Q1 2023 FB Financial Corporation Earnings Call
Good morning, and welcome to FB Financial Corporation's first quarter 2023 earnings Conference call.
Hosting the call today from FB financial is Chris Holmes, President and Chief Executive Officer, Michael <unk>, Chief Financial Officer, and Greg Bowers, Chief Credit Officer.
It will also be available for questions and answers.
Please note financial's earnings release supplemental financial information and this morning's presentation are.
Are available on the Investor Relations page of the company's website at <unk>.
Www Dot first bank online dot com and all of the Securities Exchange Commission's website at Www SEC Gov.
Today's call is being recorded and will be available for replay on FB Financial's website, approximately an hour after the conclusion.
Of the call.
At this time, all participants have been placed in a listen only mode.
The call will be opened for questions. After the presentation.
During this presentation at the financial May make comments was constituted forward looking statements under the federal Securities laws.
Forward looking statements are based on management's current expectations and assumptions.
Subject to risks 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 are beyond that'd be financial's ability to control or predict.
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 differ to materially differ from expectations.
And in FB Financial's periodic and current reports filed with the SEC.
Including FB Financial's, most recent Form 10-K.
Except as required by law FB financial disclaims any obligation to update or revise any forward looking statements contained in this presentation.
Whether as a result of new information future events or otherwise.
In addition, these remarks may include certain non-GAAP financial measures as defined by SEC regulation G.
A presentation of the most directly comparable GAAP financial measures.
Reconciliations of non-GAAP measures to comparable GAAP measures is available on our financial's earnings release supplemental financial information and this morning's presentation.
I would now like to turn the presentation over to Chris Holmes, FB Financial's, President and CEO . Please go ahead.
Alright, Thank you very much.
Good morning, everybody. Thanks for joining us. This morning, we appreciate your interest in <unk>.
The financial and as we get started this morning, just a couple of them.
Notice that aren't on the quarter first I will say that our thoughts are with our colleagues at old national.
And just knew that we weren't nothing but the best for you guys in our thoughts and support it with you.
Going forward in the face.
Difficult circumstances, but we are with you look forward to try and pull that strategy.
Second thing I would like to say is.
I'm going to ask.
Questioning to go easy today.
As Michael birthday, as our CFO .
And so oh.
Happy birthday to Michael.
All right well that I'm going to get into.
The financial results for the quarter and.
We reported EPS of <unk> 78.
And adjusted EPS of <unk> 76 cents.
We've grown our tangible book value per share excluding the impact of that Youll see yes.
Compound annual growth rate of 14, 5% since our IPO.
We also grew deposits by 12, 2% annualized during the quarter have on balance sheet liquidity to tangible assets.
Percent.
On balance sheet liquidity to uninsured and uncollateralized deposits up 49%.
$6 8 billion.
Available contingent funding sources, which is 2.1.
Those uninsured collateralized deposits and.
Two six times total coverage when you combine the old balance sheet. Thanks.
Contingent funding sources.
As of quarter end, we had tangible common equity to tangible assets of $8, 7% common.
Common equity.
Tier one capital of 11, 3% and total risk based capital of 13%.
Yeah. We work to include a OCI in those regulatory capital ratios.
No. We certainly don't have certainly we're required to do.
Our common equity tier one capital would be approximately 10%.
And that's versus a well capitalized.
Six 5%.
And a total risk based capital would be approximately 12, 3%.
Also.
We have no securities that are classified as held to maturity. So we have no unrecognized losses on the investment portfolio buried on our balance sheet.
We have no current liquidity needs that would result in the sale of any securities at a loss, but if regulatory capital rules change or if we were required to liquidate the entire securities portfolio for so much foreseen reason, we could do that.
Without requiring any additional capex.
Well last quarter's call I referenced our work in 2020 to restructure our mortgage division slow loan growth in the second half of the year and raise significant deposits in the fourth quarter, putting us and strong capital and liquidity positions and preparing the company for a range of economic scenarios.
We certainly didn't expect two of the three largest bank failures in history to happen a couple of months later.
But the turmoil experienced over the last five weeks has supported our cautious approach to managing our balance sheet.
Our continued investments and strong finance risk and operations personnel.
Elevated risk environment of the day also validates the value of our community banking model that allows our customers to have strong personal relationships with the decision makers for their accounts.
Customer philosophy, and fortress balance sheet approach when executing with discipline and results.
No one customer on the other side of every lending ship lending relationship.
It also gives us financial flexibility with the unexpected happens.
As the Silicon Valley and signature events were unfolding they call. It the same anxiety of first bank.
That I think all bank experience to some extent.
We reflexive Lee went into crisis management mode with frequent communications with the board and executive management.
A closer review of data funding flows and regular check ins with our regional presidents regarding a larger customers. What we found after a week or two of this heightened activity whether the bank was founded.
As I've often said before.
Our balance sheet is constructed with great customer relationships that make up every loan in every deposit.
We know our customers and they know us as a result of our as a result, our other sports pundits on CNBC that we're forecasting to novartis of the regional and community banking system.
For what seemed like 45 minutes out of every hour.
Many of our customers came to us for money theater or larger regional banks, the talking heads expected them to fleet too.
And they have little interest in going back to our customer service experience commensurate with being nothing more than an accounting number at some of those large banks.
We certainly continue to keep a finger on the pulse of inflows and outflows if customer funds.
But we feel good about our liquidity position.
We also understand that this downturn.
And an industry wide focus on liquidity could result in a credit crunch, that's likely to result in losses.
This is boyd.
We've not found any disturbing trends in our portfolio.
