FB Financial Corp Q1 FY2023 Earnings Call

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 Mettee, Chief Financial Officer; and Greg Bowers, Chief Credit Officer. He 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. 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 risk, uncertainties, and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial’s ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks that may cause actual results to materially differ from expectations is contained in FB Financial’s periodic and current reports filed with the SEC, including FB Financial’s most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of non-GAAP measures to comparable GAAP measures is available in 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. Please go ahead.

All right. Thank you very much. Good morning. Thank you for joining us this morning. We appreciate your interest in FB Financial. And as we get started this morning, just a couple of notes that aren't on the quarter. First, I will say that our thoughts are with our colleagues at Old National, 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 difficult circumstances, but we are with you looking forward to trying to pull through this tragedy. Second thing I would like to say is I'm going to ask the questioning to go easy. Today is Michael's birthday as our CFO, so happy birthday to Michael. With that, I'm going to 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, we have on-balance sheet liquidity to tangible assets of 12.5%, and have on-balance sheet liquidity to uninsured and uncollateralized deposits up 49%, with $6.8 billion of available contingent funding sources, which is 2.1 times those uninsured collateralized deposits and 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%, 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 are not required to do, our common equity Tier 1 capital would be approximately 10%, versus a well-capitalized of 6.5% and a total risk-based capital would be approximately 12.2%. 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 reason, we could do that without requiring any additional capital. Last quarter, I referenced our work in 2022 to restructure our mortgage division, slow loan growth in the second half of the year, and raised significant deposits in the fourth quarter, putting us in strong capital and liquidity positions, preparing the company for a range of economic scenarios. We certainly didn't expect two of the three largest bank failures in history to happen a couple of months later. But the turmoil experienced over the last five 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 also validates the value of our community banking model that allows our customers to have strong personal relationships with the decision-makers for their accounts. This customer philosophy and fortress balance sheet approach, when executed with discipline, results in a known customer on the other side of every lending relationship, it also gives us financial flexibility when the unexpected happens. As the Silicon Valley and Signature events were unfolding, they called 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 data funding flows, and regular check-ins with our regional presidents regarding our larger customers. What we found after a week or two 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 us. As a result, our depositors weren't spooked by the pundits on TV forecasting the demise of the regional and community banking system 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 those talking heads expected them to flee to. They have little interest in going back to a customer service experience that equates to being nothing more than an account number at some of those large banks. We will continue to keep a finger on the pulse of inflows and outflows of customer funds, but we feel good about our liquidity position. We also understand this downturn and the industry-wide focus on liquidity could result in a credit crunch that's likely to lead to losses. To 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 two 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 four basis points this quarter and only growing our loans by 3% annualized. We are 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. I will let Greg discuss that portfolio more later in the call, but we generally feel okay with where we are currently. We have been actively managing our overall CRE and C&D portfolio down since April last year. While commitments made in 2021 and the first quarter of 2022 have continued to fund up, unfunded commitments in our construction portfolio are down by 16% year-over-year or $260 million, and we expect outstanding balances to decrease over the coming quarters. Given our desire to manage our portfolio liquidity position near-term, we intend to focus on some internal improvements until the outlook changes. We are not pleased with the return metrics that we delivered over the past few quarters. We are intent on achieving pure leading profitability. I've mentioned the first takeaway initiative on the past call or two, and this environment provides us with a perfect window to continue to focus management's attention on the successful implementation of that plan. As a reminder, First Bank is working on documenting and implementing best practices 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 consistently and more efficiently focused on 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&A goes, downturns can result in transformational transactions and we could see that being the case in the industry over the coming quarters and into 2024. However, we'll 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 make ourselves 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 First 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 three plus quarters. We're using this time of market anxiety to continue our internal improvements with the intention of returning to pure leading profitability and growth that we're accustomed to and doing that sooner rather than later. 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 first quarter.

