Q3 2022 FB Financial Corp Earnings Call
If credit officer, who will be available for questions and answers. Please.
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 Dot first bank online dot com and on the Securities and exchange Commission's website at Www Dot.
<unk> Dot Gov.
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Conclusion of the call.
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Supplemental financial information and this morning's presentation, which are available on the Investor Relations page of the company's website at Www Dot first bank online dot com and on the SEC website at Www Dot FCC Dot Gov I would now like to turn the presentation over to Chris Holmes FB finance.
<unk> President and CEO .
Alright, Thank you Jason good morning.
Thank you for joining us this morning as always we appreciate your interest in FB financial.
For the quarter, we reported EPS.
<unk> per share.
And our tangible book value per share excluding the impact of Aoc.
Our compound annual growth rate of 14.9% since our IPO.
Great. Good performance this quarter, both in the banking segment and in the mortgage segment.
First starting with the bank, we had 22% annualized loan growth as I've said before asset generation has not been a problem from first bank.
And our continued loan growth is reflective of our experienced and trusted relationship managers operating in excellent markets that have strong underlying job growth and in migration.
We're also proud of our noninterest bearing deposit growth was nine 7% annualized this quarter at 13, 7% year over year growing operating relationships in noninterest bearing deposits has been a focus of management and our team continues to execute well, particularly.
The interest rate and a positive environment that we find ourselves and we believe that our noninterest bearing growth.
As a signal of the strength and the momentum of our franchise.
Both balance sheet trends resulted in strong growth and profitability as our net interest margin expanded to 393% in the quarter and our net interest income grew by 9%.
Over the over the second quarter.
A lot of that improvement the micro segment. The segment delivered a PK P. P. R O a of approximately one 9% in the third quarter and what you are getting closer to where we expect it to be.
For mortgage we had a loss per quarter, but we also finalized our restructuring of the segment. We're now at a point, where we feel comfortable with our staffing organization to weather this challenging environment, while avoiding additional material losses.
A result of the of.
This restructuring the mortgage segment return to operational profitability in both August and September while the seasonality of the fourth quarter and the first quarters.
Yes.
Fourth quarter, the first quarter, where it exacerbate the current headwinds.
In the industry, we would expect to be close to breakeven in the next couple of quarters.
While we are pleased with our third quarter results were also looking ahead at Grace guys. We're hoping for approval, but we're prepared for Jamie damage Hurricane.
The macro factors of rising interest rates strong employment high inflation and good customer sentiment would lead you to think that interest rates will continue to rise.
Mixed with quantitative tightening shrinking liquidity the potential for significant market disruptions of war in Europe .
Almost assurance of a recession. It makes this an important time to rely on fundamentals disciplined and messaging.
The economic times are moving from boom to something less.
We've had we've had the transition from aggressive growth in the franchise to ensuring that we take care of customers regardless of economic conditions.
In times like these we say our balance sheet did reserve for our customers. So we have to be prepared to get them through challenges, if we encounter difficult market conditions.
Our people live and work in markets that are surrounded by customers.
That continued to experience strong demand.
Above average population growth robust housing markets.
Tenuous wage growth and in some of our markets they can't get to their office without driving path C of construction cranes.
Our people are passionate about serving our customers no matter the circumstances and preparing for a slowdown when our markets are still some robust communication challenge that being the case.
Besides and continue to grow our business aggressively on the deposit side.
We are avoiding significant new customer acquisition on the credit side right now.
And we are trying to take care of the existing borrowing customers.
We're managing our liquidity credit and capital will be prepared for any range of economic scenarios better safe than sorry.
So all of that liquidity.
We had 537 million of net deposit outflows during the quarter and we expected that as we referenced on last quarter's call stripping out two large public funds accounts, which combine for $619 million in deposit reduction during the quarter. We had net growth from the rest of our deposit base one of the.
Large public accounts with over $500 million.
It was a bit away from Russell in terms that we were not willing to match, we can increase and have increased our customer funding at less expensive rates.
I'll also freeing collateral that improves our overall liquidity position.
Following this quarter's deposit activity, whereas now at 91% loans to H.
Loans to deposits.
And securities to assets of 12, 1%, 1%, we feel our balance sheet mix is optimized.
This environment for strong profitability and we have ample liquidity sources that will allow us to continue serving our customers.
Even in the most extreme economic conditions.
Going forward, we don't anticipate letting ourselves to get above the current 91% loan to deposit ratio.
We are also not willing to pay for unprofitable deposit relationships.