Our customers are cautious, but generally feeling okay in our asset quality numbers continue to reflect that.
With net charge offs for the quarter of two basis points, despite them and add results to date.
Were even more conservative with our loan portfolio typical as reflected by our ACL to loans, increasing by four basis points. This quarter end and are only growing our loans by 3% annualized.
We're not eager to aggressively grow the asset side of the balance sheet until we can understand which sectors are due for outsized losses.
At this point.
Sure broader concerns about CRE office loans and.
Having increased our monitoring of that portfolio as a result, I will let Greg discussed that portfolio.
More later in the call, but we certainly are we generally feel okay, where we are currently.
We've also been actively managing our overall CRE and C&I portfolio down since April last year, while commitments made in 2021 in the first quarter of 2022 have continued to fund up since then.
New commitments in our construction portfolio are down by 16% year over year or $260 million.
And we expect outstanding balances to decrease over the coming quarters.
And so given our desire to Kurt to Concertedly manage our portfolio.
Liquidity position in the near term, we intend to focus on some internal improvements.
Until the outlook changes.
I'm pleased with the return metrics that we've delivered over the past few quarters, where it'll kit or having peer leading profitability.
I've mentioned, the first bank wide initiative over the past call or two in this environment provides us with a perfect windows is going to continue to focus managements attention all the successful implementation of that plan.
As a reminder.
Great ways, our effort around documenting and implementing best practices and procedures that will allow us to more effectively scale, our local decision, making community banking model.
We believe this project enhances the customer says getting experiences experienced that experiences by enabling us to deliver exceptional customer service more consistently and more efficient really focus our resources towards that goal.
This puts some standards in place that will create efficiencies of scale as our balance sheet grows.
As far as M&A goes downturns can result in some training and some transformational transactions and we could see that being the case in the industry over the coming quarters and into 2024.
However, we don't necessarily see that being the case for us our goal is to be well positioned to capitalize on the turmoil and displacement of customers and talent from competitors undergoing these transformational transactions.
Also want to put ourselves in position to be the partner of choice.
The smaller community banks decide they want to seek a partner however.
We have plenty to focus on with our first bank way initiatives and we don't want distractions that come with acquisition activity.
Summarize all of that.
We're constantly checking the gauges, but believe that we are positioned well.
For the near term from our discipline over the last three plus quarters. We're using this time of more things added to continue our internal improvements with the intention of returning to purely profitability.
Growth that were accustomed to it and do that sooner versus later.
I'm now going to turn things over to Greg to provide an update on credit before Michael gives detail on our financial performance for the first quarter.
Thanks, Chris I'll start out by reminding everyone of what I've said on this call about three years ago today.
We are at our core a community bank that makes loans to support the economic activities of our community.
In our conversations in the past we've highlighted our local operating model focused on relationships with our customers. This strategy at its heart means dealing with local people, we trust and know to be good operators our portfolio reflects that bias.
We believe that has helped our credit results in the past and we'll continue to do so in the future.
We believe and conservative underwriting standards with a focus toward cash equity or skin in the game and personal guarantees we've long focused on keeping hold levels lower rather than higher we're trying our best everyday to underwrite for the long term through the cycle.
Counting on the greater Fool theory, our strategy has always been about end market lending, we've never been big on buying into shared national credits. It just doesn't match our strategy of relationship lending.
Excuse me.
We want to thank the company the owners and its employees that was all true then and it remains true today, we still feel good about our lending philosophy and underwriting process.
Moving to the slides on slide nine you can see it outlines our overall portfolio, which we believe continues to be a good mix of industry segments and product types, you've seen our credit metrics, which continue to reflect good results from past dues to NPA as well get the question in times like this about whether we have changed our underwriting.
Criteria. For example have you raise debt service requirements or loan to value Maximums. Our answer is not really that's more of what you hear from big banks that run Atlanta business model, where they get their customers whiplash, turning the spigot on one quarter and after next.
We simply work with our markets and explain our thoughts that we have a cautious outlook.
Arent looking to grow the book and as they change the focus of their teams to deposits not loans.
All the while trying to reserve our dry powder for our long term relationship customers that are the reason for our success.
That's easier said than done so what you see in the numbers is the result of that thoughtful process. Our commitments are way down over the past couple of quarters as Chris pointed out, but as you would expect balances have continued to increase as deals previously committed fund up our analysis is that we will see that begin to come down over the <unk>.
Few quarters as properties rotate out.
Switching gears.
For this quarter's presentation. We have included a page on our office exposure.
Given our focus on that property tag and the concerns that we've heard from the analysts and investor community.
Those of you that have been in Nashville lately noticed how many buildings are under construction here in the CBD like I was saying goes so many cranes that theyre going to call. It the state bird before alone.
This activity is great for the city and the region's economy as we benefit from the large inflow of companies and associated jobs, but let's make something clear we're not financing those projects frankly, we didn't even participate in the construction of the new building.
So we are moving into this year not because it wasn't a good deal or not a good developer. It has both especially a great tenant right, but it was just not our type of deal given its size not our risk appetite.
You can review this slide for yourself, but let me highlight a couple of things about our portfolio.
Office non owner occupied CRE accounts for only 4% roughly of our total loans outstanding.
These are spread across our footprint with the largest concentration being in the Nashville region.
Most of it in completed projects with only four is still under construction accounting for less than 15 magazine.
Yes.
As part of our normal portfolio management asked our teams to put together a list of office loans with commitments greater than $2 million.
Which if you think about it is a very big office right.
It is interesting to see the granularity highlighted by others.
