Good morning, welcome to the FB Financial Corporation's fourth quarter 2022 earnings conference call. Hosting the call today, FB Financial is Chris Holmes, President and Chief Executive Officer, and Michael Mettee, 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 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 risks, uncertainties and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond 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.
All right. Thank you, Rocco. Good morning. Thank you everybody for joining us this morning. We appreciate your interest in FB Financial as always. 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. 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. We exit the year with strong capital and liquidity positions. With an adjusted ROAA of 1.11% and adjusted PTPP ROAA of 1.58%, our profitability was not where we expected to be, which was disappointing.
The restructuring of our mortgage segment, our capital and liquidity management actions in the second half of the year and our operational enhancements scheduled for 2023, we feel well positioned with those for a range of potential economic scenarios entering 2023. For the quarter, we reported EPS of $0.81 and adjusted EPS of $0.85. 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 preparing 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 $950 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 timed and non-timed 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 non-interest-bearing accounts, we know some of that decline was a permanent movement out of the NIB bucket. With fed funds being over 4% for the first time in 15 years, we're seeing less in idle funds sitting in non-interest-bearing accounts. While I expect tough sledding and non-interest-bearing growth for 2023, we believe the fourth quarter decline is an anomaly, and this is always going to be an area of focus for the company. 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. Our incremental cost of deposits will be near market rates. We limited our loan portfolio to 8.4% annualized growth after producing 20%+ 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 participations 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.
We'll continue to intentionally limit our loan growth to keep our loan-to-deposit ratio in the 85%-90% range and be conservative on credit until we gain some clarity on which asset classes will be impacted in this economic environment. As we signaled last quarter, our combined C&D and non-owner occupied CRE balances decreased $12 million during the quarter. We'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 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 pre-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 1 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.
As a result of the actions taken during the quarter, we enter 2023 with loans, 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 to us should we ever need it. We maintain 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 during 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 FirstBank Way. We operate through a local authority regional president 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 model business model to look like as we grow from a 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 the lift outs of strong teams, and we continue to hold discussions with bankers across the southeast, both in existing markets as well as in contiguous 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. However, 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.
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 the customers, 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.
Thank you, Chris. Good morning, everyone. I'll speak first to this quarter's results in our core bank. Our baselined 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. 9 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 cost. 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. As I mentioned earlier, our core banking non-interest expense was $66.9 million in the fourth quarter. We expect continued growth in our banking non-interest expenses due to higher regulatory costs and inflationary pressures. For 2023, we are currently estimating mid-single digit growth over the fourth quarter's annualized run rate of $267.6 million.
Moving to mortgage, we posted a loss for the quarter as the impact of rising interest rates combined with seasonality drove down demand of rate locks by 31% quarter-over-quarter, subsequently reducing revenue. While we had hoped that we were done with our restructuring, the continued reduction in volume created this 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 4 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 loan suffer investment over the near term. With that, I'll turn the call back over to Chris.
All right, thanks, Michael. We are pleased with how we're positioned and prepared for what's coming. Thanks for the prepared remarks and we will look forward to questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speaker phone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Matt Olney at Stephens Inc. Please go ahead.
Hey, thanks. Good morning, everybody.
Good morning.
Hey, 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?
Hey, Matt Olney. Good morning. I mean, we saw kind of the time deposits depending on term coming in around 350 basis points, that's, kind of an 18-month weighted average term there. Money market came in really market rates below fed funds, but call it, you know, 60%-80% of fed funds is where we're seeing money market rates coming in, so really right at market there.
Okay. 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? Any more color on why that would be?
Yeah. I don't really think you heard it right, let me shed some additional light on it. I mean, 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. I do think that that's gonna 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.
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 do you think is sticky? How much of that do you think is real? We always answered the question, and I know others, most others did too. We're not sure. We don't really know. The fact of the matter is, we still don't really know. We knew that some of it would leave. You know, you're seeing consumer accounts finally begin to return to the balances they had in them pre-COVID. So we just think that's gonna be a tough market for non-interest bearings in 2023.
