FB Financial Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 18, 2023

There are 10 speakers on the call.

Operator

Good morning, and welcome to FB Financial Corporation's First Quarter 2023 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer Michael Matti, Chief Financial Officer and Greg Bauers, Chief Credit Officer. Who will also 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.

Operator

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. 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.

Operator

A more detailed description of these and other risks that may cause actual results to materially differ from expectations It's contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10 ks. 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 non GAAP measures to comparable GAAP measures is available on FB Financial's earnings 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.

Operator

Please go ahead.

Speaker 1

All right. Thanks very much. Good morning, everybody. Thanks for joining us this morning. We appreciate your interest in FB Financial.

Speaker 1

And as We get started this morning. Just a couple of notes that aren't on the quarter. First, I just want to say that our thoughts are with our colleagues at Old National Holmes. And just know that we want nothing but the best for you guys and our thoughts and support are with you as you move forward in the face of Holmes. Difficult circumstances, but we with you look forward to trying to pull the strategy.

Speaker 1

Second thing I would like to say is, I'm going to ask the questioning to go easy. Today is our it's Michael's birthday as our CFO. And so Happy birthday to Michael.

Speaker 2

With that, I'm going to

Speaker 1

get into the financial results for the quarter. And we reported EPS of $0.78 and adjusted EPS of $0.76 We've grown our tangible book value per share, excluding the impact of AOCI, at a compound annual growth rate of 14.5% since our IPO. We also grew deposits by 12.2% annualized during the quarter, have on balance sheet liquidity to tangible assets

Speaker 2

Holmes.

Speaker 1

And have $6,800,000,000 of available contingent funding sources, which is 2.1 times those uninsured collateralized And so 2.6 times total coverage when you combine the old balance sheet and contingent funding sources. As of quarter end, we had tangible common equity to tangible assets of 8.7%, common equity Tier 1 capital of 11.3 percent and total risk based capital of 13.5%. If we were to include AOCI in those regulatory capital ratios, which as you know, We certainly don't have we certainly aren't required to do. Our common equity Tier 1 capital would be approximately 10% And our net versus a well capitalized of 6.5%. And a total risk Base capital would be approximately 12.2%.

Speaker 1

Also, We have no securities that are classified as held to maturity, so we have no unrecognized losses on the investment portfolio buried on our balance sheet. We have no current liquidity needs that would result in the sale of any securities at a loss. But If regulatory capital rule change or if we were required to liquidate the entire securities portfolio for some unforeseen reason, we could do that Without requiring any additional capital. On last quarter's call, I referenced our work in 2022 to We'll be able to restructure our mortgage

Speaker 2

division, slow loan growth in

Speaker 1

the second half of the year and raise significant deposits in the 4th quarter putting us in strong capital and liquidity positions And preparing the company for a range of economic scenarios. We certainly didn't expect 2 of the 3 largest bank failures in history to happen a couple of months later. But the turmoil experienced over the last 5 weeks has supported our cautious approach to managing our balance sheet And our continued investments in strong finance, risk and operations personnel. The elevated risk environment Today also validates the value of our community banking model that allows our customers to have strong personal relationships with the decision makers for their This customer philosophy and fortress balance sheet approach when executed with discipline results And a known customer on the other side of every lending relationship. It also gives us financial flexibility when the unexpected happens.

Speaker 1

As the Silicon Valley and Signature events were unfolding, they caused the same anxiety at First Bank that I think all banks experienced to some extent. We reflexively went into crisis management mode with frequent communications with the Board and executive management, A closer review of daily funding flows and regular check ins with our regional presidents regarding our larger customers. What we found after a week or 2 of this heightened activity was that the bank was fine. As I've often said before, Our balance sheet is constructed with true customer relationships that make up every loan and every deposit. We know our customers and they know As a result of our as a result, our depositors weren't spooked by the pundits on CNBC that were forecasted in the demise of the regional and community banking systems For what seemed like 45 minutes out of every hour, many of our customers came to us from Money Center or larger regional banks That the talking heads expected them to plead to and they have little interest in going back to a customer service experience Commensurate with being nothing more than an account number at some of those large banks.

Speaker 1

We certainly continue Holmes. Keep a finger on the pulse of inflows and outflows if the customer funds,

Speaker 2

but we feel good about

Speaker 1

our liquidity position. We also understand this downturn and an industry wide focus on liquidity could result in a credit crunch that's likely

Speaker 3

Holmes.

Speaker 1

To result in losses. At this point, we've not found any disturbing trends in our portfolio. Our customers are cautious, but generally feeling okay and our asset quality numbers continue to reflect that With net charge offs for the quarter of 2 basis points, despite the benign results to date, we're even more conservative with our loan portfolio than typical As reflected by our ACL to loans increasing by 4 basis points this quarter and Only growing our loans by 3% annualized. We're not eager to aggressively grow the asset side of the balance sheet until we can understand which sectors are due for outsized losses. At this point, we share broader concerns about CRE office loans and Have increased our monitoring of that portfolio as a result.

Speaker 1

I will let Greg discuss that portfolio more later in the call, but we certainly Well, we generally feel okay with where we are currently. We've also been actively managing our overall CRE and C and D portfolio down since April last year. While commitments made in 2021 Q1 of 2022 have continued to fund up Since then, unfunded commitments in our construction portfolio are down by 16% year over year or $260,000,000 And we expect outstanding balances to decrease over the coming quarters. And so, given our desire To conservatively manage our portfolio liquidity position near term, we intend to focus on some internal improvements and utility outlook We're not pleased with the return metrics that we've delivered over the past few quarters. We're intent on having peer leading profitability.