This showed a total of 48 loans with outstanding balances ranging from a low of $1 $7 million. The largest has a balance of $26 million in the next largest is $20 million.
Million frankly is actually a loan secured by four different buildings.
The next five are in the $12 million to $16 million range and everything else is less than $10 million. I mentioned. This just to highlight this reflects my earlier comments about the type of lending that we do most of these are just smaller projects owned by local real estate professionals.
The average loan to value on this set of 62% demonstrating our goal of having our borrowers have a significant amount of skin in the game.
With sponsors who guarantee the loan.
We looked at the interest rate on the entire portfolio is down 58% is fixed 42% floating.
But also with maturity risk found at 7% mature only 7% mature through 2020 for.
Interest rate increases have impacted everyone of course, but so far no problems.
You'll never hear us say that our portfolio is perfect. There's no such thing I've been doing this for about as long as <unk> has been a lot, but we're proud of how it has fared so far and we'll continue to manage it to the best of our abilities.
I will also touch briefly on our commercial loans held for sale. We had only two relationships left balances less than $10 million, we feel adequately marks on that so any additional gains or losses until sale or maturity there should be relatively inconsequential. We appreciate the work Scott Maguire.
Special assets has done to work this down over the past few years.
I'll now turn that over to Michael Mitzi.
Sure.
Thank you drag and good morning, everyone.
I'll speak first to this quarter's results in the core bank, our adjusted pre tax pre provision net revenue from the bank with $45 9 million showing growth of 12, 6% year over year, but down 15, 8% from the prior quarter as deposit costs outpaced yields on earning assets and loan fees.
Due to lower origination volumes.
Moving to our liquidity position and deposit base. We've added some additional disclosure in the deck this quarter in the aftermath of S E signature.
And as the deck shows we have on balance sheet liquidity, consisting of cash and Unpledged securities of $1 6 billion. We have an additional $6 8 billion in brokered CD <unk> discount discount window funding available to us.
And for tax purposes, we have a $2 3 billion of real estate loans held at our real estate investment Trust.
Were we to fill the need we couldnt move they're going back to the bank overnight to create additional federal home loan bank borrowing capacity.
There is also the Bts P available and although we have not engaged with that program because we haven't felt the need to we could if we if we really need to and we feel comfortable in our current and available sources of liquidity.
Moving to our deposit portfolio in total our deposits grew by 12, 2% annualized or $327 million.
Seasonal inflows of public fund accounted for 313 million of that inquiry, leaving nonpublic funds effectively flat.
As a reminder, that's public fund balances tend to begin building in November peak in May and decline June through October .
A new line in the supplement this quarter and our estimated uninsured uncollateralized deposit at.
At $3 3 billion deposits make up 29% of our total deposit base.
We've not seen any concerning behavior from these customers and as mentioned previously we had on balance sheet and excess liquidity at $8 4 billion or $2 six times, the uninsured and uncollateralized deposits.
In the supplement we disclosed consumer commercial and public deposits average balances in those accounts or that consumer 23000 commercial $118000 in public $1 8 million.
From the fourth quarter to the first quarter consumer average balances were flat commercial average balances were down slightly from 122000 somewhat driven by new accounts as we saw first quarter annualized growth in the number of commercial accounts up 10%.
Public balances were up around 150000 due to the seasonal influences.
For the entire deposit portfolio and on a customer basis, rather than an account basis.
66% of our customers have less than 10000 in deposits with us and 99% have less than $1 million.
And finally.
62% of our deposit balances are with customers that have been with us for more than five years, an additional 26% of balances are with customers that have been with us for more than one year. So.
So we believe we have a pretty long tenured loyal customer base.
Briefly touching on our securities portfolio, we have no held to maturity Securities Securities.
Over the past few years the portfolio of Max out around 13% of total assets and is currently at 11, 3% and our current duration is roughly five three years.
Moving on to our net interest margin, we saw a contraction in the margin as deposit costs accelerated partially driven by an outsized increase in more coffee public funds with average balances are up $521 million from the fourth quarter to the first quarter.
Margin continues to be difficult to predict given the continued pressures on funding cost with.
With treasury back lower than fed funds, we're hopeful that the dynamic of depositors, leaving the banking system altogether due to higher risk revealed will abate.
However, with the renewed focus on liquidity from banks and regulators in the wake of SBB and signature competition between community banks for funding is likely to intensify.
There could be a larger pool of funding for it to compete ever I think wed all like a little bit more cushion than we currently have.
There are some monthly trends in March we had a cost of interest bearing deposits of 367% contractual yield on loans was 597% and a net interest margin of 345% versus our cost of interest bearing deposits of $2 five 3% contractual yield of five 9%.
NIM of $3 51 for the quarter.
Our cost of interest bearing nonpublic funds was $2 five 7% in March versus 241% for the quarter.
Our goal for the next few quarters would be to keep the margin in the same relative range with March <unk> quarter, and higher cost public plans continuing to find out through the second quarter were likely likely to see some slight contraction in Q2.
Compared to the first quarter and as I.
Again coming back off the balance sheet.
Likely to see a little bit of lift from there.
Today, we valued liquidity ever margin and a strengthened balance sheet versus maximizing the last nickel of earnings available to us.
On the other side of that we're likely to review how much public plans were willing to carry given the outside data is because many of our relationship to that.
And their impact on profitability.
Core banking noninterest income of $10 7 million was in line with our expectations and we expect to continue to hover in that $10 million per quarter range plus or minus.
<unk> 23.
Banking noninterest expense of $68 $5 million was also in line with our expectations at this point, we don't see a need to revise our prior guidance of mid single digit growth over <unk> 'twenty twos run rate of $267 6 million. However expense management is top of mind for the company as revenue pressures do continue.
