Q4 2022 FB Financial Corp Earnings Call
Speaker 2: F.
Speaker 3: Good morning and welcome to the FBI Financial Corporation's 4th quarter 2022 earnings office call.
Speaker 4: Hosting the call to the NFB Financial is Chris Hall, President and Chief Executive Officer, and Michael Batik, Chief Financial Officer. Both will be available for questions and answers.
Speaker 5: Please note, F.B. 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.scc.com.
Speaker 6: 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.
Speaker 7: At this time, all participants have in place for the listen-only mode.
Speaker 8: The call will be open for questions after the presentation.
Speaker 9: During this presentation, FBA Financial may make comments which constitute forward-looking statements under the federal securities laws.
Speaker 10: Forward-looking statements are based on management's current expectations and assumptions and are subject to risk uncertainties and other factors that may cause actual results and performance or achievements of FD Financial to differ materially from any results expressed or implied by such forward-looking statements.
Speaker 11: Many of such factors are beyond FP Financial's ability to control or predict, and whispers are caution not to put undue reliance on such forward-looking statements.
Speaker 12: A more detailed description of these and other risks that may cause actual results to materially differ from expectations is contained in F.B. Financial's periodic and current reports filed with the SEC, including F.B. Financial's most recent form, 10-K.
Speaker 13: Except as required by law, FD Financial displays any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.
Speaker 14: In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G.
Speaker 15: A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FBA Financial's earning release, supplemental financial information and this morning's presentation, which are available on the investor relations page of the company's website.
Speaker 16: at www.firstbankonline.com and on the SEC's website at www.SEC.gov.
Speaker 17: I would now like to turn the presentation over to Chris Holmes, F.B. financials president and CEO .
Speaker 18: All right, thank you Rocco. Good morning. Thank you everybody for joining us this morning. We appreciate your interest in FB Financial as always.
Speaker 19: So as we put a bow on 2022, we're pleased with some of the results from the year and we're disappointed with some others.
Speaker 20: But we grew long.
Speaker 21: By 22.3% while holding deposits flat and keeping deposits flat in 2022 wasn't a bad result.
Speaker 22: We make strategic investments in people, systems, and processes that will propel us into the future.
Speaker 23: And we exit the year with strong capital and liquidity positions. With an adjusted ROAA of 1.11%, an adjusted PPP ROAA of 1.58%, our profitability was not where we expected to be, which was disappointing.
Speaker 24: The restructuring of a mortgage segment, our capital liquidity management actions in the second half of the year, and our operational enhancements scheduled for 2023, we feel well positioned with those for a range of potential economic scenarios entering 2023.
Speaker 25: For the quarter, we reported EPS of 81 cents.
Speaker 26: and adjusted EPS of 85%.
Speaker 27: We've grown our tangible book value per share, excluding the impact of AOCI at a compound annual growth rate of 14.8% since our IPO in 2016.
Speaker 28: On last quarter's call, I highlighted that we were prepared for a potentially challenging operating environment in 2023 by reining in loan growth, particularly C&D and CRE, and focusing on liquidity and customer deposits.
Speaker 29: This quarter's performance is a reflection of those near-term priorities.
Speaker 30: Our deposit portfolio increased by $850 million this quarter, or 33.7% annualized, which we're proud of.
Speaker 31: When you exclude the change in mortgage escrow related deposits, true growth is actually $915 million at 37% annualized, which is even more impressive.
Speaker 32: The negatives to that seller deposit growth this quarter were our decline in our noninterest-bearing accounts, which were down $225 million during the quarter when you exclude the effect of the mortgage escrow deposits. And the cost of our interest-bearing deposits, which were up by 93 basis points compared to the prior quarter. While our deposit growth came at the expense of our profitability this quarter, we felt some urgency to increase the deposit balances now as we expect deposit competition to intensify in the coming months.
On non-interest-bearing accounts, we know some of that decline was a permanent movement out of the NIB bucket. With Fed funds being over 4% for the first time in 15 years, we're seeing less in idle funds sitting in non-interest-bearing accounts.
While we expect tough sledding and non-interest bearing growth for 2023, we believe the fourth quarter is defined as an anomaly. And this is always going to be an area of focus for the company. Our interest bearing deposits are gold with...
rates is to be able to continue attracting customer relationships will be long-term high-value customers to the bank. Since we intend to maintain a loan and deposit ratio near its current level, we have to go deposits to grow the balance sheet. So our incremental cost of deposits will be near market rates.
We limited our row portfolio to 8.4% annualized growth after producing 20 plus percent annualized growth in each of the prior three quarters.
