FB Financial Corporation (NYSE:FBK) Q3 2022 Earnings Conference Call October 18, 2022 9:00 AM ET
Company Participants
Chris Holmes – President, Chief Executive Officer
Michael Mettee – Chief Financial Officer
Greg Bowers – Chief Credit Officer
Conference Call Participants
Catherine Mealor – KBW
Stephen Scouten – Piper Sandler
Jennifer Demba – Truist Securities
Kevin Fitzsimmons – DA Davidson
Matt Olney – Stephens
Brett Rabatin – Hovde Group
Feddie Strickland – Janney Montgomery Scott
Operator
Good morning and welcome to FB Financial Corporation’s third quarter 2022 earnings conference call.
Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mettee, Chief Financial Officer, and Greg Bowers, Chief Credit Officer, who will be available for questions and answers.
Please note FB Financial’s earnings release, supplemental financial information, and this morning’s presentation are available on the Investor Relations page of the company’s website at www.firstbankonline.com and on the Securities and Exchange Commission’s website at www.sec.gov.
Today’s call is being recorded and will be available for replay on FB Financial’s website approximately an hour after the conclusion of the call.
At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation.
During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other 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 is contained in FB Financial’s periodic and current reports filed with the SEC, including FB Financial’s most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation whether as a result of new information, future events or otherwise.
In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial’s 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.
Chris Holmes
Thank you Jason. Good morning and thank you for joining us this morning. As always, we appreciate your interest in FB Financial.
For the quarter, we reported EPS of $0.68 per share. We’ve grown our tangible book value per share excluding the impact of AOCI at compound annual growth rate of 14.9% since our IPO. We had good performance this quarter both in the banking segment and in the mortgage segment.
First starting with the bank, we had 22% annualized loan growth. As I’ve said before, asset generation has not been a problem for First Bank, and our continued loan growth is reflective of our experienced and trusted relationship managers operating in excellent markets that have strong underlying job growth and in-migration.
We’re also proud of our non-interesting bearing deposit growth, which was 9.7% annualized this quarter and 13.7% year-over-year. Growing operating relationships in non-interest bearing deposits has been a focus of management, and our team continues to execute well, particularly in the interest rate and deposit environment that we find ourselves in. We believe that our non-interest bearing growth is a signal of the strength and the momentum of our franchise.
Those balance sheet trends resulted in strong growth and profitability as our net interest margin expanded to 3.93% in the quarter and our net interest income grew by 9% over the second quarter. As a result of that improvement, the banking segment delivered a PTPP ROAA of approximately 1.9% in the third quarter, which is getting closer to where we expected to be.
For mortgage, we had a loss for the quarter but we also finalized our restructuring of the segment. We’re now at a point where we feel comfortable with our staffing organization to weather this challenging environment while avoiding additional material losses. As a result of this restructuring, the mortgage segment returned to operational profitability in both August and September. While the seasonality of the fourth quarter and the first quarter will exacerbate the current headwinds in the industry, we would expect to be close to breakeven for the next couple of quarters.
While we are pleased with our third quarter results, we’re also looking ahead at grey skies. We’re hoping for a drizzle, but we’re prepared for Jamie Dimon’s hurricane. The macro factors of rising interest rates, strong employment, high inflation and good customer sentiment would lead you to think that interest rates will continue to rise. When mixed with quantitative tightening, shrinking liquidity, the potential for significant market disruptions, a war in Europe, and almost assurance of a recession, it makes this an important time to rely on fundamentals, discipline and messaging.
As the economic times are moving from boom to something less, we have had to transition from aggressive growth of the franchise to ensuring that we take care of customers regardless of economic conditions. In times like these, we say our balance sheet is reserved for our customers, so we have to be prepared to get them through challenges as we encounter difficult market conditions.
Our people live and work in markets that are surrounded by customers that continue to experience strong demand, above average population growth, robust housing markets, continuous wage growth, and in some of our markets they can’t get to their office without driving past a sea of construction cranes. Our people are passionate about serving their customers no matter the circumstances and preparing for a slowdown, but our markets are still so robust there’s a communication challenge.
That being the case, we’re emphasizing and continue to grow our business aggressively on the deposit side. We’re avoiding significant new customer acquisition on the credit side right now and we are trying to take care of the existing borrowing customers. We’re managing our liquidity, credit and capital to be prepared for any range of economic scenarios. Better safe than sorry.
On our liquidity, we had $537 million of net deposit outflows during the quarter and we expected that, as we referenced on last quarter’s call. Stripping out two large public funds accounts which combined for $619 million in deposit reduction during the quarter, we had net growth from the rest of our deposit base. One of these large public accounts was over $500 million and was bid away from us on terms that we were not willing to match. We can increase and have increased our customer funding at less expensive rates while also freeing collateral that improves our overall liquidity position.
