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spk02: Good morning and welcome to FB Financial Corporation's third quarter 2022 earnings conference call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mati, Chief Financial Officer, and Greg Bowers, Chief Credit Officer, who will be available for questions and answers. Please note FB Financial's earnings release, supplemental financial information, and this morning's presentation are available on the investor relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation. During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other facts 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 are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained 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, GA presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earning release, supplemental financial information and this morning's presentation, which are available on the investor relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov. I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO.
spk06: Chris Holmes All right. Thank you, Jason. Good morning, and thank you for joining us this morning. As always, we appreciate your interest in FD Financial. For the quarter, we reported EPS of 68 cents per share. We've grown our tangible book value per share, excluding the impact of AOCI, a compound annual growth rate of 14.9% since our IPO. We had good performance this quarter, both in the banking segment and in the mortgage segment. First, starting with the bank, we had 22% annualized loan growth. As I've said before, asset generation has not been a problem for First Bank. And our continued loan growth is reflective of our experienced and trusted relationship managers operating in excellent markets that have strong underlying job growth and in-migration. We're also proud of our non-interfering deposit growth, which was 9.7% annualized this quarter. and 13.7% year over year. Growing operating relationships and non-interest bearing deposits has been a focus of management and our team continues to execute well, particularly in the interest rate and deposit environment that we find ourselves in. We believe that our non-interest bearing growth is a signal of the strength and the momentum of our franchise. Those balance sheet trends resulted in strong growth and profitability as our net interest margin expanded to 3.93% in the quarter, and our net interest income grew by 9% over the second quarter. As a result of that improvement, the bank segment delivered a PPPROAA of approximately 1.9% in the third quarter, which is getting closer to where we expect it to be. For mortgage, we had a loss for the quarter, but we also finalized our restructuring of the segment. We're now at a point where we feel comfortable with our staffing and organization to weather this challenging environment while avoiding additional material losses. As a result of this restructuring, the mortgage segment returned operational profitability in both August and September, while the seasonality of the fourth quarter and the first quarters While the fourth quarter and the first quarter will exacerbate the current headwinds in the industry, we would expect to be close to break even for the next couple of quarters. While we are pleased with our third quarter results, we're also looking ahead at gray skies. We're hoping for a drizzle, but we're prepared for Jamie Dimon's hurricane. The macro factors of rising interest rates, strong employment, high inflation, and good customer sentiment will lead you to think that interest rates will continue to rise. When mixed with quantitative tightening, shrinking liquidity, the potential for significant market disruptions, a war in Europe, and almost assurance of a recession, it makes this an important time to rely on fundamentals, discipline, and messaging. As the economic times are moving from boom to something less, We've had to transition from aggressive growth of the franchise to ensuring that we take care of customers regardless of economic conditions. In times like these, we say our balance sheet is reserved for our customers, so we have to be prepared to get them through challenges if we encounter difficult market conditions. Our people live and work in markets that are surrounded by customers that continue to experience strong demand above average population growth, robust housing markets, continuous wage growth, and in some of our markets they can't get to their office without driving past a sea of construction cranes. Our people are passionate about serving their customers no matter the circumstances and preparing for a slowdown where our markets are still so robust is a communication challenge. That being the case, we're emphasizing continued to grow our business aggressively on the deposit side. We're avoiding significant new customer acquisition on the credit side right now, and we are trying to take care of the existing borrowing customers. We're managing our liquidity credit and capital to be prepared for any range of economic scenarios, better safe than sorry. On our liquidity, we had $537 million of net deposit outflows during the quarter, and we expected that, as we referenced on last quarter's call. Stripping out two large public funds accounts, which combined for $619 million in deposit reduction during the quarter, we had net growth from the rest of our deposit base. One of these large public accounts was over $500 million and was a bit away from