Q2 2024 FB Financial Corp Earnings Call

Participants

Christopher Holmes; President, Chief Executive Officer, Director; FB Financial Corp

Michael Mettee; Chief Financial Officer; FB Financial Corp

Travis Edmondson; Chief Banking Officer; FB Financial Corp

Brett Rabatin; Analyst; Hovde Group LLC

Christopher Marinac; Analyst; Janney Montgomery Scott

Steve Moss; Analyst; Raymond James Ltd

Catherine Mealor; Analyst; Keefe, Bruyette & Woods Inc

Alex Lau; Analyst; JP Morgan Securities LLC

Russell Gunther; Analyst; Stephens Inc

Presentation

Operator

Good morning, and welcome to the FB Financial Corporation's 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 to 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 and 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 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 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, the 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 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 events, I have emphasized our operating foundation, our earnings momentum, and the strength of our balance sheet in this quarter continues those themes.
Operationally, we continued 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 pretax 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 component 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% with CET 1 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% of our CRE concentration ratios 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 within, we have strong working relationships. So our balance sheet has it 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 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 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 care capabilities to allow you to serve your clients.
A second factor supporting this year's growth for 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 byproduct 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 are comfortable operating at a much higher level than that. Our second priority for deployment of capital is our 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.
Our third priority for capital deployment. That's continuing 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 continued to enhance our profitability metrics. We feel like we've done well and 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've built.
Now 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 noninterest 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 noninterest expense of $75.1 million, adjusting for $1 million in separation costs, core noninterest expense was $74.1 million, $61.3 million of which came from the banking segment. And all together, 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 rate 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 our cost of interest-bearing deposits to a 3 basis points increase over the first quarter, that 3 basis points increase in cost of interest-bearing deposits compared to a 5 basis points 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 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 the 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 fund 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 and 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 fund 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 footprint.
Moving to noninterest income at $11.8 million core banking segment noninterest 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 that we've been experiencing recently. Mortgage had another profitable quarter with a total pretax 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 noninterest expense continued to see the benefit of operational changes that we had 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 FirstBank team. On the allowance for credit loss and credit quality, credit remained fairly benign this quarter as we experienced 2 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 we'd 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 a further 4 basis points during the quarter to 1.67%. The economic environment would have kept us reasonably flat relative to the first quarter in 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 tangible assets of 10.2% and our common equity tier one 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, 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 got some momentum here, and I think the best is yet to come.
So with that, we will open the line for questions.

Question and Answer Session

Operator

(Operator Instructions)
Brett Rabatin, Hovde Group.

Brett Rabatin

Hey, guys, good morning. I wanted to just start on deposits, and you referenced in the press release the three depositor relationships. Can we talk about the net versus the gross and 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.

Michael Mettee

Brett, good morning. Yeah, those three relationships were cut to $225 million of $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, dependent on kind of both sides of how we want to manage that mix shift. We did see in non-interest bearing kind of hold in pretty well for the quarter, relatively flat interest-bearing to money market.
There wasn't a reclass 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.

Christopher Holmes

Yeah. Hey, Brett, I'll just add in on those accounts on that those funds it moved in there, they're folks that we know very well. I have long-term relationships with and moved yet about money on a short term basis at 75 basis points plus more than we're willing to offer that to. 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 and 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, move forward. We talk about kind of, and I mentioned in my comments, a 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, that personnel-wise momentum wise into we need to -- and we've been reemphasizing grow. We have been cautious during I'll see not as we've gone through economic times where we didn't know exactly where credit we've been fairly cautious and cautious on growth into, we feel much better strategically as we go forward, just with where we sit and with our economies and the economy in general, again, we as I said, we expect the industry to revert back to a more normalized charge-off rates are, but we're not really expecting it to be much worse than that and so are 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 grow some even if it cost us a little bit of margin. And by the way, we haven't been given up much of 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, so 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 make some of those longer-term down. But quite frankly, we weren't getting a whole lot of new business and that, yeah, term CDs anyway. So that's still competitive, maybe not as bad on a core basis. And that's what Chris mentioned some scenarios where we it certainly was more competitive than we expected been in sub growth, we'll be challenged. You have to add some higher-priced deposits to grow.

Christopher Holmes

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

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. When you guys continue to buy back stock. I mean, obviously you've got excess capital, or maybe do you hold it with some watching the political landscape potentially giving you opportunities with M&A if there might be regime change later this year?

Christopher Holmes

Yeah, so we are up on the capital front. We certainly have the dry powder, and we have the approval to go out and buyback it is read, as you know us, we pay diluting tangible book value. And so we're careful where we buy back calculate the price at which we have 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 stock 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 were 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 they're 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 in the payments and it's a best for the culture bits us, we're ready.

Brett Rabatin

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

Christopher Holmes

All right. Thanks, Brett.

Operator

Christopher Marinac, Janney Montgomery Scott.