Closing with our allowance for credit losses, economic forecast deteriorated slightly during the quarter.
Specifically in March and we added four basis points to the allowance as a result.
Provision expense ended up being relatively neutral as our reserves on unfunded commitments came down primarily due to the decline in our unfunded construction and development commitments.
We will continue to be cautious on our reserves and forecast continued to decline and will likely continue to build.
At this point there are no industry that weird qualitatively, if nothing additional reserves to that.
But we'll continue to monitor our portfolio to see if some additional protection is warranted it.
And with that I'll turn the call back over to Chris Alright, Thanks, Michael Thanks, Greg.
I'd like to open the line for any questions.
Thank you if you'd like to ask a question. Please press Star then one on your Touchtone phone.
We are using a speaker phone we ask you. Please pickup your handset before pressing the keys.
To withdraw your question. Please press Star then two.
Today's first question comes from Catherine Mealor with <unk>. Please go ahead.
Good morning.
Good morning Catherine.
I just wanted to start with the margin and you see Michael if you could just give us your thoughts on your outlook for the margin and particularly on the deposit side.
Maybe walk us through where deposit cost were towards the end of the quarter and where do you see those betas go in over.
Over the next couple of quarters and then also just on deposit next we've seen continued mix shift out of noninterest bearing and as you model out your outlook how.
How.
How you see that mix change evolving over the course of the year.
Yeah, Hey Board Catherine.
Net interest margin was 345 in March yet that's down on the on the lower end of the quarter.
We reported $3 51, so interest bearing deposit cost around $2 six seven.
And nonpublic funds was $2 57 that run up in public funds during the quarter, but puts pressure on net interest margin.
Yes, they have a beta of <unk>.
Really in the first quarter of 100% of actually and so.
So that really puts pressure on your overall deposit cost.
We do think that it will start to come down middle of the year and so you could see some relief which.
Which actually increases NIM.
We're going to try to hold in the same relative range at $3 45 to $3 50, but that is.
Completely dependent on liquidity pressures and competition amongst our peers that I'll tell you.
Our field the field the thing that's a really good job of keeping us informed of what's going on in and around the market.
And that we see a lot of really aggressive pricing on that.
C D, but also on money market.
A lot of the smaller community banks in and around us.
You can still see some pressure from there.
And so we're trying to manage it the best Mccann understanding that liquidity is top.
Top of mind and has been for us for the last couple of quarters, but we expect that to continue to be the focus.
I would think deposit betas.
If we get 25 basis 25 basis point increase from the fed with next one I don't know what we're getting in June .
Our non experienced about 23, 24%.
You would expect.
Deposit.
Beta on our deposit cost to go up about 60.
60% of that 25.
The incremental cost from there it's.
It's a little bit of a.
Yeah, a little bit of a mixed bag.
And you mentioned money market rate that I noticed that your money market portfolio is now just under 3% is that where is.
Where do you see that pricing today.
Yeah.
Well, we have a money market product is priced off of fed funds.
Yeah increments.
Incrementally, you'll see that 80% of fed funds move on.
Probably a third of it is money market.
And so that's the increase you're seeing there okay.
And then no no.
Second question is a little bit on the margin, but also just kind of thinking about.
Just the commercial real estate portfolio can you can you kind of walk us through what Youre seeing on the commercial real estate side, just from a pricing and the.
And maturity schedule over the next couple of quarters.
How much of that portfolio do you see repricing or maturing excuse me over the next year and then generally where are you seeing.
Dennis Lynch news to you in terms of rate.
Greg you want to talk about what we see repricing in the.
Commercial real estate.
It's especially well, we specifically pointed out.
On the slide about the.
Only 7% of that office portfolio is.
During 2024, specifically.
Hi.
I do not I don't have that specific number Michael Microdose, yes Catherine.
If we look at commercial real estate.
About 30%.
Yeah. The total book re prices within the next 12 months.
Ali.
I'd say about 70% of that number is variable and so it's already.
We have taken into account take into account.
And then fixed rates about a third of that.
50% of our portfolio re prices three years out.
So it's kind of a split and as a reminder.
Yeah, that's actually about 60%.
Variable rate and about 40% or so at fixed rate.
Okay great.
Okay. That's helpful. Thanks, so much.
Okay.
Yeah, Hey, Catherine I would say this.
And Michael.
That's all about some of his comments to save the margin.
Is it dependent on deposit.
And it has proven to be really difficult for us to predict.
But as Michael said in his comments, we really prioritize we continued about power does the strength of our balance sheet.
And that's really the priority into.
We want to make sure we're maintaining.
The deposits and funding.
And that's that's that's our priority right now and that's what made it really typically due to forecast.
So we wish we had a we had pinpointed a number for you, but but it's.
Very fast.
Yeah understood Okay. Thanks, Chris Alright.
Alright, Thanks, Kevin.
Thank you and our next question today comes from Stephen Scouten with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
If you dig down a little bit deeper in that maybe marginal cost of deposit I know Michael you gave some color on the money markets and an Indian Todd maybe you can fed fund, but do you have a feel at all for where you're adding.
New money market yields today, new Cds today, just to give us a feel for those spot rates. If you have it.
Yeah, Good morning, David.
Our CD rates maintained pretty pretty standard over the past quarter, we had a 24 month out around there.
4% in 18 months.
338, 13 month around pretty bare case that that all comes in.
The new regulations come in split a third a third a third really instead of that call. It comes in around $3 40, and money market I'd say everything that's coming on.