We could have grown much more than the 8% by holding on to more of the balances that we originated as we sold $126 million in participation during the quarter.
to keep our loan to deposit ratio in the 85 to 90% range and be conservative on credit until we gain some clarity on which asset classes will be impacted in this economic environment. As we signaled last quarter, our combined C&D and non-owner occupied CRE balances decreased $12 million during the quarter. We're not seeing any negative credit trends in these portfolios to this point, but we're intent on managing our exposure down heading into 2023.
With construction, we've been managing new commitments down since the early part of the second quarter of 2022, but due to funding of existing commitments, the balance has increased over much of the year.
The balance decline we saw in the fourth quarter is the result of our management of commitments throughout 2022 and is the beginning of a trend of declining balances in that portfolio that we expect to continue throughout 2023.
For mortgage, seasonality paired with market headwinds led to a loss of 4.2 million for the quarter. While we felt that this unit was right sized following actions taken earlier in the year, we've continued to reduce the size and scope of the unit.
2023 and we're not comfortable right now getting a lot more precise than that.
One last area that I'll touch on for the quarter is our Commercial Loans Help for Sale portfolio.
We had a negative mark-to-market adjustment of $2.6 million in the quarter, primarily driven by one credit.
The portfolio is down to three relationships with 30.5 million in remaining exposure. We believe that we will see full payoffs on two of those three remaining relationships in January and should exit the quarter with one remaining relationship and less than $10 million of remaining relationships.
As a result of the access taken during the quarter, we entered 2023 with loans, HFI loans, to deposit comfortably below 90% and 85.7%. We also were able to pay down over $300 million in short-term borrowings at a cost of nearly 12% and have approximately $7 billion in contingent liquidity.
$7 million worth of shares following the cloud and our stock price in December .
We would expect similar balance sheet management throughout the first half of 2023. Our actions have positioned the bank for improved profitability and to go on the offensive once we gain clarity on the economic environment.
So touching on a couple of our longer term priorities that we'll continue to prepare for and execute during 2023 are first, improving efficiency and effectiveness of our core community banking model model through a project that we've had going on, we call first bank way. We operate through a local authority, regional present model that has served us well and will continue to operate through a regional present model that has served us well.
efficient and effective customer service costs our footprint, while improving the associate experience. In 2022, we committed significant time and resources to what we wanted our community banking model, business model to look like, as we grow from our base of $13 billion in assets today. Much of the implementation will take place in 2023.
And we're excited about seeing the fruits of that labor.
Second, our local authority model is a weapon that positions the bank for strong organic growth via relationship manager recruitment and lift outs of existing teams and new markets.
We had outstanding results in our Memphis and Central Alabama regions recently as a result of the lift-outs of strong teams, and we continue to hold discussions with bankers across the Southeast, both in existing markets as well as in continuous geographies.
The third, we'll continue to have a dialogue with a small number of banks that we find attractive as merger partners. We position the balance sheet and our internal processes and procedures to be able to act when one of these handful of banks decides to find a partner. The current uncertainty around the operating environment, cloud to timeline, for...
We defensively positioned ourselves over the last half of 2022 to put the company in a position to improve profitability and go strongly on the offensive when we gain comfort with the economic outlook.
We've also undertaken a number of strategic initiatives that will benefit our customers and associates and make us more efficient operators.
We believe this improvement will create a superior return for shareholders through strong organic growth and the capacity to capitalize on opportunities.
I'll now turn things over to Michael to provide more detail on our financial performance in the fourth floor.
Thank you, Chris, and good morning, everyone. I'll speak first to this quarter's results in our core bank. Our baseline run rate pre-tax pre-provision income was $55.5 million in the fourth quarter. Appointing to the core efficiency ratio reconciliations, which are on page 19 of the slide deck and page 19 of the financial supplement.
We had $111.3 million in core bank tax equivalent net interest income this quarter.
Along with that $111.3 million in net interest income, we had $11.1 million in core bank non-interest income.
Finally, we had $66.9 million in bank non-interest expense.
Together, that comes to our $55.5 million in run rate PGP, which is growing 27.7% over the comparable $43.4 million that we delivered in the fourth quarter of 2021.
Moving on to our net interest margin, with summary detail on page 5 of the slide deck, our net interest margin of 3.78% contracted by 15 basis points from the third quarter.
Non-loise basis points of this decline can be attributed to lower loan fees that were result of less loan origination activity.
The remainder of the decline can primarily be attributed to balance sheet restructure and the cost of interest-bearing liabilities accelerating at a faster rate than our yield on earning assets.
