FB Financial Corporation (FBK) Q4 2022 Earnings Call Transcript

FB Financial Corporation (NYSE:FBK) Q4 2022 Earnings Conference Call January 17, 2023 9:00 AM ET

Company Participants

Chris Holmes – President and Chief Executive Officer

Michael Mettee – Chief Financial Officer

Greg Bowers – Chief Credit Officer

Conference Call Participants

Matt Olney – Stephens Inc.

Catherine Mealor – KBW

Brett Rabatin – Hovde Group

Stephen Scouten – Piper Sandler

Kevin Fitzsimmons – D.A. Davidson

Feddie Strickland – Janney Montgomery Scott

Jennifer Demba – Truist Securities

Operator

Good morning and welcome to FB Financial Corporation’s Fourth Quarter 2022 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer; and Michael Mettee, Chief Financial Officer. Both will be available for questions and answers.

Please note FB Financial’s earnings release, supplemental financial information, and this morning’s presentation are available on the Investor Relations page of the company’s website at www.firstbankonline.com and on the Securities and Exchange Commission’s website at www.sec.gov.

Today’s call is being recorded and will be available for replay on FB Financial’s website approximately an hour after the conclusion of the call. At this time, all participants have been placed in 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 currents expectations and assumptions and are subject to risk 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 may cause actual results to materially differ from expectations. This 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

Alright. Thank you, [Rocco] [ph]. Good morning. Thank you everybody for joining us this morning. We appreciate your interest in FB Financial as always. So, as we put a [ball on] [ph] 2022, we’re pleased with some of the results from the year and we’re disappointed with some others. We grew loans by 22.3%, while holding deposits flat and keeping deposits flat from 2022 was a bad result. We made strategic investments and people systems and processes that will propel us into the future. And we exit the year with strong capital and liquidity positions.

With an adjusted ROAA of 1.11% and an adjusted PTPP ROAA of 1.58%, our profitability was not where we expect it to be, which was disappointing. The restructuring of our mortgage segment, our capital liquidity management actions in the second half of the year, and our operational enhancements scheduled for 2023, we feel well-positioned with those for a range of potential economic scenarios entering 2023.

For the quarter, we reported EPS of $0.81 and adjusted EPS of $0.85. We’ve grown our tangible book value per share, excluding the impact of AOCI at a compound annual growth rate of 14.8% since our IPO in 2016. On last quarter’s call, I highlighted that we were prepared for a potentially challenging operating environment in 2023. By [bringing in] [ph] loan growth, particularly C&D and CRE and focusing on liquidity and customer deposits. This quarter’s performance is a reflection of those near-term priorities.

Our deposit portfolio increased by $850 million this quarter or 33.7% annualized, which we’re proud of. When you exclude the change in mortgage escrow-related deposits, the true growth is actually $915 million or 37% annualized, which is even more impressive. Deposit growth includes some seasonal increases in public funds, but the vast majority is customer funding spread across our customer base in both time and non-time products.

The negatives to that stellar deposit growth this quarter were our decline in our non-interest bearing accounts, which were down $225 million during the quarter when you exclude the effect of the mortgage escrow deposits and the cost of our interest bearing deposits, which were up by 93 basis points, compared to the prior quarter.

While our deposit growth came in expense of our profitability this quarter, we’ve got some urgency to increase the deposit balances now as we expect deposit competition to intensify in the coming months. While non-interest bearing accounts, we know some of that decline was a permanent movement out of the NIB bucket. With Fed funds being over 4% for the first time in 15 years, we’re seeing less in idle funds sitting in noninterest bearing accounts.

While we expect tough sliding and noninterest bearing growth in 2023, we believe the fourth quarter decline is an anomaly, and this is always going to be an area of focus for the company. Our interest-bearing deposits – all our interest-bearing deposits [our goal] [ph] with rates is to be able to continue attracting customer relationships. It will be long-term high value customers to the bank.

Since we intend to maintain a loan and deposit ratio near its current level, we have to go deposits to grow the balance sheet. So, our incremental cost to deposits will be near market rates. We’ve limited our loan portfolio to 8.4% annualized growth after producing 20% plus annualized growth in each of the prior three quarters. We could have grown much more than the 8% by holding on to more of the balances that we originated as we sold $126 million in participations during the quarter.

