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spk00: Good morning and welcome to the FB Financial Corporation's fourth quarter 2022 earnings conference call. Hosting the call today at FB Financial is Chris Holmes, President and Chief Executive Officer, and Michael Marti, Chief Financial Officer. Both 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 the 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. Forward-looking statements are based on management's current expectations and assumptions and are subject to risk uncertainties and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors 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 that may cause actual results to materially differ from expectations 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 G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in 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.
spk07: All right. Thank you, Rocco. Good morning. Thank you, everybody, for joining us this morning. We appreciate your interest in FB Financial as always. So as we put a bow on 2022, we're pleased with some of the results from the year and we're disappointed with some others. We grew loans by 22.3% while holding deposits flat and keeping deposits flat in 2022 wasn't a bad result. We made strategic investments in people, systems, and processes that will propel us into the future. And we exit the year with strong capital and liquidity positions. With an adjusted ROAA of 1.11%, an adjusted PTPP ROAA of 1.58%, our profitability was not where we expected to be, which was disappointing. The restructuring of a mortgage segment, our capital and liquidity management actions in the second half of the year, and our operational enhancements scheduled for 2023, we feel We feel well positioned with those for a range of potential economic scenarios entering 2023. For the quarter, we reported EPS of 81 cents and adjusted EPS of 85 cents. We've grown our tangible book value per share, excluding the impact of AOCI at a compound annual growth rate of 14.8% since our IPO in 2016. On last quarter's call, I highlighted that we were prepared for a potentially challenging operating environment in 2023 by reining in loan growth, particularly C&D and CRE, and focusing on liquidity and customer deposits. This quarter's performance is a reflection of those near-term priorities. Our deposit portfolio increased by $850 million this quarter, or 33.7% annualized, which we are proud of. When you exclude the change in mortgage escrow related deposits, the true growth is actually $915 million, or 37% annualized, which is even more impressive. The deposit growth includes some seasonal increases in public funds, but the vast majority is customer funding spread across our customer base in both time and non-time products. The negatives to that stellar deposit growth this quarter were our decline in our non-interest bearing accounts, which were down $225 million during the quarter when you exclude the effect of the mortgage escrow deposits and the cost of our interest-bearing deposits, which were up by 93 basis points compared to the prior quarter. While our deposit growth came at the expense of our profitability this quarter, we felt some urgency to increase the deposit balances now as we expect deposit competition to intensify in the coming months. On noninterest-bearing accounts, we know some of that decline was a permanent movement out of the NIB bucket. With Fed funds being over 4% for the first time in 15 years, we're seeing less in idle funds sitting in noninterest-bearing accounts. While we expect tough sliding in noninterest-bearing growth for 2023, we believe the fourth quarter is defined as an anomaly, and this is always going to be an area of focus for the company. Our interest-bearing deposits, on our interest-bearing deposits, our goal with rates is to be able to continue attracting customer relationships that will be long-term, high-value customers to the bank. Since we intend to maintain a loan and deposit ratio near its current level, we have to grow deposits to grow the balance sheet. So our incremental cost of deposits will be near market rates. We limited our loan portfolio to 8.4% annualized growth after producing 20-plus percent annualized growth in each of the prior three quarters. We could have grown much more than the 8% by holding on to more of the balances that we originated as we sold $126 million in participations during the quarter. If we'd kept that $126 million in participation on the balance sheet, we would have had 14% annualized loan growth during the quarter. We think the current economic environment calls for caution around credit and liquidity, so we'll continue to intentionally limit our loan growth to keep our loan-to-deposit ratio in the 85% to 90% range and be conservative on credit until we gain some clarity on which asset classes will be impacted in this economic environment. As we signaled last quarter, our combined C&D and non-owner-occupied CRE balance has decreased $12 million during the quarter. We've not seen any negative credit trends in these portfolios to this point, but we're intent on managing our exposure down heading into 2023. With construction... We've been managing new commitments down since the early part of the second quarter of 2022, but due to funding of existing commitments, the balance has increased over much of the year. The balance decline we saw in the fourth quarter is the result of our management of commitments throughout 2022 and is the beginning of a trend of declining balances in that portfolio that we expect to continue throughout 2023. For mortgage, seasonality paired with market headwinds led to a loss of $4.2 million, free tax loss of $4.2 million for the quarter. While we felt that this unit was right sized following actions taken earlier in the year, we've continued to reduce the size and scope of the segment as the mortgage industry continues to hit new depths. The environment causes mortgage to be exceptionally difficult to