Following this quarter’s deposit activity, we are now at 91% HFI loans to deposits and security to assets of 12.1%. We feel our balance sheet mix is optimized in this environment for strong profitability and we have ample liquidity sources that will allow us to continue serving our customers even in the most extreme economic conditions.
Going forward, we don’t anticipate letting ourselves get above the current 91% loan to deposit ratio. We are also not willing to pay for unprofitable deposit relationships, and we still prefer not to use brokered CDs, although that’s an available option. That means we’ll fund most of our additional loan growth with customer deposits. It also means that for the near term, we won’t have outsized loan growth that you’ve seen over the last three quarters and we would anticipate not exceeding the bottom end of our long term loan growth target of 10% to 12% during the fourth quarter and the first part of 2023.
While the past few quarters would tell you that there is still clearly strong demand for First Bank lending relationships, we’re intent on throttling back our production. As a result, we’ve raised the bar for new loans. We feel confident that our underwriting standards should hold up through the cycle. If there’s been a tweak, it’s been that we’ve been stressing interest rates a little more given the current environment; otherwise, we’ve not made changes to our credit process, however until we can gain clarity on which areas will be impacted by the slowing economy, we’re cutting back on traditionally higher risk product types of construction, A&D, and CRE. With the limitations around those assets we’re willing to put on the balance sheet, our growth should continue to be incrementally profitable.
Moving to capital, we maintain a very strong equity position with a CET-1 ratio of 10.9%. Our tangible common equity to tangible assets declined by 36 basis points to 8.54% due to a further increase in the unrealized loss of our securities portfolio, and I would reiterate that that unrealized loss is all interest rate related and temporary. As I mentioned previously, we have no intention of turning those unrealized losses into realized losses.
We’re preparing for a slowdown and being cautious on credit and balance sheet management. We’re balancing that with our longer term strategic priorities. Our recently announced Vanderbilt sponsorship would be an example – while that’s an expense for us heading into a recession, we had an opportunity to become the bank for one of the most significant institutions and brands in our geography and we acted on it. Another such focus would be our recruitment efforts for both relationship managers and customers in the wake of recent acquisitions in our footprint. While we would not allow ourselves to grow loans at an outsized pace, there are certain once-in-a-career type customers that may be looking for new partners, and we will do what we can to accommodate them.
Similarly, we continue to be active in our discussions with a handful or so of banks that we’ve identified as Tier 1 high quality potential partners. If one of those banks that we know well decides to sell in the next few quarters, we would not stay on the sidelines solely because of the uncertain economic outlook.
All that to say we’re proud of our performance in the quarter but we’re cautious about the operating environment for the next few quarters. We’re hoping for a mild downturn, but we’re doing what we can to prepare for a potentially difficult stretch. We feel our conservative balance sheet management and underwriting standards will serve us well no matter what outcomes.
I’ll turn it over to Michael for more color on our financial performance in the quarter.
Michael Mettee
Thank you Chris, and good morning everyone. I’ll speak first to this quarter’s results in our banking segment.
Our baseline run rate pre-tax, pre-provision income for the banking segment was $55.9 million in the third quarter. Pointing to the segment core efficiency ratio reconciliations, which are on Page 19 of the slide deck and Page 19 of the financial supplement, we had $112.1 million in segment tax equivalent net interest income this quarter. Along with that $112.1 million in net interest income, we had $10.3 million in core banking segment non-interest income. Finally, we had $65.9 million in banking segment non-interest expense.
You will remember that last quarter, due to our lower level of taxable income, we had a geography shift of $1.4 million as tax credits were moved from a reduction in our tax expense to instead be a reduction in non-interest expense. This quarter, we had $700,000 in banking segment non-interest expense as a result of that line item. Adjusting for that shift, core banking segment non-interest expense would have been $66.6 million. Together, that comes to our $55.9 million in run rate segment PTPP, which has grown 30.9% over the comparable $42.7 million that we delivered in the third quarter of 2021.
Moving onto our net interest margin with summary detail on Page 5 of the slide deck, our net interest margin of 3.93% showed significant improvement from the 3.52% that we reported in the second quarter. Part of that improvement was due to the continued deployment of liquidity in the loan growth. For the second quarter, we estimated that excess liquidity had a 14 basis point negative impact on our margin. With our average balance sheet composition during the third quarter, we estimate no impact to margin due to excess liquidity. The remaining 27 basis points of expansion was due to assets re-pricing faster than our liabilities as our cost of total deposits increased by 27 basis points, while our yield on loans excluding non-accrual interest recoveries, accretion on purpose loans and syndication fees in the prior quarter increased by 52 basis points. Our securities portfolio increased by seven basis points and our interest bearing cash increased by 145 basis points.