us on terms that we were not willing to match. We can increase and have increased our customer funding at less expensive rates while also freeing collateral that improves our overall liquidity positions. Following this quarter's deposit activity, we're now at 91% HFI loans to deposits and securities assets of 12.1%. We feel our balance sheet mix is optimized in this environment for strong profitability, and we have ample liquidity sources that will allow us to continue serving our customers, even in the most extreme economic conditions. Going forward, we don't anticipate letting ourselves get above the current 91% loan to deposit ratio. We're also not willing to pay for unprofitable deposit relationships, and we still prefer not to use brokered CDs, although that's an available option. That means we'll fund most of our additional loan growth with customer deposits. That also means that for the near term, we won't have outsized loan growth that you've seen over the last three quarters. We would anticipate not exceeding the bottom end of our long-term loan growth target of 10% to 12% during the fourth quarter and the first part of 2023. While the past few quarters would tell you that there's Still, clearly strong demand for first bank lending relationships. We're intent on throttling back our production. As a result, we've raised the bar for new loans. We feel confident that our underwriting standards should hold up through the cycle. If there's been a tweak, it's been that we've been stressing interest rates a little more given the current environment. Otherwise, we've not made changes to our credit process. However, until we can gain clarity on which areas will be impacted by the slowing economy, we're cutting back on traditionally higher risk product types of construction, A&D and CRE. With the limitations around assets we're willing to put on the balance sheet, our growth should continue to be incrementally profitable. Moving to capital, we maintain a very strong equity position with a CET1 ratio of 10.9% for tangible common equity. The tangible assets declined by 36 basis points to 8.54% due to a further increase in the unrealized loss on our securities portfolio. I would reiterate that that unrealized loss is all interest rate related and temporary. As I mentioned previously, we have no intention of turning those unrealized losses into realized losses. We're preparing for a slowdown and being cautious on credit and balance sheet management. We're balancing that with our longer term strategic priorities. A recently announced Vanderbilt sponsorship would be an example. While that's an expense for us heading into a recession, We had an opportunity to become a bank for one of the most significant institutions and brands in our geography, and we acted on it. Another such focus would be our recruitment efforts for both relationship managers and customers in the wake of recent acquisitions in our footprint. While we will not allow ourselves to grow loans at an outsized pace, there are certain once-in-a-career type customers that may be looking for new partners, and we will do that, and we will do what we can to accommodate them. Similarly, we continue to be active in our discussions with a handful or so of banks that we've identified as Tier 1 high-quality potential partners. If one of those banks that we know well decided to sell in the next few quarters, we would not stay on the sidelines solely because of the uncertain economic outlook. All that to say, we're proud of our performance in the quarter, but we're cautious about the operating environment for the next few quarters. We're hoping for a mild downturn, but we're doing what we can to prepare for a potentially difficult stretch. We feel our conservative balance sheet management and underwriting standards will serve us well no matter what outcomes. I'll turn it over to Michael for more color on our financial performance in the quarter. Thank you, Chris, and good morning, everyone. I'll speak first to this quarter's results in our banking segment. Our baseline run rate pre-tax pre-provision income for the banking segment was $55.9 million in the third quarter. Pointing to the segment core efficiency ratio reconciliations, which are on page 19 of the slide deck and page 19 of the financial supplement, we had $112.1 million in segment tax equivalent net interest income this quarter. Along with that $112.1 million in net interest income, we had $10.3 million in core banking segment non-interest income. Finally, we had $65.9 million in banking segment non-interest expense. You will remember that last quarter, due to our lower level of taxable income, we had a geography shift of $1.4 million as tax credits were moved from a reduction in our tax expense to instead be a reduction in non-interest expense. This quarter, we had $700,000 in banking segment non-interest expense as a result of that line. Adjusting for that shift, core banking segment non-interest expense would have been $66.6 million. Together, that comes to our $55.9 million in run rate segment PTPP, which has grown 30.9% over the comparable $42.7 million that we delivered in the third quarter of 2021. Moving on to our net interest margin, with summary detail on page five of the slide deck, Our net interest margin of 3.93% showed significant improvement from the 3.52% that we reported in the second quarter. Part of that improvement was due to the continued deployment of liquidity in the loan growth. For the second