Thanks Chris. I'll start out by reminding everyone of what I said on this call about three years ago today. We are, at our core, a community bank that makes loans to support 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. Our portfolio reflects that bias. We believe that this has helped our credit results in the past and will continue to do so in the future. We are committed to conservative underwriting standards with a focus on cash equity or 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 greater pool parity. 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 bank the company, the owners, and its employees. That was all true then and it remains true today. We still feel good about our lending philosophy and underwriting process. Moving to the slides. On slide nine, you can see it outlines our overall portfolio, which we believe continues to be a good mix of industry segments. 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? Our answer is not really. That's more what you hear from big banks that run a line of business model where they give their customers whiplash turning the spigot on one quarter and off the next. We simply work with our markets and explain our thoughts. 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. 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. Our analysis indicates 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, as you see in the slide. Given our focus on that property type 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 the state bird before long. This construction activity is great for the city and the region's economy as we benefit from the large inflow of companies and associated jobs. But let's make something clear — we are not financing those projects. 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 and 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 roughly 4% of our total loans out of state. These are spread across our footprint, with the largest concentration being in the Nashville region. Most of it is in completed projects with only four still under construction, accounting for less than $15 million in fee. As part of our normal portfolio management, our team put together a list of office loans with commitments greater than $2 million, 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 showed a total of 48 loans with outstanding balances ranging from a low of $1.7 million, the largest has a balance of $26 million and the next largest is $20 million. The $20 million, frankly, is actually a loan secured by four different buildings. The next five are in the $12 million to $16 million range and everything else is less than $10 million. I mentioned this just to highlight that this reflects my earlier comments about the type of lending that we do. 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 below. We examined the interest rate on the entire portfolio and found 58% is fixed, 42% floating. We also looked at maturity risk, finding that only 7% mature through 2024. Interest rate increases have impacted everyone, of course, but so far no problems have arisen. 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 Mettee has been alive, but we're proud of how it has fared so far and will continue to manage it to the best of our abilities. I'll also touch briefly on our commercial loans held for sale. We have only two relationships with balances of less than $10 million. We feel adequately marked on that. So, any additional gains or losses until sale or maturity there should be relatively inconsequential. We appreciate the work Scott McGuire, our Head of Special Assets has done to work this down over the past few years. I'll now turn that over to Michael Mettee.