If we kept that 126 million in participation on the balance sheet, we would have had 14% annualized loan growth during the quarter. We think the current economic environment calls for caution around credit and liquidity So, we’ll continue to intentionally limit our loan growth to keep our loan to deposit ratio in the 85% to 90% range and be conservative on credit until we gain some clarity on which asset classes will be impacted in this economic environment.

As we signaled last quarter, our combined C&D and non-owner occupied CRE balances decreased $12 million during the quarter, we’re not seeing any negative credit trends in these portfolios to this point, but we’re intent on managing our exposure down heading into 2023. With construction, we’ve been managing new commitments down since the early part of the second quarter of 2022, but due to funding of existing commitments, the balance has increased over much of the year.

The balance decline we saw in the fourth quarter is the result of our management of commitments throughout 2022 and is beginning of a trend of declining balances in that portfolio that we expect to continue throughout 2023. For mortgage, seasonality paired with market headwinds led to a loss of $4.2 million, pretax loss of 4.2 million for the quarter. While we felt that this unit was right sized following actions taken earlier in the year, we’ve continued to reduce the size and scope of the segment as the mortgage industry continues to new depths.

The environment causes mortgage to be exceptionally difficult to forecast. So, we’re budgeting a positive contribution for 2023 and we’re not comfortable right now getting a lot more precise than that. One last area that I’ll touch on for the quarter is our commercial loans held for sale portfolio. We had a negative mark to market adjustment of 2.6 million in the quarter, primarily driven by one credit. The portfolio is down to three relationships with 30.5 million in remaining exposure.

We believe that we will see full payoffs on two of those three remaining relationships in January, and should exit the quarter with one remaining relationship and less than $10 million of remaining exposure. As a reminder, we marked this portfolio conservatively when we had a combination with Franklin and have experienced net gains of 7.4 million since closing. So, as a result of the actions taken during the quarter, we entered 2023 with loans, HFI loans to deposits comfortably below 90% and 85.7%.

We also were able to pay down over 300 million in short-term borrowings at a cost of nearly 4% and have approximately 7 billion in contingent liquidity readily available to us should we ever need it. We maintained strong capital ratios for the CET1 ratio of 11% and our total risk-based capital ratio of 13.1%, while repurchasing $7 million worth of shares following the [decline] [ph] in our stock price in December.

We would expect similar balance sheet management throughout the first half of 2023 Our actions have positioned the bank for improved profitability and [got] [ph] offensive once we gain clarity on the economic environment. But touching on a couple of our longer-term priorities that we’ll continue to prepare for an execute during 2023.

First, improving efficiency and effectiveness of our core community banking model through a project that we’ve had going on, what we call FirstBank way, we operate through a local authority, regional present model that has served us well and will continue to serve us well into the future. As we continue to grow the company, we saw the opportunity to better quantify the why and how of our community banking model. This allows us to better perpetuate our culture and our banking model as we grow.

It also ensures consistency of processes that allows us to deliver efficient and effective customer service cost of footprint, while improving the associate experience. In 2022, we committed significant time and resources to what we wanted our community banking model – business model to look like as we grow from our base of $13 billion in assets today. Much of the implementation will take place in 2023 and we’re excited about seeing the fruits of that labor.

Second, our local authority model is a weapon that positions the bank for strong organic growth via relationship manager recruitment and lift outs of existing teams and new markets. We had outstanding results in our Memphis and Central Alabama regions recently as a result of lift-outs of strong teams and we continue to hold discussions with the bankers across the Southeast, both in existing markets, as well as in continuous geographies.

The third, we’ll continue to have a dialogue with a small number of banks that we find attractive as merchant partners. We position the balance sheet and our internal processes and procedures to be able to act with one of these handful of banks to satisfy the partner. The current uncertainty around the operating environment clouds a timeline for some of these management teams.

However, with the scarcity, our potential partners that have the qualities that we value, we want to be in a position to act if the opportunity presents itself. So, to summarize, we defensively positioned ourselves over the last half of 2022 to put the company in a position to improve profitability and go strongly on the offensive when we get comfortable with the economic outlook.

