FB Financial Corporation (FBK) Q2 2024 Earnings Call Transcript

FB Financial Corporation (NYSE:FBK) Q2 2024 Earnings Conference Call July 16, 2024 9:00 AM ET

Company Participants

Christopher Holmes – President and Chief Executive Officer
Michael Mettee – Chief Financial Officer
Travis Edmondson – Chief Banking Officer

Conference Call Participants

Brett Rabatin – Hovde Group
Christopher Marinac – Janney Montgomery Scott
Steve Moss – Raymond James
Catherine Mealor – KBW
Alex Lau – JPMorgan
Russell Gunther – Stephens

Operator

Good morning and welcome to the FB Financial Corporation Second Quarter 2024 Earnings Conference Call. Hosting the call today from FB Financial are Mr. Chris Holmes, President and Chief Executive Officer; and Mr. Michael Mettee, Chief Financial Officer. Also joining the call for the question and answer session is Mr. Travis Edmondson, Chief Banking 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 open for questions after the presentation. During the presentation, FB Financial may take comments, which constitute forward-looking statements under the federal securities laws.

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, 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 SEC, including FB Financials 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 the 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 Investors 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 Mr. Chris Holmes, FB Financial’s President and Chief Executive Officer. Please go ahead sir.

Christopher Holmes

All right. Thank you, Chuck. We appreciate that and good morning and thank you for joining us this morning. We appreciate your interest in FB Financial. For the quarter, we reported EPS of $0.85 and adjusted EPS of $0.84. We’ve grown our tangible book value per share, excluding the impact of AOCI at a compound annual growth rate of 13.4% since our IPO.

We reported an adjusted return on average assets of 1.28% and an adjusted PPNR return on average assets of 1.7%. Adjusted earnings per share was relatively flat with the prior quarter and up 9% year-over-year, while adjusted PPNR increased by 2.3% from the prior quarter and 16% year-over-year.

The past few quarters, I have emphasized our operating foundation, our earnings momentum and the strength of our balance sheet in this quarter continues those themes. Operationally, we continue to perform well.

Our support areas are enabling our relationship managers to be responsive to our customers and we have a platform that will help us realize the benefits of scale and allow us to grow the balance sheet and revenue with limited additional near-term investments in the back office.

For earnings momentum, we saw an inflection point in our margin last quarter and this quarter saw incremental improvement as it expanded by 15 basis points to 3.57%. With that expansion of the margin, net interest income grew by 3% from the prior quarter.

Mortgage had a reasonable quarter in light of the interest rate environment with a pre-tax contribution of $700,000, while the banking segment delivered solid core fee income of $11.8 million. And we continue to focus on efficiency as our core banking segment efficiency ratio declined to 53.8% for the quarter.

And finally, on the strength of our balance sheet, our capital ratios are exceptionally strong with tangible common equity to tangible assets of 10.2%, a CET1 ratio of 12.7% and a total risk-based capital ratio of 15.1%. As we’ve built our capital ratios, we have also continued to manage our C&D and CRE concentrations within a range that gives the company an attractive lower-risk profile, especially when you consider the economic growth of our geography. Today, our C&D concentration ratio is 78%, while our CRE concentration ratio is 249%.

At the same time, we’ve also reduced our exposure to rate-sensitive public funds from $2.3 billion in the second quarter of 2022 to $1.5 billion today or 35%. Michael will discuss in more detail, but almost 100% of our remaining relationships there keep checking accounts with us and our customers with whom we have strong working relationships. So while our balance sheet hasn’t grown materially in recent quarters, it’s been remixed so that it is safer, more profitable and more valuable.

Looking forward, we continue to explore how to most effectively — most effectively deploy the capital that we’ve built. Our first priority for that capital is always organic growth. While net loan and deposit growth were basically flat this quarter, we expect some muted growth in the low to mid-single digit range over the second half of the year and there are a few trends that give us confidence in returning to our 10% organic growth targets next year.

One trend is that we have increasing success in attracting new Relationship Managers. We brought on 14 Senior Relationship Managers in 2024, in addition to 11 revenue producers in our wealth management and mortgage groups. Our story is simple and consistent. You can count on us being here for the long-term and this is a great team that will help you advance your career.

We are conservatively run, make a strong return, and have a deep management team with a long runway. We also think you’ll enjoy working with us. We have a familial culture, a local authority model and full capabilities to allow you to serve your clients.

A second factor supporting this year’s growth, supporting next year’s growth is that we’ve managed our real estate portfolios to levels that are sustainable. These portfolios will no longer be shrinking and won’t be headwinds for growth. For reference, excluding our C&D decline this quarter, we would have shown annualized organic loan growth of approximately 4%.