Thank you, Greg, and good morning, everyone. I'll speak first to this quarter's results in the core bank. Our adjusted pre-tax pre-provision net revenue from the bank of $45.9 million is showing growth of 12.6% year-over-year, but down 15.8% from the prior quarter 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 SVB and Signature. As the deck shows, we have on-balance sheet liquidity consisting of cash and unplanned securities of $1.6 billion. We have an additional $6.8 billion in brokered CD, FHLB, and discount window funding available to us. For tax purposes, we have $2.3 billion of real estate loans held at our real estate investment trust, which we could not move back to the bank overnight to create additional Federal Home Loan Bank borrowing capacity. There is also BTFP available and although we have not engaged with that program because we didn't feel the need to, we could if we really needed to and we feel comfortable in our current and available sources of liquidity. Moving to our deposit portfolio. In total, our deposits grew by 12.2% annualized, or $327 million. Seasonal inflows of public funds accounted for $313 million of net increase, leaving non-public funds effectively flat. As a reminder, those public fund balances tend to begin building in November, peak in May, and decline from June through October. A new line in the supplement this quarter is our estimated uninsured uncollateralized deposits. At $3.3 billion, those deposits make up 29% of our total deposit base. We have not seen any concerning behavior from these customers and as mentioned previously, we have on-balance sheet access to liquidity of $8.4 billion or 2.6 times both uninsured and uncollateralized deposits. In the supplement, we declared consumer, commercial, and public deposits. Average balances in those accounts are consumer $2,300, commercial $118,000, and public $1.8 million. From the fourth quarter to the first quarter, consumer average balances were flat. Commercial average balances were down slightly from $122,000, somewhat driven by new accounts as we saw first-quarter annualized growth in the number of commercial accounts of 10%, and public balances were up around $150,000 due to those seasonal inflows. For the entire deposit 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 million with us. Finally, 62% of our deposit balances are with customers that have been with us for more than five years. An additional 26% of balances are with customers that have been with us for more than one year. We believe that we have a pretty long-tenured loyal customer base. Briefly touching on our security portfolio, we have no held to maturity securities. Over the past few years, the portfolio maxed out around 13% of total assets and is currently at 11.3%, with the current duration roughly 5.3 years. Moving on to our net interest margin, we saw a contraction in margin as deposit costs accelerated, partially driven by an outsized increase in more costly public funds with average balances that were up $521 million from the fourth quarter to the first quarter. The margin continues to be difficult to predict given continued pressures on funding cost. But with Treasury bonds back lower than Fed funds, we are hopeful that the dynamic of depositors leaving the banking system altogether due to higher risk-free yields will abate. However, with renewed focus on liquidity from banks and regulators in the wake of SVB and Signature, competition between community banks for funding is likely to intensify. 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%, contractual yield on loans of 5.97%, and a net interest margin of 3.45% versus the cost of interest-bearing deposits of 2.53%, contractual yield of 5.9%, and net interest margin of 3.51% for the quarter. Our cost of interest-bearing non-public funds was 2.57% in March versus 2.41% for the quarter. Our goal for the next few quarters would be to keep margins in the same relative range with March being below the quarter and higher cost public funds continuing to trend upwards into the second quarter; we are likely to choose slight contraction in Q2 as compared to the first quarter. As those funds begin coming back off the balance sheet, we're likely to see a little lift from there. Today, we value liquidity in our margin and the strength of the balance sheet versus maximizing the last dollar of earnings available to us. On the other side of this, we will likely review how much public funds we are willing to carry given the outside data that many of our relationships in that space have shown and their impact on profitability. Core banking non-interest income of $10.7 million was in line with our expectations, and we expect to continue to hover in that $10 million per quarter range plus or minus for the remainder of 2023. Banking non-interest expense of $68.5 million was also in line with our expectations. At this point, we don't see a need to revise our prior guidance of mid-single-digit growth over 4Q22's run rate of $267.6 million. However, expense management is top of mind for the company as revenue pressures continue. Closing with our allowance for credit losses, the economic forecast deteriorated slightly during the quarter, specifically in March, and we added four basis points to the allowance as a result. Proviso expense ended up being relatively neutral as our reserves for unfunded commitments came down, primarily due to a decline in our unfunded construction and development commitments. We will continue to be cautious on our reserves. If forecasts continue to decline, we will likely continue to build. At this point, there are no industries that we are qualitatively funding 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.

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

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

Thanks. Good morning.

Good morning, Catherine.

Good morning.

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 and 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.

Yes, good morning, Catherine. So, net interest margin was 3.45% in March, yes, that’s down on the lower end for the quarter - 3.51%. So, interest-bearing deposit costs around 2.67% and non-public funds were 2.57%. That run-up in public funds during the quarter puts pressure on net interest margin. They have a beta of really in the first quarter over 100%, actually. That really puts pressure on their overall deposit cost. We do think that will start to come down in the middle of the year and so you could see some relief, which would actually increase NIM. But we're going to kind of 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 will tell you our field team does a really good job of keeping us informed of what's going on in and around the markets, and we see a lot of really aggressive pricing on CDs, but also on money market from many of the smaller community banks in and around us. So, you could still see some pressure from there. So, we're trying to manage it the best we can, understanding that liquidity is top of mind. It 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 a 25 basis point increase from the Fed this next one, I don't know what we're getting in June. We are not expecting 23%, 24%. You should expect deposit betas or deposit cost to go up about 60% of that 25%, so you see incremental cost from there. So, it's a little bit of a mixed bag.

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

We have a money market product that's priced off Fed funds. Incrementally, you'll see 80% of Fed funds move on probably a third of those money markets. That's the increase you're seeing there.

Okay. And then my last - 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 those loans move to in terms of rate?

Greg, you want to talk about what we see repricing in the commercial real estate?