quarter, we estimated that excess liquidity had a 14 basis point negative impact on our margin. With our average balance sheet composition during the third quarter, we estimate no impact to margin due to excess liquidity. The remaining 27 or so basis points of expansion was due to assets repricing faster than our liabilities, as our cost of total deposits increased by 27 basis points, while our yield on loans, excluding non-accrual interest recoveries, accretion on purchase loans, and syndication fees in the prior quarter, increased by 52 basis points. Our securities portfolio increased by seven basis points, and our interest-bearing cash increased by 145 basis points. Looking forward for our margin, we had a run rate margin for the month of September in the 3.95% range. Our cost of funds is increasing as we expected it to, and we put new deposits on the books in the third quarter at a cost of 1.54%, and that was up to 1.79% in the month of September. So we would expect our cost of total deposits to continue to increase over the coming quarters, particularly with the additional rate hikes that are anticipated over the coming months. However, we have also seen an increase in our yield on loans. New loans in the third quarter had a yield of 5.96% and that was at the 6.18% in the month of September. So that's a net spread of 4.42% on new loans versus new deposits for the third quarter and 4.39% for the month of September. So we feel that our growth remains profitable. Our other spot numbers for you for the month of September would be contractual yield on loans of 5.12%, yield on securities of 2.15%, and cost of interest-bearing deposits of 0.97%. With our margin approaching 4%, we would expect it to start to level out. There should be continued upside to our asset yields with additional rate hikes, but competition for deposits across our markets is causing betas to accelerate, which should cap some of our upsides. For banking segment non-interest income, we continue to expect for our banking non-interest income to be in the $10 to $11 million range from quarter to quarter for the foreseeable future. As I mentioned earlier, we view our core banking segment non-interest expense as being $66.6 million versus the reported $65.9 million due to the 700,000 state tax credits that reduce non-interest expense this quarter. That number is higher than the $63.8 million to $64.3 million that we got into for the quarter as we accelerated a few of our internal projects geared towards organizational efficiency into the third and fourth quarters. As we expect continued growth in our banking segment, non-interest expenses due to inflationary pressures on wages, and we continue to hire both customer-facing and back-office talent. Moving to mortgage, after a difficult start of the quarter where we experienced a fair value reduction in both our pipeline and our mortgage servicing rights, the segment returned to profitability in spite of lower volumes. We do not expect a contribution to earnings in the fourth quarter due to the seasonal volume pressure and margins that remain below our historical levels. The changes to structure that have been made put us in a position to be profitable on an annual basis going forward. Moving on to our allowance for credit losses, we saw our ATL to loans increase by two basis points this quarter, and we recorded a sizable provision of 11.4 million. Economic forecast for the third quarter deteriorated slightly from those that we utilized in the second quarter. We have continued optimism for the long-term health and growth of our local economies, but we are closely watching inflation that we're experiencing and the increasing conviction of many economies that we will soon enter into a recession. If conditions do not change, we would anticipate remaining a similar level of ACL to loans held for investment over the near term. With that, I'll turn the call back over to Chris. All right. Thanks, Michael, for that color. Again, we're pleased with our results for the quarter and feel prepared for what's coming next. And that concludes our prepared remarks. Thank you for everyone, again, for your interest in FB Financial. And operator, at this point, I'd like to open
spk02: Thank you. We'll now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Catherine Miller from KBW. Please go ahead.
spk00: Good morning.
spk02: Good morning, Catherine.
spk00: Michael, you gave great detail into the margin, which I found really helpful, especially the spot rates at the end of the quarter. And my one follow-up to all that detail is just looking at the borrowings. It looks like you pulled down some FHLB borrowings this quarter. And so just curious if that was more of a temporary thing, just given the outflow of public funds we saw, or if you think we'll see an increase in FHLB borrowing use over the next couple of quarters. Thanks.
spk06: Yeah, that's a great question, Catherine. And yes, the FHOB borrowings were kind of a replacement for those public funds as we continue to grow our customer deposits and we expect those to be paid down over the coming quarters. Yeah. Okay, great. Catherine, it's actually already moved down some from where it was a quarter in. So we don't anticipate that. That is more temporary.
spk00: Great. Okay. So move that down and increase customer deposits from here. And that, as loan growth flows, should be an easier balance. I would assume you're not growing at 22% for the loans anymore.
spk06: You got the message.