Year-over-year excluding our net construction decline, we’ve grown loans by approximately 5%. The last factor that supports our future growth is our comfort with the credit environment in our markets. We expect charge-offs for the industry to move more towards historical trends over the next 18 to 24 months, and we’re seeing some one-off situations in our own portfolio that are the by-product of a slowing economy.

However, with most of our strong credits, we have significant collateral and guarantees and don’t see much loss content. And on the whole, we feel confident about our existing credit quality. With continued migration — with continued in-migration, investment in development and corporate relocations, we have plenty of attractive growth opportunities.

Our governing factor on asset growth will be the rate at which we generate core deposits. Our loan-to-deposit ratio is currently 89% and currently we aren’t ph comfortable operating at a much higher level than that. Our second priority for deployment of capital is opportunistic acquisitions. We continue to be interested in a handful of names that we believe would be additive to our franchise and are ready to act when those banks are ready to find a partner.

On our third priority for capital deployment, that’s continuing to — continue our marginal improvement in earnings through balance sheet optimization. Michael and his team continue to execute on additive transactions.

This quarter that looked like stock buybacks as we purchased approximately 350,000 shares for $12.6 million. So, to summarize, I’m very proud of our team for the results this quarter. We continue to enhance our profitability metrics. We feel like we’ve done well in optimizing the balance sheet and we’ve added some really strong revenue producers that are going to help us grow in the platform that we built.

Now, I’m going to let Michael go into the financial results in some more detail.

Michael Mettee

Thank you, Chris, and good morning everyone. I’ll first take a minute to walk through this quarter’s core earnings. We reported net interest income of $102.6 million, reported non-interest income was $25.6 million. Adjusting for a $2.1 million cash life insurance benefit, $300,000 in loss on sale of assets.

Core non-interest income was $23.8 million, of which $11.8 million came from the banking world. We reported non-interest expense of $75.1 million, adjusting for $1 million in separation cost. Core non-interest expense was $74.1 million, $61.3 million of which came from the banking segment and altogether adjusted PPNR earnings were $52.4 million.

Going into more detail on the margin, we grew net interest income by $3.1 million or 3% for the quarter, despite a slight decline in average earning assets. We reaped the benefit of our securities restructuring activities in the first quarter as yield on securities increased by 58 basis points and interest income on the securities portfolio was up $2.5 million.

We also allowed some higher-cost deposits to leave the bank, which helped us hold on to our cost of interest-bearing deposits to a three basis point increase over the first quarter. That three basis point increase in cost of interest-bearing deposits compared to a five basis point increase in contractual yield on loans held for investment and marks the third straight quarter that we have grown our contractual yield by more than our cost of interest-bearing deposits.

For the month of June, our contractual yield on loans held for investment was 6.62% and our yield on new commitments in June came in around 8.1%. Half of our loan portfolio remains floating rate, with $2 billion of those variable rate loans repricing immediately with a move in rates and $1.9 billion of those loans repricing within 90 days of a change in interest rates.

Of our $4.7 billion in fixed-rate loans, we have $314 million that mature over the remainder of 2024 with a yield of 6.93% and in 2025 we have $412 million maturing with a yield of 5.57%. For the month of June, cost of interest-bearing deposits was 3.56% versus 3.52% for the quarter. As I’ve noted previously, we now have a significant amount of index deposits that will reprice immediately with a change in the Fed funds target rate. Those balances stood at about $2.7 billion at the end of the second quarter.

While I’m discussing our deposit base, I want to spend some time giving detail on our public funds relationships. As Chris mentioned, we’ve made a concerted effort over the past two years to minimize our exposure to rate-sensitive accounts that act more like brokered deposits than true customer relationships. As of the second quarter, we had $1.5 billion in public funds outstanding.

Our cost of interest-bearing public funds accounts in the second quarter was 4.37% compared to 3.52% for our overall cost of interest-bearing deposits. 97% of our public funds customers have checking accounts with us and 78% of our public funds balances are in checking accounts.

We also process payroll for nearly every public funds customer that keeps a checking account with us, which we view as indicative of our being those accounts primary banking relationship. For the remainder of the year, we expect margin to settle more into a 3.47% to 3.53% range and for net interest income to be relatively stable to modestly higher as we concentrate on creating core relationships across the footprint.

Moving to non-interest income, at $11.8 million core banking segment non-interest income was stronger than typical, driven by swap fees. For the remainder of the year, we would expect to be more in our $10 million to $11 million range per quarter than we’ve been experiencing recently.

Mortgage had another profitable quarter with a total pre-tax contribution of $700,000, which was a reasonable result given the challenges in the housing market and the volatility of the current rate environment. Our non-interest expense continued to see the benefit of operational changes that we discussed on prior calls and core banking segment expense was $61.3 million for the quarter as compared to $59.8 million in the first quarter and $65.2 million in the second quarter of 2023.