Looking forward for our margin, we had a run rate margin for the month of December in the 3.75% range, inclusive of 23 basis points of fees on loans.
Our cost of interest-bearing deposits was 1.97% in December versus 1.67% for the quarter.
From our deposit cost trough in February of 2022 through the month of December , we estimate that we have experienced a roughly 40% beta for our interest-bearing deposit costs. Contractual yield on loans continues to get a lift from Fed rate hikes and was 5.61% for the month of December as compared to 5.45% for the quarter.
While we repriced the existing deposit portfolio in the fourth quarter, which ultimately led to the decline in overall margin, our spread on contractual yield on new loans originated as compared to cost of new deposits raised continues to be in excess of 4%.
With the increase in deposit costs having accelerated as rapidly as they have in the fourth quarter, we are cautious in our forward guidance.
Our best estimate right now for the first quarter would be that we hold margin relatively close to December's margin.
We anticipate mid to high single-digit loan growth for the year, and we will work our funding sources to manage the cost of incremental deposit growth.
We anticipate banking non-interest income in 2023 to be in the $10 million per quarter range.
And as I mentioned earlier, our core banking non-interest expense was $66.9 million in the fourth quarter.
We expect continued growth in our banking non-interest expenses due to higher regulatory costs and inflationary pressures.
For 2023, we are currently estimating mid-single digit growth over the fourth quarter's annualized run rate of 267.6 million.
Moving to mortgage, we posted a loss for the quarter as the impact of rising interest rates combined with seasonality drove down demand of rate locks by 31% quarter over quarter.
subsequently reducing revenue.
While we had hoped that we were done with our restructuring, the continued reduction in volume created additional evaluation of staffing and organizational structure in order to position ourselves to return to operational profitability.
as seasonal headwinds dissipate.
While we do not expect Q1 to be profitable, we would expect minimal losses if the environment holds in this current state.
Moving to our allowance for credit losses, we saw our ACL loans decrease by 4 basis points this quarter and we recorded a release of $456,000.
Economic forecasts are deteriorating slightly from quarter to quarter offset by improving overall portfolio metrics and a lower required reserve on unfunded commitments.
We have continued optimism for the long-term health and growth of our local economies, but we're closely watching inflation that we're experiencing and the increasing conviction of many economies that we will soon enter a recession.
If conditions do not change, we would anticipate maintaining a similar level of ACL to low yourself for investment over the near term.
And with that, I'll turn the call back over to Chris. All right, thanks, Michael. Again, we are a quarter pleased with how we're positioned and prepared for what's coming.
Thanks for the prepared remarks and we will look forward to questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star and press star one on your touch-tone phone.
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Today's first question comes from Matt Olney at Stevens Inc. Please go ahead.
only at Stevens Inc. Please go ahead. Hey, thanks. Good morning everybody.
good morning good morning man
You mentioned the deposit growth would continue and be relatively in line with the loan growth.
Any more color on what the the market rates are you're seeing for the incremental deposit growth and in recent weeks?
rates are you're seeing for the incremental deposit growth in recent weeks.
Yeah, good morning. Yeah, I mean, we saw kind of the time deposits depending on term coming in around 350 basis points and that's kind of an 18-month weighted average term there. And then Money Market came in …
market rates below Fed funds, but call it.
60 to 80% of fed funds is where we're seeing money market rates coming in. So really right at market there.
is where we're seeing money market rates coming in. So really right at market there. Like, okay. No.
Thanks Michael. And then on the non interest bearing deposits, just thinking about your prepared comments Chris, it sounds like you expect continued pressure on those balances but perhaps not to the same degree that we saw in the fourth quarter. Did I get that right? And any more color on why that would be?
Yeah, I don't really, yeah, I think you heard it right, but let me shed some additional light on it. I think, yeah, I don't think that they'll continue to move down like they did in the fourth quarter. As a matter of fact, I think they'll likely stabilize to a large degree.
But I do think that that's going to be a point of pressure. I mean, you've seen it.
Frankly over the last couple of years, grow pretty easily. You didn't even have to do much. The balance just grew and.
you know, if you go back to when we were having these calls in the latter half of 2020 and throughout 2021
there was a common question of how much of that you think is sticky, how much of that you think is real, and we always answered the question, and I know most others did too, we're not sure, we don't really know, and so the fact of the matter is we still don't really know. We knew that some of it would leave, you know, you're seeing...
consumer accounts finally begin to return to the balances they had in them pre-COVID. So we just think that's going to be a tough decision to make.
tough market for non-interest bearings in 2023, but we also think that especially the last half of the year, you begin to see balances leave those and we think that a lot of them.