Looking forward for our margin, we had a run rate margin for the month of September in the 3.95% range. Our cost of funds is increasing as we expected it to, and we put new deposits on the book in the third quarter at a cost of 1.54%, and that was up to 1.79% in the month of September, so we would expect our cost of total deposits to continue to increase over the coming quarters particularly with the additional rate hikes that are anticipated over the coming months.
However, we have also seen an increase in our yield on loans. New loans in the third quarter had a yield of 5.96% and that was up to 6.18% in the month of September, so that’s a net spread of 4.42% on new loans versus new deposits for the third quarter and 4.39% for the month of September. We feel that our growth remains profitable. Better spot numbers for yield for the month of September would be contractual yield on loans of 5.12%, yield on securities of 2.15%, and cost of interest-bearing deposits of 0.97%. With our margin approaching 4%, we would expect it to start to level out.
There should be continued upside to our asset yields with additional rate hikes, but competition for deposits across our markets is causing betas to accelerate, which should cap some of our upside. For banking segment non-interest income, we continue to expect for our banking non-interest income to be in the $10 million to $11 million range from quarter to quarter for the foreseeable future.
As I mentioned earlier, we view our core banking segment non-interest expense as being $66.6 million versus the reported $65.9 million, due to the $700,000 state tax credits that reduced non-interest expense this quarter. That number is higher than the $63.8 million to $64.3 million that we guided to for the quarter as we accelerated a few of our internal projects geared towards organizational efficiency into the third and fourth quarters as we expect continued growth in our banking segment non-interest expenses due to inflationary pressures on wages, and we continue to hire customer-facing and back office talent.
Moving to mortgage, after a difficult start to the quarter where we experienced a fair value reduction of both our pipeline and our mortgage servicing rights, the segment returned to profitability in spite of lower volumes. We do not expect a contribution to earnings in the fourth quarter due to the seasonal volume pressure and margins that remain below our historical levels. The changes to structure that have been made put us in a position to be profitable on an annual basis going forward.
Moving onto our allowance for credit losses, we saw our ACL to loans increase by two basis points this quarter and we recorded a sizeable provision of $11.4 million. Economic forecasts for the third quarter deteriorated slightly from those that we utilized in the second quarter. We have continued optimism for the long term health and growth of our local economies, but we are closely watching inflation that we are experiencing and the increasing conviction of many economists that we will soon enter into a recession. If conditions do not change, we would anticipate remaining at a similar level of ACL to loans held for investment over the near term.
With that, I’ll turn the call back over to Chris.
Chris Holmes
All right, thanks Michael for that color.
I would say we’re pleased with our results for the quarter and feel prepared for what’s coming next, and that concludes our prepared remarks. Thank you everyone again for your interest in FB Financial, and Operator, at this point I’d like to open the line for questions.
Question-and-Answer Session
Operator
[Operator instructions]
Our first question comes from Catherine Mealor from KBW. Please go ahead.
Catherine Mealor
Good morning.
Chris Holmes
Good morning Catherine.
Catherine Mealor
Michael, you gave great detail into the margin, which I found really helpful, such as the spot rates at the end of the quarter. I have one follow-up to all that detail, just looking at the borrowings. It looks like you pulled down some FHLB borrowings this quarter, so just curious if that was more of a temporary thing just given the outflow of public funds we saw, or if you think we’ll see an increase in FHLB borrowing use over the next couple of quarters. Thanks.
Michael Mettee
Yes, that’s a great question, Catherine. Yes, the FHLB borrowings were kind of a replacement for those public funds as we continue to grow our customer deposits, and we expect those to be paid down over the coming quarters.
Chris Holmes
Yes Catherine, I’d say [indiscernible] already moved down some from where it was at quarter end, so that’s–we don’t anticipate–that is more temporary.
Catherine Mealor
Great, okay, so move that down and increase customer deposits from here, and that as loan growth flows should be an easier balance – I would assume you’re not growing at 22% for loans anymore.
Chris Holmes
You got the message!
Catherine Mealor
Loud and clear!
Then one other–just switching to credit, it was interesting looking at your reserve. It looks like a lot of the higher provision this quarter was really just from the loan growth, but I did notice on your CECL slide that you increased your reserve on the residential mortgage portfolio. Just curious what drove that, and then bigger picture, how you’re thinking about where the ACL could go. As I look at that, I feel like it’s a very high reserve, so I would think you would be a bank that would have relatively less risk for reserve building from here, but just kind of curious how you’re thinking about that as we get into maybe a more recessionary period. Thanks.