We’ve also undertaken a number of strategic initiatives that will benefit the customers business and our customers and associates and make us more efficient operators. We believe this improvement will create a superior return for shareholders through strong organic growth and the capacity to capitalize on opportunities.

I’ll now turn things over to Michael to provide more detail on our financial performance in the fourth quarter.

Michael Mettee

Thank you, Chris, and good morning, everyone. I’ll speak first in this quarter’s results in our core bank. Our baseline run rate pretax pre-provision income was 55.5 million in the fourth quarter. According to the core efficiency ratio reconciliations, which are on Page 19 of the slide deck and Page 19 of the financial supplement, we had 111.3 million in core bank tax equivalent net interest income this quarter.

Along with that 111.3 million in net interest income, we had 11.1 million in core bank non-interest income. Finally, we had 66.9 million of bank non-interest expense. Together, that comes to our 55.5 million in run rate PTPP, which has grown 27.7% over the comparable 43.4 million that we delivered in the fourth quarter of 2021.

Moving on to our net interest margin with summary detail on Page 5 of the slide deck, our net interest margin of 3.78% contracted by 15 basis points from the third quarter. 9 basis points of this decline can be attributed to lower loan fees that were a result of less loan origination activity. The remainder of the decline can primarily be attributed to balance sheet restructure and the cost of interest bearing liabilities accelerating at a faster rate than our yield on earning assets.

Looking forward for our margin, we had a run rate margin for the month of December in the 3.75% range, inclusive of 23 basis points of fees on loans. Our cost of interest bearing deposits was 1.97% in December versus 1.67% for the quarter. From our deposit cost trial in February of 2022 through the month of December, we estimate that we have experienced a roughly 40% beta for our interest-bearing deposit cost.

Contractual yield on loans continues to get a lift from Fed rate hikes and was 5.61% for the month of December as compared to 5.45% for the quarter. While we reprice the existing deposit portfolio in the fourth quarter, which ultimately led to decline in overall margin, our spread on contractual yield on new lines originated as compared to cost of new deposits raised, continues to be in excess of 4%.

With the increase in deposit costs having accelerated as rapidly as they have in the fourth quarter, we are cautious in our forward guidance. Our best estimate right now for the first quarter would be that we hold margin relatively close to December’s margin. We anticipate mid-to-high single-digit loan growth for the year and we will work our funding sources to manage the cost of incremental deposit growth.

We anticipate banking non-interest income in 2023 to be in the $10 million per quarter range. And as I mentioned earlier, our core banking noninterest expense was 66.9 million in the fourth quarter. We expect continued growth in our banking noninterest expenses due to higher regulatory costs and inflationary pressures. For 2023, we are currently estimating mid-single digit growth over the fourth quarter’s annualized run rate of 267.6 million.

Moving to mortgage, we posted a loss for the quarter as the impact of rising interest rates combined with seasonality drove down demand of rate locks by 31% quarter-over-quarter, subsequently reducing revenue. While we had hoped that we were done with our restructuring, the continued reduction in volume created this additional evaluation of staffing and organizational structure in order to position ourselves to return to operational profitability at seasonal headwinds this pace. While we do expect Q1 to be – while we do not expect Q1 to be profitable, we would expect minimal losses if the environment holds in this current state.

Moving to our allowance for credit losses, we saw our ACL to loans decreased by 4 basis points this quarter and we recorded a release of 456,000. Economic forecasts deteriorating slightly from quarter-to-quarter were offset by improving overall portfolio metrics and a lower required reserve on unfunded commitments.

We have continued optimism for the long-term health and growth of our local economies where we’re closely watching inflation that we are experiencing and increasing conviction of many economists that we will see [an interim] [ph] recession. If conditions do not change, we would anticipate maintaining similar level of ACL to loans held for investment over the near term.

And with that, I’ll turn the call back over to Chris.

Chris Holmes

Thanks, Michael. And again, we are for the quarter pleased with how we’re positioned and prepared for what’s coming. Thanks for the prepared remarks and we will look forward to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Today’s first question comes from Matt Olney at Stephens Inc. Please go ahead.

Matt Olney

Hey, thanks. Good morning everybody.

Michael Mettee

Hey, good morning Matt.