spk00: Loud and clear, loud and clear. And then one other, just switching to credit, it was interesting looking at your at your reserve, you know, it looks like a lot of the higher provision this quarter was really just from the loan growth. But I did notice on your CISO slide that you increased your reserve on the residential mortgage portfolio. Is there just any, just curious what drove that? And then bigger picture, how you're thinking about where the ACL could go. As I look at that, I feel like it's a very high reserve. So I would think you would be a bank that would have, you know, relatively less risk for reserve buildings from here. But just kind of curious how you're thinking about that as we get into maybe a more recessionary period. Thanks.
spk06: Yeah, Katherine. Michael, good question. So the reserve around consumer and residential was impacted more so this quarter by the Moody scenario. So that's really the number you're seeing there on one to four family. It's strictly model driven. It's really around that change in GDP and unemployment being slightly higher, which tends to impact the consumer more so than some of our other asset classes. That drove that higher. We agree. We feel like our ACL is very prudent for what's in front of us and where we've been, and we We feel like we're in pretty good shape there and would expect that it to maintain the same level of 145 to 150 on a go-forward basis, given our kind of economic outlook here, which is probably a little bit more bearish than some others. Yeah, and I think maybe also you're asking, Catherine, if we're going to build above this 148th of the quarter level. It could go to 150, but we never know what the model spits out exactly until it spits it out, but I couldn't see it going to 170 or anything like that in terms of if that's what you're asking on the build side.
spk00: Yes, yes, that's helpful. That's really helpful. Okay, thank you so much. Great quarter.
spk02: The next question comes from Stephen Scouten from Piper Sandler. Please go ahead.
spk07: Hey, good morning, everyone. Can you hear me?
spk06: Hey, Steven. Good morning, Steven.
spk07: We got you. Great. So I guess, you know, one of the strengths I'm seeing here is just the spreads you saw in the quarter on new production even versus the new funding, Michael, that you referenced. Do you think that's a trend that could continue or is some of what you're saying around the increase in deposit costs, would you expect those incremental spreads to narrow? and for kind of the, let's call it the incremental deposit betas to exceed incremental asset yield betas moving forward?
spk06: So Steven, we're still seeing loan yields move higher. Um, and so they're, they've moved pretty much in line. We don't see a whole lot of expansion and margin, you know, above this 4% range kind of going forward. Um, I think one of the, uh, one of the challenges would be balance sheet mix a little bit. as our deposits grow, put a little bit of pressure on them. But for now, we are seeing increased deposit costs. There are higher betas relative to new production where rates are 3.5% Fed funds. but we're seeing that incremental loan yields as well. So right now, they're moving kind of lockstep, whereas earlier in the year, obviously, loan yields were outpacing deposits. Deposit costs were able to stay lower for longer.
spk07: Okay, that's extremely helpful. And then in the quest to kind of keep the loan-to-deposit ratio around this 91%, obviously, again, hearing the guidance around loan growth expectations, but In terms of still filling the gap on the deposit side, would we expect to see that come more within customer CDs? And if so, where are you seeing new CD yields in particular come on it?
spk06: Yeah, so kind of a mix of money market and new CDs. We're seeing, call it high-term 13-month at around 310 to 315, you know, 18-months. around 335 to 340-ish. Some of the shorter terms in the upper twos, but I will say, depending on the market, you'll see some widely various competitive rates. We see well above that in some of our more community markets on CDs, and then in some of our more metro markets, you'll see much higher money market rates in some cases. it's a pretty broad competitive landscape at this point.
spk07: Okay, great. And then I guess last thing for me, I'm encouraged by the commentary around mortgage and, you know, I think you said material losses should be kind of behind us, which is great. What's the big driver for that? Is that just that the efficiency ratio has been brought down more in line or will we see less variance around some of the MSR losses moving forward or, you know, changing fair value of MSR moving forward or, What's kind of the biggest drivers within those moving parts in mortgage that'll lead to kind of some normalcy there, I guess?