I guess I call it the low hanging fruit for that you knew would likely be leaving probably left in the fourth quarter or I'd say in the second half of the year. But I'm also qualifying that by saying we're not sure to be honest with you.
Understood. Okay. And just finally, as far as the outlook on the net interest margin, Michael, you mentioned I think a few things. I think you mentioned kind of the incremental spread there in 23 would be similar to December level. Did I catch that right? And just remind me of what you saw in the last slide. Sorry, Michael.
deposit is coming in over 400 basis points. If you kind of think about that 350 number, I just pointed you to on your deposit cost question, and I'd say that new loans are coming on that 750 plus range.
Got it. Okay. Thanks, guys. Hey, Matt. Hey, guys.
I would just add this on the deposit side. One of the things, we did feel a need to get out front on deposits. And so obviously we...
we had a big deposit quarter and it was expensive and we expected it to be, especially as we got deeper in, but if you look at where we were headed from a loan to deposit ratio and sort of the way that our arrows were trending with three quarters, 20 plus percent loan growth.
and knowing that deposit growth was going to get difficult. And also remember we did have a reduction back in July of one account that we didn't renew that was a $500 million plus account, actually plus. And so with all that, we felt the need to really get out front. And so we knew it'd be expensive and we can.
Thank you, Gary. Very good. Thank you.
Ladies and gentlemen, our next question today comes from Catherine Wheeler at KBW. Please go ahead.
Thanks. Good morning.
Thanks, Catherine.
Chris, you talked a lot about efficiency initiatives that you got to help profitability this year. Can you give any guidance on just core bank expense gross outlook excluding some of the mortgage noise? And then separately, maybe kind of thoughts around efficiency initiatives that you specifically have within mortgage as well. Thanks.
Yeah sure Catherine.
So, a couple things. When I talk about efficiency initiatives,
Yeah.
Again, remember also, historically where we're coming from, we went from $6 billion at the start of 2020 to $13 billion today in asset size. There were two acquisitions that we closed in there, both in 2020.
One was converted later, but we closed two acquisitions in 2020, remotely, by the way, during COVID. And then we...
went through the $10 billion barrier. And so with all that, we just said, you know, it's a good time in 2022 to be able to really do a deeper dive on our core banking model, make sure that it's scalable. We refer to ourselves as a scalable community bank and so make sure that we've got the right scalability, we've got the right...
frankly is not intended to be an efficiency ratio in terms of the efficiency exercise in terms of the efficiency ratio. That's not why we did it. We did it for scalability purposes and to make sure that we had the model right.
But one of the outcomes is we're going to gain some efficiencies from it. And so we frankly haven't spent a lot of time quantifying those. That being said, we're looking at a 6 to 7% type of expense.
growth over the fourth quarter as we go into next year.
And we feel pretty good about that. On the mortgage front, the second part of your question, we...
We feel pretty good about that. On the mortgage front, the second part of your question, the second part of your question,
You know, we've been through, I'd call it two phases of expense reduction there and at this point it's now sort of also...
I'd say a very vigilant approach to expenses in that part of the business.
And when we look in, again, we, I said.
It's been hard to try to forecast mortgage. It still is hard. We're forecasting it to have a positive contribution next year.
Frankly, not comfortable saying much more than that other than we'll experience the normal seasonality. We'll be a little lower in the first quarter, a little lower in the fourth quarter, but the second and third quarters should be.
You know should that's where we should really see a higher level of contribution. So I don't know if that helped you on mortgage other than the fact that it's You know given where it is It's a constant expense
initiative for us. So your comment on the 6 to 7 percent growth rate.
For that, are you saying I should take this fourth quarter 22, you know, ex-mortgage expense base of about $67 million?
then grow that at six to seven percent and that's my annual expense number for twenty three
That's right, Catherine. If you're basically, when I was in my common sense, you take that $67 million and annualize that and then grow it off that basis.
6% to 7% is where we think we'd end up. I will say there's some regulatory stuff in there. The expense has gone up and some of that as well.
is where we think we'd end up. Yeah, I will say there's some regulatory stuff in there. You know, FGS has had expense going up and some of that as well. So, a little bit plungeable, but that's...
It should be the range. Got it. And then with that, should we assume your...
You're still growing, you know, at a slower pace than obviously you were last year, but still I feel like you've still got kind of an expectation for balance sheet growth into next year. And if that's coming.
It's still an incremental 4% ish Margin is given your Kennedy simber NIM guide and the difference in your deposit costs and new word yield
I mean that 67% expense charts is still coming with.