And we still prefer not to use brokerage Cds, although that's an available option.
That means we're fine.
Most of our additional loan growth with customer deposits, but also means that for the near term we won't have outsized loan growth that you've seen over the last three quarters, we would anticipate not exceeding the bottom end of our long term.
Loan growth target of 10% to 12%.
During the fourth quarter and the first part of 2023.
While the past few quarters would tell you that there is.
Still clearly a strong demand for first bank lending relationships, we're entitled Throttling back our production as a result, we have raised the bar for new loans, we feel confident that our underwriting standards should hold up through the cycle.
There's been a tweak it.
It's been that we've been stressing interest rates are a little more given the current environment.
We've not made any changes to our credit process. However, until we can gain clarity on which areas will be impacted by the slowing economy, we're cutting back on traditionally higher risk product types of construction.
<unk> and CRE.
The limitations around those assets were willing to put on around assets, we're willing to put on the balance sheet.
Our growth should continue to be incremental incrementally profitable.
Moving to capital, we maintained a very strong equity position, which where the CET one ratio of 10.9% our tangible common equity to tangible assets declined by 36 basis points to 854% due to a further increase in the unrealized loss on our securities portfolio that would reiterate that that unrealized loss.
Is all interest rate interest rate related and temporary.
And as I mentioned previously we have no intention of turning those unrealized losses into realized I'm, sorry, those unrealized losses and realized losses.
We're preparing for a floating around and being cautious.
On credit and balance sheet management.
We're balancing that with our longer term strategic priorities, our recently announced Vanderbilt sponsor sponsorship would be an example, well that's an expense for us heading into a recession, we had an opportunity to become a bank for the most significant institutions and brands in our geography, and we acted on it.
Another such focus would be our recruitment efforts.
Both relationship managers and customers in the wake of recent acquisitions in our footprint.
We will not allow ourselves to grow loans at an outsized pace there are certain once in a career type customers.
May be looking for new partners, and we will do that.
And we will do what we can to accommodate those similar similarly, we continue to be active in our discussions with a handful or so of banks that we've identified as tier one high quality potential partners, if one of those banks.
That we know well decide to sell over the next few quarters, we would not stay on the sidelines solely because of the uncertainty.
No.
Oh, let's say, we're proud of our performance in the quarter, but we're cautious about the operating environment for the next next few quarters, we're hoping for a mild downturn, but we're doing what we can to prepare for a potentially difficult stretch.
We feel our conservative balance sheet management, and underwriting standards will serve us well no matter.
What outcomes I'll turn it over to Michael for more color on our financial performance in a quarter.
Thank you, Chris and good morning, everyone I'll speak first to this quarter's results in our banking segment, our baseline run rate pre tax pre provision income for the banking segment was $55 9 million in the third quarter.
Pointing to the segment core efficiency ratio reconciliations, which are on page 19 of the slide deck and page 19 of the financial supplement we had $112 1 million in the segment tax equivalent net interest income this quarter.
Along with that $112 1 million in net interest income, we had $10 3 million in core banking segment non interest income.
Finally, we had $65 9 million in banking segment noninterest expense.
You will remember that last quarter due to our lower level of taxable income we had a geography shift of $1 4 million as tax credits were moved from a reduction in our tax expense since it would be a reduction in noninterest expense. This quarter. We had 700000 in banking segment noninterest expense as a result of that line.
Adjusting for that shift core banking segment noninterest expense would've been $66 6 million.
Together that comes off of $55 9 million in run rate segment P. T. P. P, which is growing 39% over the comparable $42 $7 million that we delivered in the third quarter of 2021.
Moving on to our net interest margin with summary detail on page five of the slide deck. Our net interest margin of 393% showed significant improvement from the $3 five 2% we reported in the second quarter.
Part of that improvement was due to the continued deployment of liquidity in the loan growth.
For the second quarter, we estimated that excess liquidity had a 14 basis point negative impact on our margin.
With our average balance sheet competition during the third quarter, we estimate no impact to margin due to excess liquidity.
The remaining 27 or so basis points of expansion was due to asset repricing faster than our liabilities as our cost of total deposits increased by 27 basis points.
Our yield on loans, excluding nonaccrual interest recoveries and accretion on purchase loans syndication.
Syndication fees in the prior quarter increased by 52 basis points.
Our securities portfolio increased by seven basis points, and our interest bearing cash increased by 145 basis points.