Matt Olney

You mentioned the deposit growth would continue and be relatively I think in-line with the loan growth, any more color on what the market rates are you’re seeing for the incremental deposit growth in recent weeks?

Chris Holmes

Yes. Hi, Matt. Good morning. Yes, I mean, we saw kind of the time deposits depending on term coming in around 350 basis points and that’s kind of an 18-month weighted average term there. And then – and money market came in like market rates below Fed funds, but call it 60% to 80% of Fed funds is where we’re seeing money market rates coming in. So, really right at market there.

Matt Olney

Okay. Thanks, Michael. And then on the non-interest bearing deposits, just thinking about your prepared comments, Chris, it sounds like you expect continued pressure on those balances that perhaps not to the same degree that we saw in the fourth quarter, did I get that right and any more color on why that would be?

Chris Holmes

Yes. I don’t really – yes, I think you heard it right, but let me shed some additional light on it. I mean, I think – yes, I don’t think that they’ll continue to move [down as they did] [ph] in the fourth quarter. As a matter of fact, I think they’ll likely stabilize to a large degree, but I do think that that’s going to be a point of pressure. I mean, you’ve seen it – frankly over the last couple of years grow pretty easily. You didn’t even have to do much.

The balance just grew, and, you know, if you go back to when we were having these calls in the latter half of 2020 and throughout 2021, there was a common question of how much of that you think is sticky. How much of that you think is real? And we always answered the question, and I know others – most others did too. We’re not sure. We don’t really know. And so, as a fact of matter, we still don’t really know.

We knew that some of it would leave, you’re seeing consumer accounts finally begin to return to [the balances they had in the] [ph] pre-COVID, and so we just think that’s going to be a tough market for non-interest bearings in 2023. But we also think that especially in the last half of the year, you begin to see balances leave those and we think that that a lot of the – I guess, I call it the low hanging fruit for – that you knew would likely be leaving probably left in the fourth quarter or I’d say in the second half of the year, but I’m also qualifying that by saying we’re not sure to be honest with you.

Matt Olney

Understood. Okay. And just finally, as far as the outlook on the net interest margin, Michael, you mentioned I think a few things. I think you mentioned the incremental spread there in 2023 would be similar to December level. Did I catch that right? And just remind me what you saw in December again?

Michael Mettee

Yes. The net interest margin for December was about [3.75] [ph]. So, the outlook, right now, we feel like we maintain around that level. Spread on kind of new loans versus new deposits is coming in over 400 basis points. So, if you kind of think about that [3.50] [ph] number, I just pointed you to on your deposit cost question, I’d say that new loans are coming on in that [7.50] [ph] plus range.

Matt Olney

Got it. Okay. Thanks guys.

Chris Holmes

Hey, Matt. I would just add this on the deposit side. One other thing. We did feel a need to get out front on deposits. And so, obviously, we had a big deposit quarter and it was expensive and we expected it to be especially as we get deeper in, but if you look at where we were headed from a loan to deposit ratio in, sort of the way that our [arrows] [ph] trending with three quarters and 20% plus loan growth and knowing that deposit growth is going to get difficult.

And also remember, we did have a reduction back in July of one account that we didn’t renew. That was a $500 million plus account, actually plus. And so, with all that, we felt the need to really get out front. And so, we knew it’d be expensive and we – but when we look at the balance of 2023 and look at our projections, we feel pretty good about where we put ourselves with regards to how margin looks moving forward.

Matt Olney

Understood. Thank you, guys.

Chris Holmes

Very good. Thank you.

Operator

And ladies and gentlemen, our next question today comes from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor

Thanks. Good morning.

Chris Holmes

Hi, Catherine.

Catherine Mealor

Chris, you talked a lot about efficiency initiatives that you [got to help] [ph] profitability this year, can you give any guidance on just core bank expense growth outlook excluding some of the mortgage noise? And then separately, maybe kind of thoughts around efficiency initiatives that you specifically have within mortgage as well? Thanks.

Chris Holmes

Yes, sure, Catherine. So, a couple of things. When I talk about efficiency initiatives, again remember also historically where we’re coming from, we went from 6 billion at the start of 2020 to 13 billion today in asset size or two acquisitions that we closed in there, both in 2020. One was converted later – one was converted later, but we closed two acquisitions in 2020 remotely, by the way, during COVID and then we went through the [$10 billion] [ph] barrier.