spk06: Yeah, I mean, so staffing is built for kind of a go-forward basis where in the range we're in now, probably a little bit of capacity for some growth going into the second quarter. You know, one of the challenges with fair value in March market is you take a hit on when your pipeline shrinks, and so we incurred that in March. July is, you know, we moved out of the direct consumer business and retail business load as well. You can see our volume drop a couple hundred million on interest rate locks. And then on the MSR side, there was a valuation kind of, as rates get high, the valuation starts to taper. You don't see as much increase. And we keep the assets pretty much hedged at around 100%. and so we've had to modify some of our stock hedges there to kind of maintain current valuation. So I wouldn't expect swings in the MSR wildly unless interest rates just get more and more volatile, and hopefully most of that's behind us as well. But yeah, mortgages seem to be stabilized, but we've got some seasonality ahead of us, and hopefully the waters will be much calmer from here. I would just add to that on the mortgage side a couple things. It's been a painful restructure for us because we've had about a 60% reduction in staff there overall from our peak. Again, that was painful. The second thing, going back to what Michael was talking about on that mark-to-market, you have to mark your mortgage loans held for sale. If you go back to the third quarter of last year, we had $750 million in mortgage loans held for sale. At the end of this quarter, we had $97 million. If you think about that reduction in what your it can't drop that much further from there.
spk07: Got it. Makes sense. Thanks for all the color. Guys, appreciate the time.
spk02: Sure. The next question comes from Jennifer Dempa from True Securities. Please go ahead.
spk01: Thank you. Good morning.
spk06: Hey, Jennifer. Good morning.
spk01: I'm just wondering what kind of merger disruption opportunities you're seeing or saw in the third quarter and are seeing over the near term right now?
spk06: Yeah, I'll comment on a little bit of that. that are undergoing big transactions right here in our core markets. We hear a lot about that. We see movement from that, both customer and associate. That leads to just a lot of conversations with folks. As we go back to one of my prepared remarks, I made the comment, sometimes you see a customer become available that you've coveted for maybe years or decades, and they're not going to come available again, probably at least in my career over the next decade. And so we're going to make a hard move for those whenever that's the case. And it's the same way with some of these associates. We've hired a lot of, we're looking at revenue producers across our footprint, but in addition to that, the first bank, if you go back to 2000, it was about a $6 million asset institution. I'm sorry, in 2020, it was about a $6 million institution. On the operation side, on the risk management side, even places, especially in Birmingham, we've really grown our operational muscle and our administrative muscle in Birmingham through some disruption down there. Our chief risk officer came to us from Texas. By the way, it's never easy to move people out of Texas. And so it's really coming from all around, and it's not only on the revenue side. It's on accounting and finance. It's on risk management. It's on operations where we've really been able to beef up.
spk01: Great. And question on asset quality, what do you feel like is a normal level of annual loan losses for this company? I mean, I think that's probably one of the biggest variances in earnings models for the industry going forward is what should we assume as the economy gets a bit weaker?
spk06: Yeah, well, we had $15,000 net recoveries in this quarter, and that's I'd like to just assume that we're going to have net recoveries in perpetuity. Probably not going to be the case. Frankly, you're asking that question. It's a hard question, which we ask internally because it's a little like some of the weather extremes we see these days. Normal losses have not been, quote, normal in so long that we're not sure what that is. We have traditionally said somewhere We're not sure that that's ... I'd say there's a chance that it could be higher, especially in the latter half of 23 or in 24. Charge-offs are lagging the economy. I'd say they could just be higher, and then, of course, they'd be followed by lower. One of the things that we watch closely, Jennifer, is our MH portfolio. And I've said once on this call, I'll say it again, in that portfolio, if you go back to 20 and 21, we saw record low past dues. We saw record low charge-offs. We saw record low non-accruals. because of all the stimulus money that put money in everybody's pocket. And today, if we didn't see, we'd think something was wrong with our tracking systems or something. If we didn't see those go up, we have seen past dues go up to a normal rate. And so we mix all those together in roughly, I'd say, 20 to 30 basis points, something like that. Right.
spk01: Thank you so much.
spk02: The next question comes from Kevin Fitzsimmons from DA Davidson. Please go ahead.
spk03: Hey, good morning, guys. How are you? Good morning, Kevin. Good morning. wanted to take a step back with all that, you know, to talk about the balance sheet and to talk about the margin. You know, definitely we've had a reversal where a couple years ago we were all talking about the percentage margin getting hurt, but the balance sheet driving growth in NII. So now it seems like we've had a bit of a handoff of reversal on those contributors. But if you look at dollars of NII, do you feel you will be able to, on a quarterly basis, continue to grow that? I mean, maybe not to the pace, 9% pace we saw this quarter, but do you feel that NII is going to be able to continue to grow in this environment?
