantly more challenging than where it was this time last year. So we don't have a direct return to profitability number, but we do see further declines the rest of this year. I would expect first quarter next year to be challenging as well as a seasonality perspective and have the ship righted and back on our feet.

Yes, I think -- and it's important we have revenues that follow as rapidly as they have in mortgage. And if you look at the projections on mortgage originations expected to be less next year than anywhere this year that requires some reevaluation really, I think, Mike, we used the term use the word structurally. We've already obviously done that with the wind down of our direct-to-consumer where we got out of the business. And same we've got to really make sure that on the retail side, structurally, that it is where it's return to contribution in any market environment. And so a little bit more adjustment to go there in the third quarter.

Our next question comes from Kevin Fitzsimmons from D.A. Davidson.

Just a few remaining questions. Most have been asked and answered already. The very strong loan growth this quarter was one -- was it -- one of the sources for that relative absence of payoffs. We heard from another bank that there were virtually 0 payoffs this quarter, but they expected that to -- those to resume in the second half. And that was part of the reason for their strong loan growth moderating in -- likely in the back half. So just wondering if that applies to you as well.

Yes. Yes, a good observation. We probably should have pointed that out is we did expect a couple of payoffs to hit right at the end of the quarter, they did not and so they went into the next quarter. And so that would have moved the number down a little bit. It's still been an extraordinary quarter. I do not how you stack it, but we did expect a couple of payoffs. And so we will see those in the second quarter, and there was absence of payoffs, frankly, in the quarter even compared to the first quarter, which we also had -- we had 21% loan growth in the first quarter, but we had pretty normal payoff activity have it in the second quarter. I don't frankly know why that is, but it's a good observation and interesting to me, I didn't know another bank and said that same thing, but we did see.

Okay. That's great. That's good to know. And I just wanted to clarify that when you were discussing the margin and where that stands? I just want to make sure I heard it right that I think you said about $3.70 for the month of June. And is that a good -- so that's a good starting point. And then if we have another Fed rate hike, but I definitely got the message also that the ability to lag on deposit pricing has probably gone much quicker than maybe we might have been thinking, and that's going to be -- that ability is probably going to be less given what we've seen on deposit levels.

That's right, Kevin. Yes. $3.70 is kind of where we were in June. And so definitely a good starting for that excludes that excess liquidity number I spoke to (inaudible) and so. And so certainly expect margin to continue to expand, just not at the velocity that it has because of deposit pricing pressure so I think you will.

Okay. Great. One last one from me is I definitely get at an interesting point where we're -- you aren't seeing any flashing red signals terms of credit problems or warning signs, but you're cognizant of the national trends and expectations out there. Have you seen any changes from bank examiners or regulators in terms of things they're looking a lot closer at whether it be certain capital levels, certain liquidity levels, certain kinds of lending they're digging into or concentration that's different than, say, a few quarters ago.

From a regulatory standpoint, I don't know that I've seen anything different. I'll say this, being over the $10 billion threshold, we've seen a lot of things that are different from a -- with regulators. And so -- but -- so we're trying to segment those from above the $10 billion threshold things may be caused by the environment. I can't say that I have, yes, I really can't say that I have. Liquidity has not been an issue. And so I don't think -- other than, of course, your normal regulatory rigor there and the same on the loan portfolio other than your normal regulatory rigor seeing any significant change.

And I will say we put our portfolio through a lot of rigor to try to -- to try to see things before they happen. And portfolio is holding up really well. And one -- I'd say we have been watching closely, as Michael alluded about on or just regular mortgage portfolio, particularly on our higher LTV products, and we're watching our -- Michael described. We've got about $245 million in manufactured housing which are made on units. And those -- if you go back over the last 2 years on the credit side, the fact of the matter is it's been hard. There's been so much money pumped into people's pockets. It's been pretty hard to default over the last 2 years. And so we're now watching because -- and so your past dues are artificially low, your nonaccruals are artificially low particularly in this. We don't have a big consumer segment, but all of those things are artificially low. So as they begin to move up some we expect because like I said, we've got a 14-year history with particularly the -- with the MH consumer portfolio. We watch to see how it compares to over that 14-year history. And we saw some past dues tick up in June, but so far, it's staying within our historical bound. And so those are the things that we're really watching for as we're watching what happens to the economy over the next months and quarters.