NII growth in 2023, is that correct?
You're right, you're right, yes.
Great. And then do you have flexibility in your expense plan if the NII growth comes in less than expected? I guess the question is how much flexibility do you have to kind of control that operating leverage if the margin compresses more than expected as we move through the year? Yeah, so we do have some levers.
Catherine, we feel like in a couple of places on both sides of that equation.
And again, that's what we were trying to create in the fourth quarter, was try to give ourselves a little bit of some levers that we could pull on the net margin side, and then we also have levers that we pull on the expense side.
Thanks for the commentary.
Thank you and our next question today comes from Brett Rapetent with Hozni Group. Please go ahead. You're welcome.
from Brett Rapatone with HOGVY Group. Please go ahead.
Hey guys, good morning.
Good morning Brett, how you doing?
I wanted to use a football analogy, Chris, and a college football analogy. You guys are usually in the playoffs in terms of profitability, but obviously mortgage banking has been a stymie to that here in the past year. My question is, you're obviously in a...
have in place could get you back in the playoffs.
Yeah, I like your analogy, by the way. And so I'm going to give you one back. Man, at the risk of, Michael was pointing to his University of Alabama socks, which he has on. And so at the risk of...
I'll keep this short, but I use an analogy. I do have, I do orientation for all of our folks. Every single new hire, I spend about two hours with all the new hires going through culture and mission and values. And Brett, I use a football analogy. I use a college football analogy because that's big and our part of it.
of Alabama to play football. Because we go to, that's exactly what I said, I said we compete for the national championship every year. Okay, we go to the college football playoff almost every year. We expect to be there all the time. And realize that's what you've just signed on for when you took a job with First Banks.
I'd say another term I use, I'm going to refer to the book Good to Great, is confront the brutal facts. I use that one internally a lot. And I would say our internal talk is a little tougher than you missed the playoffs this year. You know, you need to confront the brutal facts that we haven't had a good year in terms of profitability.
doesn't miss the playoffs. We do not.
We also don't...
like
I tell them unless we're in the top quartile, then it's not acceptable performance. And so,
Now to a couple of specifics, mortgage has been a great contributor for us. You only have to go back to 2020 when we had a hundred and five million dollar contribution.
from mortgage and so it's been a great contributor for us. It's been an important additive for us. We do not have to have mortgage and we're very specific. You'll notice a lot we talk about the bank segment a lot. That bank segment actually had a pretty good year.
And if you look at some of the numbers on the bank segment, again, a pretty good year there, and we would be certainly well in the top half of our peer group. Probably top quartile of our peer group is the bank stand alone.
We had a significant, more than a 20 cent EPS, close to a 30, you know, 20, 20, 30 percent impact, 30 percent impact of mortgage negative this year. And.
and we've made some changes there, and we'll continue to make a few more. So we don't have to have mortgage to be that 1.5% ROA, but with it, we expect to be actually higher than that. So that's the way that we view it.
That's a lot of gray color. The other thing I wanted to make sure I understood was you obviously linked quarter improve, the liquidity, some extra cash on the balance sheet at the end of the quarter. You talked about managing it similar going forward. Yes, that's a very low- 1958 Estate I got done.
Maybe go into the interplay between the seasonal funds increase and how much that might come back down and you know if you're expecting any other I know it's tough in this environment than the other makeshift change to affect what you do with the balance sheet in the near term Yah just…
Michael, I'll let you come in. I'll make a couple of comments. So we had some Federal Home Loan Bank borrowings, actually $540 million at the end of the third quarter. We paid that down significantly by the end of the year.
We subsequently, by the way, paid it off, and so it's zero today. That's post the end of the year. And so we expect to, we have always funded our balance sheet through customer deposits.
And we intend to continue to do that.
On the public funds, they usually actually stay pretty robust through the first quarter. And so it'll be late second quarter when they start to pay down some, and they'll pay down into the third quarter, but then start funding up usually at the end of the year.
And so that's the cycle we see, and we manage around that.
Michael's saying, okay, I'll pick up.
Yeah, that's great, I appreciate it.
All right. Thank you. Our next question today comes from Steven Scouton with Piper Sandler. All right.
Hey, good morning everyone. I wanted to follow back around the funding cost a little bit and just...
I'm curious one if you could remind us kind of how much of the public funds deposits are more directly indexed and you know maybe more like a hundred percent made on those public funds versus some that are maybe you know longer term or tied to different metrics and then kind of what you expect to see in terms of incremental
interest-bearing deposit betas. I think you said Michael we were looking at 40% cycle of the date so far and just kind of where you think that can play out maybe
Yeah, on your core customer deposits in particular.