Michael Mettee
Yes Catherine, it’s Michael – good question. The reserve around consumer and residential was impacted more so this quarter by the Moody’s scenario, so that’s really the number you’re seeing there on one to four family. It’s strictly model driven. It’s really around that change in GDP and unemployment being slightly higher, which tends to impact the consumer more so than some of our other asset classes, so that drove that higher.
We agree – we feel like our ACL is very prudent for what’s in front of us and where we’ve been, and we feel like we’re in pretty good shape there. We’d expect that to maintain the same level of 1.45 to 1.50 on a go-forward basis given our economic outlook here, which is probably a little bit more bearish than some others.
Chris Holmes
Yes, and I think maybe you’re also asking, Catherine, if we’re going to build above this 1.48 for the quarter. It could go to 1.50, but we never know what the model spits out exactly until it spits it out, but I couldn’t see it going to 1.70 or anything like that in terms of what we–in the period, if that’s what you’re asking on the build side.
Catherine Mealor
Yes, that’s helpful. That’s really helpful. Okay, thank you so much. Great quarter.
Operator
The next question comes from Stephen Scouten from Piper Sandler. Please go ahead.
Stephen Scouten
Hey, good morning everyone. Can you hear me?
Chris Holmes
Good morning, Stephen. We got you.
Stephen Scouten
Great. I guess one of the strengths I’m seeing here is just the spreads you saw in the quarter on new production, even versus the new funding, Michael, that you referenced. Do you think that’s a trend that could continue, or is some of what you’re saying around the increase in deposit costs, would you expect those incremental spreads to narrow and for kind of the, let’s call it the incremental deposit beta to exceed incremental asset yield betas moving forward?
Chris Holmes
Stephen, we’re still seeing loan yields move higher, and so they’ve moved pretty much in line. We don’t see a whole lot of expansion in margin above this 4% range, kind of going forward. I think one of the challenges would be balance mix a little bit as our deposits grow, put a little bit of pressure on NIM, but for now we are seeing increased deposit costs. There are higher betas relative to new production, where rates are 3.5% Fed funds, but we’re seeing that incremental loan yields as well, so.
Right now, they’re moving kind of lockstep, whereas earlier in the year, obviously loan yields were outpacing deposits. Deposit costs were able to stay lower for longer.
Stephen Scouten
Okay, that’s extremely helpful. Then in the quest to keep the loan deposit ratio around this 91%, obviously again here in the guidance around loan growth expectations, but in terms of still filling the gap on the deposit side, would we expect to see that come more within customer CDs, and if so, where are you seeing new CD yields in particular come on at?
Chris Holmes
Yes, so kind of a mix of money market and new CDs. We’re seeing, call it odd term, 13-month at around 3.10 to 3.15, 18-month around 3.35 to 3.40-ish, and some of the shorter terms in the upper 2s. But I will say depending on the market, you’ll see some widely varying competitive rates, and we see well above that in some of our more community markets on CDs, and then in some of our more metro markets, you’ll see much higher money market rates in some cases. It’s a pretty broad competitive landscape at this point.
Stephen Scouten
Okay, great. Then I guess last thing for me, I’m encouraged by the commentary around mortgage. I think you said material losses should be kind of behind us, which is great. What’s the big driver for that? Is that just that the efficiency ratio has been brought down more in line, or will we see less variance around some of the MSR losses moving forward, changing fair value of MSR moving forward? What’s kind of the biggest drivers within those moving parts in mortgage that will lead to some normalcy there, I guess?
Michael Mettee
Yes, staffing is built for kind of a go-forward basis, where in the range we’re in now, probably a little bit of capacity for some growth going into the second quarter. One of the challenges with fair value and mark to market is you take a hit on when your pipeline shrinks, and so we incurred that in July as we moved out of the direct-to-consumer business and retail business slowed as well. You can see our volume dropped a couple of hundred million on interest rate locks.
Then on the MSR side, there was a valuation, kind of as rates get high, the valuation starts to taper, you don’t see it much increase. We keep the assets pretty much hedged at around 100%, and so we’ve had to modify some of our hedges there to kind of maintain current valuations. I wouldn’t expect swings in the MSR unless interest rates just get more and more volatile, and hopefully most of that is behind us as well.
But yes, mortgage seems to be stabilized, but we’ve got some seasonality ahead of us and hopefully the waters will be much calmer from here.