Not everything but the majority of it is coming down that money market, 80% of fed funds. So it's coming on around 4%.
That's where the bulk of the volume is on the money market yet.
Yes.
Yes.
Products, so it changes as fed funds changes.
Yeah. So that's why it made so much sense for you to pay off the H S. H there'll be at 489, so that was still a really really nice trade even with the high.
Marginal cost of deposits.
Exactly.
Okay great.
I love the slide here on the office exposure really appreciate you guys putting that in there.
You have a feel for you guys look the credit detail by class on slide 11.
How that weighted average occupancy has that moved around much on those categories. I mean, it all looks pretty strong today, but are you seeing any sort of <unk>.
<unk> to the downside yet or is that one maybe overblown.
Or two maybe you just haven't they haven't seen those trends shake out.
Thanks, David Greg Bowers, no I have not.
Matter of fact that class a portfolio that is a weighted average number so that's 82% right now.
You just look at it.
And I think that's a project.
Excuse me total 11 projects eight of those are 100% couple of them are 94% one of them is it 50% 50%.
Came out at the end of fourth quarter last year. So overall.
I think all of them are hanging in there there is pressure out there and how supply is coming on so.
It's a cautious outlook for for everyone in the market.
Okay. That's helpful color.
Just one last thing for me I'm curious, what you're seeing on the mortgage side of me is nice to see that breakeven.
Obviously, you can see the purchase refinance mix you lay out but.
Are you seeing any pickup in demand on the refinance side with the tick down in rates or there are people that are locked in at higher rates that are now able to come back to the table or is that moved down not been substantive enough to drive that incremental volume.
Yeah David.
If the rates have come down.
Right and treasuries is that kind of put it in my comments the mortgage spread is actually not come down as much not to be overly technical so certainly need.
Mortgages tightened and rates.
We need to go down but.
You got all these guys are under 3% so there's a long way.
And I think refinancing.
Electric taken equity out and there's still significant equity in Ireland.
But.
The overall mortgage activity I'd say first quarter was pleasantly surprising.
Do you have.
Like even with it was a good quarter, we expect to be profitable in all cycles and better work last year came to fruition, a little bit slower and more but we expect that there to kind of pick back up.
Seasonality.
Perfect great. Thanks for all the color guys I appreciate it.
Hey, Steve and I'm going to make one more comment he talked about us paying down those that FHFA.
<unk>.
And I would just say this.
We still got a little bit of it that you'll be borrowers on our balance sheet, we debate internally whether to pay it off because we are sitting on.
Roughly a billion and a half in cash every day.
We didn't need that when we borrowed it we did it the day after the Monday after the Silicon Bank failure, just to make sure. We had access to put put the money on our balance sheet, we paid a little of that back.
You know the cost of the spread is probably 15 basis points between the cost that we pay for it and then we reinvest the cash overnight.
But that's.
Frankly, we don't need what's there we could easily pay you don't pay it off but during this week again, it's just opting for balance sheet strength.
Over.
Over.
Half of them say 15 basis points to hold onto it for now in the face of.
The market uncertainty so.
That's an example.
The types of decisions that we're making every day in this timeframe that cost us a little bit of money, but we think it's more long term business.
No doubt.
A little bit less to pick out in the in the regional bank space that we appreciate that.
The security for the group as a whole thanks again exactly exactly so.
Thank you.
Next question comes from Brett Robinson with B Group. Please go ahead.
Hey, guys good morning.
Alright.
Wanted to first ask.
Just on the unfunded commitments on construction the contraction linked quarter was that intentional or did you have some.
And put it into that or just customers just pull back in terms of what they were doing.
And then secondly, Christian you mentioned the word that Jamie Diamond didn't really like credit crunch, or you're seeing market participants not being able to get credit or maybe you're struggling to get.
You know a favorable terms on things in the market or any color around that comment.
Yeah Brett.
So on the first one on the reduction in the commitments are absolutely intentional.
We are if you did you did.
If you go back actually into 'twenty two.
We're running it at 120% of risk based capital in terms of fundings on our.
Our A&D or construction.
We don't like that and so we.
It's viewed as higher risk because it is high risk, we don't view ourselves as a high risk company.
Who are we.
We it's our commitment to ourselves to get that under under.
100%, because we don't like running that way and so very intentional.
And and that so that's that.
That one that didn't.
The easy one.
Then when it comes to that.
Don't don't tell Jamie that I.
Violate it as.
Uh huh.
His mantra.
But because we have we hold a little respect for him and the way they do things that being said.
The market is getting slower and credit is pulling back and we can talk to our peers, we talk to our customers and folks out there right now.
Greg talked about all the cranes that you see in downtown Nashville, It look all of our other markets Knoxville Chattanooga.
You know bowling Green, Kentucky, Huntsville, Alabama, there, they're all doing well.
Construction is harder to pull off these days because they're just less less folks more folks that are like us that are.
One have hit their thresholds.
And to look out over the horizon and go well, it's probably a time to not be mesh in the accelerator or so.
And Sue is we've certainly seen some slowing.
Sure.
Okay.
That's helpful and I wanted to make sure I understood a little bit of a balance sheet management strategy from here, obviously really improve the liquidity.
Linked quarter and so I was just kind of curious if you think about the <unk>.
Profile on the balance sheet going forward, if you might draw down some of that liquidity in cash and use that to fund.
Loan growth.
Balance sheet is fairly flattish and you have mix shift change in deposits from here you know, obviously Cds were a bigger percentage of funding you know two years ago. You know maybe just any color you could give on how you see the balance sheet liquidity and then maybe absolute size from here.