We would still expect banking segment expenses of $250 million to $255 million for 2024, as we expect performance to drive an increase in our short-term incentive compensation. We also continue to focus on recruiting talented and experienced relationship managers to the First Bank team.

On the allowance for credit loss and credit quality, credit remained fairly benign this quarter as we experienced two basis points of charge-offs. That said, we did have one relationship that we added an additional $5 million specific reserve and a total of $6.7 million against and would expect resolution on that credit in the third or fourth quarter.

Speaking more to the allowance, our allowance for credit loss to loans held for investment increased to further four basis points during the quarter to 1.67%. The economic environment would have kept us reasonably flat relative to the first quarter and the specific reserve I mentioned led to the majority of that increase in the ratio.

Total provision expense was again impacted by a release on reserve for unfunded commitments of $1.7 million due to the continued decline in those balances. On capital and as Chris mentioned, we have developed very strong capital ratios with TCE to tangible assets of 10.2% and a common equity Tier 1 ratio of 12.7%. We continue to focus on the best way to deploy that capital to deliver consistent long-term growth in earnings and tangible book value.

I’ll now turn the call back over to Chris.

Christopher Holmes

All right. Thank you, Michael. And just to conclude our prepared comments, as we’re certainly pleased with the progress that we continue to make, our balance sheet is in a good position and our profitability is trending in the right direction. So and we actually think we’ve got some momentum here and think the best is yet to come.

So with that, we will open the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. [Operator Instructions] And the first question will come from Brett Rabatin with the Hovde Group. Please go ahead.

Brett Rabatin

Hey, guys. Good morning.

Christopher Holmes

Good morning, Mr. Rabat.

Michael Mettee

Good morning, Brett.

Brett Rabatin

I’m good. Wanted to start on deposits and you referenced in the press release the three depositor relationships. Can we talk about the net versus the gross? How much those — how much might have moved out relative to those larger deposit relationships and then maybe any mix shift change? It was interesting that your interest-bearing checking was up quite a bit. Your money market was down. Was there any reclassification or maybe talk about the net versus the gross trends in the quarter? Thanks.

Christopher Holmes

Hey, Brett. Good morning. Yeah, those three relationships was call it $225 million to $250 million. One of the companies was acquired, but the other two are still relationships with the company and could come back as we move forward depending on kind of both sides of how we want to manage that. Mix shift, we did see non-interest bearing kind of hold in pretty well for the quarter, relatively flat interest-bearing to money market. There wasn’t a reclassification or anything like that. Just some of the funds from some of our counterparts are in interest checking now instead of a money market funds, it’s a little bit more transactional basis. And so that product works better for some of our clients than a money market fund.

Michael Mettee

Yeah. Hey, Brett, I’ll just add and on those accounts — on that — those funds that moved, again, they’re folks that we know very well, have long-term relationships with and moved out money on a short-term basis at 75 basis points plus more than we were willing to — more than we were willing to offer. And so — so that’s the scenario.

Brett Rabatin

Okay. That’s helpful. And then what’s your strategy from here? I mean, your cost of funds is still a little bit lower than some peers, and I know some banks have said that they’ve been able to maybe tweak down their highest rate offerings, but I still see locally here in Nashville around 5% CD money, et cetera. What’s your strategy and is the margin guidance for it to be a little bit lower — slightly lower in the back half of the year? Is that due to you expecting continued increases or increases in the cost of funds relative to your stability in the second quarter?

Christopher Holmes

Yes, there’s two or three pieces on the margin. I’ll let Michael comment there. I’ll just comment on strategy moving forward. We talked about kind of — I mentioned in my comments, remix of balance sheet, kind of where we stand on strength of balance sheet. We’re actually really pleased with the strength of the company, balance sheet-wise, again, personnel-wise, momentum-wise, and so we — we need to — and we’ve been reemphasizing growth. You know, we have been cautious during, I’ll say, not — as we’ve gone through economic times where we didn’t know exactly where credit was headed, we’ve been fairly cautious and cautious on growth. And so we feel much better strategically as we go forward, just with, where we sit and with our economies and the economy in general. Again, as I said, we expect the industry to revert back to a more normalized charge-off rates, but we’re not really expecting it to be much worse than that. And so — and if it is, by the way, we’re prepared for that. And so we’re looking at it. We’re getting a lot of opportunities with recruiting and so we’re ready. And as we talk about the margin kind of holding in from here, that’s because we will use some bullets as we get into the last half of the year to — to grow some even if it cost us a little bit of margin. And by the way, we haven’t been given up much on margin in the last six months.