Especially - well, we specifically pointed out on the slide about the - only 30% of that office portfolio is maturing through 2024 specifically. I do not - I don't have that specific number. Michael—

Yes, Catherine. If we look at commercial real estate, about 30% of the total book reprices within the next 12 months. Only - I'd say about 70% of that number is variable, so it's already taken into account. We will factor in interest rate risk and then fixed rates about a third of that. About 50% of our portfolio reprices three years out. So, that's kind of a split and as a reminder, that's actually about 60% variable rate and about 40% or so fixed rate.

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

Yes. Hey, Catherine. I will add some of my 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 his comments, we've really prioritized the strength of our balance sheet, and that's really the priority. We want to make sure we're maintaining deposits and funding, and that's our priority right now. That's made it really difficult to forecast. So, I wish we had a pinpointed number for you, but it changes actually very fast.

Yes. Understood very clear. Thanks, Chris.

All right. Thanks, Catherine.

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

Hey. Good morning, everyone. If I could dig down a little bit deeper about the marginal cost of deposits, I know, Michael, you gave some color on the money markets being tied to maybe Fed fund. 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 a feel for those spot rates if you have it?

Yes. Morning, Stephen. Our CD rates have maintained pretty standard over the past quarter. We had 24 months out around 4%, 18 months, 3.38%, and 13 months around 3.13%. So, that all comes in, and the new rejections come in split, a third, a third, a third, and really. And so that cost comes in around 3.40%. 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 it's coming somewhere around 4% -

That's where the bulk of the volume is on the money market side.

Yes. 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 the high marginal cost of deposits.

Yes, exactly.

Okay, great. And I love the slide here on the office exposure, really appreciate you guys putting that in there. Do you have a feel for you guys look at the credit detail by class on slide 11? How that weighted average occupancy, has that moved around much in those categories? I mean, it all looks pretty strong today, but are you seeing any sort of migration to the downside yet or is that one, maybe overblown or two, maybe you just haven't seen those trends shake out?

Hey, Stephen. It's Greg Bowers. No, I have not. Matter of fact, that Class A portfolio that is a weighted average numbers. So, that's 82%, right? If you just look at the - I think what - that's eight projects - total 11 projects, eight of those are 100%, a couple of them are 94%, one of them is at 50%. That one at 50% just came out at the end of the fourth quarter last year. Overall, I think all of them are hanging in there. There is pressure out there and supply is coming on. So, it's a cautious outlook for everyone in the market.

Okay. That's helpful color. And maybe just one last thing for me. I'm curious what you're seeing on the mortgage side, and it's nice to see that breakeven. Obviously, you can see the purchase refinance mix you lay out. But are you seeing any pickup in demand on the refinance side with the tick down in rates? Are there people that are locked in at higher rates that are now able to come back to the table or is that move down not been substantive enough to drive that incremental volume?

Yes, Stephen. The rates have come down specifically, right, in Treasury. As I kind of put in my comment, the mortgage spread has actually not come down as much, not being overly technical. We need mortgages to tighten in, and rates continue to go down, but you've got 103%, so there's a long way to go to I think refinancing unless they're taking equity out and there’s still significant equity. Overall, mortgage activity at first quarter was pleasantly surprising. We have breakeven, which was a good quarter. We expect to be profitable in all cycles and so the work last year came to fruition. It's a little bit slower in March, but we expect that to kind of pick back up with seasonality.

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

Hey, Stephen. I’m going to make one more comment. You talked about us paying in those, that FHLB. As we still got a little bit of a jumpy borrowings on our balance sheet. We debate internally whether to pay it off because we're sitting on roughly $1.5 billion in cash every day. But 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 bit of it back. The cost of the spread is probably 15 basis points between the cost that we pay for it and then we reinvest the cash overnight. 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, say, 15 basis points to hold on to it for now in the face of just the market uncertainty. That’s an example of the types of decisions that we're making every day at this timeframe that cost us a little bit of money, but we think it's smart long-term business.

No doubt. Gives everybody a little bit less to pick out in the regional bank space. So we appreciate that - the extra security for the group as a whole. Thanks, guys.

Exactly.

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

Hey, guys. Good morning.

Good morning.