Chris Holmes
Yes Stephen, I would just add to that on the mortgage side, a couple things. It’s been a painful restructure for us because we’ve had about a 60% reduction in staff there overall from our peak, and so that was painful. But going back to what Michael was talking about on that mark to market, you have to mark your mortgage loans held for sale, and so if you go back to the third quarter of last year, we had $750 million in mortgage loans held for sale; end of this quarter, we had $97 million, and so if you think about that reduction in what you’re marking and you have to step that down, which we’ve had to step down over the last four quarters, and so–and that’s down to $97 million at this point, so it can’t drop that much further from there.
Stephen Scouten
Got it, makes sense. Thanks for all the color, guys. Appreciate the time.
Chris Holmes
Sure.
Operator
The next question comes from Jennifer Demba from Truist Securities. Please go ahead.
Jennifer Demba
Thank you, good morning.
Chris Holmes
Hi Jennifer, morning.
Jennifer Demba
Just wondering what kind of merger disruption opportunities you’re seeing, or saw in the third quarter and are seeing over the near term right now.
Chris Holmes
Yes, I’ll comment on a little bit of that. We don’t usually speak specifically to other institutions, but we do have some institutions that are undergoing big transactions and right here in our core markets, and so we hear a lot about that. We see movement from that, both customer and associate, and so that leads to just a lot of conversations with folks. It goes back to my prepared remarks, I made the comment, sometimes you see a customer become available that you’ve coveted for maybe years or decades, and they’re not going to come available again probably, at least in my career, over the next decade, and so we’re going to make a hard move for those whenever that’s the case.
It’s the same way with some of these associates – we’ve hired a lot of–we’re looking at revenue producers across our footprint, but in addition to that, the bank–First Bank, if you go back to 2000, it was about a–I’m sorry, in 2020, it was about a $6 billion institution, and then if you look at 2022, it’s a $12 billion institution, so we’ve also gotten opportunity on the operations side, on the risk management side, even places–especially in Birmingham, we’ve really grown our operational muscle and our administrative muscle in Birmingham through some disruption down there, and we’ve even–you know, our Chief Risk Officer came to us from Texas. By the way, it’s never easy to move people out of Texas, so it’s really coming from all around, and it’s not only on the revenue side, it’s on accounting and finance, it’s on risk management, it’s on operations where we’ve really been able to beef up.
Jennifer Demba
Great. A question on asset quality – what do you feel like is a normal level of annual loan losses for this company? I mean, I think that’s probably one of the biggest variances in earnings models for the industry going forward, is what should we assume as the economy gets a bit weaker?
Chris Holmes
Yes, well we had $15,000 net recoveries in this quarter, and I’d like to just assume that we’re going to have net recoveries in perpetuity. It’s probably not going to be the case, and frankly, you’re asking that question – it’s a hard question which we ask internally because it’s a little like some of the weather extremes we’re seeing these days. Loan losses have not been, quote, normal in so long that we’re not sure what that is. We have traditionally said somewhere in the 25 basis points has kind of been something that we model, but we’re not sure that that’s–you know, I’d say there’s a chance that it could be higher in especially the latter half of ’23 or in ’24. Charge-offs are lagging the economy, and so I’d say they potentially could be higher and then of course they’d be followed by lower.
One of the things that we watch closely, Jennifer, is our MH portfolio, and I’ve said once on this call and I’ll say it again, in that portfolio, if you go back to ’20 and ’21, we saw record low past dues, we saw record low charge-offs, we saw record low non-accruals because of all the stimulus money that put money in everybody’s pocket. Today, if we didn’t see–we’d think something was wrong with our tracking systems or something, we didn’t see those go up. We have seen past dues go up to a normal level, which is closer to, say, 0.4 to 0.65 of the balances is sort of the range, and we’ve seen it come back up to that range from being down to 0.2 to 0.21 in 2021.
We mix all those together, and roughly I’d say 20 to 30 basis points, something like that.
Jennifer Demba
Great, thank you so much.
Operator
The next question comes from Kevin Fitzsimmons from DA Davidson. Please go ahead.
Kevin Fitzsimmons
Hey, good morning guys. How are you?
Chris Holmes
Morning Kevin.
Kevin Fitzsimmons
I wanted to take a step back. With all of the talk about the balance sheet and the talk about the margin, definitely we’ve had a reversal where a couple years ago, we were all talking about the percentage margin getting hurt, but the balance sheet driving growth in NII, so now it seems like we’ve had a bit of a hand-off or a reversal on those contributors. But if you look at dollars of NII, do you feel you will be able to, on a quarterly basis, continue to grow that, I mean maybe not to the pace, 9% pace we saw this quarter, but do you feel that NII is going to be able to continue to grow in this environment?