And so with all that, we just said, it’s a good time in 2022 to be able to really do a deeper dive on our core banking model, make sure that scalable. We refer to ourselves as a scalable community bank and so make sure that we’ve got the right scalability, we’ve got the right model that we were moving forward with. That’s a collection of the things we’ve learned over the years. And so, we’ve done that. And so, as we implement different pieces of that in phases, we’re excited about what that means to us.

It frankly is not intended to be an efficiency ratio in terms of the efficiency – an efficiency exercise in terms of the efficiency ratio, that’s not why we did it. We did it for scalability purposes and to make sure that we had the model right. But one of the outcomes is, we’re going to gain some efficiency from it. And so, we frankly haven’t spent a lot of time quantifying those. That being said, we’re looking at a 6% to 7% type of expense growth over fourth quarter as we go into next year. And we feel pretty good about that.

On the mortgage front, the second part of your question, we’ve been through, I’d call it two phases of expense reduction there. And at this point, it’s now, sort of also, I’d say a very vigilant approach to expenses in that part of the business. And when we look in, again, we said, then it’s been hard to try to forecast mortgage is still is hard. We’re forecasting it to have a – certainly have a positive contribution next year, but we’re frankly not comfortable saying much more than that.

Other than we’ll experience the normal seasonality, we’ll be able to lower in the first quarter, lower in the fourth quarter, but the second, third quarters should be – that’s where we should really see a higher level of contribution. So, I don’t know if that helped you on mortgage other than the fact that it’s, you know given where it is, it’s a constant expense initiative for us.

Catherine Mealor

Got it. And to [indiscernible], so your comment on the 6% to 7% growth rate, so for that, are you saying I should take this fourth quarter 2022 ex-mortgage expense base of about 67 million and then grow that at 6% to 7% and that’s my annual expense number for 2023?

Michael Mettee

That’s right, Catherine. If you basically, when I was – in my comments, you take that 67 million and annualize that, and then grow it off that base of 6% to 7% is where we think we’d end up. And yes, I will say, there’s some regulatory stuff in there. You have expense going up and some of that as well. So, little bit fungible, but that should be the range.

Catherine Mealor

Got it. And then with that, should we – I mean, you’re still growing at a slower pace than obviously you were last year, but still I feel like you still got, kind of an expectation for balance sheet growth into next year. And if that’s coming at still an incremental 4%-ish margin just given your kind of December NIM guide and the difference in your deposit costs and new loan yields, I mean, that 6% to 7% expense growth is still coming with NII growth in 2023. Is that correct?

Michael Mettee

You’re right. Yes.

Catherine Mealor

Great. And then do you have flexibility in your expense plan if the NII growth comes in less than expected? I guess the question is, how much flexibility do you have to kind of control that operating leverage if the margin compresses more than expected as we move through the year?

Michael Mettee

Yes. So, we do have some levers, Catherine. We feel like in a couple of places on both sides of that equation. And again, that’s what we were trying to create in the fourth quarter, was trying to give ourselves a little bit of some levers that we can pull on the [net margin] [ph] side and then we also have leverage that we pull on the expense side.

Catherine Mealor

Great. Thanks for the commentary.

Michael Mettee

Thank you.

Operator

Thank you. And our next question today comes from Brett Rabatin with Hovde Group. Please go ahead.

Brett Rabatin

Hey, guys. Good morning.

Michael Mettee

Good morning, Brett. How are you doing?

Brett Rabatin

Doing great. Thanks. Wanted to use a football analogy, Chris, and college football analogy. And you know, you guys are usually in the playoffs in terms of profitability, but obviously mortgage banking has been a stymie to that here in the past year. And so, my question is, you’re obviously in a better position than a lot of the industry related to the reserve build need, but my question is, do you really need mortgage banking to get back to a solid level of profitability to get back in the playoffs? Or do you think that this first bank way and then initiatives you have in place could get you back in the play offs?