Yeah, on the public funds first and Stephen, I'm sure I don't have exactly how much of that is tied to an index. But I will say this, it's a mixture, we have a mixture in there of even, you know, non-interest bearing some index.
a little bit of time and some that sits in a non-time instrument that is not indexed. And the bulk of it would be in the non-time.
not indexed.
as well as the non-time index would be the bulk of it. There's not a lot in...
There's not a lot in time, but there's a little bit, and those are all negotiated over time. And frankly, that'd be the least, we don't have a lot of time, but there's just a little bit.
On the Go4 beta, the fourth quarter, obviously with our deposit raise, you saw betas accelerate significantly. Over the cycle, if you look back through February , the first quarter, we saw the first quarter
where we came to that kind of 40% range on interest bearing.
low 30s on total deposits. Yeah, I would expect that, you know, we'll see in that mid 40 beta range kind of as we look in 23, but it is highly dependent on really what our peers do. We feel like we can maintain this level.
and recognizing deposit costs are going to go up. I will say on index, we don't have a whole lot of stuff that's indexed 100% to any rate. Just
As Chris mentioned, we don't have that exact number, but it's not 100% one-to-one. Fed funds goes up, deposit costs goes up on the accounts. There's not a ton of that stuff. So, while it is a percentage, it varies. And we have certainly seen deposit costs go up. Expecting to incrementally move higher, but...
Definitely right type will kind of settle in here with the Fed and we'll get a normal operating environment.
Yeah, okay, that's helpful. And I guess overall, if I'm listening to your comments kind of holistically, it feels like you guys think maybe you, you know, gross maybe put you behind the curve on deposits to some degree throughout the year with really strong growth, and this quarter may have put you ahead of the curve relative to peers for the rest of 23. Is that the right way to think about it?
Well said. Great.
Great. And thinking really briefly about expenses, I noticed other expenses were up a good bit. Is there anything notable to call out there or is that some of the regulatory costs, Michael, that you mentioned is kind of embedded in some of these numbers?
All right.
Nothing too noticeable. I think the difference in the third quarter versus fourth quarter is kind of a pencil franchise tax rolling through there. Sometimes a major piece, it wasn't in the third quarter.
But in the full folder.
Gotcha, gotcha. And then maybe just two quick ones left for me. One on the participation side, sound like that was more about balance sheet management than risk management, but maybe a little bit of both. Are there particular categories you're trying to participate out more so than others? Maybe that's C and D and C. Are you like you spoke to or is that?
Is that indeed more just about controlling the pace of growth?
Yeah, it's total balance sheet management. If you think about it from a risk management side, the folks that we're going to participate to are going to be friends of ours, and so we're not going to participate in anything that's going to create credit risk. Well, we're never going to knowingly participate in anything that's going to create credit risk for them.
So it's all about balance sheet management for us. And the bulk of that would be CRE.
Occasionally we can do some construction. Construction is harder to do a participation on because it's lines, withdrawals against it, and it's just a little more work on the participation side versus a CRE versus CRE. We're usually participating with either peers that are our size or...
There's one or two that are quite a bit larger than us that are good friends that we would participate with regularly, but the rest of them are smaller than us community-type banks, and frankly they love it if they can get that CRE when we're willing to sell it down.
Got it. That's helpful. And then maybe last thing, just on the share repurchase, I know you said about 7 million in the quarter. You've had some insider buys as well. Stocks a little lower I think even than where you bought back that 7 million, if my math is correct, in the quarter. Do you become more active on the repurchase at these levels?
But we do have the capital to be able to do it if we need to do it. And so it's a tool that we'll use.
Yeah, very helpful. Thanks guys for all the code. Appreciate it.
Thanks, Dave.
Thank you. Our next question today comes from Kevin Fitzsimmons at VA Davidson. Please go ahead.
Hey, good morning guys. How are you?
Good, Kevin. Hope you are.
Good, good, thank you.
You know we've had a number of questions on this But I just want to make sure I'm thinking about the right way. So the deposit growth
was really a very accelerated effort in this past quarter and then going forward you expect, it's put you in a position that now you're expecting more deposit loan growth to be kind of in line and thus keeping the loaner deposit ratio roughly where it is, is that correct?
Yes, Kevin, you're thinking that correctly.
When we ended, we're just over 91% loan deposit ratio in the last quarter. We want to be in that 85 to 90% range, so it doesn't bother us to get up to that 90%. And so you'll see it, we'll manage it within that range. And so what that means is we'll be growing loan deposits as we're going along portfolio.