Michael Mettee
Yes, hey Kevin, it’s Michael. Good morning.
Yes, we still expect a couple more rate hikes, so the variable rate portfolio should still re-price higher. We still expect, I guess relative to the last three quarters, modest loan growth over the next couple quarters, so you’ll still see some balance sheet growth, and deposit costs, as I say, it’s the change, right, it’s going to increase but I still think that there’s net interest income expansion in that for sure.
Chris Holmes
Yes, because there should be some modest margin in there and some balance growth–
Michael Mettee
That’s right.
Chris Holmes
–and so between the two, yes, the absolute dollars should increase.
Kevin Fitzsimmons
Okay, and just to clarify, so Michael, when you talked about the margin now approaching 4%, starting to stabilize, are you kind of saying literally at 4%, which is only 7 basis points from here, or just talking more like a low 4% handle type margin if we assume you to get more of the benefit from the Fed rate hikes over the next quarter or two, and then it levels off at a low 4% level? I just wanted to clarify.
Michael Mettee
Yes, it’s not a ceiling for sure, so not trying to imply that. I think it’s in the low 4s, in there over the next couple quarters pending deposit costs, for sure.
Kevin Fitzsimmons
Okay, and then Chris, when you were talking initially about the loan growth relative to your long term guidance, I definitely get the message that it’s going to moderate from what you’ve been putting up here in recent quarters, but can you–I just didn’t catch what you had said relative to that long term outlook. Thanks.
Chris Holmes
Yes, we have–our long term target’s been 10% to 12% annually, and typically–frankly, if you’ve go back the last, I don’t know, five, seven years, we’ve typically been on the high side of that. When we look out into the fourth quarter and the first part of the third quarter, we’d be on the low side of that, maybe–it could even be below that. I think it’s a good time to really focus on liquidity and credit, capital, make sure right now–again, we’ll continue to grow, but it’s just going to be a slower and measured pace. We’re doing some additional reviews on internal credits, things like that, just–again, we don’t know exactly what’s on the horizon. We feel certainly that the economy is going to be slower, likely even a recession, but that being the case, we look around and go, well, our markets continue to outperform and will likely continue to outperform in a recession, so we put all those things into the mix and consider them all, and that’s what we’ve come up with, is we’re going to be on the low side of that 10% to 12%, maybe even below.
But we think we’ll continue to see growth, and with that level of growth, we think it will actually be quite profitable growth through both the loan and deposits that we have.
Kevin Fitzsimmons
Okay, thanks Chris. One last one on deposits – do you guys feel you’re at–third quarter will prove to be the bottom for deposits? I know you were proactive in moving out those higher cost public fund deposits. Just wondering if there’s more of those to go in fourth quarter, or can you say you believe you’re at a bottom here?
Chris Holmes
Yes, is the answer. We don’t–I mean, because we’ve increased since the end of the quarter, we think that’s set to continue, so yes, we would think so.
Michael Mettee
Yes, I think [indiscernible] public funds as well, would kind of naturally go back up during the fourth quarter as well.
Chris Holmes
They bottom out in the third quarter as well for us on just the annual cycle, so we feel like we’re at a low point.
Kevin Fitzsimmons
Got it, okay. Thanks guys.
Operator
The next question is from Matt Olney from Stephens. Please go ahead.
Matt Olney
Hey, thanks. Good morning everybody. My question is similar to Jenny’s question around investments, but besides merger disruption opportunities, I think the slide deck also mentions investments in technology via the innovations group. Would love to dig more into this and appreciate kind of what the investments are on this side. Thanks.
Michael Mettee
Yes Matt, we’ve kind of continued to operate. Look, we’ll get a lot of opportunities come our way, a lot of different opportunities, and so we continue to kind of investigate things that augment our business and things that can ultimately provide a lot of efficiencies and really help grow some of our businesses. An example really is, there’s a recent press release on our relationship with Treasury Prime which supports our strategy for open API backing to clients and potential fintech partners, and maybe even deploying [indiscernible] offerings of our own. We see strong demand on our customer base for embedded banking services and solutions that kind of creates competitive technology that augments our community banking model.
I think ultimately we’re focused on these relationships because they bring deposits to the balance sheet and they create core customers there, so that’s one example of things we’re doing. There’s a laundry list of things we haven’t really publicly talked about yet that are exciting opportunities that we’re working on.
Chris Holmes
I’d just add in our relationship with the USDF consortium there and some of the founding entities, and just the fact that we’re active in the market just brings, man, a lot of exciting opportunities. Now, those don’t have a cost attached to them, a material cost attached to them. They do have some, but not a material cost attached to them today because we’ve got Wade Peery, who some of you know, on the call who is on the road most of the time, and he’s pursuing these opportunities. Actually, I guess at this point, it’s just the opposite – they’re pursuing him and us, and so it’s a matter of wading through them, so.