Yeah. So.
Just I'll just comment on a few things that we're managing in the first.
I think I'm going to repeat as right now balance sheet strength crops of squeezing the last nickel out of profitability as Michael said in his comments, we would've managed liquidity above everything else.
And so we'll continue to do that we want to manage credit and capital very closely.
That being said if you look at what's happened to our our liquidity ratio that if you look at what's happened to our loan to deposit ratio. We feel like we've created a place where we've got some flexibility and more leavers to pull as we move forward when it comes to profitability Michael gave an example.
When he talked about managing public funds.
The public float.
Or are funded up most of those relationships are contractual for a period of time.
Some of those are actually quite high rates on those funds and so that's driving our cost up.
As those move down some if some of those that money moves out later this year and you know it's going to move our cost downs on again gives us a profitability.
We were to pull there or whether we do exactly what you're suggesting do we ramp up the growth rate a little more we certainly could.
The girl and the asset side of the balance sheet faster than we are without really having to strained from a pricing standpoint or other standpoint.
But we are comfortable and then I'm going to call it.
Mid to even low single digit.
Loan growth rate right now.
Until the because the other side of that is a credit that we're managing and we will see you soon.
We want to be cautious, especially as we.
S asset classes continued to emerge that cause you concern.
We just are crazy about matching the accelerator right now and so we're going with it.
A slower growth rate and.
Have created ourselves hopefully some levers that we can pull in the latter half of the year to improve profitability.
Yeah, Brad I'll, just add that when you come out balance sheet and I mentioned the investment portfolio that we haven't actually bought a bond like may early June of last year.
Okay.
Believing right in a rising rate environment now.
Part of it I think Chris mentioned parking money at the fed which is where most of that cash sits I mean your earnings.
Pretty good relative.
Number versus kind of reinvesting because we've been we've been sitting on cash and it hasn't been a huge drain on profitability from our alternative.
Beckman scenario and of course, you're not adding any duration there.
Yes.
We're still a little bit cautious there and keep it in cash.
Maybe one day, we we redeploy but not really.
Plans at this point.
I think I understand this.
Yeah, I understand the strength of the balance sheets are key.
And then just lastly, I appreciate all the color on the slides on the office stuff in particular.
I am curious I I've had several.
Local lenders tell me that if there's any pressure off of a meaningful nature on.
Office or maybe other classes that theres a lot of deep money, that's just waiting to swoop in and maybe grab some properties. If the cap rates move up you know any any at all have you guys had those conversations as well or any any thoughts on.
Yeah.
Liquidity as you see it from other sources of capital locally that are looking to deploy if maybe prices come down a little bit.
I have not seen a specific example of that but in previous cycles, you always do and we know that there are people that a.
Watch those cap rates so.
Yeah.
And Brett I'll, just add a little bit of commentary from just personal conversations with folks that are.
The real estate market in some of our.
Our local.
<unk> geographies.
Most of that would come in our biggest geography, which is Nashville and that is there are some folks that are on the sidelines I knew that.
Have liquidity that are that would love to.
Get opportunities.
They've been waiting for some.
Some slow down or downturn to be able to deploy.
I've also heard they're not huge but there's going to be enough of a slowdown.
At least especially in Nashville for them to be able to deploy it where they think they like they should and so.
I would echo that yes, I do think there's.
Money, both local and out of market.
They would like to get into the market on the real estate side.
And so I think there's I think there's money on the sidelines.
That's available.
Okay.
I appreciate all the color and happy birthday Michael.
Thanks, Brett.
Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one.
Our next question today comes from Matt Olney with Stephens, Inc. Please go ahead.
Hey, Thanks, good morning I'm on.
On the on the appointment.
Good morning on the January call, Chris I think you mentioned that are.
You guys execute them some loan sales to help manage liquidity manage credit and kind of growth.
Late last year.
Any loan sales to speak up more and more recently and just with the overall plan as far as Oh participations. This year. Thanks.
No.
No nothing reset in terms of loan sales to move the numbers Youre exactly right. We had some in the fourth quarter.
As we were some of the things that we're talking about were really focused on the day, we were talking about how to manage liquidity and how to manage.
Outstandings on both CRE and Sandy and that's it so that those were the things.
That drove those but we didn't have any any.
New activity to speak of this quarter.
Okay.
And then I guess, maybe a question more for more for Greg on the on the construction side I know you've been talking about you know seeing.
See imbalances construction balances peak here.
Quickly can you just speak and provide some commentary about the absorption rate into the secondary market.
For some of those projects have been completed and I know there can be a big difference, thereby absorption by product type. So any commentary you have is with respect to types of commercial or residential construction.
Yeah.
Yes, good morning, I think that right.
Right now most of the when I talked about you'll see.
<unk> rotate out I think most of my comment there is as as it pertains to the residential side, that's the bulk of that.
That segment and so we're in the what we're seeing right now and expect to see over the next quarter or so as a result of sales of residential here in the peak seasons.
For residential and so that's where when you were talking earlier about the commitments coming down you'll see.
I think you'll see the benefit of that in those residential properties being sold.
I think that the bulk of the rotation will be in a residential.
Yeah, Matt This is Michael.
I'll get from time to time get phone calls.
And from there.
Permanent market kind of take out.
Asking if they can use our balance sheet.
Parks out and of course, Andrew Thank you.
But does that tell you anything about the secondary market looks like a lot but that.
The I don't know how active a lot a lot of art I love, our it's really.
It's a little bit of a boring portfolio. Sometimes these are just loans that are many firms that will then go into <unk> on our balance sheet.