Looking forward for our margin we had a run rate margin for the month of September in the 395% range. Our cost of funds is increasing as we expected it to and we put new deposits on the books in the third quarter at a cost of 1.54% and that was up to 179% in the month of September .
So we would expect our cost of total deposits to continue to increase over the coming quarters, particularly with the additional rate hikes that are anticipated over the coming months.
However, we have also seen an increase in our yield on loans.
New loans in the third quarter had a unit, 596% and that was at the $6 one 8% in the month of September .
So that's a net spread of 442% on new loans versus new deposits for the third quarter and $4 three 9% for the month of September .
So we feel that our growth remains profitable.
Our spot better spot numbers for you for the month of September would be contractual yield on loans of 512% yield on securities of $2, one, 5% and cost of interest bearing deposits of nine 7%.
With our margin approaching 4%, we would expect it to start to level out there would be there should be continued upside to our asset yields with additional rate hikes. The competition for deposits across our markets is causing betas to accelerate which had kept some of our upside.
Yeah.
For banking segment noninterest income, we continue to expect for our banking noninterest income to be in that $10 million to $11 million range for quarter to quarter for the foreseeable future.
As I mentioned earlier, we view, our core banking segment noninterest expenses being $66 $6 million versus the reported $65 9 million due to the 700000 and state tax credits that reduce noninterest expense this quarter.
That number is higher than the $63 eight to $64 3 million that we guided to for the quarter as we accelerated a few of our internal projects geared towards organizational efficiency into the third and fourth quarters.
As we can as we expect continued growth in our banking segment noninterest expenses due to inflationary pressures on wages and we continue to hire but customer facing and back office talent.
Moving to mortgage after a difficult start to the quarter, where we experienced the fair value reduction both our pipeline and our mortgage servicing rights. This segment returned to profitability in spite of lower volumes.
We do not expect a contribution to earnings in the fourth quarter due to the seasonal volume pressure in margins that remained below our historical levels.
The changes to structure that had been may put us in a position to be profitable on an annual basis going forward.
Moving on to our allowance for credit losses, with our ACL to loan decreased by two basis points this quarter.
Recorded a sizable provision of $11 4 million.
Economic forecast for the third quarter deteriorated slightly from that we utilized in the second quarter.
We have continued optimism for the long term health and growth of our local economies, but we are closely watching inflation.
That we're experiencing and the increasing conviction of many economies that we will soon enter into a recession.
If conditions do not change we would anticipate it remaining a similar level of NPL to loans held for investment over the near term.
Yeah.
With that I'll turn the call back over to Chris.
Alright. Thanks.
Thanks, Michael for that color.
We'll play again, we're pleased with our results for the quarter and feel cared for.
Coming next.
That concludes our prepared remarks. Thank you for everyone again for your interest in FB financial and operator at this point I'd like to open the line for questions.
Thank you we will now begin the question and answer session.
I ask a question you May press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys.
Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Catherine Mealor from K B W. Please go ahead.
Good morning.
Good morning Catherine.
Maybe you gave great detail into the margin, which was really helpful.
Rates at the end of the quarter.
One follow up to all that detail and just looking at the borrowings. It looks like you pulled up and I think that'll be borrowings this quarter and just curious if that was more of a temporary thing just given the outflow of public funds. We thought well. If you think we'll see an increase and I think that'll be borrowing used over the next couple of quarters.
Yeah, that's a great question, Catherine yes that job.
Borrowings were kind of a replacement for those public funds as we continue to grow our customer deposits and I expect those to be paid down over the coming quarters.
Yeah, Okay got it.
And I would say.
It's actually already moved down some from where it was at quarter end so that.
We.
We don't anticipate that that is more temporary.
Alright, Okay, and then back out and increased customer deposits from here and that the.
Greg Flynn <unk>.
It would be an easy and easier.
It's been the you're not growing at 22% or the loans anymore.
You got the message.
[laughter] loud and clear.
And then one other.
Credit and it's interesting looking at your at your reserves.
It looks like a lot of the higher provision this quarter was really just some good loan growth, but just on your Stifel flat that you increase your reserve on the residential mortgage portfolio just any.
Curious what drove that and then bigger picture, how youre thinking about where the ACL could go as I look at that I feel like it's a very high reserves.
Thank you would you think that would happen.
Relatively less risk for reserve building from here.
Just kind of curious how you're thinking about that as we get into maybe a more of a cautionary period.
Yes, Catherine Michael Good question so.
The reserve around consumer and residential was impacted more so this quarter by the Moody's scenarios.
