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 Mettee, 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 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 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. GAAP 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 earnings release. Supplemental financial information in this morning's presentation, which is 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.
All right. Thank you, Jason. Good morning and thank you for joining us this morning. As always, we appreciate your interest in FB Financial. For the quarter, we reported EPS of $0.68. We've grown our tangible book value per share, excluding the impact of AOCI at 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 FirstBank, 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-interest-bearing 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 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 banking segment delivered a PPNR to AA 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 to operational profitability in both August and September. While the seasonality of the fourth quarter and the first quarter will exacerbate the current headwinds in the industry, we would expect to be close to breakeven for the next couple of quarters.
While we are pleased with the 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 would 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 as 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 continuing 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 bid 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 position. Following this quarter's deposit activity, we're now at 91% HFI loans to deposits and securities to 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%-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 FirstBank 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 those 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%. Our tangible common equity to 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 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. Our 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 the 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 one high quality potential partners. If one of those banks that we know well decide to sell 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 pretax preprovision 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 5 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 7 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. 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 up to 6.18% in the month of September. 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. 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.
The competition for deposits across our markets is causing betas to accelerate, which should cap some of our upside. For banking segment non-interest income, we continue to expect our banking non-interest income to be in the $10-$11 million range 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 credit that reduced non-interest expense this quarter. That number is higher than the $63.8-$64.3 million that we guided to for the quarter, as we accelerated a few of our internal projects geared towards organizational efficiency into the third and fourth quarters.
As we 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 to 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 ACL to loans increase by two basis points this quarter, and we recorded a sizable provision of $11.4 million.
Economic forecasts 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 economists 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. We're pleased again with our results for the quarter and feel prepared for what's coming next. That concludes our prepared remarks. Thank you, everyone, again, for your interest in FB Financial. Operator, at this point, I'd like to open the line up for questions.
Thank you. We'll now begin the question-and-answer session. To ask a question, you may press star then one 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 two.
At this time, we'll pause momentarily to assemble our roster. Our first question comes from Catherine Mealor from KBW. Please go ahead.
Good morning.
Good morning, Catherine.
Michael, you gave great detail into the margin, which I found really helpful, especially the spot rates at the end of the quarter. 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. 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.
Yeah, it's a great question, Catherine. Yes, the FHLB 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, I'd say it's actually already moved down some from where it was at quarter end. We don't anticipate. That is more temporary.
Great. Okay. Move that down and increase customer deposits from here. That as loan growth slows should be an easier balance, I would assume you're not growing at 22% for the loans anymore.
You got the message.
Yep. I got loud and clear. Loud and clear. One other just switching to credit. It was interesting looking at your reserve. You know, looks like a lot of the higher provision this quarter was really just from the loan growth. I did notice on your CECL slide that you increased your reserve on the residential mortgage portfolio. Just curious what drove that? 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. I would think you would be a bank that would have, you know, relatively less risk for reserve buildings from here. Just kind of curious how you're thinking about that as we get into maybe a more recessionary period. Thanks.
Yeah. Catherine, Michael, good question. The reserve around consumer and residential was impacted more so this quarter by the Moody's scenario. That's really the number you're seeing there on 1-4 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.
We feel like we're in pretty good shape there, and we expect it to maintain the same level of 145-150 on a go forward basis, given our kind of economic outlook here, which is probably a little bit more bearish than some others.
I think maybe also you're asking, Catherine, if it's, you know, if we're going to build above this one, like we're at 148 for the quarter. Actually it could go to 150, but no, you know, 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 what we've if that's what you're asking on the build side.
Yes. Yes, that's helpful. That's really helpful. Okay, thank you so much. Great quarter.
The next question comes from Stephen Scouten from Piper Sandler. Please go ahead.
Hey, good morning, everyone. Can you hear me?
Hey, Stephen. Good morning, Stephen. 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?
Stephen, we're still seeing loan yields move higher. They've moved pretty much in line. We don't see a whole lot of expansion in margin, you know, above this 4% range kind of going forward. I think one of the challenges will be balance sheet mix a little bit, as our deposits grow, put a little bit of pressure on NIM. For now we are seeing increased deposit costs. They are higher betas, relative to new production where rates are 3.5% Fed funds, but we're seeing that incremental loan yields as well. 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.