It is and so we'll be we'll be but we again we do feel like we gave ourselves some room. And we also I mean.
Because we paid, we don't have short term, we basically paid off any short term borrowings and we feel like we're in a really good position.
Okay, and as far as the margin, how to think that through. So I appreciate the color on the 375 December margin. And I think what was said was, you're probably gonna
hold the margin roughly at that level. If we're looking beyond that and just assuming we have.
few more hikes here of You know 25 basis points is it?
Is it reasonable to think about the margin just grinding lower from that level, but the balance sheet growth you alluded to before still able to drive dollars of NII higher throughout 2023?
think about the margin just grinding lower from that level, but the balance sheet growth you alluded to before still able to drive dollars of NII higher throughout 2023. INAUDIBLE
As we move forward with our budget and look into the year,
You know, we've traditionally said we'd be 10 to 12 percent loan growth organically, you know, for the year. We could be, you know, could be a little less than that, but we'll, you know, we certainly anticipate a healthy, some healthy loan growth during the year. We've been getting a good spread on that. I do think loan growth is going to get harder.
That way we don't see the NIM grinding significantly below this. It could give us a little bit of range there, but as we look out in the year, we're going to try to...
we're going to try to hold near at least where we are, again, with a little bit of flexibility, range for flexibility there. Got it. And just your comment before, Chris, about lung growth. So really, the reining in on lung growth was much more
proactive in terms of participating out and letting some of that C&D and CRE run off. But as far as core loan demand and the loans you want to book, you haven't seen a dramatic fall off in that yet.
No, we really haven't. We have seen it slow.
late in the year. We did see loan demand slow some. It's slower as we start the year as well. So I do think.
all the things that the Federal Reserve has been
kind of accomplish, I think some of them they are, because we do see less demand than we did six months ago, or even three months ago in terms of loan demand.
Now that being said, like I said, if you take
If you add those dissipation back to the balance sheet, we grow 14% in the quarter on an annualized basis. So that's still pretty strong. But we were 20% plus the previous three quarters.
All right, thanks very much.
All right, thanks very much. All right.
Thanks, Kevin.
And ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then one.
Today's next question comes from Freddie Strickland with Jenny Montgomery Scott. Please go ahead.
from Freddie Strickland with Jannie Montgomery Scott. Please go ahead. Hey, good morning.
What ready?
I am going to clarify one more time on an earlier point. It sounds like you are confident you can continue to grow deposits and manage loan growth accordingly. So we really should not see wholesale funding increase over the next couple of quarters. Is that right? Yes, I am confident that you can continue to grow deposits and manage loan growth accordingly.
Well, let me put it this way. I think your premise is correct. Because our intent is to try to grow loans and deposit at about the same rate. Now, we do have access to the wholesale funding, but we want...
Our view is we want to be able to use that to improve our profitability. We don't want to use that because we have to have the funding in order to fund our loan growth. And so we want to use it as a tool, not as something we have to rely on because we get overextended. Got it. That makes sense.
or do you already feel like you've got more than enough collateral that that's not really as much of a consideration.
Well, I'd say it's always a consideration because, almost always.
because you like to keep yourself.
as
as flexible as possible. And so we do think about assets for pledging, how much free collateral we have, and that causes us, for instance, how many reference to us.
not keeping some public funds that required collateral, because we knew we could go get the money at the same rate or cheaper from customers, just by increasing customer deposits.
We take the approach of we'd like to have as much free collateral as possible again because we like to be in a position to be opportunistic when opportunities present themselves.
One other thing and I haven't talked about this in a long time, but back when we going back three or four years ago we used to talk about all the time our balance sheet is
almost 100% direct customer funding and direct customer loans.
We utilize, we have almost no brokered CDs on the books. We have almost no, only brokered CDs and internet deposits that we have on the books came through acquisition and are still there.
and there are less than 2 million, I think. So less than 2 million in time deposits. And so we just don't utilize those in broker deposits or internet time deposits. We use direct customer assets and direct customer funding, which again, we think.
is how you build value in your franchise is by building customers.
And so when we think about wholesale...
The times that we're tapping those channels is like I said, it's just to improve our profitability not because we have to do it.
Got it. That's really helpful. And then just one last question from me. Just curious, in terms of the positive competition in your markets, are you seeing more from bigger national competitors? Is it smaller local banks? Is it a mix of both? I'm just curious whether...