We also think that, especially in the last half of the year, you begin to see balances leave those, and we think that, a lot of the, I guess I'd call it the low-hanging fruit for, that you knew would likely be leaving probably left in the fourth quarter or I'd say in the second half of the year. I'm also qualifying that by saying we're not sure, to be honest with you.
Understood. Okay. Just finally, as far as the outlook on the net interest margin, Michael, you mentioned, I think, a few things. I think you mentioned the kind of the incremental spread there, in 2023 would be similar to December level. Did I catch that right? Just remind me what you saw in December again.
Yeah. The net interest margin for December was about 3.75. You know, the outlook right now, we feel like we can maintain around that level. Spread on kinda new loans for new deposits is coming in over 400 basis points. If you kinda 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. Okay. Thanks, guys.
Hey, Matt.
Yeah.
I would just add this on the deposit side, one of the things. You know, we did feel a need to get out front on deposits. So obviously we had a big deposit quarter. It was expensive. We expected it to be, especially as we got deeper in. You know, if you look at where we were headed from a loan deposit ratio and sort of the way that our arrows were twin-trending with three quarters, 20%+ loan growth, and knowing that deposit growth was gonna 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+ account, actually plus.
With all that, we felt the need to really get out front. 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.
Understood. Thank you, Chris.
All right. Very good. Thank you.
Ladies and gentlemen, our next question today comes from Catherine Mealor at KBW. Please go ahead.
Thanks. Good morning.
Thanks, Catherine.
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 separately, maybe kind of thoughts around efficiency initiatives that you specifically have within mortgage as well. Thanks.
Yeah, sure, Catherine. Couple things. When I talk about efficiency initiatives, you know, 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, and 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. Then we went through the $10 billion barrier. 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, so make sure that we've got the right scalability, we've got the right model that we wanna move forward with. That's a collection of the things we've learned over the years. We've done that. 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. One of the outcomes is, we're gonna gain some efficiencies from it.
We frankly hadn't spent a lot of time quantifying those. That being said, you know, we're looking at a 6%-7% type of expense growth over 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, you know, we've been through, I'd call it two phases of expense reduction there. At this point, it's now sort of also, I'd say a very vigilant approach to expenses in that part of the business. When we look again, we said, 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. 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, third quarters should be, you know, that's where we should really see a higher level of contribution. 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.
Got it. Your comment on the 6%- 7% growth rate. For that, are you saying I should take this fourth quarter 2022, you know, ex mortgage expense base of about $67 million and then grow that at 6%- 7%, and that's my annual expense number for 2023?
That's right, Catherine. If you're basically what I was in my comment saying, you take that $67 million, annualize that, then grow it off that base at 6%-7% is where we think we'd end up. Yeah, I will say there's some regulatory stuff in there. You know, FDIC expense going up and some of that as well. A little bit fungible, but that's should be the range.
Got it. Then with that, should we I mean, you're still growing, you know, at a slower pace than obviously you were last year. Still, I feel like you've still got kind of an expectation for balance sheet growth into next year. 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 7%, 8%, or that 6% to 7% expense growth is still coming with NII growth in 2023. Is that correct?
You're right. You're right. Yes.
Great. 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, if the margin compresses more than expected as we, as we move through the year?
Yeah. We do have some levers, Catherine. We feel like in a couple of places on both sides of that equation. 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 can pull on the expense side.
Great. Great. Thanks for the commentary.
Thank you.
Thank you. Our next question today comes from Brett Rabatin with Hovde Group. Please go ahead.
Hey, guys. Good morning.
Good morning, Brett. How you doing?
Doing great, thanks.
Good
... use a football analogy, Chris, and a college football analogy. 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. You know, my question is, you're obviously in a better position than a lot of the industry related to the, you know, reserve build need. My question is, do you really need mortgage banking to get back to a solid level of profitability to get back in the playoffs? Do you think that this FirstBank Way and the initiatives you have in place could get you back in the playoffs?