Christopher Marinac

Hey, thanks. Good morning. Chris, I want to go back to the public funds and the comments that you and Michael made, if you think about them being sources of payroll, the other payroll clients that you have, they're 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 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 have kind of the all-in rate, including the transactional accounts.

Michael Mettee

Yeah, that excess interest graph on top of the payroll. And so that's generally multiple accounts that kind of make that. I think the back half of that question is, can we replace? I think we're pretty comfortable with like I said, 97% of our public funds are what we consider clients, right. And so we value those partnerships. We think part of being a community bank has been in your community and partnering with the municipalities.
And so we expect to continue that. And 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. 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 the 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 them that individually evaluated loans. 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, 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 what Michael said. When we look at our business is credit related. When we look at our portfolio, we had a few things that we've had to deal with on commercial real estate, but as we've dealt with those, but we've just found that there hadn't been lost counted in there. I mean, it's just things that we had to deal with and continue to do with.
But, generally plenty of equity and generally guarantees. And so they haven't resulted in us looking at it and go, I mean we've got a future loss there, where you could have wear and I think this just goes industry-wide and I think everybody should be watch C&I because it does can pop up in tougher economic times when you have the inflation we've had and you don't have on those your collateral different and sometimes you might not have had guarantees. And so you might get more loss content out of the C&I buckets at 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.

Operator

Steve Moss, Raymond James.

Steve Moss

Good morning. 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

Yes, Steve, we think there's about 25 basis points of rate cuts come in, 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 points guide. We'll see if that happens or not, but it certainly has that in there.

Steve Moss

Okay. And just judging by the balance sheet remixing and 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, our bucket continues to build. And just kind of curious, you know, maybe some color on the underlying drivers there?

Christopher Holmes

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

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. I 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 a bigger just kind of thinking about on 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 to pick up from folks just around our geography. We're not big on no offense to recruiters, but we're not big on own recruiters calling us with people that want to move to Nashville from at St. Louis or Albuquerque for San Diego.
But there are a lot of those, and we get a lot of those. But frankly, that's not we don't know how many of those were we're interested in folks that we know, frankly, that are coming through a recruiter. So that's made really more of the recruiters of recruiting that we do. They're in geography, and they have some experience and a portfolio. And that's really what we're talking about.
And so it is the things I made reference were actually with some intent. The things that I made reference to are people view us as being consistent. We place that is a good place to work in 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 in any turmoil that takes place in any part of our footprint, whether that's Memphis or Birmingham or Knoxville or [Pwork] anywhere else, we tend to benefit from that.

Travis Edmondson

Yeah, just a couple of points that we're seeing the same momentum. It's 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 REMs. And one thing I'll note what Chris is referencing our favor 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. 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. I'm just kind of curious maybe how much lower could they go in the color on that would be great?

Michael Mettee

Steve, I think we're kind of at the we're not actively trying to reduce construction balances much what we're focused on as relationships. And so if that happens to be some construction business with relation to 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 in size. It's more about relationships, and 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 the relationships.

Christopher Holmes

Well stated, Michael, I will say this as well. Steve that is all on as we think about construction, is that relationship driven piece for us. And we think about our own risk tolerance and our own risk portfolio -- 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 of the thing we have to keep an eye on is the regulatory guidance and the regulatory threshold efficient, 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 better well, that could come down. And so far in the independent or what should be taken on. You want to make sure you begin, you've got room for whatever you would have the opportunity to do that. That doesn't become a barrier to you.

Steve Moss

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

Operator

Catherine Mealor, KBW.

Catherine Mealor

Good morning. Back to the margin just done, Michael can you talk just about the securities yield. I know you had the boundary structure late last quarter into that. I'm a big piece of the security of going higher. But if you just talk about your outlook for where that yields 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. I think there's couple of hundred million that reprice or come mature throughout the back half of the year and so. One of the benefits from the second quarter is we saw some treasuries reprice and went from a, call it a 2% to 5%, 6% reinvestment yield. So there's 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 the what call it a couple of quarters ago, the dogs we took the bite of the apple and reinvested, so probably not as much benefit I think you're going to be saying 50 basis points pops. So a lot more consistency from here forward.
That being said, we do continue to look at capital deployment and reinvestment opportunities, which we didn't do any restructuring this quarter other than, as you mentioned, kind of just maturing and reinvesting.

Catherine Mealor

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 that because maybe the size of the credit, maybe the type of industry has been then outside of that one credit? Or have you seen any other migration within criticized clubs, classifieds, or any other migration within your portfolio?

Travis Edmondson

Yeah, good morning. On the particular credit, it's in the service industry. It was a service provider to another specific industry and not to get two in the weeds, but this was one where there was some changes in the dynamics of what they had to do for licensing that did added a substantial burden to the company that was unforeseen and also there was some fraud which combined forced the company into bankruptcy.
So that's well, 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 the 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 did I guess is what I'm saying.

Michael Mettee

And Catherine on that C&I you asked about the size of it, I guess, in bankruptcy. So there's a little bit of a ramp there, but we're fully reserved on the credit that's not collateralized so we should be --

Travis Edmondson

Fully reserved on the credit is not collateralized by real estate.