Matt Olney
Okay, that’s helpful. Thanks for the commentary there.
Then I guess kind of following up on that, Michael, given these investments are being accelerated, it sounds like core expense levels at the bank will continue to build from that 66.6 core level – is that right? Anything you would point us towards for the fourth quarter or towards next year?
Michael Mettee
We’re working through next year right now, so we’ll have more updates early in ’23. But for the fourth quarter, I’d say they’re going in to be in and around this range, maybe some modest growth, but we really did accelerate a lot of the expenses into the third quarter, and that some stuff that could create modest growth but nothing material.
Chris Holmes
Yes, and I’ll just add, we’ve got a couple of efficiency initiatives working with some, in one case anyway, a third party, and we’ve really accelerated the initiative to try and get it done this year, again in anticipation that next year could potentially be a tougher year, and so we’ve just accelerated that whole project, including the expense of the project and the implementation, so.
Matt Olney
Okay, that’s helpful. Thanks for that.
Then switching over to the funding side and deposit side, I think you’ve been targeting cumulative deposit beta for the cycle around 30% – is that right? – in the past, and is that still the case? Any color on what you expect more near term given some of the changes you’ve mentioned previously?
Michael Mettee
Yes Matt, that’s right – I mean, we kind of–you know, [indiscernible] about models, I guess you’ve got to be careful, but we modeled in and around 30%. That’s probably historical, maybe a little bit higher than that. We’ve been well below that if you kind of look from the base to where we are now, so I do expect that to accelerate and work its way back towards that 30% with the newer deposits that are coming on, re-pricing some existing deposits. But you know, that’s why we continue to focus on non-interest bearing deposits as well and growing that core customer base, is it certainly helps to offset some of the increase in deposit costs in the franchise.
Matt Olney
Okay, thanks guys.
Chris Holmes
Thanks Matt.
Operator
The next question comes from Brett Rabatin from the Hovde Group. Please go ahead.
Brett Rabatin
Hey guys, good morning.
Chris Holmes
Morning Brett.
Brett Rabatin
Wanted to circle back around on loan growth and the expectations for growth to slow. I know you’ve talked about it quite a bit, but was looking at the construction commitments and noticed those were up quite a bit linked quarter, and I kind of feel like that’s one of the segments that you kind of keyed in on as a slower growth engine going forward. Wanted to make sure I understood your comments around construction specifically, and then, just is there anything to read into the linked quarter increase in construction for the quarter?
Chris Holmes
Yes, I’m going to let Michael address it, but I will say this – as you may or may not understand, the construction bucket is not easy to project because you make commitments and then those commitments may be drawn on at any time, and so sometimes you make a commitment and you don’t expect it to be drawn on for nine months or a year even, and some of them may never be drawn on, so you’re always trying to project that. Really, what you have to manage in the present is the commitments versus the balances, and so we are really focused on the commitments and have been, actually, but of the commitments you have made, those can be drawn, and so that means that balance, you can stop making–let me take that back. You can pull back on commitments, but then the balances may continue to go up from draws that have been previously been committed.
Michael Mettee
Yes, that’s good commentary. I think we did have commitment increases in the quarter, but most of that was things that we were working on prior to the third quarter. If you just look at the balances in that bucket, as Chris mentioned, about 65%, 70% of that was prior commitments that funded up versus any type of new origination type of business in the quarter.
Brett Rabatin
Okay, that’s helpful. I wanted just to ask–you know, Chris, you alluded to Jamie Dimon’s storm and not necessarily knowing for sure what next year is going to look like. Are there any loan segments that you’re looking to maybe specifically be more conservative with? I know everyone’s worried about consumer, but are there any things that you’re specifically thinking about in terms of credit, where we might see credit become softer next year?
Chris Holmes
Yes, we’re–I think it’s your typical segments, construction being one. Residential is within that, but as you know, Brett, because you live in middle Tennessee, that man, you know, our market, even though the world’s getting softer in residential, and it is in our markets as well, but it’s still strong. Most of our folks describe it as–in most of our economic recency here, you’d say it’s kind of getting back to normal if you look at days in inventory and things like that, so that’s one.