So that's really the the number you're seeing there.
One to four family, it's strictly model driven.
And so it's really around that change in GDP, and unemployment being slightly higher which tends to impact the consumer more so than some of our other asset classes, so that drove that higher.
We agree we felt like our.
I feel very prudent for what's in front of us and where we've been.
We feel like we're in pretty good shape, there and would expect that if at all.
Maintain the same level of $1 45 to $1 50 on a go forward basis, given our kind of economic outlook here, which is probably a little bit more bearish than some others, but.
Yes, It did say and I think it.
Maybe also you're asking Kathryn.
If we're going to build about this one by $1 48 for the quarter.
But it could go to 150, but no.
We never know what the model spits out exactly until it spits it out but I couldn't see it go into 170 or anything like that in terms of what we appeared if that's what you're asking on the build side.
Yes, yes. That's helpful. That's all I have okay. Thank you so much great quarter.
The next question comes from Stephen Scouten from Piper Sandler. Please go ahead.
Hey, good morning, everyone can you hear me.
Hey, it's David I'm going to say when we got you.
Great.
I guess.
One of the strengths I'm seeing here is just the.
Spreads you saw in the quarter on new production, even versus the new funding Michael that you referenced.
That's a trend that can continue or are some of what you're saying around the increase in deposit costs would you expect those incremental spreads to narrow and for kind of the let's call. It the incremental deposit made is to exceed incremental.
Youll betas moving forward.
So to stay but we're still seeing loan yields moved higher.
And so they've moved pretty much in line, we don't see a whole lot of expansion in margin by this 4% range kind of go forward.
I think one of the.
One of the challenges would be balance sheet mix a little bit.
As our deposits grow.
Put a little bit of pressure on NIM, but for now we are saying we are seeing increased deposit cost.
They are higher.
Fainted.
Relative to new production, where rates are three 5% fed funds, but we're seeing that incremental loan yields as well set right now.
We're moving kind of lockstep, whereas earlier in the year, obviously loan yields were outpacing deposit deposit costs, we're able to stay lower for longer.
Okay. That's extremely helpful and then.
And the quest.
Keep the loan to deposit ratio around 91%, obviously again here in the guidance around loan growth expectations, but in terms of still filling the gap on the deposit side, we expect to see that come more.
In customer Cds, and if so where are you seeing new CD yields in particular come on it.
Yeah, so kind of a mix of money market and Cds were seeing.
Got it.
Turned 13 months at around 310 to $3 15 18 months.
Around 335% to $3 40 ish.
And then some of the some of the shorter term and the upper twos.
But I will say, depending on the market youll see some widely various competitive rates.
And we say well above that in some of our more community markets.
The C D and then in some of our more Metro market Trophy.
Much higher money market rates in some cases.
It's a pretty broad competitive landscape at this point.
Okay, Great and then I guess last thing for me I'm encouraged by the commentary around mortgage.
You know I think you said material losses should be kind of behind us which is great.
What's the big driver for that is that just that the efficiency ratio has been brought down more in line or when we see less variance around some of the MSR losses, moving forward or change in fair value of MSR moving forward or what's kind of the biggest drivers within those moving parts in mortgage that will lead to kind of.
Some normalcy there I guess.
Yes.
Staffing is is built for kind of a go forward basis. We're in the range. We're in now probably a little bit of capacity for some growth going into the second quarter.
One of the challenges with fair value and Mark to market as you take a hit on when your pipeline shrinks and so we incurred that in.
In July as we moved out of the direct to consumer business.
Retail business slowed as well you can see our volume dropped a couple of hundred million on interest rate locks and then on the MSR side.
Yeah, there was a valuation kind of.
It is as rates get higher the valuation starts to taper you don't see as much increased and we keep the assets pretty much hedged at around 100%.
So we've had to modify some of our hedges there to kind of maintain.
Current current valuation so I wouldn't expect swings in and the MSR.
Unless interest rates, just get more and more volatile and hopefully most of that behind us as well.
We have mortgages.
Seems to be stabilized.
We've got some seasonality had edison and hopefully the waters will be much calmer from here.
Okay.
Steve I would just add to that on the mortgage side a couple of things.
It's been a painful restructure for us.
We've got about 60% reduction in staff, there overall from where from our peak.
And that was painful but it if you did and the second thing going back to what Mike was talking about on that mark to market.
Mark your gift or mark or mortgage loans.
<unk> held for sale.
And so.
If you go back to the third quarter of last year, we had $750 million in mortgage loans held for sale into this quarter, we had $97 million.