forecast, so we're budgeting a positive contribution for 2023, and we're not comfortable right now getting a lot more precise than that. One last area that I'll touch on for the quarter is our commercial loans held for sale portfolio. We had a negative mark-to-market adjustment of 2.6 million in the quarter, primarily driven by one credit. The portfolio is down to three relationships with $30.5 million in remaining exposure. We believe that we will see full payoffs on two of those three remaining relationships in January and should exit the quarter with one remaining relationship and less than $10 million of remaining exposure. As a reminder, we marked this portfolio conservatively when we had the combination with Franklin and have experienced net gains of $7.4 million since closing. So as a result of the actions taken during the quarter, we entered 2023 with HFI loans to deposits comfortably below 90% and 85.7%. We also were able to pay down over $300 million in short-term borrowings at a cost of nearly 4% and have approximately $7 billion in contingent liquidity readily available should we ever need it. We maintained strong capital ratios for the CET1 ratio of 11% and our total risk-based capital ratio of 13.1% while repurchasing $7 million worth of shares following the decline in our stock price in December. We would expect similar balance sheet management throughout the first half of 2023. Our actions have positioned the bank for improved profitability and to go on the offensive once we gain clarity on the economic environment. Touching on a couple of our longer-term priorities that we'll continue to prepare for and execute here in 2023 are First, improving efficiency and effectiveness of our core community banking model through a project that we've had going on that we call First Bank Way. We operate through a local authority, regional present model that has served us well and will continue to serve us well into the future. As we continue to grow the company, we saw the opportunity to better codify the why and how of our community banking model. This allows us to better perpetuate our culture and our banking model as we grow. It also ensures consistency of processes that allows us to deliver efficient and effective customer service across our footprint while improving the associate experience. In 2022, we committed significant time and resources to what we wanted our community banking business model to look like as we grow from our base of $13 billion in assets today. Much of the implementation will take place in 2023, and we're excited about seeing the fruits of that labor. Second, our local authority model is a weapon that positions the bank for strong organic growth via relationship manager recruitment and lift-outs of existing teams in new markets. We had outstanding results in our Memphis and Central Alabama regions recently as a result of lift-outs of strong teams, and we continue to hold discussions with bankers across the southeast, both in existing markets as well as in continuous geographies. Third, we'll continue to have a dialogue with a small number of banks that we find attractive as merger partners. We position the balance sheet and our internal processes and procedures to be able to act when one of these handful of banks decides to find a partner. The current uncertainty around the operating environment clouds the timeline for some of these management teams. With the scarcity of potential partners that have the qualities that we value, we want to be in a position to act if the opportunity presents itself. So to summarize, we defensively positioned ourselves over the last half of 2022 to put the company in a position to improve profitability and go strongly on the offensive when we gain comfort with the economic outlook. We've also undertaken a number of strategic initiatives that will benefit our customers and associates and make us more efficient operators. We believe this improvement will create superior returns for shareholders through strong organic growth and the capacity to capitalize on opportunities. I'll now turn things over to Michael to provide more detail on our financial performance in the fourth quarter.
spk06: Thank you, Chris, and good morning, everyone. I'll speak first to this quarter's results in our core bank. Our baseline run rate pre-tax pre-provision income was $55.5 million in the fourth quarter. Pointing to the core efficiency ratio reconciliations, which are on page 19 of the slide deck and page 19 of the financial supplement, we had $111.3 million in core bank tax equivalent net interest income this quarter. Along with that $111.3 million in net interest income, we had $11.1 million in core bank non-interest income. Finally, we had 66.9 million in bank non-interest expense. Together, that comes to our 55.5 million in run rate PTPP, which has grown 27.7% over the comparable 43.4 million that we delivered in the fourth quarter of 2021. Moving on to our net interest margin, with summary detail on page five of the slide deck, our net interest margin of 3.78% contracted by 15 basis points from the third quarter. Nine basis points of this decline can be attributed to lower loan fees that were a result of less loan origination activity. The remainder of the decline can primarily be attributed to balance sheet restructure and the cost of interest bearing liabilities accelerating at a faster rate than our yield on earning assets. Looking forward for our margin, we had a run rate margin for the month of December in the 3.75% range, inclusive of 23 basis points of fees on loans. Our cost of interest-bearing deposits was 1.97% in December versus 1.67% for the quarter. From our deposit cost trough in February of 2022 through the month of December, we estimate that we have experienced a roughly 40% beta for our interest-bearing deposit costs. Contractual yield on loans continues to get a lift from Fed rate hikes and was 5.61% for the month of December as compared to 5.45% for the quarter. While we repriced the existing