A&D, land, all of those things, CRE, all those things would be the major things we’d focus on. Again, remember we have a manufactured housing portfolio. We look at our–there’s two pieces of that, one is communities, which has about $290 million in it, the other is retail, which has about $270 million in it. We watch those closely. Communities is performing extremely well in terms of any kind of pick-ups, where we watch it closely, and retail continues to perform. We’ve seen some things again tick up there, but there’s been several years of really strong performance in that manufactured housing retail, and so we reserve 5% on that just because at some point, it could–at some point, you could see that tick up because it hasn’t–well, we’ve had the portfolio now, including Clayton for 14 years, and at least for, I’d say, the last seven or eight, charge-offs have been really low, so. Those are the things that we keep a really close eye on.
Brett Rabatin
Okay, great. Appreciate all the color.
Chris Holmes
Sure.
Operator
The next question comes from Feddie Strickland from Janney Montgomery Scott. Please go ahead.
Feddie Strickland
Hey, good morning.
Michael Mettee
Morning Feddie.
Chris Holmes
Nice to have you.
Feddie Strickland
Glad to be here. Just wanted to clarify on Kevin’s question from earlier. Average earnings assets were down this quarter despite the loan growth. Should we expect earning assets to grow from here closer to the level of loan growth, just given where loans and deposits are today – you know, a lot of that cash has been deployed?
Michael Mettee
Yes, that’s a reasonable assumption. Average earning assets haven’t grown a lot because we’ve taken up the liquidity that we had, as did everybody. We all had excess liquidity on the balance sheet, and we’ve taken that excess liquidity off of loans, and so from here I think you would see the average earning assets–you will see that go up as our deposits increase and our own increase at close to the same percentage.
Feddie Strickland
Got you, that makes sense, and that does play into your earlier comments about spread growth too.
Switching gears for a second, you’ve talked about bringing more mortgage producers online over time. Was just curious what the level of opportunity is that you see there, and did you bring anyone online or have you hired anyone, any mortgage producers since last quarter?
Michael Mettee
Yes Feddie, it’s Michael. Welcome, glad to have you. Yes, we’re actually seeing quite a bit of opportunity on mortgage producers across our footprint. We’ve actually been able to bring back a couple that had left over the last year or so, and so we’re super excited about those joining the team, coming back to the team. Then really, we’ve had a lot of opportunity, people coming to us over the past 60 days generally from IMBs – independent mortgage companies, banks, as they’ve kind of lived in that space and looking to join a bank. We’re being selective in that. As you kind of look over the next six to nine months, you know, volume’s depressed, and so we’re kind of being selective there and making sure they fit our culture and can work within our model, which is realtor builder based, customer focused. So a lot of opportunity out there, and we expect that to continue over the next 15 to 18 months, that there will be a lot of originator talent coming available.
Feddie Strickland
Got it. Last question kind of along those same lines, [indiscernible] mortgages dropping to about 9% of revenues this quarter, I think it was 16% last quarter, 31% a year ago. Do you have any sort of target or sense for where you want that number to be by next year’s peak season? Will we see that rising back to something like 15%, or is it kind of just too hard to tell at this point?
Michael Mettee
Yes, well it’s definitely too hard to tell at this point, but what we’re really focused on is contribution and running a variable business that’s profitable through all cycles. We would expect a contribution in the range of about 10% or lower in the mortgage space. Revenue is highly unpredictable because of rate lock volume and originations is fairly foggy at this point in time, but we’re focused on the core profitability of the business.
Feddie Strickland
Understood. Thanks so much for taking my questions.
Chris Holmes
Yes, I’d just make a comment – it won’t return to anywhere near the level that it has been, that it was in ’21, nowhere near that. Like I said, contribution would stay down below 10%, and so that’s what we would see.
The other thing I want to mention, that Michael just mentioned, that is really a point of pride. We have had really–again, it’s a tough time in the mortgage business, and we’ve had some especially independent mortgage banks get really aggressive in recruiting and offer really significant upfront payments to people to come work for them, and we lost some large key producers. We’ve seen some of those folks that are great folks and great producers actually come back in a relatively short period of time, and they attribute that to the culture is really good, and they just appreciate the fact that it’s a place where they can be successful and it’s a good culture for those folks, so we’re proud of the fact that–and we think it’s a very good sign when folks, especially really high producers that get recruited away, in a relatively short period of time come back and go, wait a minute, we appreciate what we had. I’d just make that commentary.
Feddie Strickland
Got you – no, that’s great incremental color. I appreciate it.
Chris Holmes
Okay.
Operator
This concludes our question and answer session. I’d like to turn the conference back over to Chris Holmes for any closing remarks.
Chris Holmes
All right, very good. Thank you for all the questions. Thank you for all the–everybody following FB Financial. We always appreciate your interest, and we will look forward to seeing some of you throughout the quarter at some investor events. Everybody have a great day.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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