And so if you think about that reduction and what your marketing and you have to step that down which we've had to step down over the last four quarters and so.
And that's down to 97 million at this point so.
It can drop that much further from there.
Got it makes sense. Thanks for all the color guys.
Guys appreciate the time.
Sure.
The next question comes from Jennifer Damper from <unk> Securities. Please go ahead.
Thank you good morning.
Hey, good morning.
I'm, just wondering what kind of merger disruption opportunities youre seeing.
Hum.
Third quarter and are seeing over the near term.
Right now.
Yeah, I'll comment on a little bit of that so.
But we don't we don't.
Usually speak specifically to other institutions, but we do have some institutions that are undergoing.
You know a big transactions and right right here in our core markets and says.
We hear a lot about that.
You see.
Movement from that.
Both customer and so as yet.
And so.
That leads to just a lot of conversations with folks in and so.
As we it goes back to one of them.
The prepared remarks.
Sometimes you see.
Our customer become available that use.
The covenant for baby years or decades.
And they don't come in but they're not going to come available again, probably in at least in my career over the next decade, and so we make are we going to make a hard move for those whenever that is the case and it's the same way with some of these associates.
We've hired a lot of.
We're looking at revenue producers across our footprint, but in addition to that.
You know the bank the bank.
First of all I can go back.
The 2000, and there was about a $6 billion asset institution.
I'm, sorry, 2020, it's about $6 billion institution and then you look at 2022 was $12 billion of Tusa until we've also got an opportunity.
Operation side of the risk management side.
Even places, especially in Birmingham.
We've really grown our.
<unk>.
Our operational muscle in our administrative muscle in Birmingham through some disruption down there and we've even.
Our our chief risk officer came to us from Texas, and so by the way, it's never easy to move people out of Texas, and so of course a week.
And so it's really coming from all around and it's and it's not only on the revenue side its own.
Our accounting and finance its own risk manage but its own operations.
Where we've really been able to beef up.
Yeah.
Great.
And a question on asset quality.
I think the normal level.
Annual loan losses for this company.
I think that's probably one of the biggest variances in earnings models for the industry going forward is.
What should we assume.
The economy gets a bit weaker.
And while we had $15000 net recovery this quarter and.
I'd like to just assume that we're going to have net recoveries and into perpetuity.
Perpetuity.
Probably not going to be the case.
And frankly, you're asking that question, it's a hard question, which we ask internally because.
It's a little like some of the weather extremes, we see these days don't losses have not been normal and so long that we're not sure what that is we have traditionally said.
Okay.
We're in the 20 to 25 basis points has kind of been something that we model.
But we're not we're not sure that that's that's that's I'd.
I'd say there is a chance.
That.
It could be.
It can be high.
Higher and especially in the latter half of 'twenty, three or <unk> 24 charge offs are a lagging economy and so.
You know I'd say, they quit testing could be higher than of course they'd be followed by lower one of the things that we watch closely Jennifer is our MH portfolio.
Yeah.
Said once on this call I'll say it again.
And that portfolio. If you go back to 2020. One we saw record low past dues, we saw record low charge offs, we saw record low non accruals because of all the stimulus money that put money in everybody's pocket.
And today, but if we didnt see we think something was wrong with our assist our tracking systems or something working we didn't see those go up we have seen past days go up to a normal level, which is which is closer.
Closer to say 40 to 65.4.
Four to six five of the balances as sort of a range and we've seen it come back up to that range from being down to the point to point to one in 2020 one.
And so.
<unk>.
And so we mix all those together and roughly I would say 'twenty to.
'twenty two.
30 basis points something like that.
Alright, thank you so much.
The next question comes from Kevin Fitzsimmons from D. A Davidson. Please go ahead.
Hey, good morning, guys how are you.
I wanted to take a step back with all the talk.
Talk about the balance sheet, and then talk about the margin.
Definitely we had a reversal where a couple of years ago, we were all talking about the <unk>.
<unk> margin getting.
Uh huh.
The balance sheet driving growth in NII, so now it.
It seems like we've had a bit about <unk>.
Handoff of reversal on those contributors but.
If you look at dollars of NII.
Do you feel you will be able to on a quarterly basis continue to grow back I mean, maybe not so the pace.
9% pace, we saw this quarter, but do you feel that NII is going to be able to continue to grow in this environment.
Yeah, Hey, Kevin Michael Good morning, Yes.
Yes.