Michael Mettee

Right? That's so that if you're asking, is there going to be additional reserve based on that. I wouldn't foresee it.

Travis Edmondson

I've not been.

Catherine Mealor

Okay. And what in versus that's the current size of that credit?

Michael Mettee

Current size of the credit let's say $7 million-ish.

Christopher Holmes

Whether all the related ones are roughly TM.

Michael Mettee

Yeah, approximately a shade under 10.

Catherine Mealor

Great. Okay, very, very helpful. Thank you.

Operator

Alex Lau, JP Morgan.

Alex Lau

Hi, good morning. 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 are 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 to see it as probably the biggest single contributor. And so that's going to come from multiple industries that could be a little bit of real estate, but not a lot and then we can continue to progress well with specialty lending Travis, anything else that we?

Travis Edmondson

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. You know, as Chris referenced in his opening remarks, we've grown roughly 5% absent trying to get the ADC down. So that's basically continue to do what we've been doing without the headwinds of getting down ADC bucket is another way to think about it.

Christopher Holmes

Yeah, there was, I would say is in. So it'll -- it 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 enough if it. If we can't get as usual solid relationship customers and then the growth rate will be lower than that. That's what I wake 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, does the construction loan commitments were down about $70 million. How do you expect the pace of decline in commitments in the quarters ahead or is that similar to your balanced outlook?

Travis Edmondson

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

Michael Mettee

Yeah, we're down $600 million year over year and unfunded commitments for that bucket and side, 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're expecting it to peak at $1.7 billion, $1.8 billion. 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?

Michael Mettee

No, I think we're it's almost the same story as construction. And I think we expect stability in that bucket from here. And we, as Travis mentioned, the 5% loan growth kind of overcoming that contraction in deposit growth or flattish business has overcome kind of the $600 million decrease in public funds. And so I expect that kind of bogey to debate will go on at this point as well.

Travis Edmondson

But we also have to remember in the public funds, there is an actual seasonality to the 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 starting year than they pay all the expenses and other things that they have to pay for until the next taxes.

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 compare to say last year? And what type of contribution are you expecting to this year's outlook? Thanks.

Christopher Holmes

Yeah, certainly it's higher than last year, frankly, I don't remember in terms of the exact data, what would look like at the same time last year, but we two places. I'd say we're it has an impact one, as we will continue to add folks of the caliber that we're getting a 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 follow on 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 better 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

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

Christopher Holmes

So we're not necessarily counting on these producers to have to make those numbers that we've talked about. We're not counting on them to be 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 that absolutely reliant on all that panning out. As Michael said, a lot of times, they do their agreements in place, and we absolutely have to abide by those. So we don't count on that.

Alex Lau

Great. Thanks for taking my questions.

Operator

(Operator Instructions)
Russell Gunther, Stephens.

Russell Gunther

Hey, good morning, guys. I just had a good morning and a couple of follow-up questions at this point. First, on the glide path to that 10% loan growth number in '25, you guys just parse 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 become 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. I won't frankly, all of that as it 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 you know, there are a lot of variables that have gone into that.
You said you count on the bulk of that to come from of the force of relationship managers that we have not is how I look at it. And I'm getting nods of a three-minute from the other two guys sit here at the table.

Michael Mettee

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 guys 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.

Christopher Holmes

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

Travis Edmondson

And I think Michael says as well. And I'll put it slightly more specifically to say today. We think we'll be I think we'll be on that within that guidance. As we continue to get opportunities. We're not going to shy away from it that causes us to go outside that guidance. We think it's a very, very, very good investment in the future. So we 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 did.

Russell Gunther

Understood. Thank you, guys. And then just switching to the excess capital deployment. When 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 and 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 runoff. But we're on the ready if there were backup. That being said, you just kind of evaluate it on a daily basis. You said quarterly at our private bank, my desk and there'll be a couple scenarios. Why not me to evaluate on the security side.
So there's probably more there than a share repurchase at this point, but we'd love to spend it organically. That's number one. We're creating and team lift-outs that we've been discussing that's really where we'd love to spend it.

Russell Gunther

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

Christopher Holmes

Yeah, our target asset size, ERPs, you call it $1 million to $5 million would be asset size into that's kind of a wide range. So I'd take kind of the center point out of maybe two to four would be the preferable one to five. If we expand out of that by geographically, contiguous to our existing geography or our existing geography of 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 of 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 most interested maybe even at say a western part of Virginia. We are suffering on a technically not a contiguous state and Virginia technically is, but there's not much overlap with Virginia and we just barely missed South Carolina.
So we consider all those to be our friendly neighbors. And those are the places where we are most interested. And we continue to be a year of Northeast Tennessee is a place where we're not. And that's a place where we are. Those are a place where we understand the culture. And we at least we think we do and 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 question.

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 in the next quarter. Thanks.

Operator

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