Start amortizing.
So.
Not a lot of it if you were thinking about a lot of projects that.
We're going into it's the MBS market or something like that are going into a life company, that's really not what what these are.
Mhm Okay.
Okay. I appreciate that and then I guess I guess circling back on the margin I appreciate its tough to give much guidance around the all the moving parts, especially within kind of the excess liquidity position.
Michael what about with respect to just the NII.
There'll be some pressure there it sounds like from a monkey levels any commentary. If you think the bank can can grow NII in 'twenty three versus 22. Thanks.
Yeah, Matt I think.
The loan growth there from.
From last year second and third quarter.
Everybody put for this division to be able to grow net interest income this year, where if you just look at first quarter. This year. The first quarter of last year, where we're ahead of pace.
Based off of that growth, we do believe we can grow.
Net interest income and 23.
Hi.
However.
That had an interest expense number is the key there it looks like loan growth as Chris talked about so yeah. We think so yeah. He was eroded or good question.
It wasn't that we that we debate, but we think we can actually for the year and.
We're trying to create.
More flexibility and as the industry continues to.
Again, I'll say additional foundation.
We hope that in the back half of the year, we'll be able to to.
Do some good things, but we think when we when we project out today and it will be able to grow net interest income.
Okay. That's helpful. And then I guess, just lastly, kind of a bigger picture question I think Michael mentioned that low.
Nation fees this quarter.
Well recognize just from obviously slow originations I guess, just any commentary just on how overall origination level volumes in the first quarter at the bank compared to previous quarters.
Looking for read throughs, I think obviously investors are concerned that a slowdown in bank lending could slow the overall.
Economy, So just any general commentary on originations that you're seeing now versus before.
Yeah.
Oh.
I don't have a lot of additional commentary we've seen slower.
Some of that is because we're not but some of that is because we're not beating the bushes as hard okay, but some of it is also because there's less demand I can't exactly.
Parse it between the two but there is there is less demand, but we're also not beat the bushes quite as hard and there are certain product types, where we're just.
Not not not being the bushes at all.
No and I would just say this when I talk about not beating the bushes at all we do have customers that are absolutely great long term customers that we got to take care of and so when you see that our construction commitments are down you know.
Oh close to $300 million in the quarter.
And then.
Remember, we're taking care of customers in there too and so that's a net number that you're that you end up looking at because where we've got customers that we are going to take care of and so.
So.
That's part of the art of managing the bank.
It's how you do that so we are making commitments just net net we're down.
Got it.
Okay. Okay. Thanks, guys.
Alright.
And our next question today comes from studies first line with Janney Montgomery Scott. Please go ahead.
Hey, good morning, and happy birthday, Michael.
Good morning.
Gordon.
Appreciate all the detail on the office portfolio.
Curious when you did the review on the office credits above 2 million are those ltvs using existing appraisals or did you get new ones for the review.
Yeah, good morning that was where the existing at at at.
At inception.
Gotcha do you happen to know what kind of the average age of the appraisals might be on that portfolio.
I do not specific lay out as we continue the call I'll look at a couple of things and see if I can get some origination dates.
It might have a little flavor okay.
That works just as curious.
And while Youre looking at that.
Really appreciate all the liquidity detail in the deck.
Was just curious what your thoughts were on the bank term funding program.
Guys said, you havent acceptance, thus far I'm, just curious how you view it versus other potential sources of potential liquidity.
Yeah.
Yeah.
We like I said, we haven't tapped yet.
Yeah.
Wow.
It's roughly in line with federal home loan bank borrowing.
We do it and I could probably give the discount window.
But I mean, they're basically basically the same.
Federal home loan bank, but our typical.
Gotta look and said we continue to do that but there is nothing against that.
That kind of funding program or discounting or anything else. That's been the way we've operated we certainly testing.
Test them they want to make sure that if we haven't needed it we would.
Yeah, and I would just add this I mean, we've got.
Gosh close to $7 billion.
Sources and so.
<unk>.
And we really can't we tap those sources I mean, what type of federal home loan bank, but even that is unusual and we don't we don't we don't.
We'd like we'd say this around.
Mike we don't borrow money to lend okay, we lend out deposits and so we don't go and borrow money from the federal home loan bank two to satisfy our lending appetite.
So when we tap any of those even federal bank gets a little bit of an unusual event for us and so.
We don't.
We're glad they're there we're glad the.
Bank term funding program is there.
But we haven't frankly studied it that much.
Because we it it's way down the list of things that we would we would get to.
And so that and that's really our approach to it.
Glad to there.
But all those sources are there and by the way we're not.
We're realistic when things really really get tough.
Those things start to dry up and that's the one that's probably not going to dry up okay. That's one that's going to be there we understand it anyway in Atlanta, you're going to get pulled from your from correspondent banks, you know federal home loan bank is going to get tight and so are we.
But that's the reason we're glad it's there, but we've not had to really think about that.
Sure.
And then I will go back to Gregg for just one minute.
The detail that night, we could include on a future slide or something but just looking at top five exposures.
As far as these appraisal dates at 'twenty, one 'twenty two 'twenty, one 'twenty two 'twenty one.
Well just I mean, it was a pretty rich yeah. So they're all they're all quite recently.
21, Scott.
Just wanted to make sure I understood that.
It sounds like.
Yep got it and it sounds like with the with the banks on funding pregnant and federal home loan Bank everything else is just you guys truly view it as contingent liquidity.
It's just not how you fund loan growth is really the way we should think about that.
Yes exactly.
Got it thanks for taking my question.
Absolutely.
Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one.