Speaker 1

I've mentioned the First Bank Way initiative on the past call or 2 and this environment provides us with a perfect window to continue to focus management's attention Holmes. As a reminder, the First Bank weighs our effort around documenting and implementing best and procedures that will allow us to more effectively scale our local decision making community banking model. We believe this project enhances The customer associate experiences by enabling us to deliver our exceptional customer service more consistently and more efficient We focus our resources towards that goal. This puts some standards in place That will create efficiencies of scale as our balance sheet grows. As far as M and A goes, downturns can result And some transformational transactions and we could see that being the case in the industry over the coming quarters and into 2024.

Speaker 1

However, we don't necessarily see that being the case for us. Our goal is to be well positioned to capitalize on the turmoil and displacement of Customers and talent from competitors undergoing these transformational transactions. We also want to put ourselves in position To be the partner of choice as strong smaller community banks decide they want to seek a partner. However, at present, We have plenty to focus on with our 1st Bank Way initiatives and we don't want distractions that come with acquisition activity. To summarize all that, We're constantly checking the gauges, but believe that we are positioned well for the near term From our discipline over the last 3 plus quarters, we're using this time of more anxiety to continue our internal improvements with the intention of returning Profitability and growth that we're accustomed to and returning and doing that sooner versus later.

Speaker 1

I'm now going to turn things over to Greg to provide an update on credit before Michael gives detail on our financial performance for the Q1.

Speaker 3

Thanks, Chris. I'll start out by reminding everyone of what I said on this call about 3 years ago today. We are at our core a community bank that makes loans to For the economic activities of our communities. In our conversations in the past, we've highlighted our local operating model focused on relationships with our customers. This strategy at its heart means dealing with local people we trust and know to be good operators.

Speaker 3

Our portfolio reflects that bias. We believe that has helped our credit results in the past and will continue to do so in the future. We believe in conservative underwriting standards with a focus For cash equity, your skin in the game and personal guarantees. We've long focused on keeping hold levels lower rather than higher. We're trying our best every day to underwrite for the long term through the cycle, not counting on the greater pool theory.

Speaker 3

Our strategy has always been about end market lending. We've never been big on buying into shared national credits. It just doesn't match our strategy of relationship lending. We want to thank the company, the owners and its employees. That was all true then And it remains true today.

Speaker 3

We still feel good about our lending philosophy and underwriting process. Moving to the Slides on Slide 9, you can see, it outlines our overall portfolio, which we believe continues to be a good mix of industry segments And product types. You've seen our credit metrics, which continue to reflect good results from past dues to NPAs. We get the question in times like this about whether we have changed our underwriting criteria. For example, have you raised debt service Requirements or loan to value maximums.

Speaker 3

Our answer is not really. That's more what you hear from big banks that run a line of business model Holmes. We simply work with our markets and We have a cautious outlook and we aren't looking to grow the book and as they change the focus of their teams to deposits not loans, all the while trying to reserve our dry powder for our long term relationship customers that are the reason for our success. Now that's easier said than done. So what you see in the numbers is the result of that thoughtful process.

Speaker 3

Our commitments are way down Over the past couple of quarters as Chris pointed out, but as you would expect balances have continued to increase as deals previously committed fund up. Our analysis is that we will see that begin to come down over the next few quarters as properties rotate out. Switching gears. For this quarter's presentation, we have included a page on our office exposure. You see that slide?

Speaker 3

Given our focus on that property tag and the concerns that we have heard from the analysts and investor community, Those of you that have been in Nashville lately know just how many buildings are under construction here in the CBD. Like the old saying goes, so many cranes that they're going to call up the state Holmes. This activity is great for the city and the region's economy as we benefit from the large inflow of companies and associated jobs. Let's make something clear. We are not financing those projects.

Speaker 3

Frankly, we didn't even participate in the construction of the new building That we are moving into this year, not because it wasn't a good deal or not a good developer. It has both, especially a great tenant, right? But it was just not our type of deal given its size, not our risk appetite. You can review this slide for yourself, but let me highlight a couple of things about our portfolio. Office non owner occupied CRE accounts for only 4% roughly of our total loans out These are spread across our footprint with the largest concentration being in the Nashville region, Most of it in completed projects with only 4 still under construction accounting for less than 15,000,000 in fee difference.

Speaker 3

As part of our normal portfolio management, I asked our teams to put together a list of office loans with commitments greater than $2,000,000 Which if you think about it isn't a very big office, right? It is interesting to see the granularity highlighted by this. The list shows a total of 48 loans with outstanding balances ranging from a loan of $1,700,000 the largest has a balance of $26,000,000 And the next largest is $20,000,000 The $20,000,000 frankly is actually a loan secured by 4 different buildings. The next 5 are in the $12,000,000 to $16,000,000 range and everything else is less than $10,000,000 I mentioned this just to highlight that this reflects my earlier comments about Most of these are just smaller projects owned by local real estate professionals. The average loan to value on this set is 62%, demonstrating our goal of having our borrowers have a significant amount of skin in the game With sponsors who guarantee the loan.

Speaker 3

We looked at the interest rate on the entire portfolio and found 58% is fixed, 42% flowing, Holmes. To everyone, of course, but so far no problems. You'll never hear us say that our portfolio is perfect. There is no such thing. I've been doing this for about as long as Mattia has been alive, but we're proud of how it has fared so far, and Holmes.