Okay, that's extremely helpful. 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 in at?
Yeah. Kind of a mix of money market and new CDs. We're seeing call it odd term, 13 months at around 3.10%-3.15%, you know, 18 months.
Around 3.35-3.40-ish. Some of the shorter terms in the upper 2s. I will say, depending on the market, you'll see some widely varying competitive rates. We see well above that in some of our more community markets on CDs. 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.
Okay, great. 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, change in 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?
Yeah, I mean, 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 and mark-to-market is you take a hit on when your pipeline shrinks, and so we incurred that in July as you know, we moved out of the direct consumer business and retail business slowed as well. You can see our volume drop $200 million on interest rate locks. And then on the MSR side, you know, 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%.
We've had to modify some of our stock hedges there to kind of maintain current valuation. I wouldn't expect swings in the MSR widely unless you know interest rates just get more and more volatile. Hopefully, most of that's behind us as well. Yeah, mortgages seem to be stabilized. You know, we've got some seasonality ahead of us and hopefully the waters will be much calmer from here. Yeah.
Okay.
I would just, Stephen Scouten, I'd 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 their kind of overall from our peak. That was painful. If you just and the second thing, going back to what Mike was talking about on that mark-to-market, you know, you have to mark your mortgage loans held for sale. You know, if you go back to the third quarter of last year, we had $750 million in mortgage loans held for sale. The end of this quarter, we had $97 million.
If you think about that reduction in what you're marking, you know, and you have to step that down, which we've had to step down over the last four quarters. That's down to $97 million at this point. It can't drop that much further from there.
Got it. Makes sense. Thanks for all the color. Guys, appreciate the time.
Sure.
The next question comes from Jennifer Demba from Truist Securities. Please go ahead.
Thank you. Good morning.
Hey, Jennifer. Good morning.
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?
Yeah. I'll comment on a little bit of that. Well, we don't usually speak specifically to other institutions. We do have some institutions that are undergoing you know big transactions and right here in our core markets. We hear a lot about that. We see movement from that both customer and associate. That leads to you know just a lot of conversations with folks.
It goes back to within 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 just don't come available. They're not gonna come available again, probably, at least in my career, over the next decade. You know, we're gonna make a hard move for those whenever that's the case. It's the same way with some of these associates. We're looking at revenue producers across our footprint. In addition to that, the bank, the banks, FirstBank, if you go back to 2000, it was about a $6 billion institution.
Now, I'm sorry, in 2020, it's about a $6 billion institution. Then if you go look at 2022, it's a $12 billion institution. We've also gotten opportunity 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. We've even, our chief risk officer came to us from Texas. By the way, it's never easy to move people out of Texas. We... 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.
Great. Question on asset quality. What does it 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?
Yeah. Well, we had $15,000 net recoveries in this quarter. I'd like to just assume that we're gonna have net recoveries in perpetuity. Probably not gonna 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. Loan losses have not been, quote, "normal," in so long that we're not sure what that is. We have traditionally said, you know, somewhere in the 20-25 basis points has kind of been something that we model, but we're not sure that that's.
You know, I'd say there's a chance that it could be, you know, higher, especially in the latter half of 2023 or in 2024. You know, as charge-offs are lagging the economy. You know, I'd say they statistically could 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.
Mm-hmm.
I've said once on this call, I'll say it again, you know, in that portfolio, if you go back to 2020 and 2021, you know, 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. Today, if we didn't see those go up, we'd think something was wrong with our tracking systems or something. We have seen past dues go up to a normal level, which is, you know, closer to, say, 0.40%-0.65% of the balances as sort of a range.
We've seen it come back up to that range from being down to 0.2, 0.21 in 2020 and 2021. We mix all those together and roughly I'd say 20-30 basis points, something like that.
Great. Thank you so much.
The next question comes from Kevin Fitzsimmons from D.A. Davidson. Please go ahead.
Hey, good morning, guys. How are you?
Morning, Kevin.