deposit portfolio in the fourth quarter, which ultimately led to the decline in overall margin, our spread on contractual yield on new loans originated as compared to cost of new deposits raised continues to be in excess of 4%. With the increase in deposit costs having accelerated as rapidly as they have in the fourth quarter, we are cautious in our forward guidance. Our best estimate right now for the first quarter would be that we hold margin relatively close to December's margin. We anticipate mid to high single-digit loan growth for the year, and we will work our funding sources to manage the cost of incremental deposit growth. We anticipate banking non-interest income in 2023 to be in the $10 million per quarter range, And as I mentioned earlier, our core banking non-interest expense was 66.9 million in the fourth quarter. We expect continued growth in our banking non-interest expenses due to higher regulatory costs and inflationary pressures. For 2023, we're currently estimating mid-single-digit growth over the fourth quarter's annualized run rate of 267.6 million. Moving to mortgage, we posted a loss for the quarter as the impact of rising interest rates combined with seasonality drove down demand of rate locks by 31% quarter over quarter, subsequently reducing revenue. While we had hoped that we were done with our restructuring, the continued reduction in volume created additional evaluation of staffing and organizational structure in order to position ourselves to return to operational profitability as seasonal headwinds dissipate. While we do not expect Q1 to be profitable, we would expect minimal losses if the environment holds in this current state. Moving to our allowance for credit losses, we saw our ACL to loans decrease by four basis points this quarter, and we recorded a release of $456,000. Economic forecasts deteriorating slightly from quarter to quarter were offset by improving overall portfolio metrics and a lower required reserve on unfunded commitments. We have continued optimism for the long-term health and growth of our local economies, but we're closely watching inflation that we're experiencing and the increasing conviction of many economists that we will soon enter a recession. If conditions do not change, we would anticipate maintaining a similar level of ACL to lowest health or investment over the near term. With that, I'll turn the call back over to Chris. Thanks, Michael.
spk07: Again, we are a quarter pleased with how we're positioned and prepared for what's coming. Thanks for the prepared remarks, and we will look forward to questions.
spk00: Thank you. We will 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, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Matt Olney at Stevens, Inc. Please go ahead.
spk04: Hey, thanks. Good morning, everybody. Good morning, Hank. Good morning, Matt. You mentioned the deposit growth would continue and be relatively, I think, in line with the loan growth. Any more color on what the market rates are you're seeing for the incremental deposit growth in recent weeks?
spk06: Yeah, Matt, good morning. Yeah, I mean, We saw kind of the time deposits, depending on term, coming in around 350 basis points, and that's kind of an 18-month weighted average term there. And money market came in really market rates below Fed funds, but call it 60% to 80% of Fed funds is where we're seeing money market rates coming in. So really right at market there. Okay.
spk04: Thanks, Michael. And then on the non-interest-bearing deposits, just thinking about your prepared comments, Chris, it sounds like you expect continued pressure on those balances, but perhaps not to the same degree that we saw in the fourth quarter. Did I get that right? And any more color on why that would be?
spk07: Yeah, I don't really... Yeah, I think you heard it right, but let me shed some additional light on it. I mean, I think... Yeah, I don't think that they'll continue to move down like they did in the fourth quarter. As a matter of fact, I think they'll likely stabilize to a large degree. But I do think that that's going to be a point of pressure. I mean, you've seen it, frankly, over the last couple of years grow pretty easily. You didn't even have to do much. The balance just grew and increased. You know, if you go back to when we were having these calls in the latter half of 2020 and throughout 2021, there was a common question of how much of that you think is sticky, how much of that you think is real. And we always answered the question, and I know most others did too, we're not sure. We don't really know. And so the fact of the matter is we still don't really know. We knew that some of it would leave, you know, you're seeing – consumer accounts finally begin to return to the balances they had in them pre-COVID. And so we just think that's going to be a tough market for non-interest bearings in 2023. But we also think that, especially in the last half of the year, You began to see balances leave those and we think that that a lot of them I guess I caught the low hanging fruit for That you knew would would likely be leaving probably left in the in the fourth quarter or I'd say in the second half a year But I'm but I'm also qualifying that by saying we're not sure to be honest with you Understood okay, and just finally I
spk04: As far as the outlook on the net interest margin, Michael, you mentioned, I think, a few things. I think you mentioned that kind of the incremental spread there in 23 would be similar to December level. Did I catch that right? And just remind me what you saw in December again.
spk06: Yeah, the net interest margin for December was about 375. So, you know, as the outlook right now, we feel like we can maintain around that level. spread on kind of new loans first, new deposits is coming in over 400 basis points. So if you kind of think about that 350 number I just pointed you to on your deposit cost question, I'd say that new loans are coming on in that 750 plus range. Got it.
spk04: Okay. Thanks guys.