Speaker 3

I'll also touch briefly on our commercial loans held for sale. We have only 2 relationships Left balance is less than $10,000,000 We feel adequately marked on that. So any additional gains or losses Holmes. We appreciate the work Scott McGuire, our Head of Special Assets has done to work this down over

Speaker 2

Thank you, Greg, and good morning, everyone. I'll speak first to this quarter's results from the core bank. Our adjusted pretax pre provision net revenue from the bank was 45,900,000 Showing growth of 12.6% year over year, but down 15.8% from the prior quarter Holmes. As deposit costs outpaced yields on earning assets and loan fees declined due to lower origination volumes. Moving to our liquidity position and deposit base, we've added some additional disclosures in the deck this quarter in the aftermath of FCDN's signature.

Speaker 2

And as the deck shows, we have on balance sheet liquidity consisting of cash and unpledged securities of $1,600,000,000 We have an additional $6,800,000,000 in brokered CD, FHLB and discount window funding available to us. And for tax purposes, we have a $2,300,000,000 of real estate loans held at our real estate investment trust. Where we to fill the need, we could move those loans back The bank overnight to create additional Federal Home Loan Bank borrowing capacity. There is also a BTFP available. And although we have not engaged with that program because we hadn't felt the need to, we could if We really need to and we feel comfortable in our current and available sources of liquidity.

Speaker 2

Moving to our deposit portfolio. In total, our deposits grew by 12.2 percent annualized or $327,000,000 Seasonal inflows of public funds accounted for $313,000,000 of that increase, Holmes. As a reminder, as public fund balances tend to begin building in November, peak in May And declined June through October. A new line in the supplement this quarter is our estimated uninsured, un collateralized deposits. At $3,300,000,000 those deposits make up 29% of our total deposit base.

Speaker 2

We've not seen any concerning behavior from these customers. And as mentioned previously, we have on balance sheet an excess liquidity of $8,400,000,000 or 2.6 times those uninsured and uncollateralized deposits. In the supplement, we disclosed consumer, commercial and public deposits. Average balances in those accounts are At Consumer, dollars 23,000 Commercial, dollars 118,000 and Public, dollars 1,800,000 From the 4th quarter to 1st quarter consumer average balances were flat. Commercial average balances were down slightly from 122,000 Holmes.

Speaker 2

Somewhat driven by new accounts as we saw 1st quarter annualized growth in the number of commercials accounts of 10%. And Public balances were up around $160,000 due to those seasonal inflows. For the entire deposit On a portfolio and on a customer basis rather than an account basis, 66% of our customers have less than $10,000 in deposits with us And 99% have less than $1,000,000 with us. And finally, 62% of our deposit balances With customers that have been with us for more than 5 years. In addition, 26% of balances are with customers that have been with us for more than 1 year.

Speaker 2

So we believe that we have a pretty long tenured loyal customer base. Briefly touching on our securities portfolio, We have no held to maturity securities. Over the past few years, the portfolio maxed out around 13% of total assets And it's currently at 11.3 percent and the current duration is roughly 5.3 years. Moving on to our net interest margin, we We saw contraction in the margin as deposit costs accelerated, partially driven by an outsized increase in more costly public funds, With average balances that were up $521,000,000 from the Q4 to the Q1. Margin continues to be difficult to predict given the continued pressures on funding costs.

Speaker 2

With treasuries back lower than Fed funds, we're hopeful that the dynamic of depositors leaving the banking system altogether due to higher risk free yields will abate. However, with the renewed focus on liquidity from banks and regulators in the wake of FBB and Signature, competition between community banks Holmes. So while there could be a larger pool of funding for us to compete over, I think we all like a little bit more cushion than we currently have. For some monthly trends, in March, we had a cost of interest bearing deposits of 2.67 percent, contractual yield on loans of 5.97 percent And a net interest margin of 3.45 percent versus the cost of interest bearing deposits of 2.53%, Contractually owned at 5.9 percent and a NIM of 3.51 Holmes. Our goal for the next few quarters would be to keep the margin in the same relevant range With March below the quarter and higher cost public funds continuing to fund us through the 2nd quarter, we're likely to see Slight contraction in Q2 as compared to the Q1.

Speaker 2

And as those funds begin coming back off the balance sheet, we're likely to see a little bit of lift from there. Today, we value liquidity over margin and the strength of the balance sheet versus maximizing the last nickel of earnings available to us. On the other side of this, we're likely to review how much public funds we're willing to carry given the outside betas that many of our relationships and aspects have shown and their impact on profitability. Core Banking non interest income of $10,700,000 was in line with our expectations and we expect to continue to hover in that $10,000,000 per quarter range Plus or minus for the remainder of 'twenty three. Banking non interest expense of $68,500,000 was also in line with our expectations.

Speaker 2

At this point, we don't see a need to revise our prior guidance of mid single digit growth over 4Q 'twenty two's run rate of 267,600,000 However, expense management is top of mind for the company as revenue pressures do continue. Closing with our allowance for credit losses, economic forecast deteriorated slightly during the quarter, specifically in March, And we added 4 basis points to the allowance as a result. Provision expense ended up being relatively neutral as our reserves on unfunded commitments came down, Primarily due to the decline in our unfunded construction and development commitments. We'll continue to be cautious on our reserves. If forecast continue to decline, And we'll likely continue to build.

Speaker 2

At this point, there are no industries that we are qualitatively assigning additional reserves to, But we'll continue to monitor our portfolio to see if some additional protection is warranted. And with that, I'll turn the call back over to Chris.

Speaker 1

All right. Thanks, Michael. Thanks, Greg. And with that, I'd like to open the line for any questions.