Michael Mettee

Yeah, I think you nailed it. And you’re right, Brett. The cost of deposits to grow still 5%, give or take. And we’ve made some tweaks on the edges down as well, but mainly because you don’t want to add a whole lot of term on deposit costs if you believe rates are going down over the next 12 to 24 months and I think that’s the broad view. Not sure how much, but so, yeah, we’ve moved some of those longer-term rates down, but quite frankly, we weren’t getting a whole lot of new business than that term CD stuff anyway. So still competitive. Maybe not as bad on a core basis and that’s — but Chris mentioned some scenarios where we — it certainly was more competitive than we expected and so growth will be challenged. You have to add some higher-price deposits to grow.

Christopher Holmes

Yeah. Hey, I will add one more thing. And we talk about this, we don’t place a lot of leverage on our deposit base through wholesale funding, broker funding, and so we always had those outlets and no different than this quarter. We’re not going to — today, we’re not going to pay 6% on a one-year kind of term deposit. We’re not going to generally do that because we can go out and we can fund it at 5%. And so that’s something that we won’t do for the sake of growth. So generally.

Brett Rabatin

Okay. That’s great. If I could sneak in one last one. Just, Chris, you sound, I would say overall, more optimistic thematically, maybe economically, about your prospects on capital. Will you guys continue to buy back stock? I mean, obviously you’ve got excess capital or maybe do you hold it with some watching of the political landscape, potentially giving you opportunities with M&A if there might be a regime change later this year?

Christopher Holmes

Yes. So we are on the capital front. We certainly have the dry powder and we have the approval to go out and buy back. Brett, as you know us, we hate diluting tangible book value, and so we’re careful where we buy back. You know, if you calculate the price at which we have, you know, we bought back in this quarter, it looks like a pretty good transaction at this point. And so it’s — a lot of it is a function of what happens to the stocks moving forward is an important piece of that, but we certainly have the capability to apply it there. And then on what happens with the M&A market, we’re prepared to, for us, it’s more — it’s as much about when things become available as anything. And so we’re sitting ready because we don’t think there are that many really attractive balance sheets out there on banks. And so we are, but when there is, we’re ready. When there’s one and it’s available and the culture fits us, we’re ready.

Brett Rabatin

Okay. That’s great color. Thanks so much, guys.

Christopher Holmes

All right. Thanks, Brett.

Operator

The next question will come from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Christopher Marinac

Hey, thanks. Good morning. Chris, I want to go back to the public funds and the comments that you and Mike had made. If you think about them being the sources of payroll, the other payroll clients that you have that are not public funds, do you pay them a similar rate or do you pay them less? Because I’m curious if you can replace those public funds down the road with either new customers or certainly merger partners that you find in the next several years.

Travis Edmondson

Yeah. Good morning. This is Travis. Generally speaking, our payroll accounts for non-public funds are much cheaper than the public funds payroll accounts. Generally, on the public funds you look kind of the all-in rate, including the transactional accounts.

Michael Mettee

Yes, that excess interest, Chris, on top of the payroll, and so it’s generally multiple accounts that kind of make that up. I think the back half of that question is, can we replace that? I think we’re pretty comfortable with — like I said, 97% of our public funds are what we would consider clients, right. And so we value those partnerships. We think part of being a community bank is being in your community and partnering with those municipalities. And so we expect to continue that. If it’s excess interest, we may partner with them to find some alternatives. And, yeah, I think our focus every day is on growing treasury management and small business and operating accounts. It takes a while, as you know to build those up, but that’s really where our focus is, getting those core operating accounts, not necessarily to replace, but to augment and grow the company.

Christopher Marinac

Great. Thank you both for that. I appreciate it. And then just a quick reserve question. What do you see from the external factors that kind of help you build reserves? Do you see anything even in the month of July that would support more reserve build this quarter?

Michael Mettee

Yeah, so we used a kind of looked at May-June scenario and commercial real estate on baseline for Moody’s was worse than the first quarter. So that’s kind of where that growth really came from than the individually evaluated loan. I think like we feel really good about our position and that we have the right reserve for the unknown economic scenarios that are out there. There’s nothing specific in July or anything else that we’re seeing that says, hey, you should be increasing materially from here. As Chris mentioned, our markets seem pretty good. There’s some things economically that pop up on C&I and you deal with it. But overall, I think we are in a really good spot.

Christopher Holmes

Yeah, I would just add one amplification on what Michael said. When we look at our, and this is just credit related, when we look at our portfolio, we’ve had a few things that we’ve had to deal with on commercial real estate, but as we’ve dealt with those, we just found that there hadn’t been lost content in there. I mean, it’s just things that we’ve had to deal with and continue to deal with, but generally plenty of equity and generally guarantors. And so they haven’t resulted in us looking at it and go, man we’ve got a future loss there. Where you could have — I think this just goes industry-wide. I think everybody should be watching C&I because those can pop up in tougher economic times, when you have the inflation we’ve had and you don’t have on those, your collateral is different. And sometimes you might not have guarantees and so you might get more loss content out of the C&I buckets, that specific reserve that we made reference to is actually a C&I credit, not a CRE credit.