Our next question comes from Catherine Mealor from KBW.

I just wanted to dig into the $370 million June margin that you talked about and if you look at it in 2 components, one on loan yield, maybe where you've seen loan yields moved through the quarter. And then also on the deposit side, where you maybe saw those for the month of June. And as we think about you increasing your deposit growth in the back half of the year, what categories think are going to be growing the most interest-bearing demand or CDs? Like where do you think we'll see most of that deposit growth come from balances.

Catherine, it's Michael. Good morning. Yes. contractual yields, if I think about kind of April to June, we saw about 27, 28 basis point increase from around the $4.12 to $4.39 number where we ended June. So we saw some pretty decent growth there versus deposits, total deposits. Total cost of interest-bearing liabilities went from 19 to 30 on total deposits, so about a 11-basis point increase. And if you look at interest-bearing, it moved up 15% from 41% to 26%, partially offset by that NIB growth brought down the total cost of deposits kind of help balance that out. Does that make sense? Those are a lot of differ net numbers out there.

Yes. No, no, you said the interest-bearing deposits went from -- went to 41, you said?

41% and June from 46 in April.

Okay.

And if I think about where we would likely see growth, yes. I would say it's going to be in the money market, yes, out of the house. It's going to be in money market it will be in time also. We've seen -- at this point, we've seen actually a little more increase in time than we have money market. So I think we'll see money market increase over the next few quarters. And then I think the next biggest part will come in time. Our interest-bearing demand is not one that we typically see move up a lot. So we think it will come in those 2 buckets.

Great. And then money market looks like it hasn't moved at all still so 20 basis points. Where do you think that moves to fit in.

I don't know, Catherine, I was hoping you'd tell us. We've seen things -- and by the way, we're seeing some aggression not on a little bit, maybe a little bit on stated rates, but we're seeing some real aggression on large balances -- large balance customers from some of our key competitors where they're going out. They're going out at 1% on money markets to keep the balances because if you go back to last quarter, just about all the banks and particularly those headquartered in Middle Tennessee, but the other parts of our geography is strong, too, they all had 20%-plus loan growth. And I think we're the first to report from these banks right in this general geography, but I think you're going to be real good. We're not going to be the only 1 that has really strong loan growth, I can assure you. And so I think that the battle is probably going to be the toughest in the money market segment. And I think it will -- I think it will go -- I don't know where it will go during the quarter, but we're already seeing 75 and 80 basis points pretty regularly out there of approaches to some of our customers up from there.

Yes. And just to gather a little color there. In June, money market is 27 basis points. So I've seen that start to inch higher. But as Chris mentioned, we think that, that will start to move materially more in the second half.

(Operator Instructions)

Our next question comes from Stephen Scouten from Piper Sandler.

I guess my first question, I just wanted to clarify a couple of things. One, the 5% qualitative reserve on the manufactured housing, you mentioned at the start of COVID, that's still in place still in existing...

Yes, it is.

Perfect. And then on the -- just looking at some of the line items within expenses, it looks like there was a little bit of a jump in professional fees and then advertising expense was down a good bit. I'm wondering what was driving that if some of the advertising mortgage lead generation costs or something with the shutdown of consumer direct or what the drivers of those movements were.

Yes. So a couple of things there. First, when you -- and just to clarify, when we said 5% reserve on MH, Michael talked about how that portfolio is really 2 -- 3 revenue lines, but 2 of them are on the balance sheet, one on just a servicing line. So the 2 from the balance sheet are our MH community portfolio, which is roughly $265 million, $270 million of that. And then the second part of that is the MH retail portfolio. Communities being loans being -- commercial loans on manufactured home communities, just the MH retail is actually loans against the manufactured home units. Again, that's about [204]. That's the one that has the 5% reserve that we include in our ACL calculations.

And then on the expense side, Michael knows more than I do, but I do know just a couple of things on the professional fees. Part of that comes from -- as we have continued to ramp up different things that we're doing, we've outsourced some things to a couple of our partners, particularly [TY] has done some things for us on accounting and audit side and particularly the internal audit side.