Operator

Thank Holmes. Today's first question comes from Catherine Mealor with KBW. Please go ahead.

Speaker 4

Thanks. Good morning.

Speaker 2

Good morning, Catherine.

Speaker 4

I just want to start with the margin and see, Michael, if you could just give us your thoughts on your outlook for the margin, Particularly on the deposit side, maybe walk us through where deposit costs were towards the end of the quarter and where you see those betas going Over the next couple of quarters. And then also just on deposit mix, we've seen continued mix shift out of non interest bearing. And as you model out your outlook, How you see that mix change evolving over the course of the year? Thanks.

Speaker 2

Yes. Good morning, Catherine. So net interest margin was 3.45% in March, yes, that's down Holmes. On the lower end for the quarter, I think for the quarter we reported 3.51. So interest bearing deposit costs around 2.67 In non public funds is $2.57 that run up in public funds during the quarter puts pressure on net interest margin.

Speaker 2

They have a beta of really in the Q1 100 plus percent actually. And So that really puts pressure on your overall deposit costs. We do think that will start to come down middle of the year and so you could see some relief Which actually increases NIM. We're going to try to hold in the same relative range at $3.45 to $3.50 but that is Completely dependent on liquidity pressures and competition amongst our peers. I'll tell you Our field the field of team does a really good job of keeping us informed of what's going on in and around the markets.

Speaker 2

And We see a lot of really aggressive pricing on CDs, but also on money market From a lot of the smaller community banks in and around us. So you can still see some pressure from there. And Holmes. We're trying to manage it the best we can, understanding that liquidity is top of mind and has been for us for the last couple of quarters, so we expect that to continue to be the focus. I would think deposit betas, if we get 25 more 25 basis point increase from the Fed and this next one, I don't know what we're getting in June.

Speaker 2

Our non experienced about 23%, 24%. So you'd expect deposit Beta deposit costs go up about 60% of that 25% and so you see incremental costs from there. It's a little bit of a mixed bag.

Speaker 4

And you mentioned money market rates. I I noticed that your money market portfolio is now just under 3%. Is that where do you see that pricing today?

Speaker 2

Well, we have a money market product that's priced off Fed funds. And so incrementally, you'll see 80% of Fed funds move on Probably a third of those money markets. And so that's the increase you're seeing there.

Speaker 4

Okay. And then my second question is a little bit on the margin, but also just kind of thinking about, just the commercial real estate portfolio. Can you kind of walk us through what you're Seeing on the commercial real estate side just from a pricing and maturity schedule over the next couple of quarters, How much of that portfolio do you see repricing or maturing, excuse me, over the next year? And then generally, where are you seeing

Speaker 2

Holmes. Greg, do you want

Speaker 1

to talk about what we see repricing in the commercial real estate?

Speaker 3

Well, we specifically pointed out on the slide about the only 7% of that office Portfolio is maturing through 2024 specifically. Holt. I do not I don't have that specific number. Michael?

Speaker 2

Yes, Catherine. So if we look at commercial real estate, About 30% of the total book re prices within the next 12 months. Only I'd say about 70% of that number is variable. And so it's already Taking into account we'll take into account the interest rate real fair and then fixed rate is about a third of that. So 50% of our portfolio reprises 3 years out.

Speaker 2

So it's kind of a split and as a reminder, that's actually about 60% Variable rate and about 40% or so fixed rate.

Speaker 4

Okay, Great. I'll pop out. Thanks so much.

Speaker 1

Yes. Hey, Catherine, I would say this and Michael I'd summarize some of his comments to say the margin is dependent on deposit cost and it has Proven to be really difficult for us to predict. But as Michael said in We've really prioritized we continue to prioritize the strength of our balance sheet And that's really the priority. And so we want to make sure we're maintaining deposits and funding And that's our priority right now and that's made it really difficult to forecast. So wish we had a pinpointed number for you, but it just changes actually Very

Speaker 4

fast. Understood. Very clear. Thanks, Chris.

Speaker 1

All right. Thanks, Catherine.

Operator

Thank you. And our next question Today comes from Stephen Scouten with Piper Sandler. Please go ahead.

Speaker 5

Hey, good morning, everyone. If I could dig down a little bit deeper in that maybe marginal cost of deposits. I know, Michael, you gave some color on the money markets and being tied maybe with Fed funds. But Do you have a feel at all for where you're adding new money market yields today, new CDs today, just to give us

Speaker 2

a feel for the spot rates

Speaker 1

if you have it? Yes.

Speaker 2

Good morning, Steven. So our CD rates have maintained pretty standard over the past quarter. We had 24 months out around 4% in 18 months, 3.38 no, 13 months around 3.13%. So That all comes in and there's the new originations come in split, a third, a third, a third really. And so that cost comes in around 3.40.

Speaker 2

Yes. Money market, I'd say everything that's coming on, it's not everything, but the majority of it's coming on that money market, 80% of Fed funds, so that's coming on around 4%.

Speaker 1

That's where the bulk of the volume is on the money market side. Yes. And that's a debt tax product, so it changes as the Fed funds changes.

Speaker 5

So that's why it made so much sense for you to pay off the FHLB at $4.89 so that was still a really nice trade even with

Speaker 2

the high marginal cost of deposits.

Speaker 1

Yes, exactly.

Speaker 5

Okay, great. And I love the slide here on the office Holmes. Really appreciate you guys putting that in there. You have a feel for you guys look the credit detail by class on Slide How that weighted average occupancy, has that moved around much on those categories? I mean, it all looks Pretty strong today, but are you seeing any sort of migration to the downside yet?