spk06: Yeah, hey, Kevin. Michael, good morning. Yeah, you know, we still expect a couple more rate hikes of the variable rate portfolio. I should still reprice higher. We still expect, I guess, relative to the last three quarters, we have modest loan growth over the next couple of quarters, so you'll still see some balance sheet growth. And deposit costs, like I say, it's the change, right? It's going to increase, but I still think that there's net interest income expansion in that. Sure. Yeah, because there should be some modest growth.
spk03: margin in there and some balance growth and so between the two yeah that that should the absolute dollar should should increase okay and and just to clarify so michael when you talked about the margin now approaching four percent starting to stabilize are you kind of saying literally at four percent which is only seven basis points from here or just talking more of like a low four percent handle type margin if we assume you to get more of a benefit from the Fed rate hikes over the next quarter or two, and then it levels off in a low 4% level. I just wanted to clarify.
spk06: Yeah, it's not a ceiling for sure, so I'm not trying to imply that. I think it's in the low fours in there over the next couple quarters, pending deposit costs for sure. Okay.
spk03: And then, Chris, when you were talking initially about the loan growth relative to your long-term guidance, I definitely get the message that it's going to moderate from what you've been putting up here in recent quarters. But can you – I just didn't catch what you had said relative to that long-term outlook. Thanks.
spk06: Yeah. We have – our long-term target's been 10% to 12% annually. And – We've typically, frankly, been, if you go back last, I don't know, five, seven years even, we've typically been on the high side of that. When we look out into the fourth quarter and the first part of the third quarter, we'd be on the low side of that. Maybe we could even be below that. I think it's a good time to really focus on – liquidity, credit, capital, make sure right now, again, we'll continue to grow, but it's just gonna be at a slower and measured pace. We're doing some additional reviews on internal credits, things like that. Just, again, we don't know exactly what's on the horizon. We feel certainly that the economy is going to be slower. likely even recession. But that being the case, we look around and go, well, you know, our markets continue to outperform and will likely continue to outperform in a recession. So we put all those things into the mix and consider them all. And that's what we come up with is we're going to be on the low side of that 10% to 12%, maybe even below that. but we think we'll continue to see growth. And with that level of growth, we think it will actually be quite profitable growth through both the loans and deposits that we had.
spk03: Okay. Thanks, Chris. And one last one on deposits. Do you guys feel – you're at third quarter will prove to be the bottom for deposits. I know you were proactive in moving out those higher cost public fund deposits. Just wondering if there's more of those to go in fourth quarter, or can you say you believe you're at a bottom here?
spk06: Yeah. Yes, is the answer. Because we've increased since the end of the quarter we think that's set to continue. So, yeah, we would think so. Yeah, I think you'd see public funds as well would kind of naturally go back up during the fourth quarter as well. Yeah, they bottom out in the third quarter as well for us on just the annual cycle. And so we feel like we're at a low point.
spk02: Got it.
spk03: Okay, thanks, Gus.
spk02: The next question is from Matt Olney from Stevens. Please go ahead.
spk08: Hey, thanks. Good morning, everybody. My question is similar to Gene's question around investments, but besides merger disruption opportunities, I think the slide deck also mentions investments in technology via the innovations group. Would love to dig more into this and appreciate kind of what the investments are on this side. Thanks.
spk06: Go ahead. Matt, we've continued to operate. We're getting a lot of opportunities come our way, a lot of different opportunities. We continue to investigate things that augment our business and things that can ultimately provide a lot of efficiencies and really help grow some of our businesses. An example really is there's a recent press release on our relationship with Treasury Prime. which supports our strategy for open API banking to clients and potential FinTech partners, and maybe even deploying niche offerings of our own. We see strong demand on our customer base for embedded banking services and solutions that will create competitive technology that augments our community banking model. I think ultimately we're focused on these relationships because they bring deposits to the balance sheet and they create core customers there. That's one example of things we're doing, and there's a laundry list of things we haven't really publicly talked about yet that are exciting opportunities that we're working on. I'll just add. In our relationship with the USDF consortium there and some of the founding entities and just the fact that we're active in the market just brings a lot of exciting opportunities. Those don't have a cost attached to them, a material cost attached to them. They do have some but not a material cost attached to them today because we've got Wade Perry, who some of you know on the call, who is on the road most of the time, and he's pursuing these opportunities that are actually, I guess at this point, it's just the opposite. They're pursuing him and us, and so it's a matter of wading through them.