One type of bank is a little more aggressive than another. Yes, it is. You know, I said it comes in pockets. We've seen a couple of products, one particular product I guess, but now I have a particular product. Have I have a particular pair that comes out, basis for by default for acoin a Heidi.
from some of the big banks that has some attraction to it, but that's it from I'd say from the bigger banks.
And they're still not very reactive as you move money away from them.
the regionals at in, I would say they're there.
almost versus size of bank, it's almost more profile of bank. Those banks that are
I call them high performing rapidly growing banks, are really competitive on the deposit side. Because they're in the same position that we are. They're growing their franchise, and they're growing their business, and you can't do that without deposits. And so they're aggressive. And so I'd say it depends more on the profile versus the size.
an ad, I mean literally an ad for folks running five and a quarter CD campaigns, folks running a 5% money market, and it'll be you know I'll call it a less than a billion dollar bank that apparently needs the funding. But we see we do see quite a bit of that from small banks.
Interesting. I appreciate the color guys and thanks again.
All right, thanks, Ben.
Thank you. And our next question today comes from Jennifer Dunbar at Truist Securities. Please go ahead.
Thanks. Good morning, everybody.
Good morning, everybody.
Your asset quality has stayed really, really strong. I'm just curious, Chris,
what categories in your loan portfolio concern you most as...
if the economy weakens significantly here.
Yes, I'd say three things.
you know, construction and CRE would be the ones that would...
concern you most, certain pockets of the CRE. I say construction because it's a risky asset and you can get surprised but...
You know, our constru- we- we-
Uh...
I just go stick my head on the credit folks, Greg Bowers especially, often just to go, hey, how we feeling? You know, how's your day going? And so and I asked about construction and we know our construction customers well. And so we cut the
While I think that's probably a bigger concern for the industry, and I say all the time, every bank thinks their credit's great and they're not going to be the ones. And I always say, I didn't come up on the credit side or the commercial side of the bank, so I don't say that.
That being said, I know a lot most of our big construction customers and we've had them for a long, long time and we feel really good about them. So frankly, I don't worry about it quite as much for our portfolios as I do for the industry. I do worry about pockets of commercial real estate because there are things that can, you know, office can get, again, we don't have a lot of office, but I think the office space could get.
But again, the big stuff we have we feel quite good about.
The other one I think about is we remember we have a specialty portfolio in manufactured housing. And so I watch past dues on that quite a bit. I watch anything else from a non accrual standpoint. And again it's performed as the gas.
If you go back to the acquisition of Clayton, we've been in that business for 14 years. And before the cycles hit, they'll go, well, here's what's going to happen to past dues, and they've been calling it right. And so past dues are up a little bit, but they're not out of line with where they were back in 2019 or so.
for FBK.
Yeah, there's a slide in the deck. On our CRE, we've got about 23% of our CRE exposure is office related.
You know, we don't have.
We don't have any high rises in downtown Nashville, downtown Memphis, or any other downtown right now. At least I don't think we do. I don't think we have that. We do have some smaller office buildings.
with really, really good clients that are sitting out there.
But again, we feel pretty good about that. It's not, we don't have big, and we don't have pieces of.
$250 million office buildings. We still have those in our portfolio. It's gonna be, again, direct to a customer that we know we originated, and it's gonna be a manageable balance is what would be in that office portfolio for us.
Okay, and one last question if I could. What kind of economic scenario is
is assumed in your loan loss reserve as of the end of the year.
Hi, Jennifer. I actually have a mix between baseline and F2.
It's not a 75% baseline, 25% S2, but there's some qualitative in there as well.
The economic scenario has changed pretty rapidly there between third quarter and fourth quarter.
Thanks so much. Yeah, and Jennifer, one thing that we haven't touched on, I don't think there were any questions on this, of course we did have a small, but if you look at our loans of HFI, we actually had a very small provision.
which would have added a small amount to our ACL, we did have a negative provision or a provision release related to our unfunded commitments and those unfunded commitments, again we've been managing those commitments down particularly in the construction area and that's what led to the small release.
And we were comfortable with that, even though we've tried to be absolutely as conservative as we could be in managing the loan portfolio and in managing that ACL. And we've kept it at 1.44% of loans held for investment, which we, again, find to be...
quite high actually in terms of if you look at it relative to loss experience and so we we still we feel pretty good about where it sits.
Great, thank you.
Great, thank you. All right, thank you.
And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Holmes for any closing remarks.
Once again, thank you very much. We appreciate you being with us. We always appreciate your interest in FD Financial and Operator at this point.
we're finished. So thanks very much.
Thank you sir, this concludes today's conference call. Email this connection line and have a wonderful day.