Speaker 5

Or is that, 1, maybe overblown? Or 2, maybe you just haven't seen those trends shake out.

Speaker 3

Hey, Steven, Greg Bowers. No, I have not. Matter of fact that Class A portfolio that is a weighted average number. So that's 82%, right? If you just look at Holt.

Speaker 3

I think that's 8 projects excuse me, total of 11 projects, 8 of those are 100%, Couple of them are 94%, one of them is at 50%. That one at 50% just came out at the end of 4th quarter Last year. So overall, I think all of them are hanging in there. There is pressure out there and Holmes. Supply is coming on, so it's a cautious outlook for everyone in the market.

Speaker 5

Okay. That's helpful color. And maybe just one last thing for me. I'm curious what you're seeing on the mortgage side. I mean, it's nice See that breakeven, obviously, can see the purchase refinance mix you lay out.

Speaker 5

But are you seeing any pickup in demand on the refinance side with the Shakedown in rates, are there people that are locked in at higher rates that are now able to come back to the table or has that move down not been Substantive enough to drive that incremental volume?

Speaker 1

Yes. Stephen,

Speaker 2

the rates have come down Specifically, right, in treasuries, as I kind of put in my comments, the mortgage spread has actually not come down as much, not to be overly technical. So certainly need mortgages to tighten in. Rates continue to go down, but You got all these guys under 3%. So there's a long way from I think refinancing unless they're taking equity out and there's still Holmes. The overall mortgage activity I'd say first quarter was Holmes.

Speaker 2

Pleasantly surprising. You had to say breakeven was a big quarter. We expect to be profitable in all cycles and so the work last year came to fruition A little bit slower in March, but we expect that to kind of pick back up the seasonality.

Speaker 5

Perfect. Great. Thanks for all the color guys. I appreciate it.

Speaker 1

Hey, Steven. I'm going to make one more comment. You talked about us paying down those that FHLB. Holmes. We still got a little bit of FHLB borrowings on our balance sheet.

Speaker 1

We debate internally whether to pay it off because we're Holmes. Roughly $1,500,000,000 in cash every day. We didn't need that when we borrowed it. We did it The day after the Monday after the Silicon Bank failure just to make sure we had access to Put the money on our balance sheet. We paid a little of it back.

Speaker 1

The cost of the spread is probably 15 basis Between the cost that we pay for it and then we reinvest the cash overnight. But that's Frankly, we don't need what's there. We could easily pay it off. But during this, again, it's just opting for balance sheet Strength over the cost of the say 15 basis points to hold on to it for now in The face of just the market uncertainty. So that's an example of Kind of the types of decisions that we're making every day in this timeframe that cost us a little bit of money, but we think it's more long term business.

Speaker 5

No doubt. Gives everybody a little bit less to pick out in the regional bank space. So we appreciate

Speaker 3

that extra security for the group as a whole. Thanks, guys.

Speaker 1

Exactly, exactly, sir.

Operator

Thank you. And ladies and gentlemen, our next question comes from Brett Rabatin with Ducharme Group. Please go

Speaker 6

ahead. Hey, guys. Good morning.

Speaker 2

Good morning.

Speaker 3

Wanted to first ask

Speaker 6

Just on the unfunded commitments on construction, the contraction linked quarter, was that intentional? Or did you have some Input into that or did customers just pull back in terms of what they were doing? And then secondly, Chris, you mentioned the word that Jamie Dimon didn't really like credit crunch. Are you seeing market participants not being able to get credit or maybe struggling to get Holmes. Favorable terms on things in the market or any color around that comment?

Speaker 1

Yes, Brett. So on the first one on the reduction in the commitments absolutely intentional. We if you go back actually into 2022, We're running at 120 percent of risk based capital in terms of fundings On our A and D or construction and we don't like that. And so we It is viewed as high risk because it is high risk. We don't view ourselves as a high risk company.

Speaker 1

And so we It's our commitment to ourselves to get that under 100%, because we don't like running that way. And so very intentional And that so that's that one that's an easy one. And then when it comes To man, don't tell Jamie that I violated His mantra, but because we have we hold immense respect For him and the way that they do things that being said, the market is getting slower and credit is Pulling back and we talk to our peers, we talk to our customers and folks out there right now. Greg talked about all the cranes that you see in downtown Nashville and look at our other markets Knoxville, Chattanooga, Bowling Green, Kentucky, Huntsville, Alabama, they're all doing well. And construction is Harder to pull off these days because they're just less folks more folks that are like us that are 1, have hit their thresholds and 2, look out on the horizon and go, well, it's probably a time to not be meshing So we've certainly seen some slowing

Speaker 6

Okay. That's helpful. And I want to make sure I understood

Speaker 7

a little bit of the

Speaker 6

balance sheet management strategy from here. You obviously really improved the liquidity And so I was just kind of curious if you think about the profile of the balance sheet going forward, if You might draw down some of that liquidity and cash and use that to fund loan growth. And if the balance sheet is fairly flattish and You have mix shift change in deposits from here. Obviously, CDs were a bigger percentage of funding 2 years ago. Holmes.

Speaker 6

Maybe just any color you could give on how you see the balance sheet, liquidity and then maybe absolute size from here?

Speaker 1

Yes. So I'll just comment on a few things that we're managing. And the first The thing I'm going to repeat is right now balance sheet strength comes squeezing the

Speaker 8

last nickel out of profitability as Michael

Speaker 1

said in his comments. And so we want to As Michael said in his comments. And so we want to manage liquidity above everything else. And so we'll continue to do that. We want to manage Credit and capital very closely.