Wanted to first ask just on the unfunded commitments on construction - the contraction linked quarter, was that intentional or did you have some insight 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 Diamond didn't really like, credit crunch. Are you seeing market participants not being able to get credit or maybe struggling to get favorable terms on things in the market or any color around that comment?

Yes, Brett. So, on the first one, on the reduction in the commitments, absolutely intentional. If you go back into 2022, we were running at 120% of risk-based capital in terms of fundings on our A&D or construction, and we don't like that. That's viewed as high risk because it is high risk. We hold ourselves as a high-risk company. So, we committed to getting that under 100%, and we don't like running that way. Very intentional in that. So, that one - that's an easy one. And then when it comes to - and don't tell Jamie that I've violated his mantra - because we hold immense respect for him in the way that they do things. That being said, the market is getting slower and credit is pulling back. We talked to our peers, we talked 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 Nashville, Chattanooga, Bowling Green, Kentucky, Huntsville, Alabama, they're all doing well and construction is harder to pull off these days because there are just less folks - more folks that are like us that have hit their thresholds and look out on the horizon and say it’s probably time to not be matched to the accelerator. We have certainly seen some slowing among our customers and in our mortgage.

Okay, that's helpful. I wanted to make sure I understood a little bit of the balance sheet management strategy from here. You obviously really improved the liquidity linked quarter. I was just 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 its balance sheet's fairly flat and you have a mix shift change in deposits from here. Obviously, CDs were a bigger percentage of funding two years ago, maybe just any color you could give on how you see the balance sheet liquidity and then maybe absolute size from here?

Yes. I will just comment on a few things that we're managing. The first thing I'm going to repeat is, currently, balance sheet strength tops squeezing the last nickel out of profitability as Michael said in his comments. 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. 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 to pull as we move forward when it comes to profitability. Michael gave an example when he talked about managing public funds. The public funds are funded up, most of those relationships are contractual for a period of time. Some of those are actually quite high rates on those funds, and that's driving up our cost. As those move down and some of those that money moves out later this year, it’s going to move our cost down some and provide us a profitability lever to pull on whether we do exactly what you're suggesting. We 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 standpoint. We are comfortable with a mid to low single-digit loan growth rate right now because the other side has credit that we are managing. We are cautious especially as asset classes continue to emerge that cause you concern; we aren't crazy about matching the accelerator right now. We're going with a slower growth rate and have created ourselves hopefully some levers that we can pull into the latter half of the year to improve profitability.

Okay.

Yes, Brett. I just add that when you come out balance sheet and I mentioned the investment portfolio that we haven't actually bought a bond since May or late June of last year, just believing right in the rising rate environment. Now, if we're Fed fund and Chris mentioned parking money as I said, which is where most of that cash is; you're earning a pretty good relative number versus kind of reinvesting. We've been thin on cash and it hasn't been a huge drain on profitability from alternative investment scenario and of course, you're not adding any duration there. So, we are still a little bit cautious there in keeping it in cash, and maybe one day we redeploy, but it's not really in our plans at this point.

I think I understand the strength of the balance sheet is key. And then just lastly, appreciate all the color in 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 on office or maybe other classes that there's a lot of deep money that's just waiting to swoop in and grab some properties if the cap rates move up 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?

I have not seen a 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.

Yes, and Brett, I just add a little bit of commentary from personal conversations with folks that shape real estate in some of our local geographies. Most of those would come in our biggest geography, which is Nashville; there are some folks that are on the sidelines I know that have liquidity 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 if there's going to be enough of a slowdown, especially in Nashville for them to be able to deploy to where they think they should. So, I would echo that, yes, I do think there's money both local and out of market that would like to get into the market on the real estate side. So, I think there is money on the sidelines that's available.

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

Thanks, Brett.

Thanks, Brett.

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

Hey, thanks. Good morning.

Good morning, Matt.

On the January call, Chris, I think you mentioned that you guys executed some loan sales to help manage liquidity, manage credit, and kind of, growth late last year. Any loan sales to speak of more recently? And just what's the overall plan as far as loan participations this year? Thanks.