Christopher Marinac

Great, Chris. Thank you, Michael, very much. Appreciate it.

Christopher Holmes

Thanks Chris.

Operator

The next question will come from Steve Moss with Raymond James. Please go ahead.

Steve Moss

Good morning.

Christopher Holmes

Hey, Steve.

Michael Mettee

Good morning, Steve.

Steve Moss

Hey, guys. Maybe just starting here with going back to the margin for a moment, does your guidance here for the second half of the year assume any rate cuts?

Michael Mettee

Excuse me. Yes, Steve, we think there’s about 25 basis points of rate cuts coming, maybe one late in the year. But we’ve had September kind of targeted as the first cut for, I guess, since we did our budget last year. And so it does contemplate a 25 basis point cut. We’ll see if that happens or not, but it certainly has that in there.

Steve Moss

Okay. And just judging by, you know, the balance sheet remixing, especially on the deposit side, are you guys more asset-sensitive today than maybe a year ago?

Michael Mettee

Actually, I’d say we’re more neutral. Yeah, we still lean towards a little bit asset-sensitive, but a lot of the work we’ve done on indexing deposits was to remove some of that risk from a repricing down from the overall net interest income.

Steve Moss

Okay, great. Appreciate that. And then in terms of, on the lending side, I noticed in, on the loans by market, your specialty lending bucket continues to build. I’m just kind of curious, maybe some color on the underlying drivers there?

Christopher Holmes

Yeah. On specialty lending, it’s been a — it’s a consistent producer for us. And we probably — we’ve ramped up the retail side of that a little bit. And just to describe what that is, that’s what we call the retail side of that. Anyway, what that is when we’re loaning on a manufactured home directly to the purchaser of that home, typical average balance will be somewhere between, I guess, in the portfolio, it’s around 60,000 on a new loan, it’s higher than that, say, 90-ish, I would say 90 to 100, and that’s been the bucket that has actually grown for us and it’s pretty much a steady month-over-month producer. Travis, would you add anything?

Travis Edmondson

No. I think you described it well. We have seen an uptick in the retail portion of that business over the last few months, just tweaking some of our offerings to make sure we’re competitive in the marketplace and having good relationships with the retailers out in the various states in which we operate.

Steve Moss

Okay, great. Appreciate that color there. And then, Chris, you mentioned earlier you hired 14 producers, still looking for additional talent. Maybe just curious like what does that pipeline account look to you today? Is it bigger and just kind of thinking about managing or thinking about expenses beyond your guidance for this year?

Christopher Holmes

Yeah. So the pipeline I would describe as consistent. It hasn’t been — it’s consistent, but interestingly, we probably get more inbound calls today from folks just around our geography. We’re not big on — no offense to recruiters, but we’re not big on recruiters calling us with people that want to move to Nashville from St. Louis or Albuquerque or San Diego. And there are a lot of those, and we get a lot of those, but frankly, that’s not. We don’t hire many of those. We’re interested in folks that we know, frankly, that aren’t coming through a recruiter. And so that’s really more the recruiters, recruiting that we do. They’re in geography and they have some experience in a portfolio, and that’s really what we’re talking about. And so as — the things I made reference were actually with some intent, the things that I made reference to, people view us as being a consistent place that that is a good place to work and is going to be here for the long-term. And so that’s what many folks are seeking. And so that’s really what is, you know, any turmoil that takes place in any part of our footprint, whether that’s — whether that’s Memphis or Birmingham or Knoxville or anywhere — anywhere else, we tend to benefit from that.

Michael Mettee

Yeah. Just a couple of points to add. We’re seeing the same momentum already in the third quarter of talking to really talented people in our geography. So we’re excited about the prospects of continuing to bring on RMs. And one thing I’ll note, what Chris is referencing is, our favorite people to bring on our team of people that we’ve known for a long time. And those are long sales cycles. And what we’re seeing is just some of those people that we’ve been talking to for many, many quarters, for one reason or another are ready to come over to a different bank, and more specifically, the First Bank here in recent times.

Steve Moss

Okay. Great. I appreciate all that color there. And maybe just one last one here for me, going back to the loan portfolio, construction balances have come off quite a bit, just kind of curious maybe how much lower could they go and any color around that would be great?