We still expect a couple of more rate hikes in the variable rate portfolio should still reprice higher.
We still expect.
I guess relative to the last three quarters.
Modest loan growth.
Over the next couple of quarters, so you'll still see some some balance sheet growth and deposit costs might fare that cause the change right.
Going to increase but I still think that there is a net interest income expansion and that.
Sure Yep.
It goes there should be some modest.
Margin in there and some balance growth.
So between the two yes that should be absolute dollars should increase.
Okay, and just to clarify so Michael when you talked about the margin now approaching 4% starting to stabilize or you.
Kind of saying literally at 4%, which is only seven basis points from here or just talking more of like a low 4% handle.
Margin, if we assume that you get.
More of a benefit from the fed rate hikes.
You know over the next quarter or two and then and then it levels off in the low 4% level just wanted to clarify.
Yes, it's not a ceiling for sure so I'm not trying to imply that I'm just.
I think it's in the low fours in there over the next couple of quarters.
Pending deposit costs for sure.
Okay.
And then.
When you were talking initially about.
The loan growth.
Relative to your long term guidance I definitely got the message that it's going to moderate from.
What <unk> been putting up here in recent quarters, but can you.
I just didnt catch what you had said relative to that long term outlook.
Yeah, we have.
Our long term target has been 10% to 12% annually.
And.
Typically frankly been if you go back last.
I don't know five seven years, even we've typically been on the high side of that.
When we look out into the fourth quarter and the first part of the third quarter, we'd be on the low side of that maybe could even be below that.
We are.
I think it's a good time to really focus on.
Liquidity and credit.
Capital make sure right now.
Continued to grow.
But it's just going to be a slower and measured pace.
We're doing some.
Additional reviews on internal credits things like that just.
We don't know exactly what's on the horizon, we feel.
Certainly that the economy is going to.
The slower.
Likely.
Even.
Recession.
But that being the case.
Look around and go well you know our markets continue to outperform and will likely continue to outperform in a recession. So.
We put all of those things and into into the mix and consider them all in there.
That's what we that's what we come up with it.
The low side of that 10% to 12%, maybe even maybe even below.
But we think we'll continue to see growth and with that level of growth. We think it will actually be quite profitable.
Growth for both.
For both the loan and deposit.
The departments that we have.
Okay. Thanks, Chris.
And one last one on deposits do you guys feel you were at third quarter will be the bottom for deposits. I know you were proactive in moving out those higher cost public fund deposits. Just wondering if there's more of those to go in fourth quarter or can you say your.
You believe you're at a bottom here.
Yeah.
Okay.
Yes is the answer we we don't have it.
Because we're we've increased since the end of the quarter.
We think that's set to continue.
So yes, we would think so yeah I think it's all public funds as well what would kind of naturally go back up here in the fourth quarter as well.
Bottom out in the third quarter as well for us.
Just the annual cycle.
So we feel like we're at a low point.
Got it okay. Thanks, guys.
Sorry.
Next question's from Matt Olney from Stephens. Please go ahead.
Hey, Thanks, good morning, everybody.
My question of the moment.
Good morning.
My question is similar to <unk> question around investments, but.
Sides merger disruption opportunities I think the slide deck also mentioned investments in technology innovations group would love to dig more into this I appreciate kind of.
With the investments are on this side.
Go ahead.
Matt.
<unk>.
Yeah.
We kind of continue to operate and look we're getting a lot of opportunities come our way a lot of a lot of different opportunities and so we continue to kind of investigate things that augment our business and things that can ultimately provide a lot of efficiencies and really help grow some of our businesses and.
Yes example, really is there was a recent press release on our relationship with Treasury problem.
Which supports our strategy for open API banking declines and potential Fintech partners.
And maybe even deploy niche offerings of our onset.
We see strong demand on our customer base for embedded banking services and solutions.
That it will kind of create competitive technology that augments our community banking model.
And I think ultimately for.
Focused on these relationships because they bring deposits to the balance sheet and the correct core customers there.
That's one example of things we're doing and there's there's a.
A laundry list of things, we haven't really publicly talked about yet that are exciting opportunities that we're working on.
Yeah.
AD.
And our relationship with the USPS.
A control issue there.
Some of the founding entities.
And just the fact that we're active in the market Springs.
I mean a lot of.
Exciting opportunities that were not those aren't don't have a cost attached to them.
Material cost attached to them. They do have so but not material costs attached to them today, because we've got a wait period and some of you know on the coal.
Who is.
On the road most of the time.