No. Nothing recent in terms of loan sales to move the numbers. You're exactly right, we had some in the fourth quarter as we were - some of the things that we're talking really focused on today. We're discussing how to manage liquidity and to manage the outstandings on both CRE and C&D. So, it's not a repeat of that, but we didn't have any new activity to speak of this quarter.

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? I know there can be a big difference there of absorption by product type. So, any commentary you have with respect to types of commercial or residential construction?

Yes, good morning. I think that right now most of the - when I talked about projects rotating out, I think most of my comment there pertains to the residential side; that's the bulk of that segment. We are in the - what we're seeing right now and expect to see over the next quarter. So, as a result of sales of residential here during the peak seasons for residential. 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. So, I think the bulk of the rotation will be in residential.

Yes, Matt. This is Michael. I’ll occasionally get phone calls from those permanent market, kind of, take out asking if they can use our balance sheet to facilitate loans and of course, the answer is no. No, thank you. But that tells you anything about what the secondary market looks like; I don't know - but I don't know how active it is.

A lot of our - it's really - it's a little bit of a boring portfolio sometimes. These loans are many firms 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 we're going into a CMBS market or something like that or going into a life company, that's really not what these are.

Okay. Appreciate that. And then I guess circling back on the margin. Appreciate that there wasn't much guidance around now all the moving parts, especially in kind of the excess liquidity position. Michael, what about with respect to just the NII? There'll be some pressure there, it sounds like, from 1Q levels. Any commentary if you think the bank can grow NII in 2023 versus 2022? Thanks.

Yes, Matt. I think the loan growth from last year's second and third quarter really puts us in a position to be able to grow net interest income this year. If you just look at the first quarter this year versus the first quarter of last year, we're ahead of pace based off of that growth. So, we believe we can grow net interest income in 2023. However, that interest expense number is key there, and as we've slow loan references, Chris talked about; but we think it's fine.

Yes, you zeroed in on a good question that we debate, but we think we can actually grow for the year. We're trying to create more flexibility 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, that we'll be able to grow net interest income.

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 first quarter 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. So, just any general commentary on originations that you're seeing now versus before? Thanks.

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 two, but there is less demand, but we're also not beating the bush quite as hard. 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 long-term customers that we got to take care of, and so when you see that our construction commitments are down close to $300 million in the quarter, remember we're taking care of customers in there too. That net number ends 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 - it's how you do that. So, we are making commitments; just net-net, we’re down.

Got it. Okay. Thanks, guys.

All right. Appreciate it.

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

Hey, good morning, and happy birthday, Michael.

Thanks, Feddie. Good morning.

Morning. Appreciate all the detail on the office portfolio. I was just curious when you did the review on the office credits above $2 million, are those LTVs using existing appraisals or did you get new ones for the review?

Yes, good morning. That was where the existing at inception.

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

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 to it.

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

Yes, Feddie. Like I said, we haven't tapped it cost wise; it's roughly in line with Federal Home Loan Bank borrowing with the way we do it. I think we probably got a discount window first, but I mean they're basically the same. Federal Home Loan Bank has been are typical partners, and we continue to do that. But there's nothing against the bank term funding program or the discounting or anything else. It's just the way we've operated. We certainly test the midline to make sure that if we ever needed it, we would.

Yes. And I would just add this. I mean, we've got close to $7 billion in sources, and so we - the only times we tap those sources, I mean, we'll tap Federal Home Loan Bank. But even that is unusual. We don't - we'd like - we'd say this around First Bank. We don't borrow money to lend, okay? We lend out deposits. We don't go and borrow money from the Federal Home Loan Bank to satisfy our lending appetite. When we tap any of those, even Federal Bank, it's a little bit of a new event for us. 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 on the list of things that we would get to. And that's our approach to it. And we're glad it's there 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. The bank term funding program is going to be there. We understand, hey, I mean your lines are going to be pulled from your correspondent banks, Federal Home Loan Banks are going to get tight. So, we're glad those sources are there, but we have not had to really think about tapping it. So, we'll go back to Greg for just one minute.

I 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 would be 2021, 2022, 2021, 2022, 2021. So, just anything else is pretty recent.