spk08: Okay, that's helpful. Thanks for the commentary there. And then I guess kind of following up on that, Michael, given these investments are being accelerated, It sounds like core expense levels at the bank will continue to build from that 66.6 core level. Is that right? Anything you would point us towards for the fourth quarter or towards next year?
spk06: We're working through next year right now, so we'll have more update early in 2023. But for the fourth quarter, I thought they were going to be in and around this range, maybe some modest growth. But we really did accelerate a lot of the expenses into the third quarter and have some stuff that could create a modest growth, but nothing material. Yeah, we got a couple of, I'll just add, we got a couple of efficiency initiatives with working with some, in one case anyway, a third party, and we really accelerated the initiatives. to try to get it done this year. Again, in anticipation that next year could potentially be a tougher year, and so we've just accelerated that whole project, including the expense of the project and the implementation.
spk08: Okay, that's helpful. Thanks for that. And then switching over to the funding side and deposit side, I think you've been targeting a cumulative amount deposit beta for the cycle around 30%. Is that right in the past and is that still the case? Any color on what you expect more near term given some of the changes you've mentioned previously?
spk06: Yeah, Matt, that's right. I mean, we kind of, you know, what they said about models, I guess you've got to be careful, but we modeled in and around 30%. That's probably historical, maybe a little bit higher than that. We've been well below that if you kind of look from the base to where we are now. So I do expect that to accelerate and work its way back towards that 30% with the newer deposits that are coming on. repricing of some existing deposits. But that's why we continue to focus on non-interest-bearing deposits as well and growing that core customer base is it certainly helps to offset some of the increase in deposit costs for the franchise.
spk08: Okay. Thanks, guys.
spk06: Thanks, man.
spk02: The next question comes from Brett Rabitin from the Hovde Group. Please go ahead.
spk05: Hey, guys. Good morning. Morning, Brett. Wanted to circle back around on loan growth and the expectations for growth to slow. I know you've talked about it quite a bit, but was looking at the construction commitments and noticed those were up quite a bit, link quarter, and I kind of feel like that's one of the segments that you kind of keyed in on is as a slower growth engine going forward. Wanted to make sure I understood your comments around construction specifically, and then just, you know, is there anything to read into the link quarter increase in construction for the quarter?
spk06: Yeah, and I'm going to let Michael address it, but I will say this. As everybody may or may not understand, the construction bucket is not easy to project because you make commitments and then those commitments may be drawn on at any time. Sometimes you make the commitment and you don't expect it to be drawn on for nine months or a year even. Some of them may never be drawn on. You're always trying is the commitments versus the balances. And so, Yeah, that's good commentary. I think we did have commitment increases in the quarter, but most of that was things we were working on prior to the third quarter. If you just look at the balances in that bucket, as Chris mentioned, about 65-70% of that was prior commitments that funded up versus any type of new origination type of business in the quarter.
spk05: Okay, that's helpful. And then one, just to ask, you know, Chris, you alluded to, you know, Jamie Diamond's storm and, you know, not necessarily knowing for sure what next year is going to look like. Are there any loan segments that you're looking to maybe specifically be more conservative with? And, you know, everyone's worried about consumer, but are there any things that you're specifically thinking about in terms of credit where we might see credit become softer next year?
spk06: Yeah, I think it's your typical segments. We are construction being one, residential within that. But as you know, Brett, because you live in Middle Tennessee, that then our market, even though the world is getting softer in residential, and it is in our market too. In most of our economic recency here, you'd say it's getting back to normal if you look at days in inventory and things like that. That's one. A&D, you know, land, all of those things, CRE, all those things would be the major things we focus on. Again, remember we have a manufacturer housing portfolio. We look at our – there are two pieces of that. One is communities, which has about $290 million in it. The other is retail, which has about $270 million in it. We watch those closely. Communities is performing well. extremely well in terms of any kind of pickups. We watch it closely, and retail continues to form. We've seen some things, again, pick up there, but there's been several years of really strong performance in that At some point, you can see that tick up because it hasn't – well, we've had the portfolio now, including Clayton, for 14 years. And at least for, I'd say, the last seven or eight, our charge-offs have been really low. So those are the things that we keep really close eye on.