Next question today comes from Kevin Fitzsimmons with D. A Davidson. Please go ahead.
Hey, good morning, guys.
Kevin.
Most of most of my questions have been asked but just one it seems Chris you mean kind of message here is we've said it a number of times is balance sheet strength.
He is going to Trump.
Any kind of stretching for incremental profitability. So I'm. Just wondering you guys have definitely been deliberate about that and with the loan to deposit ratio down now below 84% your CET one ratio.
He is looking healthy your ACL ratio determined by sea.
<unk> ticked up.
You talked about specific loan exposures that you have been kind of managing down. So is the art given you know.
Likely economic slowdown are you on those measures or maybe there's other measures you look at where.
You want to be or is that incremental.
Over the next quarter or two like do you have a certain.
<unk> for loan to deposit ratio or CET, one that you're.
For instance.
Targeting or or would seem to work.
Two two.
And you know consistent with that concept about balance sheet strength.
And everything else.
Yeah.
Yeah. Good question Kevin.
We are generally about where we want to be as this is the way you should view is we're not going to turn down deposit growth.
And so even if it's you know it.
If we can get it if we can get deposit growth and it's it's discounted to the fed funds and it's a reasonable discount to fed funds, we're not gonna turned down deposit growth into if that if our loan to deposit ratio went down from here that would not bother us okay, but we would like but you could probably also see is can they get it.
Probably need to make a.
People are loans, just to kind of keep that range.
So we we feel good about the position we're in in terms of where we are liquidity frankly.
Our own balance sheet liquidity is higher today than it was at quarter end.
And so we again, we feel good about that.
The trends there.
But also remember we were keeping in the back room and some of those some of the public funds that have come in are going to go out.
In in the let's say the June July August range, and so again we.
Just managing through that which we're not gonna turned down additional deposit growth even if it's.
Oh.
Certainly not at 5%, we're not looking at trying to grow deposits at 5%, but if it comes down to just three years to 4% yes.
We would continue to take that and then we would.
To add on the asset side.
It is how we're thinking about that so we're in good position, we're comfortable with the position. We have we don't feel like we've got to go out and build more liquidity I would say the other thing that we want to do.
It has continued to grow.
<unk> customer.
The commercial retail customer deposit base, we would continue to grow those.
That's full time 365 to eight years. So we want to continue to do those on the capital side get ratios are actually quite good. We don't think we need to build from here.
Yeah, we're not against building, but we don't feel like we need to build more capital.
Other than just to keep make sure we keep up with the growth of our business.
Got it great very helpful and one quick follow on on M&A, you you kind of it sounded like you kind of laid out on.
On one hand.
We don't need it and you see opportunities from.
M&A happening in your market, you being able to benefit from disruption at others.
But you did mentioned that you know you're in a position to be.
A larger partner for community banks can you just remind us is that right.
Because I think what you've said in the past is you have a specific list of certain community banks that fit your criteria from where they operate the management teams.
Their model and if and when they ever.
Looks.
Two for that larger partner that you'd be willing, but youre just not.
Youre not.
Theyre on months in other words right is that how to think about.
Yeah Ken.
Kevin I think that's generally fair and I'll I'll make two or three statements there.
Where we're at now.
Trying to do everything.
Especially in this in this current environment.
We're certainly not and given where stock prices are it would be tough to make a transaction work financially.
We're not we're not out there doing that and Theres. A couple of reasons. One is we're really intensely focused on yeah, we'd grow on some profitability metrics and some sustainability of those and you know as.
We've grown the company, we've got a fairly rapidly.
Because of their times and those go.
And those growth cycles, where you need to make sure you got everything.
Operating like you wanted to and you've heard me over the years referred to us as a good operator, we always want to be known as a bank that operates very effectively very efficiently very very well managed from a risk standpoint, and so that's really our focus right now.
And that will bring organic growth.
In normal times, and I'm not calling this this or what I anticipate in the next quarter or what I anticipate in the next couple of quarters renewable tubs, but that typically would bring us a double digit growth rate, which is pretty attractive.
Oh, the growth standpoint, and it typically brings us very strong profitability.
So that's where we are that's what we're focused on.
And so we're really not thinking about acquisition related transactions right now.
No.
We do keep a list of our banks are very short list that we would be interested if if they if we got the opportunity.
I think we don't get that in the near term, which again. That's another reason we're not we don't think we're going to get that opportunity in the near term, but those bags. The reason we're interested is this this environment.
Perfect really illustrates why we're interested as they're very granular.
Generational debate the generational community bank with generational customers that had been with them for decades.
They get it.
Got you.
Usually great funding profiles and there again I like to stay there exactly like us in some cases.
Maybe even a better profile because we've got big and have some have a few lumpy pieces of our balance sheet, just because of size creates that and gives you that opportunity. So these are if anything probably even improve your overall profile from what from what I consider to be a.
Great highly valuable bank and I talked about that earlier, having customers on the other side of your your loan to deposits.
<unk> is very important to us and that's the kind of things that we're talking about.
So.
We keep that list, we're not anticipating anything happening with that list in the in the near term and so we're focused on continuing our R.
There are really a transformational improvements.
Come at a better a better operator.
Great. Thanks, Chris I appreciate it.
Alright, Kevin good to talk to you.
This concludes our question and answer session I would like to turn the conference back over to Chris Holmes for any closing remarks.
Alright.
Thank you all again for being with US today. We appreciate the questions. If there are things we need to clarify or talk about Africa, we're glad to glad to do that we appreciate your interest and appreciate your support of FB financial and we look forward to moving moving forward for this quarter into the next.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.