Yes. So, they're all quite recent - 2021.

Got you. No, just want to make sure I understood. It sounds like - got it. And it sounds like with the bank term funding primary and Federal Home Loan Bank, everything else, you guys truly view it as contingent liquidity. That's just not how you fund loan growth; it's just the way we should think about that.

Yes, exactly.

Thank you. And ladies and gentlemen, our next question comes from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.

Hey, good morning, guys.

Good morning, Kevin.

Most of my questions have been asked, but just one, it seems, Chris, your main kind of message here: you've said it a number of times, this balance sheet strength is going to trump any kind of stretching for incremental profitability. I'm just wondering, you guys have definitely been deliberate about that and with the loan to deposit ratio down now below 84%, 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 managing down. So, is that - given a likely economic slowdown, are you on those measures? Or maybe there are other measures you look at? Are you where you want to be or is that incremental work over the next quarter or two? Like, do you have a certain bogey for loan to deposit rates or CET1 that you're aiming for to be consistent with that concept about balance sheet strength trumping everything else? Thanks.

Yes, good question, Kevin. 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? Even if it's - if we can get it - if we can get deposit growth and it's discounted into the Fed funds at some reasonable discount to Fed funds, we are not going to turn down deposit growth. If that - if our loan to deposit ratio went down from here, that would not bother us, okay? You would probably also see us continue - we'll 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 liquidity. Frankly, our on-balance sheet liquidity is higher today than it was at quarter end. We feel good about trends there. But remember, we're keeping in the background of some of the public funds that have come in are going to go out in the let's say the June, July, August range. Again, we're managing through that. We’re not going to turn down additional deposit growth even if it's - certainly not at 5%. We're not looking at trying to grow deposits at 5%, but if it comes in at 3% to 4%, yes, we would continue to take that and then we would look to add on the asset side, that's how we're thinking about that. We're in a good position. We're comfortable with where we are. 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 customer - the commercial retail customer deposit base. We want to continue to grow those, and that's full time, 365 days a year. So, we want to continue to do those. On the capital side, ratios are quite good. We don't think we need to build from here. 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 in our business.

Got it. Great. Very helpful. And one quick follow-on on M&A. You kind of - it sounded like you kind of laid out on one hand, we don't need it, and you see opportunities from M&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. 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 criteria from where they operate, the management teams, their model; and if and when they ever looked to seek that larger partner, then you'd be willing, but you're just not out there on the hunt, in other words, right? Is that how to think of it?

Yes, Kevin, I think that's generally fair. I'll make two or three statements there. We're not out trying to do, eliminate especially in this current environment, we're certainly not. Given where stock prices are, it'd be tough to make a transaction work financially. We're not out there doing and there are a couple of reasons. One is we are really intensely focused on - we've grown on some profitability metrics and some sustainability of those. 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 operating like you wanted to. You've heard me over the years refer to us as a good operator. We always want to be known as a bank that operates very effectively, very efficiently, and is very well-managed from a risk standpoint. That's really our focus right now. And that will bring organic growth in normal times. I'm not calling this or what I anticipate in the quarter or what I anticipate in the next couple of quarters, normal times. That typically would also deliver a double-digit growth rate, which is pretty attractive from the growth standpoint and typically brings robust profitability. That's where we are, that's what we're focused on. We're not thinking about acquisition-related transactions right now. We do keep a list of banks, a 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 is another reason we're not focused on it. We don't think we're going to get that opportunity in the near-term. But those banks are, the reason we're interested is this environment perfectly illustrates why we're in those. They're very granular; I call them generational banks, the generational community banks with generational customers that have been with them for decades and they’ve usually great funding profiles in there. Again, I like to say they're exactly like us. In some cases, they may even have a better profile because we've gotten big and have a few lumpy pieces on our balance sheet just because size creates that and gives you that opportunity. If anything, it would improve your overall profile from what I consider to be a highly valuable bank. 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. 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 and becoming a better and better operator.

Great. Thanks Chris. Appreciate it.

All right. Kevin, good to talk to you.

And 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.

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

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.