And so they've been a helpful partner, but they're really, really good, but they know it. And so there's been some expense related to that. And then the other that I know that I'll comment on is on advertising you are exactly right. What -- with advertising, that was a heavy expense in the direct-to-consumer because you're paying for leads in that business. And since we're in the business, we're no longer paying for those leads and that led to a significant drop in advertising spend.

Mike, any others comments there.

Well, I would just say part of that advertising kind of marketing line item is expected to increase in the second half year as well. Obviously, we'll make up the $2 million difference quarter-over-quarter. But that taking out part of that $2 million to $2.5 million a quarter, I was kind of that -- I pointed to in the expense growth.

Got it. Got it. And then maybe drilling back into loan growth a little bit more. I know your answer to Kevin's question about kind of slower paydowns, but I'm wondering if you could kind of frame that up in terms of what you've seen production-wise, like maybe first quarter to second quarter, if that was relatively flat or if that was also a big increase? And then kind of note some of the movements in the unfunded loan book, how much of the growth may have been from the unfunded book funding and where that is as a total balance today?

Yes. I will say we did see move up again some of our fundings, again, particularly on construction, we saw some move up there in terms of the funding. I will say this also on the production.

Geographically for us, it continues to be really well dispersed. I'd like to say that we just we're great at coordinating that. It just continues to work out where -- but this quarter, we had great growth out of our new Central Alabama team, they really contributed Nash -- sorry, Memphis actually was also a really nice contributor for us. The team there continues to grow in terms of people, but also continues to grow in terms of production. And then our team in Northern Alabama, where we're in Florence and Huntsville, again, having good results. And those were probably our strongest growth areas for that. And they accounted for about 1/3 of our growth coming out of the areas right there, which are all smaller areas -- smaller for us in terms of in terms of balances and in terms of presence, in terms of branch presence just a number of people, but they accounted for a lot.

Got it. And how big is that total unfunded book today? And I would kind of imagine a lot of that growth maybe was from the legacy -- Frank kind of resi construction homebuilder type construction, but I'm just kind of curious what the breakdown there, resi versus maybe more (inaudible) commercial?

Yes. So the total unfunded for us is about $1.5 billion in terms of totals. And let's see about 50% of that, it's really close. About half of that is residential and about half of that is commercial, and you're correct also that spectrum -- a lot of that is -- comes in, I'll call it, Nashville and suburban Nashville, particularly strong in Williamson County and Rather County, which brings us quite a bit of comfort. Those are the 2 fastest-growing counties in our entire geography. Yes, without a doubt.

No doubt. Okay. That's great. And then maybe just last thing for me. I appreciate all the color on deposits and where we could see increases there. The deposit beta this quarter, looks like maybe was only about 10% on the interest-bearing deposits given the rate move. But it looked like the cumulative loan beta was maybe only about 20% as well. I'm just kind of curious how you're thinking loan betas moving forward? I know, Michael, you gave some color kind of throughout the quarter. And if I do that math, it looked like maybe 67% on the variable rate production. If I break that out. But I guess I'm just kind of wondering how we can think about a loan beta on the whole 50-50 fixed floating kind of split what you're seeing on fixed rate loans spread?

Yes. Steve, that's a great question. One of the things that we experienced in the first half of the year as there was a lag in competitive move up in loan pricing. And so Chris mentioned in his part of the discussion, we expect to see kind of higher prices on new production going forward. The fixed rate part of our portfolio and new production was relatively flat in the quarter. And so I think you'd start to see -- as the market is now adjusting to higher rates, some of the commitments that were made 30, 60 days ago, have been baked. And so the newer commitments are certainly coming on at higher rates. Competitive pressures, again, are still out there. You're not getting 100% beta by any means, but we are seeing a little bit more up in betas is what I would expect on that going forward.

And ladies and gentlemen, with that, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Chris Holmes for any closing comments.

All right. As always, we appreciate your interest. We appreciate the questions. And we appreciate your support. We will -- for other things, we certainly can -- are available for telephone calls if people have further questions. Okay. Everybody, have a great rest of your day.

Ladies and gentlemen, with that, we'll end today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.