Speaker 1

That being said, if you look at what's happened to Our liquidity ratios, if you look at what's happened to our loan to deposit ratio, we feel like we've created a place where we've got some flexibility and more levers The pull as we move forward when it comes to profitability. Michael gave an example When he talked about managing public funds, the public our public funds are funded up. Most of those relationships are contractual for a period of time. Some of those are actually quite high rates Holmes. On those funds and so that's driving our cost up.

Speaker 1

As those move down some as some of those That money moves out later this year, it's going to move our cost down some. Again, it gives us a profitability lever to pull there on whether we Do exactly what you're suggesting. Do we ramp up the growth rate a little more? We certainly could be growing the asset side of the balance sheet faster than we Are without really having to strain from a pricing standpoint or other standpoints. And so but we Are comfortable and I'm going to call it a mid to even low single digit loan growth rate Right now, until we get because the other side of that is credit that we're managing and we want to so we want to be cautious, especially As asset classes continue to emerge that cause you concern, we just aren't Crazy about matching the accelerator right now.

Speaker 1

And so we're going with a slower growth rate and We have created ourselves hopefully some levers that we can pull into the latter half of the year to improve profitability.

Speaker 8

Yes. Brad,

Speaker 2

I'd just add that Yes. When you talk about balance sheet and I mentioned the investment portfolio that we haven't actually bought a bond late May, early June of last year, You're believing right in the rising rate environment. Now it's where Fed funds is and Chris mentioned Parking money at the Fed, which is where most of that cash sits. I mean, you're earning a pretty good relative number We've been sitting on cash and it hadn't been a huge drain on profitability from an alternative Investment scenario and of course you're not adding any duration there. So we're still a little bit Cautious there and keeping it in cash and maybe one day we redeploy, but it's not really in the plans at this

Speaker 6

Holmes. I understand the strength of the balance sheet is key. And then just lastly, appreciate all the color on the slides, on the office stuff in particular. I'm curious, I've had several local lenders tell me that if there's any pressure of meaningful nature Holmes. Office or maybe other classes that there's a lot of deep money that's just waiting to swoop in and maybe grab some properties if the cap rates move up, Holmes.

Speaker 6

Any at all? Have you guys had those conversations as well? Or any thoughts on Liquidity as you see it from other sources of capital locally that are looking to deploy if maybe prices come down a little bit?

Speaker 3

I have not seen any specific example of that, but in previous cycles you always do and we know that There are people that watch those cap rates. So indeed.

Speaker 1

Yes. And Brad, I'll just add a little bit of commentary from just personal conversations with folks that shape the real estate market Some of our local geographies, most of those would come in our biggest geography which Nashville and that is there are some folks that are on the sidelines I know that have liquidity Holmes. That would love to get opportunities. They've been waiting for Some slowdown or downturn to be able to deploy. I've also heard they're not sure it's going to be enough of a slowdown At least especially in Nashville for them to be able to deploy where they think they should.

Speaker 1

And so I would Echo that yes, I do think there's money both local and out of market They would like to get into the market on the real estate side. And so I think there's money on the sidelines that's available.

Speaker 6

Okay. Appreciate all the color and happy birthday, Michael.

Operator

Our next question today comes from Matt Olney with Stephens Inc. Please go ahead.

Speaker 8

Hey, thanks. Good morning. On the January call, Chris, I think you mentioned that you guys executed some loan sales to help manage liquidity, manage credit and Holmes. And kind of growth late last year, any loan sales to speak of more and more recently and just what's the overall plan as far as loan participation

Speaker 1

Nothing recent in terms of loan sales to move the numbers. You're exactly right. We had some in the 4th quarter as we were some of the things that we're We're really focused on today. We're talking about how to manage liquidity and how to manage the outstandings on both CRE And C and D. And so that those were the things that drove those, but we didn't have any

Speaker 8

Okay. And then I guess maybe a question more for Greg On the construction side, I know you've been talking about seeing balance construction balances peak here pretty quickly. Can you just speak and provide some commentary about the absorption rate into the secondary market for some of those projects that have been completed? And I know there can be a Big difference there by absorption by product type. So any commentary you have with respect to types of commercial or residential construction?

Speaker 3

Yes, good morning. I think that right now most of the when I talked about you'll see projects rotate out, I think most of my comment there is as it pertains to the residential side. That's the bulk And so we're in the what we're seeing right now and expect to see over the next quarter or so is As a result of sales of residential here in the peak seasons for residential. And so that's where when you're talking earlier about the commitments coming down, You'll see I think you'll see the benefit of that in those residential properties being so so I think The bulk of the rotation will be in residential.

Speaker 2

Yes, Matt, this is Michael. I'll get from time to time get Holmes. Some calls from some of those permanent market kind of take out asking if they can use our balance sheet To parse that, and of course the answer is no. No, thank you. But does that tells you anything about what the secondary market looks like?

Speaker 2

I don't know. But Holmes. I don't know how active it is.

Speaker 3

Yes. A lot of our it's really It's a little bit of a boring portfolio sometimes. These are just loans that are many perms that will then go into perms on our balance sheet, start amortizing. So not a lot of if you're thinking about a lot of projects that were going into a CMBS market or something like that are going into a life company, that's really not what these are.

Speaker 8

Okay. Okay. Appreciate that. And then I guess circling back on the margin, appreciate it's tough to get a bunch of guidance around now all the moving parts, Especially within the kind of the excess liquidity position. Michael, what about with respect to just the NII?