spk07: Hey Matt. Yeah. I would just add this on the deposit side. We did feel a need to get out front on deposits. Obviously, we had a big deposit quarter, and it was expensive. We expected it to be, especially as we got deeper in. If you look at where we were headed from a loan to deposit ratio and the way that our arrows were trending with three quarters, 20 plus percent loan growth, and knowing that deposit growth was going to get difficult. Also, remember we did have a reduction back in July of one account that we didn't renew That was a $500 million plus account, actually plus. And so with all that, we felt the need to really get out front. And so we knew it would be expensive. But when we look at the balance of 2023 and look at our projections, we feel pretty good about where we put ourselves with regards to how margin looks moving forward.
spk04: Understood. Thank you, Gary. All right. Very good. Thank you.
spk00: And ladies and gentlemen, our next question today comes from Catherine Miller at KBW. Please go ahead. Thanks.
spk01: Good morning.
spk07: Thanks, Catherine.
spk01: Chris, you talked a lot about the efficiency initiative that you've got to help profitability this year. Can you give any guidance on just core bank expense growth outlook, excluding some of the mortgage noise? And then And then separately, maybe kind of thoughts around efficiency initiatives that you specifically have within mortgage as well. Thanks.
spk07: Yeah, sure, Katherine. So a couple things. When I talk about efficiency initiatives, again, remember also historically where we're coming from, We went from $6 billion at the start of 2020 to $13 billion today in asset size. There were two acquisitions that we closed in there both in 2020. One was converted later, I think. One was converted later, but we closed two acquisitions in 2020 remotely, by the way, during COVID, and then we – went through the $10 billion barrier. And so with all that, we just said, you know, it's a good time in 2022 to be able to really do a deeper dive on our core banking model, make sure that it's scalable. We refer to ourselves as a scalable community bank, and so make sure that we've got the right scalability, we've got the right model that we want to move forward with. That's a collection of the things we – We've learned over the years and so we've done that and so as we implement different pieces of that in phases, we're excited about what that means to us. It frankly is not intended to be an efficiency ratio in terms of the efficiency. exercise in terms of the efficiency ratio. That's not why we did it. We did it for scalability purposes and to make sure that we had the model right. But one of the outcomes is we're going to gain some efficiencies from it. And so we frankly hadn't spent a lot of time quantifying those. That being said, we're looking at a 6% to 7% type of expense growth over the fourth quarter as we go into next year. We feel pretty good about that. On the mortgage front, the second part of your question, we've been through, I'd call it two phases of of expense reduction there and at this point it's now also a very vigilant approach to expenses in that part of the business. Man, it's been hard to try to forecast mortgage. It still is hard. We're forecasting it to certainly have a positive contribution next year, but we're frankly not comfortable saying much more than that. Other than, you know, we'll experience the normal seasonality. We'll be a little lower in the first quarter, a little lower in the fourth quarter, but the second and third quarters should be – that's where we should really see a higher level of contribution. So I don't know if that helped you on mortgage other than the fact that it's, you know, given where it is, it's a constant expense initiative for us.
spk01: Got it. And so then if I, so your comment on the 6% to 7% growth rate, so for that, are you saying I should take this, fourth quarter 22, you know, ex-mortgage expense base of about $67 million and then grow that at 6% to 7% and that's my annual expense number for 23?
spk06: That's right, Catherine. If you're basically, what I was in my comments saying, you take that $67 million and annualize that and then grow it off that base at 6% to 7% is where we think we'd end up and Yeah, I will say there's some regulatory stuff in there, you know, FGSN expense going up and some of that as well, so a little bit plungeable, but that should be the range.
spk01: Got it. And then with that, should we assume, I mean, you're still growing, you know, at a slower pace than obviously you were last year, but still, I feel like you've still got kind of an expectation for balance sheet growth into next year, and if that's coming, That's still an incremental 4%-ish margin, just given your kind of December NIM guide and the difference in your deposit costs and new loan yields. I mean, that 67% expense growth is still coming with NII growth in 2023. Is that correct?
spk07: You're right. You're right. Yes.
spk01: Great. And then do you have flexibility in your expense plan if The NII growth comes in less than expected. I guess the question is, how much flexibility do you have to kind of control that operating leverage if the margin compresses more than expected as we move through the year?
spk07: Yeah, so we do have some levers, Catherine. We feel like in a couple of places on both sides of that equation. And again, that's what we were trying to create in the fourth quarter. was try to give ourselves a little bit of some levers that we could pull on the net margin side, and then we also have levers that we could pull on the expense side.
spk01: Great. Great. Thanks for the commentary.
spk07: Thank you.
spk00: Thank you. And our next question today comes from Brett Rapaton with the Hovde Group. Please go ahead.