Yeah. Like your analogy, by the way. I'm gonna give you one back. At the risk of Michael was pointing to his The University of Alabama socks, which he has on. At the risk of I won't 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. Brett, I use a football analogy. I use a college football analogy because that's big in our part of the world. One of the things I tell them is, "Hey, you've joined FirstBank.
You need to feel like you," and some people, by the way, would really like this analogy, and some people are envious of it. I say, "You need to feel like you just signed a scholarship with The University of Alabama to play football." That's exactly what I said. I said, "We compete for the national championship every year, okay? We go to the college football playoff almost every year. We expect to be there all the time and realize that's what you've just signed on for when you took a job with FirstBank." I use the almost a very, very similar analogy when I talk to all of our folks.
When you said, you know, you missed the playoffs this year, I'd say another term I use, I'm gonna refer to the book Good to Great, is confront the brutal facts. I use that one internally a lot. 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. 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. Catherine, right in front of you, asked about what 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. Now to a couple of specifics. Mortgage has been a great contributor for us. You only have to go back to 2020 when we had a $105 million contribution from mortgage. 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. If you look at some of the numbers on the bank segment, again, a pretty good year there.
We would be certainly well in the top half of our of our peer group, probably top quartile of our peer group if the bank stand alone. We had a significant more than a $0.20 EPS, close to a $0.30, you know, between 20% and 30% impact, $0.30 impact of mortgage negative this year. 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.
Okay. That's a lot of great color. 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. What can you, maybe go into the interplay between the seasonal funds increase and how much that might come back down and, you know, if you're expecting any other, I know it's tough in this environment, any other makeshift change to affect what you do with the balance sheet in the near term?
Just, Michael, I'll let you come in. I'll make a couple of comments. We had some Federal Home Loan Bank borrowings, actually $540 million at the end of the third quarter. We'd paid that down significantly by the end of the year. We subsequently, by the way, paid it off, and so it's zero today. That's post the end of the year. We expect to. We have always funded our balance sheet through customer deposits, and we intend to continue to do that. On the public funds, they usually actually stay pretty robust through the first quarter.
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, you know, at the end of the year. So that's the cycle we see, and we just, we manage around that. Michael saying-
Okay.
Say if you.
Yeah, that's great, y'all. I appreciate it. All right.
Thank you.
Thank you.
Our next question today comes from Stephen Scouten with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Good morning, Stephen.
I guess I wanted to follow back around the funding cost a little bit. Just, I'm curious, one, if you could remind us kinda how much of the public funds deposits are more directly indexed, you know, maybe more like 100% beta on those public funds versus some that are maybe, you know, longer term or tied to different metrics. Then kinda 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 kinda where you think that can play out, maybe, you know, on your core customer deposits in particular.
Yeah. On the public funds first, and Stephen I'm sorry I don't have exactly how much of that is tied to an index. But I will say this, it's a mixture. We have a mixture in there of even, you know, non-interest-bearing, some indexed, a little bit of time, and some that sits in a non-time instrument that is not indexed. 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. Those are all negotiated over time.
Frankly, that'd be the least, we don't have a lot of time, but there's just a little bit, so.
Yeah. Stephen, on the go-forward 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, you know, we'll see in that mid-40 beta range kind of as we look in 2023, but it is highly dependent on really what our peers do. We feel like we can maintain this level and, you know, recognizing deposit costs are going to go up. I will say on indexed, we don't have a whole lot of stuff that's indexed 100% to any rate.
Just as Chris mentioned, don't have that exact number, but it's not 100% one-to-one, you know, fed fund goes up, deposit cost goes up on the accounts. There's not a ton of that stuff. A lot is a percentage. It varies and, yeah, we have certainly seen deposit costs go up, expect them to incrementally move higher. Hopefully rate cycle kind of settles in here with the Fed and we get a normal operating environment.
Yeah.