Michael Mettee

Yeah. Steve, I think we’re kind of at the — we’re not actively trying to reduce construction balances as much. What we’re focused on is relationships. And so if that happens to be some construction business with existing or new relationships that bring deposits and everything. Yeah, we’re in that business. We’re not looking to grow it back to anywhere where we were. We’re comfortable where we are. And so it’s more about relationships than it is balances to us. And so that’s kind of where our focus is. I don’t expect them to move materially lower or materially higher, but we kind of take opportunities as they come, as we can add new business and new relationships.

Christopher Holmes

Yeah, well stated, Michael. I will say this as well, Steve. That is, as we think about construction, it is that relationship-driven piece for us. And we think about our own risk tolerance and our own portfolio and what level of risk we’re willing to accept and we’re really comfortable where we are right now. That being said, one other thing we have to keep an eye on is the regulatory guidance and the regulatory threshold, especially in the current regulatory environment. And you also have to keep in mind, let’s say we did have some type of transaction out there that capital would likely drop some. And so you have to keep that in mind as well that could come down. And so depending on what you’d be taking on, you want to make sure, again you’ve got room for whatever you would have the opportunity to do there and that doesn’t become a barrier to you.

Steve Moss

Great. I appreciate all the color and everything. Thank you very much.

Christopher Holmes

Okay.

Operator

The next question will come from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor

Thanks. Good morning.

Christopher Holmes

Good morning, Catherine.

Michael Mettee

Good morning.

Catherine Mealor

Back to the margin just, Michael, can you talk to us about the security yield? I know you had the bond restructured late last quarter. And so that was a big piece of the security yield going higher. But maybe just talk to us about your outlook for where that yield is going, cash flows towards the back half of the year? And maybe anything else you did to the bond book this quarter to push yields up so much?

Michael Mettee

Yeah. Good morning, Catherine. So I think there’s a couple hundred million that reprice or come mature throughout the back half of the year. And so one of the benefits in the second quarter is we saw some treasuries reprice and went from, I call it a 2% to 5%, 6% reinvestment yield. So there is certainly some benefit to that. Obviously, we don’t have as much lower-yielding stuff maturing at this point because we’ve cycled through a lot of what I’ve called it a couple of quarters ago, the dogs, we took the bite of the apple and reinvested. So probably not as much benefit. I don’t think you’re going to be seeing 50 basis point pops. So a lot more consistency from here forward. That being said, we do continue to look at capital deployment and reinvestment opportunities. We didn’t do any restructuring this quarter other than, as you mentioned, kind of just maturing and reinvesting.

Catherine Mealor

Okay. Great. And then back to the C&I credit that you added the specific reserve for. Can you talk a little bit about, I know you mentioned that it was a C&I credit and we saw your C&I reserve go up, so that makes sense. So maybe the size of the credit, maybe the type of industry it’s in and then outside of that one credit, have you seen any other migration within criticized classifieds or any other migration within your portfolio?

Michael Mettee

Yeah. Good morning. On the particular credit, it’s in the service industry and it was a service provider to another specific industry. And not to get too in the weeds, but this was one where there was some changes in the dynamics of what they had to do for licensing that added a substantial burden to the company that was unforeseen. And also there was some fraud which combined forced the company into bankruptcy. And so that’s what happened to that without getting too specific. And yeah, we do see some migration. We see stuff going in, we see stuff coming out of various buckets, adversely classified. We see things getting better. But on the whole, we’ve just seen a little bit more going into that adversely classified buckets that we’re seeing coming out. But we are still seeing quite a bit of movement in our credits like we always do, I guess is what I’m saying.

Christopher Holmes

And Catherine, on that C&I credit, you asked about the size of it. Yeah, it’s in bankruptcy, so there’s a little bit of rub there. But we’re fully reserved on the credit that’s not collateralized. So we should be —

Michael Mettee

We’re fully reserved on the credit that’s not collateralized by real estate.

Christopher Holmes

Right? Yes. So I’d say if you’re asking, is there going to be additional reserve based on that? I wouldn’t foresee it.

Travis Edmondson

Nothing there.

Catherine Mealor

Okay. And what’s the current size of the credit?

Christopher Holmes

Current size of the credit is, it’s a — let’s see, $7 million-ish.

Travis Edmondson

No. It’s well, all the related ones are roughly 10, approximately

Christopher Holmes

Yeah. Just a shade under 10.

Travis Edmondson

And yeah.

Catherine Mealor

Great. Okay. All right. Very helpful. Thank you.

Operator

The next question will come from Alex Lau with JPMorgan. Please go ahead.

Alex Lau

Hi. Good morning.

Christopher Holmes

Good morning.

Michael Mettee

Good morning, Alex.

Alex Lau

Chris, can you confirm if the low to mid-single digit outlook for the second half of the year was for loan growth specifically and where do you expect net loan growth to come from for the back half of the year?