Speaker 8

There'll be some pressure there, it sounds like, from 1Q levels. Any commentary if you think the bank can grow NII in 'twenty three versus 'twenty two? Thanks.

Speaker 2

Yes. Matt, I think the loan growth from last year, 2nd, Q3, Everybody puts us in a position to be able to grow net interest income this year. If you just look at Q1 this year, Q1 of last year, we're ahead of pace Based off of that growth, we do believe we can grow net interest income in 2023. However, That interest expense number is the key there and it was a slight line graph as Chris talked about. Yes.

Speaker 2

But we think it's fine.

Speaker 1

Yes, you're zeroing in on Good question.

Speaker 2

And one

Speaker 1

that we debate, but we think we can For the year, we're trying to create more flexibility. And as the industry continues To gain, I'll say, additional foundation, we hope that in the back half of the year we'll be able To do some good things, but we think when we project out today, we'll be able to grow net interest income.

Speaker 8

Okay, that's helpful. And then I guess just lastly kind of a bigger picture question. I think Michael mentioned that low origination fees This quarter were recognized just from obviously slow originations. I guess just any commentary just on how overall origination level Volumes in the Q1 at the bank compared to previous quarters. Just looking for read throughs, I think obviously investors are Concerned that a slowdown in bank lending could slow the overall economy.

Speaker 8

So just any general commentary on originations that you're seeing now versus before?

Speaker 1

I don't have a line of additional commentary. We've seen it slower. Some of that is because we're not but some of that is because we're not beating the bushes as hard, Okay. But sometimes also because there's less demand. I can't exactly parse it between the 2, but There is less demand, but we're also not beating the bushes quite as hard.

Speaker 1

And there are certain product types where we're just not beating the bushes at all. Now, and I would say this when I talk about not beating the bushes at all. We do have customers that are absolutely great Holmes. Long term customers that we've got to take care of. And so when you see that our construction commitments are down Close to $300,000,000 in the quarter.

Speaker 1

Then remember we're taking care of customers in there too. And so that's a net number that you end up looking at because we've got customers that we are going to take care of. And So that's part of the art of managing the bank is how you do that. So we are making commitments. Just net net, we're down.

Speaker 8

Got it. Okay. Okay. Thanks, guys.

Speaker 1

All right. Appreciate it.

Operator

And our next question today comes from Freddie Strickland with Janney Montgomery Scott. Please go ahead.

Speaker 7

Hey, good morning and happy birthday, Michael. I appreciate all the detail on the office portfolio. I was just curious when you did the review on the office credits above $2,000,000 are those LTVs using existing appraisals or did you get new ones for the review?

Speaker 3

Yes, good morning. Those were the existing ad inception.

Speaker 7

Got you. And do you happen to know what kind of the average age of the appraisals might be on that portfolio?

Speaker 3

I do not specifically. As we continue the call, I'll look at a couple of things and see if I can get some Origination dates might have a little flavor.

Speaker 7

Okay. That works. I just was curious, while you're looking at that, Holmes. I really appreciate all the liquidity detail in the deck. I was just curious what your thoughts were on the bank term funding program.

Speaker 7

I know you guys said you haven't accessed it thus far. I'm just curious how you view it versus other potential sources of potential liquidity.

Speaker 2

Yes, Betty. Like I said, we haven't capped it. We have cost wise, It's roughly in line with Federal Home Loan Bank borrowing, at least the way we do it. And I think we probably get a discount window First, but I mean they're basically the same. But federal home loan bank has been our typical first Got to look and so we continue to do that.

Speaker 2

But this is nothing against the bank term funding program or the discount or anything else. And the way we've operated, we certainly test the Medmont, make sure that if we ever needed it, we would.

Speaker 1

Yes. And I would just add this. I mean, we've got close to $7,000,000,000 in sources. And so We the only times we tap those sources, I mean, we tap Federal Home Loan Bank, but even that is Holmes. We'd say this around First Bank, we don't borrow money to lend, Okay.

Speaker 1

We lend out deposits. And so we don't go and borrow money from the Federal Home Bank to satisfy our lending appetite. So when we tap any of those, even Federal Bank, it's a little bit of a new event for us. And so we don't We're glad they're there. We're glad the bank term funding program is there, but we Haven't frankly studied it that much because we it's way down the list of things that we would get to.

Speaker 1

Holmes. And so that's really our approach to it. And I said, glad it's there, that all those sources Holmes. And by the way, we're not we're realistic. When things really, really get tough, those things start to Dry up and that's one that's probably that's not going to dry up.

Speaker 1

Okay, that's one that's going to be there. We understand, hey, I mean, your lines are going to get pulled From your correspondent banks, federal home loan banks can get tight. And so we but that's the reason we're glad it's there, but we've not had to really think about Holt. And then we'll go back to Greg for just one minute.

Speaker 3

Yes, I probably don't have the detail that Maybe we could include on a future slide or something, but just looking at top five exposures as far as these appraisal dates, that's 'twenty one, 'twenty two, 'twenty one, 'twenty two, 'twenty one.

Speaker 1

So just I mean, that was pretty recent. Yes. So they're all quite recent. Holmes. Got

Speaker 7

you. No, just want to make sure I understood that. Got it. And it sounds like with the bank term funding program and Federal Home Loan Bank, everything else is just you guys truly view it as contingent liquidity. It's just not how you fund loan growth.

Speaker 7

That's really the way we should think about that.

Speaker 1

Yes, exactly.

Speaker 7

Got it. Thanks for taking my question. Absolutely.