spk05: Okay, great. Appreciate the call.
spk02: Sure. The next question comes from Fetty Strickland from Janie Montgomery Scott. Please go ahead. Hey, good morning.
spk06: Good morning. Nice to have you.
spk04: Glad to be here. Just wanted to clarify on Kevin's question from earlier. Average earning assets were down this quarter despite the loan growth. Should we expect earning assets to grow from here closer to the level of loan growth just given where loans deposits are today? You know, a lot of that cash has been deployed.
spk06: Yeah, that's a reasonable assumption. And, you know, the average earning assets haven't grown a lot because we've taken up the liquidity that we had as did everybody. We all had excess liquidity on the balance sheet. And we've taken that excess equity up with loans. And so from here, I think you would see the average earning assets, you will see that go up as our deposits increase and our home increase at close to the same percentage.
spk04: Gotcha. That makes sense. And that does play into earlier comments about spread growing too. Switching gears for a second, you've talked about bringing more mortgage producers online over time. I was just curious what the level of opportunity is that you see there, and did you bring anyone online, or have you hired anyone, any mortgage producers since last quarter?
spk06: Yeah, Freddie, this is Michael. Welcome. Glad to have you. Yeah, we're actually seeing quite a bit of opportunity on mortgage producers. across our footprint. We've actually been able to bring back a couple that had left over the last year or so, and so we're super excited about those joining the team, coming back to the team. And then, in reality, we've had a lot of opportunity people coming to us over the past 60 days, generally from IMBs, independent mortgage companies, banks, as they're leaving that space and looking to join a bank. We're being selective in that. As you look over the next six to nine months, volume's depressed. We're being selective there and making sure they fit our culture and can work within our model, which is realtor, builder-based, customer-focused. Yeah, a lot of opportunity out there, and we expect that to continue over the next 15, 18 months, that there will be a lot of originator talent coming available.
spk04: Got it. And the last question, kind of along those same lines, I sensed the mortgage is dropping to about 9% of revenues this quarter. I think it was 16% last quarter, 31% a year ago. do you have any sort of target or sense for where you want that number to be by next year's peak season? Do we see that rising back to something like 15%, or is it just kind of too hard to tell at this point?
spk06: Yeah, well, it's definitely too hard to tell at this point, but we're really focused on contribution and running a variable business that's profitable through all cycles of We would expect a contribution in the range of bottom line about 10% or lower in the mortgage space. Revenue is highly unpredictable because of rate lock volume and originations is fairly foggy at this point in time. We're focused on the core profitability of the business.
spk04: Understood. Thanks so much for my questions.
spk06: Yeah, I'll just make a comment. It won't return to anywhere near the level that it has been. It was in 20 or 21. It's nowhere near that. Like I said, contribution would stay down below 10%, and so that's what we would see. And then the other thing I want to mention that Michael just mentioned is really a point of pride. We have had really, again, it's a tough time in the mortgage business, and you've had some especially independent mortgage banks, get really aggressive in recruiting and offer really significant upfront payments to people to come work for them. We lost some large key producers. We've seen some of those folks that are great folks and great producers actually come back in a relatively short period of time. They attributed that to, hey, the culture is really good. The And they just appreciate the fact that it's a place where they can be successful and it's a good culture for those folks. And so we're proud of the fact that, and we think it's a very good sign when folks, especially really high producers, that get recruited away in a relatively short period of time come back and go, hey, wait a minute, we appreciate what we had. So just make that commentary.
spk04: Gotcha. No, that's great incremental color. I appreciate it.
spk02: Okay. This concludes our question and answer session. I'd like to turn the conference back over to Chris Holmes for any closing remarks.
spk06: All right. Very good. Thank you for all the questions. Thank you for everybody following FV Financial. We always appreciate your interest, and we will look forward to seeing some of you throughout the quarter at some investor events. Everybody have a great day.
spk02: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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