Chris Holmes

Yeah. Like your analogy, by the way. And so, I’m going to give you one back. At the risk of – Michael was pointing to as University of Alabama sucks, which he has on. And so, at the risk of – I won’t know, I’ll keep this short, but I use an analogy. I do have – I do orientation for all of our folks. Every single new hire I spend about two hours with all the new hires going through culture and mission and values. And Brett, I use a football analogy. I use a college football analogy because that’s big in our part of the world.

And one of the things I tell them is, hey, you joined First Bank, you need to feel like you – and some people by the way would really like this analogy and some people are envious of it, but I’d say you need to feel like you just signed a scholarship with University of Alabama to play football because we go to – that’s exactly what – I’d say, we compete for the national championship every year.

Okay. We go to the college football playoff almost every year. We expect to be there all the time and realize that’s what you just signed on for when you took a job with First Bank. So, I use the – almost a very, very similar analogy when I talk to all of our folks. And when you said, you missed the playoffs this year, I’d say another term I use, I’m going to refer to the book, the [greatest] [ph] Confront the Brutal Facts. I use that one internally a lot. And I would say our internal talk is a little tougher than you missed the playoffs this year.

You need to confront the brutal facts that we haven’t had a good year in terms of profitability. And if you go back, since we’ve been a public company, we’ve never had a return on assets less than 1.5% until this year. And so, [indiscernible], right in front of you ask about levers we could pull, we have levers that we can and we’ll pull because this organization doesn’t miss the playoffs. We do not. We also don’t like, I tell them unless we’re in the top quartile, then it’s not acceptable performance.

And so, now to a couple of specifics, mortgage has been a great contributor for us. You’ll have to go back to 2020 when we had $105 million contribution from mortgage. And so, it’s been a great contributor for us. It’s been an important additive for us. We do not have to have mortgage and we’re very specific. You’ll notice a lot, we talk about the bank segment a lot. That bank segment actually had a pretty good year. And if you look at some of the numbers on the bank segment, again, a pretty good year there.

And we would be certainly well in the top half of our peer group. It’s probably top quartile on our peer group as a bank standalone. We had a significant – more than a $0.20 EPS close to a [indiscernible] $0.30 impact of mortgage negative this year. And we’ve made some changes there and we’ll continue to make a few more. So, we don’t have to have mortgage to be that 1.5% ROA, but with it, we expect to be actually higher than that. So that’s the way that we view it.

Brett Rabatin

Okay. That’s a lot of great color. And the other thing I wanted just to make sure I understood was you obviously linked quarter improve the liquidity, some extra cash on the balance sheet at the end of the quarter and you talked about managing it similar going forward. What can you maybe go into the interplay between the seasonal funds increase and how much that might come back down? And if you’re expecting any other – I know it’s tough in this environment and the other mix shift change to affect what you do with the balance sheet in the near term?

Chris Holmes

Yes. Just – Michael, I’ll let you come in. I’ll make a couple of comments. So, we had some Federal Home Loan Bank borrows, actually 540 million at the end of the third quarter. We paid that down significantly by the end of the year. We subsequently, by the way, paid it off and so it’s zero today. That’s post the end of the year. And so, we expect to – we have always funded our balance sheet through customer deposits.

And we intend to continue to do that. Public funds, they usually actually stay pretty robust through the first quarter and so it will be late second quarter when they start to pay down some and they’ll pay down into the third quarter, but then start funding usually at the end of the year. And so, that’s the cycle we see and we manage around that. Michael, [indiscernible].

Brett Rabatin

Okay. Yes, that’s great color. Appreciate it.

Operator

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

Stephen Scouten

Hey, good morning, everyone.

Chris Holmes

Good morning, Stephen.

Stephen Scouten

I wanted to follow back around the funding costs a little bit and just, I’m curious, one if you could remind us kind of how much of the public funds deposits are more directly indexed and maybe more like a 100% made on those public funds versus some that are maybe longer-term or tied to different metrics? And then, kind of what you expect to see in terms of incremental interest-bearing deposit betas? I think you said Michael, we were looking at 40% cycle to date so far and just kind of where you think that can play out maybe on your core customer deposits in particular?