Christopher Holmes

Yes, we’re really targeting loan and deposit growth there with those numbers so that we’re kind of keeping the balance sheet in check. And where does it come from? If you remember that we think of ourselves as a community bank. So it comes from multiple geographies and it comes from multiple loan types. And so it’s — we hope and think that C&I is probably the biggest single contributor. And so that’s going to come from multiple industries. There could be a little bit of real estate, but not a lot. And then again, continued on progress with specialty lending. Travis, anything else that we?

Travis Edmondson

No, no, we don’t target a specific industry or specific geography to hang our growth on. We really look to the entire footprint and the entire portfolio to get that growth. As Chris referenced in his opening remarks, we’ve grown roughly 5% absent trying to get the ADC down. So that’s basically continuing to do what we’ve been doing without the headwinds of getting down the ADC bucket is another way to think about it.

Christopher Holmes

Yeah. The other thing I would say is — and so it will — like we like our portfolio to be on both the loan and deposit side. It will be fairly granular. And so — and I’ll tell you what, it won’t be. It won’t be going out and buying syndicated deals. It will not be buying participations. It will not be — you know, if it, if we can’t get our usual solid relationship customer then the growth rate will be lower than that. That’s what will make it up.

Alex Lau

That’s great color. And how much runoff in construction loans are you assuming in that outlook?

Michael Mettee

Yeah, relatively flat from here forward.

Alex Lau

Thank you. And then just on the commitment side of it, those — the construction loan commitments were down about $70 million. How do you expect the pace of this decline in commitments in the quarters ahead or is that similar to your balance outlook?

Michael Mettee

I think it’s similar to our balance outlook. I think you’re not going to see the commitments decline as rapidly as they have in the past few quarters.

Christopher Holmes

Yeah, we’re down $600 million year-over-year and unfunded commitments to that bucket. And so I’d say most of that is kind of normal operating business at this point stabilized.

Alex Lau

Thank you. And then just a follow up on the public funds. Last quarter, you were expecting it to peak at $1.7 billion, $1.8 billion. You know, given the recent customer actions this quarter, how has this changed your expectations for peak deposits this year? And do you expect any seasonal increase in the third quarter?

Christopher Holmes

No, I think we’re, it’s almost the same story as construction. I think we expect stability in that — in that bucket from here. You know, we, as Travis mentioned, the 5% loan growth kind of overcoming that construction deposit growth or flattishness has overcome kind of the $650 million decrease in public funds. And so I expect that kind of bogey to be gone at this point as well.

Travis Edmondson

But we also have to remember in the public funds, there is an actual seasonality to public funds, regardless if we’re adding or declining clients. So third and fourth quarter usually is kind of gets to the low point of what they’re holding on balance, because taxes come in at the start of the year, then they pay all the expenses and all their things that they have to pay for till the next tax season.

Alex Lau

Great. And just one follow up on the revenue producers being added this year. How does this pace of investing in revenue producers compared to, say, last year? And what type of contribution are you expecting to this year’s outlook? Thanks.

Christopher Holmes

Yeah. So certainly it’s higher than last year. Frankly, I don’t remember in terms of the exact data, what it looked like at the same time last year. But we — two places, I’d say where it has an impact, one, is we will continue to add folks of the caliber that we’re getting the chance to add. It does add to our expense base and we’re very disciplined and mindful of the expenses and how much it takes us to run the company on a business as usual basis. And so we stick to that and have stuck to that very rigidly throughout this year. We consider this to be on top of that. And so we do consider this to be on top of that. We did allow for some, as we thought about our budget, but this is on top of what we call business as usual expenses.

Travis Edmondson

Yeah, I mean, another way to say that is we’re very diligent on our expense initiatives, but we’re not going to pass on good revenue producers to make that expense number. We would take on the additional expense of any good revenue producer as we can get.

Michael Mettee

Yeah. And Alex, on your growth aspect, a lot of that’s right in ’25, right. So as people come on, typically they’ve been at other competing institutions, and so there’s some agreements there and we honor those agreements. And so the growth is further out in the year. It’s not necessarily a back half of ’24, ’25, ’26.

Christopher Holmes

We’re not necessarily counting on these producers to make those numbers that we’ve talked about. We’re not counting on them to be what — what makes that happen for us? Any help we get, we’re certainly grateful for, and I’m sure there will be some, but it’s not absolutely reliant on all that panning out. As Michael said, a lot of times there are agreements in place and we absolutely 100% abide by those, and so we don’t count on that.

Alex Lau

Great. Thanks for taking my questions.

Christopher Holmes

Thanks, Alex.

Michael Mettee

Thanks, Alex.

Operator

[Operator Instructions] Our next question will come from Russell Gunther with Stephens. Please go ahead.

Russell Gunther

Hey, good morning, guys.