Okay. That's helpful. I guess overall, I mean, if I'm listening to your comments kinda holistically, it feels like you guys think maybe 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 2023. Is that the right way to think about it?
Well said. Yeah. Yeah.
Okay, great. Great. Thinking really briefly about expenses. I noticed 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?
Nothing too noticeable. I think that the difference third quarter versus fourth quarter is kind of the Tennessee franchise excise tax rolling through there. That was a major piece that it wasn't in the third quarter, but it's in the fourth quarter.
Okay. Gotcha. Gotcha. Maybe just two quick ones left for me. One, on the participation side, sounded like that was more about balance sheet management than risk management, but maybe a little bit of both. Are there particular categories you're trying to participate out more so than others? Maybe that's C&I and CRE like you spoke to, or is that, you know, is that indeed more just about controlling the pace of growth?
Yeah, it's total balance sheet management. If you think about it from a risk management side, the folks that we're gonna participate to are gonna be friends of ours. We're not gonna participate anything that's gonna create credit risk. Well, we're never gonna knowingly create or participate anything that's gonna create credit risk for them. It's, it's all about balance sheet management for us. 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 withdrawals against it, and it's just a little more work on the participation side versus a CRE versus CRE.
We're usually participating with either peers that are our size or, 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. Frankly, they love it if they can get that CRE for when we, when we're willing to sell it down.
Got it. That's helpful. 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?
Yeah, we think about that very cautiously from here. We, yeah, we'll think about it cautiously. I wouldn't say we do have the capital to be able to do it if we need to do it. It's a tool that we'll use.
Got it. Very helpful. Thanks, guys, for all the color. Appreciate it.
Thanks, Stephen.
Thank you. Our next question today comes from Kevin Fitzsimmons at D.A. Davidson. Please go ahead.
Hey, good morning, guys. How are you?
Morning, Kevin. We're good, Kevin. Hope you are.
Good. Thank you. just, you know, we've had a number of questions on this, but I just wanna make sure I'm thinking about the right way. The deposit growth was really a very accelerated effort in this past quarter. Going forward, you expect. It's put you in a position that now you're expecting more deposit loan growth to be kinda in line and thus keeping the loan-to-deposit ratio roughly where it is. Is that correct?
Yes, Kevin, you think of that correctly. When we ended. We're just over 91% loan-deposit ratio in the last quarter. We want to be in that 85%-90% range, so it doesn't bother us to get up to that 90%. It, you'll see it. We'll manage it within that range. What that means is we'll be growing loan deposits as we grow our loan portfolio. It is. So we'll be. We. Again, we do feel like we gave ourselves some room.
We also, I mean, because as I said, we don't have short-term, I mean, we basically paid off any short-term borrowings, and we're, and we feel like we're in a really good position.
Okay. As far as the margin, how to think that through. I appreciate the color on the 375, December margin, and I think what was said was you're probably gonna hold the margin roughly at that level. If we're looking beyond that and just assuming we have a few more hikes here of, you know, 25 basis points, is it, is it reasonable to think about the margin just grinding lower from that level, but the balance sheet growth you alluded to before still able to drive dollars of NII higher throughout 2023?
As we move forward with our budget and look into the year, you know, we've traditionally said we'd be 10%-12% loan growth organically, you know, for the year. We could be, you know, could be a little less than that. But we'll, you know, we certainly anticipate a healthy loan growth during the year. We've been getting a good spread on that. I do think loan growth is gonna get harder as we get into 2023. 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.
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. If we look out in the year, we're gonna try to hold near at least where we are, again, with a little bit of flexibility range for flexibility there.
Got it. Just your comment before, Chris, about loan growth. 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. As far as core loan demand and the loans you wanna book, you haven't seen a dramatic fall off in that yet?
No, we really haven't. We have seen it slow late in the year. We did see loan demand slow some. It's slower as we start the year as well. 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. That's still pretty strong. But we were 20% plus the previous three quarters.
Right. Right. Okay. All right. Thanks very much.