Operator

Our next question today comes from Kevin Fitzsimmons with D. A. Davidson. Please go ahead.

Speaker 9

Hey, good morning, guys.

Speaker 1

Good morning, Kevin.

Speaker 9

Most of my questions have been asked, but just Holmes. It seems, Chris, your main kind of message here is, you've said it a number of times, this balance sheet strength is going to trump Any kind of stretching for incremental profitability. So I'm just wondering, you guys have definitely been deliberate about that. And with the loaner deposit Holm. Your down now below 84%.

Speaker 9

Your CET1 ratio is looking healthy. Your ACL Ratio, I know determined by CECL has ticked up. You've talked about specific loan exposures that You've been kind of managing down. So is that given a likely economic slowdown, are you On those measures or maybe there's other measures you look at, are you where you want to be? Or is there incremental work over the next Quarter or 2, like do you have a certain bogey for loan to deposit ratio or CET1 that you're, for instance, Targeting or would aim for You know consistent with that concept about balance sheet strengths trumping everything else?

Speaker 9

Thanks.

Speaker 1

Yes. Good question, Kevin. And We are generally about where we want to be is the way you should view us. We're not going to turn down Deposit growth, okay. And so even if it's if we can get deposit growth and It's discounted to the Fed funds and at some reasonable discount to Fed funds and we're not going to turn down deposit growth.

Speaker 1

So if that if our loan to deposit ratio went down from here that would not bother us, okay, but we would but you'd probably also see us, okay, We probably need to make a few more loans just to kind of keep that range. So We feel good about the position we're in, in terms of where we are in liquidity. Frankly, our on balance sheet liquidity is Higher today than it was at quarter end. And so we feel good about The trends there, but also remember we're keeping in the back of our mind some of the public funds that have come in are going to go out In the let's say the June, July, August range. And so again we're Just managing through that.

Speaker 1

We're not going to turn down additional deposit growth even if it's No, certainly not at 5%. We're not looking at trying to grow deposits at 5%, but if it comes down It's 3% to 4%, yes, we would continue to take that and then we would look to add on the asset side. It is how we're thinking about that. So we're in good position. We're comfortable with the position we're in.

Speaker 1

We don't feel like we've got to go out and Build more liquidity. I would say the other thing that we want to do is continue to grow The commercial retail customer deposit base, we want to continue to grow those and that's full time So we want to continue to do those. On the capital side, again, ratios are actually quite good. We don't think we need to build from here. Again, we're not against building, but we don't feel like we need to build more capital other than just to keep make sure we're keeping up with the growth

Speaker 9

Got it. Great. Very helpful. And one quick follow on on M and A. You kind of It sounded like you kind of laid out on one hand, we don't need it and you see opportunity from M and A happening in your market, you being able to benefit from disruption at others, but you did mention that you're In a position to be a larger partner for community banks.

Speaker 9

Can you just remind us is that Because I think what you've said in the past is you have a specific list of certain community banks that fit your criteria from where they operate, The management teams, their model and if and when they ever looked For that larger partner that you'd be willing, but you're just not you're not out there on hunt In other words, right? Is that how to think of it?

Speaker 1

Yes. Kevin, I think that's generally fair, and I'll make 2 or 3 statements there. We're not out trying to do M and A especially And in this current environment, we're certainly not. And given where stock prices are, it'd be tough to make a transaction And we're not out there doing that and there's a couple of reasons. One is we are really intensely focused on Yes, we've grown on some profitability metrics and some sustainability of those.

Speaker 1

And as we've grown the company, we've grown it fairly rapidly. There are times in those growth cycles where you need to make Sure, you've got everything. We're operating like you wanted to. You've heard me over the years refer to us as a good operator. We always want Holmes.

Speaker 1

To be known as a bank that operates very effectively, very efficiently, very well managed from a risk standpoint. And so that's really Our focus right now and that will bring organic growth of In normal times, and I'm not calling this or what I anticipate in the next quarter or what I anticipate in the next couple of quarters normal times, But that typically would bring us a double digit growth rate, which is pretty attractive from a growth standpoint and it typically brings us very strong profitability. So that's where we are. That's what we're focused on. And so we're really not thinking about acquisition related Transactions right now.

Speaker 1

Now we do keep a list of banks, very short list That we would be interested in if we got the opportunity. We don't think we're going to get that in the near term, which again that's another reason we're Holt. We don't think we're going to get that opportunity in the near term. But those banks, the reason we're interested is this Environment perfectly illustrates why we're interested in those. They're very granular, I call them generational the bank, the generational community banks with generational customers that have been with them for decades.

Speaker 1

And they've got usually great funding profiles in there. Again, I like to say they're exactly like us. In some cases, maybe even a better profile because we've gotten big and have some have a Holmes. Few lumpy pieces of our balance sheet just because size creates that and gives you that opportunity. So these if anything probably even improve your overall profile from what I consider to be a great highly valuable bank.

Speaker 1

And I talked about that earlier, having customers On the other side of your loans and deposits is very important to us and that's the kind of banks that we're talking about. So we keep that list. We're not anticipating anything happening with that list in the near term. So we're focused on continuing our really transformational improvements

Speaker 5

And

Speaker 2

Kevin, good to talk to you.

Operator

Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Chris Holmes for any closing remarks.

Speaker 1

All right. Thank you all again for being with us today. We appreciate the questions. If there are things we need to To clarify or talk about after the call, we're glad to do that. We appreciate your interest and appreciate your support of FB Financial, And we look forward to moving forward for this quarter into the next.

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
FB Financial Q1 2023
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