He's he's pursuing these opportunities that are actually I guess at this point is it just the opposite there pursuing him and us and so it's a matter of waiting for something.
Okay. That's helpful. Thanks for the commentary there and then I guess kind of following up on that.
Michael given these investments are being accelerated it sounds like core expense levels at the bank. We will continue to build from that $66. Six core level is that right anything you would point us towards for the fourth quarter or next year.
We're working through next year right now so we'll have more updates.
Irwin early in 'twenty three.
For the fourth quarter, that's what they're going to be in and around this range.
Maybe some modest growth.
But we really did accelerate a lot of the expenses into the third quarter and have some stuff.
It could create modest growth, but nothing material.
Yes, we got a couple of I'll just add that we got a couple of.
Efficiency initiatives.
With working with them.
One case anyway.
Third party and we've really accelerated the initiatives.
To try and get it done this year again in anticipation that next year.
Potentially it.
Could potentially be a tougher here until we just accelerated that coal project, including expensive project.
The implementation so.
Okay. That's helpful. Thanks for that and then.
Switching over to the funding side deposit side I think you've been.
And our cumulative deposit beta for the cycle around 30% is that right in the past and is that still still the case.
Any color on what you expect more near term given some of the changes you've mentioned previously.
Yes, Matt that's right I mean, what kind of what they say about models I guess can be careful but we model.
<unk>.
In and around 30%, that's probably historical maybe a little bit higher than that.
We've been well below that.
You've got to look from the base to get to where we are now.
I do expect that accelerated and work its way back towards that 30% with the newer deposits that are coming on.
Repricing.
Existing deposits.
But that's why we continue to focus on noninterest bearing deposits as well and growing that.
Core core customer base is it certainly helps to offset some of the increase in deposit costs for the franchise.
Okay.
Okay. Thanks, guys.
Thanks, Matt.
The next question comes from Brett Robinson from the hub group. Please go ahead.
Hey, guys good morning.
Good morning, Brett.
Wanted to circle back around on loan growth and the expectations for growth to slow I know, you've you've talked about it quite a bit but we're looking at the construction commitments.
And noticed centers were up quite a bit linked quarter.
I feel like that's one of the segments that you kind of keyed in on us.
A slower slower growth.
Engine going forward wanted to make sure I understood.
Yeah.
Comments around construction, specifically and then just is there anything to read into the linked quarter increase in construction.
For the quarter.
Yeah.
Michael.
The address it but I will say this that.
Yeah.
Bye bye.
Hi, everybody ought to understand you know the construction.
Bucket.
Easy to project because you know you make commitments and then those commitments may be drawing them in.
At any time, and so sometimes you'd make a commitment and you don't expect it to be drawn on for nine months or a year even and.
And in some of them may never be drawn on it so you're always trying to project that really what you have to manage in the present is that commitments versus the balances and two we are really focused on the commitments and happened actually.
But that but that does it.
The commitment you have made there.
Those can be drawn.
That means that balance you can stop making.
Let me take that thank you can you can pull back on commitments, but then the balance is continuing to go up for a draw that had been previously been committed.
Yes.
Your commentary I think.
But we did have commitment increases from in the quarter, but most of that was.
Things, where we were working on prior to the third quarter and if you just look at the balances in that bucket as Chris mentioned about.
65, 70% of that was prior commitments funded up.
Versus any type of new origination type of business in the quarter.
Okay. That's helpful.
And then wanted just to ask you know.
Chris you alluded to you know Jamie Diamond Storm, and you know not necessarily knowing for sure what next year's going to look like.
Are there any loan segments that youre looking to maybe.
Specifically be more conservative with everyone's worried about consumer but are there any things that youre, specifically thinking about in terms of.
Credit, where we might see credit become softer next year.
Yeah.
Where.
I think it's your typical segments.
<unk>.
For construction.
One.
Residential within that.
But as you, though right because you live in middle Tennessee that that then.
Market.
Even though the world getting softer in residential and it is in ours, our mortgage as well, but its still strong and most of our our folks describe it as.
But most.
But in most of our.
Economic Recency here you didn't you didn't start you'd say, it's kind of getting back to normal.
If you look at days of inventory and things like that so.
So that's that's one.
The land all of those things CRD all of those things with being the bigger things we focus on again remember we haven't manufactured housing portfolio.
Look at our with its two there are two pieces to that one as communities.
Which has about.
$290 million in it.
The other is retail which has about $270 million in it we watch those closely communities is performing extremely well in terms of.