Right. Thanks, Kevin.
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 Feddie Strickland with Janney Montgomery Scott. Please go ahead.
Hey, good morning.
Good morning, Feddie.
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 of quarters. Is that right?
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, okay? We do have access to the wholesale funding, but 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. We, we want to use it as a tool, not as something we have to rely on because we get overextended.
Got it. That makes sense. 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, you know, 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?
Well, I'd say it's always a consideration because, almost always, because you like to keep yourself as lean and flexible as possible. We do think about, you know, 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, you know, because we knew we could go get the money at the same rate or cheaper from customers, and, you know, by just by increasing customer deposits. We take the approach of we like to have as much free collateral as possible, again, because we like to be in a position to be opportunistic, when opportunities present themselves.
One other thing, and I haven't talked about this in a long time, but back when going back three or four years ago, we used to talk about it all the time. Our balance sheet is almost 100% direct customer funding and direct customer loans. We utilize, we have almost no brokered CDs on the books. We have only brokered 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. Less than $2 million in time deposits. We just don't utilize those, you know, 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. When we think about wholesale, the times that we're tapping those channels is, like I said, it's just to improve our profitability, not because we have to do it.
Got it. That's really helpful. Just one last question from 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? Was just curious whether, you know, one type of bank is a little more aggressive than another.
Yes, is the answer. 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, from, I'd say from the bigger banks. They're still not very reactive as you move money away from them. The regionals, and I would say they're almost versus size of bank, it's almost more profile of bank. Those banks that are, I'm gonna 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. So they're aggressive.
I'd say it depends more on the profile versus the size. The other thing I would say, and this is 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, 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. It'll be, you know, I'll call it a less than a billion-dollar bank that apparently needs the funding. We do see quite a bit of that from small banks.
Interesting. I appreciate the color, guys, and thanks again.
All right. Thanks, Feddie.
Thank you. Our next question today comes from Jennifer Demba at Truist Securities. Please go ahead.
Thanks. Good morning, everybody.
Good morning, Jennifer.
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?
I'd say three things. you know, construction and CRE would concern you most, certain pockets of the CRE. I say construction because it's a risky asset and you can get surprised. you know, our construction I just go stick my head in on the credit folks, Greg Bowers especially, often just to go, "Hey, how we feeling? You know, how's your day going?" I ask about construction, and we know our construction customers well. While I think that's probably a concern for the industry, and I say all the time, every bank thinks their credit's great and they're not gonna 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 man, 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 can, you know. 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.
You know, 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. I watch past dues on that quite a bit. I watch anything else from a non-accrual standpoint. Again, it's performed as the guys have. You know, we've been. If you go back to the acquisition of Clayton, we've been in that business for 14 years. 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.
You know, 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.
Could you give us a sense of what the office portfolio does look like for FBK?
Yeah. There's a slide in the deck.
Yeah.
On our CRE, we 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. Again, we feel pretty good about that. As 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 gonna be, again, direct to a customer that we know, we originated, and it's gonna be a manageable balance, is what would be in that office portfolio for us.
Okay. 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?
Hey, Jennifer.
Hi.
We actually have a mix between baseline and S2. About a 75% baseline, 25% S2. There's some qualitative in there as well. The economic scenario has changed pretty rapidly there between third quarter and fourth quarter.
Thanks so much.
Yeah. Jennifer, one thing that we haven't touched on, I don't think there were any questions on is, of course, we actually, if you look at our loans with HFI, we actually had a very small provision, which would have added very, again, a small amount to our ACL. We did have a negative provision or a provision release related to our unfunded commitments. 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. 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.
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. We still feel pretty good about where it sits.
Great. Thank you.
All right. Thank you.
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.
All right. Once again, thank you very much. We appreciate you being with us. We always appreciate your interest in FB Financial. Operator, at this point, we're finished, so thanks very much.
Thank you, sir. This concludes today's conference call. You may all disconnect your lines and have a wonderful day.