spk08: Hey, guys. Good morning. Good morning, Brett. How are you doing? Doing great. Thanks. Wanted to use a football analogy, Chris, and college football analogy. And, you know, you guys are usually in the playoffs in terms of profitability, but obviously mortgage banking has been a stymie to that, you know, here in the past year. And so, you know, my question is you're obviously in a better position to than a lot of the industry related to reserve build need. But my question is, do you really need mortgage banking to get back to a solid level of profitability to get back in the playoffs? Or do you think that this first bank way and the initiatives you have in place could get you back in the playoffs?
spk07: Yeah, I like your analogy, by the way. And so I'm going to give you one back. Man, at the risk of – Michael was pointing to his University of Alabama socks, which he has on. And so at the risk of – I'll keep this short, but I use an analogy. I do orientation for all of our folks. Every single new hire, I spend about two hours with all the new hires going through culture and mission and values. And, Brett, I use a football analogy. I use a college football analogy because that's big in our part of the world. And one of the things I tell them is, hey, you joined First Bank. You need to feel like you – and some people, by the way, would really like this analogy, and some people are envious of it. But I say you need to feel like you just signed a scholarship with the University of Alabama to play football. because that's exactly what I said. I said we compete for the national championship every year. We go to the college football playoff almost every year. We expect to be there all the time and realize that's what you just signed on for when you took a job with First Bank. So I use almost a very, very similar analogy when I talk to all of our folks. And when you said, you know, you missed the playoffs this year. I'd say another term I use, I'm going to refer to the book Good to Great, is confront the brutal facts. I use that one internally a lot. And I would say our internal talk is a little tougher than you missed the playoffs this year. You know, you need to confront the brutal facts that we haven't had a good year in terms of profitability. And if you go back, Since we've been a public company, we've never had a return on assets less than 1.5% until this year. And so, Catherine, right in front of you asked about levers we could pull. We have levers that we can and will pull because this organization doesn't miss the playoffs. We do not – we also don't like – I tell them unless we're in the top quartile, then it's not acceptable performance. And so now to a couple of specifics. Mortgage has been a great contributor for us. You don't have to go back to 2020 when we had a $105 million contribution. from mortgage, and so it's been a great contributor for us. It's been an important additive for us. We do not have to have mortgage, and we're very specific. You'll notice a lot we talk about the bank segment a lot. That bank segment actually had a pretty good year, and if you look at some of the numbers on the bank segment, again, a pretty good year there, and we would be certainly well in the top half of our peer group, probably top quartile of our peer group, the bank stand alone, we had a significant, more than a 20 cent EPS, close to a 30, you know, between 20 and 30 percent impact, 30 cent impact of mortgage negative this year. And We've made some changes there, and we'll continue to make a few more. We don't have to have mortgage to be that 1.5% ROA, but with it, we expect to be actually higher than that. That's the way that we view it.
spk09: Okay.
spk08: That's a lot of gray color. And the other thing I wanted just to make sure I understood was you obviously linked quarter, improved the liquidity, some extra cash on the balance sheet at the end of the quarter, and you talked about managing it similar going forward. Can you maybe go into the interplay between the seasonal funds increase and how much that might come back down? And if you're expecting any other – I know it's tough in this environment, but any other makeshift change to affect what you do with the balance sheet in the near term?
spk07: Yeah, just, Michael, I'll let you come in. I'll make a couple of comments. So we had some federal home loan bank borrowings, actually $540 million at the end of the third quarter. We paid that down significantly by the end of the year. We subsequently, by the way, paid it off, and so it's zero today. That's post-2020. the end of the year. We have always funded our balance sheet through customer deposits, and we intend to continue to do that. On the public funds, they usually actually stay pretty robust through the first quarter, and so it'll be late second quarter when they start to pay down some, and they'll pay down into the third quarter, but then start funding up usually at the end of the year. And so that's the cycle we see, and we manage around that. Michael was saying. Okay.
spk08: Yeah, that's great, Kyle. I appreciate it.
spk00: All right. Thank you. And our next question today comes from Stephen Scalton with Piper Sandler. Please go ahead.
spk10: Hey, good morning, everyone. Good morning, Stephen. I wanted to follow back around the funding cost a little bit and just – I'm curious, one, if you could remind us kind of how much of the public funds deposits are more directly indexed and, you know, maybe more like 100% made on those public funds versus some that are maybe, you know, longer term or tied to different metrics. And then kind of what you expect to see in terms of incremental interest-bearing deposit betas. I think you said, Michael, we were looking at 40% cycle to date so far and just kind of where you think that can play out. Maybe... on your core customer deposits in particular.