Any any kind of.
Hiccups, we watch it closely and then in retail continues to fall and we've seen some things again tick up there but.
But theres been several years of really strong performance in the manufactured housing retail and so we reserved 5% on that just because at some point.
Could.
In some at some point you can see.
That.
That that tick up because it has a well we've had the portfolio now, including you know Clayton for 14 years and.
At least for I'd say the last.
Seven or eight.
Charge offs have been waiting on them.
So.
Those are the things that we keep close eye on.
Yeah.
Okay, Great appreciate all the color.
Sure.
The next question comes from Citi strictly from Janney Montgomery Scott. Please go ahead.
Hey, good morning.
Hi, good morning nice.
Nice to have you.
Glad to be here.
I wanted to clarify on Kevin's question from earlier.
Average, earning assets were down this quarter, despite the loan growth.
Should we expect earning assets to grow from here closer to level, one growth just given where loans deposits are today.
A lot of that cash has been deployed.
Yes, that's a reasonable assumption.
And the average earning assets haven't haven't grown a lot.
Because we've taken up to liquidity.
We had.
Thereby we all had excess liquidity on the balance sheet.
And we've taken a lot, but we've taken that excess pointed out the loans and so from here I think you would see the average earning assets you will see that go up as our deposit to increase and increase at close to the same percentage.
Yeah.
Gotcha that makes sense and that that does play in your earlier comments about spread growing too.
Switching gears for a second.
You've talked about bringing more in mortgage producers line over time.
Curious what the level of opportunity.
Is that you see there.
And did you bring anyone online or have you hired anyone any mortgage producers since last quarter.
Yes, Fred as Michael welcome glad to have you.
Yeah, we're actually seeing.
Quite a bit of opportunity on mortgage producers.
Across our footprint.
<unk> actually been able to bring back a couple.
That had left over the last year or so and so we're super excited about those joining the team coming back to the team and then the reality is we've had a lot of opportunity people coming to us over the past 60 days generally from RMB is independent mortgage companies banks.
Is there kind of leaving that space and looking to join a bank. So we're been being selective in that as you kind of look here over the next six to nine months.
We have volume depressed.
Sorry.
We're kind of being selected there and making sure they fit our culture and can can work within our model, which is realtor builder based customer focused.
And so yeah, a lot of opportunity out there and we expect that to continue over the next.
15, 18 months that there will be a lot of originator catalog coming available.
Got it and.
And last question kind of along those same lines I pencil mortgages drop until about 9% of revenues this quarter, 16% last quarter.
31% a year ago.
Do you have any sort of target a sense for where you want that number to be.
Bye.
Next year's peak season to go.
We see that rising back to something like 15% or is it just kind of too hard to tell at this point.
Yeah, well, it's definitely too hard to tell at this point, but.
We're really focused on his contribution.
And running a variable business thats profitable through all cycles.
And so we would expect a contribution in the range of about a lot of that 10% or lower.
And then in the mortgage space and so revs.
Revenues highly unpredictable because of the rate lock volume and originations it's fairly foggy at this at this point in time.
But we're focused on the core profitability of the business.
Got it thanks, so much for my questions.
Comment we did it won't return to anywhere near the level that it has been it was in 'twenty.
'twenty one it is nowhere near that like I said, the contribution would stay down below 10% and so.
That's what we would we would see and then the other thing I'll mention that Michael just mentioned it is really a point of pride.
We haven't had.
Again, it's a tough time in the mortgage business and you've had some.
Especially in a bit of a mortgage bank get really aggressive in recruiting and to offer a really significant upfront payments to people to come work for them and we lost some large keep producers.
And we've seen some of those folks that are great folks enjoy producers actually come back.
A relatively short period of time.
And they attributed that to hated that culture is really good.
Uh huh.
The.
And then just I appreciate the fact that it's you know.
It's a place where they can be successful and it's a good cultural fit for those folks and so we're proud of the fact that and we think it's a very good sign when folks, especially really have producers that get recruited away in a relative short period of time to come back and go Hey, wait a minute.
We appreciate what we had so.
Just make that commentary.
Got it no that's great incremental color I appreciate it.
Okay.
This concludes.
I'll go ahead.
A question and answer session I would like to turn the conference back over to Chris Holmes for any closing remarks.
Alright very good. Thank you for all the questions. Thank you for all the.
Everybody following FB financial.
We always appreciate your interest in <unk>.
We will look forward to seeing some lumpy throughout the quarter and some some investor events.
Have a great day.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.