I wanted to take a step back with all the, you know, the talk about the balance sheet and the 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. Now seems like we've had a bit of a handoff reversal on those contributors. If you look at dollars of NII, or 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 gonna be able to continue to grow in this environment?
Yeah. Hey, Kevin. It's Michael. Good morning. Yeah, you know, we still expect a couple more rate hikes, so the variable rate portfolio should still reprice higher. You know, we still expect, I guess relative to the last three quarters, we have modest loan growth over the next couple quarters. You'll still see some balance sheet growth. 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.
For sure.
Yeah. Because there should be some modest margin in there and some balance growth.
Gotcha.
Between the two, yeah, the absolute dollar should increase.
Just to clarify, Michael, when you talked about the margin now approaching 4% starting to stabilize, are you kind of saying literally at 4%, which is only seven basis points from here? Or are you just talking more of like a low 4% handle type margin if we assume continue to get more of a benefit from the Fed rate hikes, you know, over the next quarter or two, and then it levels off in a low 4% level? Just wanted to clarify.
Yeah. It's not a ceiling, for sure, so I'm not trying to imply that. I'm just, I think it's in the low fours in there over the next couple quarters, pending deposit costs, for sure.
Okay. 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 gonna moderate from what you've been putting up here in recent quarters. I just didn't catch what you had said relative to that long-term outlook. Thanks.
Yeah. Our long-term target's been 10%-12% annually. Typically, frankly, been if you go back last, I don't know, 5-7 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. You know, 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 a recession. 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. We put all those things into the mix and consider them all, and that's what we come up with, is we're gonna be on the low side of that 10%-12%, maybe even below. We think we'll continue to see growth. With that level of growth, we think it will actually be quite profitable growth for both through both the loans and deposits that we have.
Okay. Thanks, Chris. One last one on deposits. Do you guys feel that the 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?
Yeah. Yes, is the answer. We don't. I mean, because we've increased since the end of the quarter, we think that's set to continue. 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 a just the annual cycle. We feel like we're at a low point.
Got it. Okay. Thanks, guys.
The next question.
Thank you.
Oh, sorry. Next question's from Matt Olney from Stephens. Please go ahead.
Hey, thanks. Good morning, everybody. My question is similar-
Morning.
Morning. My question is similar to Kevin'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.
Um.
Go ahead, Mike.
Yeah. Matt, we've kind of continued to operate and look, we're getting a lot of opportunities come our way, a lot of different opportunities. We continue to kind of investigate things that augment our business and things that can ultimately provide a lot of efficiencies and really help grow some of our businesses. You know, 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 you know, kind of creates competitive technology that augments our community banking model.
I think ultimately, you know, we're focused on these relationships because they bring deposits to the balance sheet and, you know, 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'd just add in our relationship with USDF Consortium there and some of the founding entities and just the fact that we're active in the market just brings man a lot of exciting opportunities. Those don't have a cost attached to them. I think they don't have a material cost attached to them.
They do have some, but not a material cost attached to them today because we've got Wade Peery, 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 weeding through them.
Okay, that's helpful. Thanks for the commentary there. 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?
We're working through next year right now, so we'll have more update early in 2023. For the fourth quarter, I thought they're gonna be in and around this range, maybe some modest growth. We really did accelerate a lot of the expenses into the third quarter and have some stuff that could create modest growth, but nothing material.
Yeah, we got a couple of efficiency initiatives, working with some, in one case anyway, a third party, and we've really accelerated the initiative to try to get it done this year, again, in anticipation that next year could potentially, I don't know, could potentially be a tougher year. We've just accelerated that whole project, including the expensive project and the implementation, so.
Okay, that's helpful. Thanks for that. Switching over to the funding side and deposit side. I think you've been targeting a cumulative 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?
Yeah. Matt, that's right. I mean, we kind of, you know, with what they say about models, I guess you gotta 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, you know, that's why we continue to focus on non-interest-bearing deposits as well and growing that core customer base, it certainly helps to offset some of the increase in deposit costs for the franchise.
Okay. Thanks, guys.
Thanks, Matt.
The next question comes from Brett Rabatin from the Hovde Group. Please go ahead.
Hey, guys. Good morning.