spk07: Yeah, on the public funds first, and Stephen, I'm sure I don't have exactly how much of that is tied to an index, but I will say this. It's a mixture. We have a mixture in there of even non-interest bearing, some indexed, a little bit of time, and and some that sits in a non-time instrument that is not indexed. And the bulk of it would be in the non-time, non-indexed, as well as the non-time indexed would be the bulk of it. There's not a lot in time, but there's a little bit, and those are all negotiated over time. And frankly, we don't that'd be the least, we don't have a lot of time, but there's just a little bit.
spk06: Yeah, and Stephen, on the go-for beta, I mean, the fourth quarter, obviously, with our deposit raise there, you saw betas accelerate significantly. Over the cycle, if you look back through February, where we came to that kind of 40% range on interest bearing and low 30s on total deposits, yeah, I would expect that We'll see in that mid-40 beta range as we look in 23, but it is highly dependent on really what our peers do. We feel like we can maintain this level and recognizing deposit costs are going to go up. I will say on index, we don't have a whole lot of stuff that's indexed 100% to any rate, so just... as Chris mentioned, don't have that exact number, but it's not 100% one-for-one. Fed fund goes up, deposit cost goes up on the accounts. There's not a ton of that stuff. So a lot is a percentage. It varies, and we have certainly seen deposit costs go up. Expect them to incrementally move higher, but hopefully rate cycle kind of settles in here with the Fed, and we'll get a normal operating environment.
spk10: Yeah, okay, that's helpful. And I guess overall, I mean, if I'm listening to your comments kind of holistically, it feels like you guys think maybe you, you know, growth maybe put you behind the curve on deposits to some degree throughout the year with really strong growth. And this quarter may have put you ahead of the curve relative to peers for the rest of 23. Is that the right way to think about it? Well said. Yeah. Okay. Great. Great. And, um, Thinking really briefly about expenses, I noticed the other expenses were up a good bit. Was there anything notable to call out there, or is that some of the regulatory costs, Michael, that you mentioned is kind of embedded in some of these numbers?
spk06: Nothing to notice. Well, I think the difference, third quarter versus fourth quarter, is kind of the Tennessee franchise excise tax is rolling through there. That was a major piece. It wasn't in the third quarter. but in the fourth quarter.
spk10: Gotcha, gotcha. And then maybe just two quick ones left for me. One, on the participation side, sound like that was more about balance sheet management than risk management, but maybe a little bit of both. Are there particular categories you're trying to participate out more so than others, maybe that C&D and CRE like you spoke to, or is that indeed more just about controlling the pace of growth?
spk07: Yeah, it's total balance sheet management. If you think about it from a risk management side, The folks that we're going to participate to are going to be friends of ours, and so we're not going to participate in anything that's going to create credit risk. Well, we're never going to knowingly participate in anything that's going to create credit risk for them. So it's all about balance sheet management for us. And the bulk of that would be CRE. Occasionally we can do some construction. Construction's harder to do a participation on because it's lines, withdraws against it, and it's just a little more work on the participation side versus a CRE. And we're usually participating with either peers that are our size or, you know, there's one or two that are quite a bit larger than us that are good friends that we would participate with regularly. But the rest of them are smaller than us, community type banks. And frankly, they love it if they can get that CRE when we're willing to sell it down.
spk10: Got it. That's helpful. And then maybe last thing, just on the share repurchase, I know you said about $7 million in the quarter. You've had some insider buys as well. Stock's a little lower, I think, even than where you bought back that $7 million, if my math is correct, in the quarter. Do you become more active on the repurchase at these levels, or is capital a constraint there? How do you think about that repurchase from here?
spk07: Yeah, we think about that very cautiously from here. But we'll think about it cautiously. I wouldn't say we – but we do have the capital – to be able to do it if we need to do it. And so it's a tool that we'll use.
spk10: Got it. Very helpful. Thanks, guys, for all the color. Appreciate it. Thanks, David.
spk00: Thank you. And our next question today, Councilman Kevin Fitzsimmons of DA Davidson. Please go ahead.
spk09: Hey, good morning, guys. How are you? Good morning, Kevin. We're good, Kevin. Hope you are. Good. Good. Thank you. So just You know, we've had a number of questions on this, but I just want to make sure I'm thinking about the right way. So the deposit growth was really a very accelerated effort in this past quarter. And then going forward, it's put you in a position that now you're expecting more deposit and loan growth to be kind of in line and thus keeping the loan to deposit ratio roughly where it is. Is that correct?
spk07: Yes, Kevin, you think of that correctly. When we ended, we were just over 91% loan deposit ratio in the last quarter. We want to be in that 85% to 90% range, so it doesn't bother us to get up to that 90%. You'll see it. We'll manage it within that range, and so what that means is we'll be growing loan deposits as we run a loan portfolio. It's And so we'll be – but we – again, we do feel like we gave ourselves some room. And we also – I mean, because as I said, we paid – we don't have short-term – I mean, we basically paid off any short-term borrowings, and we're – we feel like we're in a really good position.