Christopher Holmes

Hey, Russell.

Michael Mettee

Good morning, Russell.

Russell Gunther

I just had, good morning, a couple of follow-up questions at this point. The first on the glide path to that 10% loan growth number in ’25. You guys just parsed that a little bit in terms of how much that would be driven by the new revenue producers versus no longer declines in some of the construction balances versus a willingness to just grow legacy with the producers you currently have?

Christopher Holmes

Yeah. So we count on the bulk of it to come from the producers we currently have. We do count on nice additions because there’s no net runoff from the producers that are coming on and there’s an unknown, well, frankly, all of that has a bunch of assumptions in it. So I guess it’s all unknown. But you also you could lose some producers along the way. So we, you know, there are a lot of variables that are — that are going into that. You said you count on the bulk of that to come from the force of relationship managers that we have is how I look at it and I’m getting nods of agreement from the other two guys sitting here at the table.

Russell Gunther

Very good. And then you guys have done a great job on the expense side of things. Trends were favorable again this quarter. You reiterated your full-year core bank expectations. And if I recall that guide does not assume a significant increase in new revenue producers. So I’m just trying to parse, based on the guides you’ve already added and your current expectations for the back half of the year, would you expect to be within that current guide or does the pipeline suggest the potential to punch outside?

Michael Mettee

Yeah, I appreciate those comments, Russell. Yeah, and we expect it to be inside the current guide. But as Travis mentioned, yes, a lot of this is quarters, months, years’ worth of conversations and recruiting. And so just like when bank — Chris talked about attractive bank acquisitions, we don’t always get to choose the timing, but we certainly have to manage as how we bring people and when they do. But when they’re ready and they bring value to us and we bring value to them, then we accept it. So I wouldn’t — I’m not going to turn away top tier talent because of a number that I put on these guys.

Christopher Holmes

Yeah. And I think Michael says it well. And I’m going to put it slightly more specifically to say, hey, today we think we’ll be in — we think we’ll be within that guidance as we continue to get opportunities, we’re not going to shy away from them if that causes us to go outside that guidance, we think it’s a very, very, very good investment in the future. So today, we feel pretty good about being within. If we get the right opportunities to continue to hire things that are long-term constructive for our company, we’re going to do that and we’ll certainly update you on that as we do.

Russell Gunther

Understood. Thank you, guys. And then just switching to the excess capital deployment, we saw the benefit of a prior securities repositioning in the numbers this quarter. You guys were active with the buyback. I understand you evaluate both on a quarterly basis just as we looked at 3Q. What does the opportunity set look like and where would you expect to be more active?

Michael Mettee

Yeah, I mean, it’s probably more in balance sheet right now than it is share repurchase with the run up, but we’re on the ready, if there were backup. That being said, you just kind of evaluated on a daily basis. You said quarterly, I’ll probably get back to my desk and there’ll be a couple of scenarios waiting on me to evaluate on the security side. So it’s probably more there than share repurchase at this point, but we’d love to spend it organically, that’s number one, is these recruiting and team lift outs that we’ve been discussing. That’s where we’d love to spend it.

Russell Gunther

Got you. Okay, great. And then last one on the M&A front, you reminded us of the interest in a handful of names. Could you just also remind in terms of your targeted asset size and desired geographies?

Christopher Holmes

Yeah, our targeted asset size geographies call it $1 billion to $5 billion would be asset size. And so that’s kind of a wide range. So I’d take kind of the center point for that of maybe $2 billion to $4 billion would be preferable. $1 billion to $5 billion, if we expand out to that. Geographically contiguous to our existing geography or our existing geography, the State of Alabama is a place that we have a good, but very young presence. And we would do things if we got a chance to expand and add there, we would love to, State of Georgia, same, North and South Carolina, same. Mostly, I’d say on the western side of those of the Carolinas would be the places that we’d be the most interested. Maybe even at say a western part of Virginia. Those are South Carolina technically is not a contiguous state, and Virginia technically is, but there’s not much overlap with Virginia and we just barely miss South Carolina. So we consider all those to be our friendly neighbors and those are the places where we’re most interested. And we continue to be Northeast Tennessee is a place where we’re not — where we’re not. And that’s a place where we — those are a place where we understand the culture and at least we think we do have a lot of friends up there and then other places in the state where we’d either love to grow or where we don’t currently exist.

Russell Gunther

Got you. Okay, great, guys. Thank you very much for taking my questions.

Christopher Holmes

Thanks, Russ.

Operator

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

Christopher Holmes

Yes. So thank you very much. We always appreciate everybody’s interest. We appreciate you joining us this morning and we look forward to Q3. And if we don’t talk to you before, we’ll talk to you on this call again next quarter. Thanks.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.