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 linked quarter. 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 linked quarter increase in construction for the quarter?
Yeah. I'm gonna let Michael address it, but I will say this. That is, everybody may or may not understand, you know, the construction bucket is not easy to project because, you know, 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. Then some of them may never be drawn on. You're always trying to project that. Really what you have to manage in the present is the commitments versus the balances. We are really focused on the commitments and have been actually.
Commitments you have made, those can be drawn. That means that balance. Let me take that back. You can pull back on commitments, but then the balance may continue to go up from draws that have been previously committed.
Yeah, I mean, that's good commentary. I think we did have commitment increases from within 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.
Okay, that's helpful. Wanted just to ask, you know, Chris, you alluded to, you know, Jamie Dimon's storm and, you know, not necessarily knowing for sure what next year's gonna look like. Are there any loan segments that you're looking to maybe specifically be more conservative with? I 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?
Yeah. I think it's your typical segments. Our construction, being one, residential within that. As you know, Brett, because you live in Middle Tennessee, that then you know our market even though the world's getting softer in residential, and it is in ours, our markets as well, but it's still strong. You know, most of our folks describe it as in most of our economic resiliency here, you'd say it's kind of 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 manufactured 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 extremely well in terms of any kind of hiccups. Well, we watch it closely. Retail continues to perform. We've seen some things again tick up there, but there's been several years of really strong performance in that manufactured housing retail. We reserve 5% on that just because at some point it could. At some point, you could see that tick up because it hasn't.
Well, we've had the portfolio now, including in Clayton for 14 years. At least for, I'd say the last 7 or 8 charge-offs have been really low. Those are the things that we keep really close eye on.
Okay, great. Appreciate the color.
Sure.
The next question comes from Feddie Strickland from Janney Montgomery Scott. Please go ahead.
Hey, good morning.
Good morning, Feddie.
Morning.
Nice to have you.
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 and deposits are today? You know, a lot of that cash has been deployed.
Yeah, that's a reasonable assumption. 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. We've taken that excess liquidity up with loans. From here, I think you would see the average earning assets. You will see that go up as our deposits increase and our loans increase at close to the same percentage.
Gotcha. That makes sense. That does play into your earlier comments about spread growth, too. Switching gears for a second, you've talked about bringing more mortgage producers online over time. Was just curious what the level of opportunity is that you see there. Did you bring anyone online, or have you hired any mortgage producers since last quarter?
Yeah. Freddy, it's 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. The reality is 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 kind of leaving that space and looking to join a bank. We're being selective in that, as you kind of look over the next 6-9 months, you know, volume's depressed.
you know, we're kind of being selective there and making sure they fit our culture and can work within our model, which is, you know, 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.
Got it. Last question, kind of along those same lines, I sensed the mortgages drop 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'd want that number to be, you know, by next year's peak season? Will we see that rising back to something like 15%? Or is it just kinda too hard to tell at this point?
Yeah, well, it's definitely too hard to tell at this point, but and we're really focused on contribution, you know, and running a variable business that's profitable through all cycles. We would expect a contribution in the range of bottom line of about 10% or lower in the mortgage space. You know, revenue's highly unpredictable because of rate lock volume and originations is fairly foggy at this point in time. You know, we're focused on the core profitability of the business.
Understood.
Yeah.
Thanks so much for my questions.
Yeah. Freddy, just a quick comment. It won't return to anywhere near the level that it was in 2020 or 2021. Nowhere near that. Like I said, contribution would stay down below 10%. That's what we would see. Then the other thing I wanna mention that Michael just mentioned that it's really a point of pride. You know, again, it's a tough time in the mortgage business when 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've attributed that to, hey, the culture is really good. You know, they just appreciate the fact that it's, you know, it's a place where they can be successful. It's a good culture for those folks. We're proud of the fact that 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." Just make that commentary.
Gotcha. No, that's great incremental color. I appreciate it.
Okay.
This concludes our.
Oh. Go ahead.
This concludes our question- and- answer session. I'd like to turn the conference back over to Chris Holmes for any closing remarks.
All right. Very good. Thank you for all the questions. Thank you for all the everybody following FB 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.
Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.