spk09: Okay. And as far as the margin, how to think that through, so – I appreciate the color on the 375 December margin, and I think what was said was you're probably going to hold the margin roughly at that level. If we're looking beyond that, and just assuming we have a few more hikes here of 25 basis points, is it Is it reasonable to think about the margin just grinding lower from that level, but the balance sheet growth you alluded to before still able to drive dollars of NII higher throughout 2023?
spk07: As we move forward with our budget and look into the year, We've traditionally said we'd be 10% to 12% loan growth organically for the year. We could be a little less than that, but we certainly anticipate some healthy loan growth during the year. We've been getting a good spread on that. I do think loan growth is going to get harder as we get into 23. you know, demand could become an issue with generating loan growth. Again, we've typically led our peers in terms of that metric and that ability to generate that. But if you look at it that way, we don't see the NIM grinding significantly below this. You know, it could, you know, give us a little bit of range there, but we're as we look out in the year, we're going to try to hold near at least where we are, again, with a little bit of flexibility, range for flexibility there.
spk09: Got it. And just your comment before, Chris, about loan growth. So really the reining in on loan growth was much more proactive in terms of participating out and letting some of that C&D and CRE run off. But as far as core loan demand and the loans you want to book, you haven't seen a dramatic fall off in that yet?
spk07: No, we really haven't. We have seen it slow. late in the year, we did see loan demand slow some. It's slower as we start the year as well. So I do think all the things that the Federal Reserve has been trying to accomplish, I think some of them they are because we do see less demand than we did six months ago or even three months ago in terms of loan demand. Now, that being said, like I said, if you add those participations back to the balance sheet, we've grown 14% in the quarter on an annualized basis. So that's still pretty strong. But we were 20% plus the previous three quarters. Right. Right.
spk09: Okay. All right. Thanks very much. All right.
spk07: Thanks, Kevin.
spk00: And, ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then 1. Today's next question comes from Teddy Strickland with Jannie Montgomery Scott. Please go ahead.
spk05: Hey, good morning. Good morning, Eddie. So just going to clarify one more time on an earlier point. It sounds like you're confident you can continue to grow deposits and manage loan growth accordingly. So we really shouldn't see wholesale funding increase over the next couple quarters. Is that right?
spk07: Well, let me put it this way. I think your premise is correct, because our intent is to try to grow loans and deposits at about the same rate. Now, we do have access to the wholesale funding, but we want... Our view is we want to be able to use that to improve our profitability. We don't want to use that because we have to have the funding in order to fund our loan growth. And so we want to use it as a tool, not as something we have to rely on because we get overextended. Got it.
spk05: That makes sense. And kind of along that same line of questioning, as you're managing your earning asset growth, whether it's loans or securities, Is pledgeability of potential collateral to places like the Federal Home Loan Bank a consideration in terms of choosing what assets you decide to put on the balance sheet, or do you already feel like you've got more than enough collateral that that's not really as much of a consideration?
spk07: Well, I'd say it's always a consideration because – almost always – because you like to keep yourself as – lean and flexible as possible. And so we do think about assets for pledging, how much free collateral we have, and that causes us, for instance, I made reference to us not keeping some public funds that required collateral because we knew we could go get the money at the same rate or cheaper from customers, just by increasing customer deposits. We take the approach of we'd like to have as much free collateral as possible, again, because we like to be in a position to be opportunistic when opportunities present themselves. One other thing, and I haven't talked about this in a long time, but going back three or four years ago, we used to talk about it all the time. is almost 100% direct customer funding and direct customer loans. We utilize, we have almost no broker CDs on the books. We have almost no, only broker CDs and internet deposits that we have on the books came through acquisition and are still there. and they're less than $2 million, I think. So less than $2 million in time deposits. And so we just don't utilize those broker deposits or internet time deposits. We use direct customer assets and direct customer funding, which, again, we think is how you build value in your franchise is by building customers. And so when we think about wholesale, The times that we're tapping those channels, like I said, is just to improve our profitability, not because we have to do it.
spk05: Got it. That's really helpful. And then just one last question for me, just curious. In terms of deposit competition in your markets, are you seeing more from bigger national competitors? Is it smaller local banks? Is it a mix of both? I was just curious whether – You know, one type of bank is a little more aggressive than another.
spk07: Yes, is the answer. So, you know, I'd say it comes in pockets. We've seen a couple of products, one particular product, I guess, from some of the big banks that has some attraction to it, but that's it, I'd say from the bigger banks. and they're still not very reactive as you move money away from them. The regionals, I would say they're almost versus size of bank, it's almost more profile of bank. Those banks that are I'm going to call them high-performing, rapidly growing banks, are really competitive on the deposit side because they're in the same position that we are. They're growing their franchise and they're growing their business, and you can't do that without deposits. And so they're aggressive. And so I'd say it depends more on the profile versus the size. But the other thing I would say, and this just frustrates the heck out of us, is we see some crazy things from some small banks in some of our markets. I mean, three times a week, you know, if one of our markets is sending over an ad, I mean, literally an ad for folks running five and a quarter CD campaigns, folks running a 5% money market, and it'll be, you know, I'll call it a less than a billion dollar bank that apparently needs the funding. But we do see quite a bit of that from small banks.
spk05: Interesting. No, I appreciate the color, guys, and thanks again. All right. Thanks, guys.
spk00: Thank you. And our next question today comes from Jennifer Dunbar at Truist Securities. Please go ahead.
spk03: Thanks. Good morning, everybody.
spk07: Good morning, Jennifer.
spk03: You know, your asset quality has stayed really, really strong. I'm just curious, Chris, what categories in your loan portfolio concern you most as if the economy weakens significantly here?
spk07: Yes. I'd say three things. Construction and CRE would be the ones that would concern you most. Certain pockets of the CRE. I say construction because it's a risky asset and you can get surprised. I just go stick my head in on the credit folks, Greg Bowers especially, often just to go, hey, how we feeling? How's your day going? I ask about construction, and we know our construction customers well. While I think that's probably a bigger concern for the industry, and I say all the time, Every bank thinks their credit's great and they're not going to be the ones. I always say, I didn't come up on the credit side or the commercial side of the bank, so I don't say that. That being said, I know most of our big construction customers and we've had them for a long, long time and we feel really good about them. Frankly, I don't worry about it quite as much for our portfolio as I do for the industry. I do worry about pockets of commercial real estate because there are things that office can get Again, we don't have a lot of office, but I think the office space could get soft. I think it has gotten soft in places. Our residential book, again, we can have some small stuff in there on the construction or other residential. Again, the big stuff we have, we feel quite good about. The other one I think about is, remember, we have a specialty portfolio in manufactured housing. And so I watch past dues on that quite a bit. I watch anything else from a non-accrual standpoint. And, again, it's performed as, again, if you go back to the acquisition of Clayton, we've been in that business for 14 years. And before the cycles hit, they'll go, well, here's what's going to happen to past dues, and they've been calling it right. And so past dues are up a little bit, but they're not out of line with where they were back in 2019 or so. But those are all the ones that I stay particularly vigilant on.
spk03: Could you give us a sense of what the office portfolio does look like for FBK?
spk07: Yeah, there's a slide in the deck. On our CRE, we've got about 23% of our CRE exposure is office related. You know, we don't have any high rises in downtown Nashville, downtown Memphis, or any other downtown right now. At least I don't think we do. I don't think we have that. We do have some smaller office buildings with really, really good clients that are sitting out there. But, again, we feel pretty good about those. Like I said, we don't have big and we don't have pieces of $250 million office buildings. We just don't have those in our portfolio. It's going to be, again, direct to a customer that we know we originated, and it's going to be a manageable balance is what would be in that office portfolio for us.
spk03: Okay, and one last question if I could. What kind of economic scenario is assumed in your loan loss reserve as of the end of the year?
spk06: Hi, Jennifer. Hi. We actually have a mix between baseline and S2. About a 75% baseline, 25% S2, but there's some qualitative in there as well. the economic scenario has changed pretty rapidly there between third quarter and fourth quarter.
spk03: Thanks so much.
spk07: Yeah, and Jennifer, one thing that we haven't touched on, I don't think there were any questions on this, of course we did have a small, if you look at, we actually, if you look at our loans at HFI, we actually had a very small provision which would have added, again, a small amount to our ACL. We did have a negative provision or a provision release related to our unfunded commitments, and those unfunded commitments, again, we've been managing those commitments down, particularly in the construction area, and that's what led to the small release. And we were comfortable with that, even though we've tried to be absolutely as conservative as we could be in managing the loan portfolio and in managing that ACL. And we've kept it at one, it's still at 1.44% of loans held for investment, which we, again, find to be quite high, actually, in terms of if you look at it relative to loss experience. And so we still feel pretty good about where it sits.
spk03: Great. Thank you.
spk07: All right. Thank you.
spk00: And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Holmes for any closing remarks.
spk07: All right. Once again, thank you very much. We appreciate you being with us. We always appreciate your interest in FD Financial and Operator at this point. We're finished, so thanks very much.
spk00: Thank you, sir. This concludes today's conference call. You may all disconnect your lines and have a wonderful day.
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