Michael Mettee

Yes. On the public funds first and Stephen, I’m sure I don’t have exactly how much of that is tied to an index, but I will say, it’s a mixture. We have a mixture in there of even non-interest bearing some indexed a little bit of time and some that sits in a non-time instrument that is not indexed. And the bulk of it would be in the non-time non-indexed, as well as the non-time indexed would be the bulk of it. There’s not a lot in, not a lot in time, but there’s a loan that – and those are all negotiated over time. And frankly, that’d be the least. We will have a lot of time, but there’s just a little bit. So…

Chris Holmes

Yes. And Stephen, on the go forward beta, I mean, the fourth quarter, obviously, with our deposit grade, there you saw betas accelerate significantly. There is a cycle if you look back through February where we came to that, kind of 40% range on interest-bearing and low 30s on total deposits. Yes, I would expect that we’ll see in that mid-40 beta range, kind of as we look in 2023, but it is highly dependent on really what our peers do. We feel like we can maintain this level and recognizing deposit costs are going to go up.

I will say on index, we don’t have a whole lot of stuff that indexed 100% to any rate. So, just as Chris mentioned, not on that exact number, but it’s not a 100% one for one Fed fund gives up, deposit cost goes up on the accounts. There’s not, kind of that stuff. So, while it is a percentage, it varies and we have certainly seen deposit costs go up expecting to incrementally move higher, but definitely right type of [indiscernible] here with the Fed and we’ll get a normal operating environment.

Stephen Scouten

Yes. Okay. That’s helpful. And I guess overall, I mean, if I’m listening to your comments, kind of holistically, it feels like you guys think maybe you, you know growth maybe put you behind the curve on deposits to some degree throughout the year with really strong growth and this quarter may have put you ahead of the curve relative to peers for the rest of 2023, is that the right way to think about it?

Chris Holmes

Well said. Yes.

Stephen Scouten

Okay. Great. Great. And thinking really briefly about expenses, I noticed other expenses were up a good bit. Was there anything notable to call out there or is that some of the regulatory costs Michael that you mentioned is kind of embedded in some of these numbers?

Michael Mettee

Nothing too noticeable. I think the different third quarter versus fourth quarters kind of [indiscernible] franchise excise tax is well and through there. That was a major piece that it wasn’t in the third quarter – in the fourth quarter.

Stephen Scouten

Got you. Got you. And then maybe just two quick ones left for me. One, on the participation side, sound like that was more about balance sheet management than risk management, but maybe a little bit of both. Are there particular categories you’re trying to participate out more so than others? Maybe that C&D and CRE like you spoke to or is that indeed more just about controlling the pace of growth?

Chris Holmes

Yes, it’s total balance sheet management. If you think about it from a risk management side, the folks that we’re going to participate to are going to be friends of ours. And so, we’re not going to participate anything that’s going to create credit risk. Well, let me – we’re never going to knowingly participate anything. It’s going to create credit risk for them. So, it’s all about balance sheet management for us.

And the bulk of that would be CRE. Occasionally, we can do some construction, construction is harder to do a participation on because it’s lines, withdrawals against it and it’s just a little more work on the patient side versus a CRE versus CRE. And we’re usually participating with either peers that are our size or there’s one or two that are quite a bit larger than us that are good friends that we would participate with regularly and the rest of them are smaller than us community type banks, and frankly, they love it if they can get that CRE when we own to sell it down.

Stephen Scouten

Got it. That’s helpful. And then maybe last thing, just on the share repurchase, I know you said about 7 million in the quarter, you’ve had some insider buys as well. Stocks a little lower, I think, even in where you bought back that 7 million, if my math is correct, in the quarter, do you become more active on the repurchase at these levels or is capital constraint there? How do you think about that repurchase from here?

Chris Holmes

Yes. We think about that very cautiously from here, but we’ll think about it cautiously. I wouldn’t say we – but we do have the capital to be able to do it if we need to do it. And so – it’s a tool that we’ll use.

Stephen Scouten

Got it. Very helpful. Thanks guys for all the color. Appreciate it.

Chris Holmes

Thanks Stephen.

Operator

Thank you. And our next question today comes from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.

Kevin Fitzsimmons

Hey good morning. Guys, how are you?

Chris Holmes

We’re good Kevin. Hope you are.

Kevin Fitzsimmons

Good, thank you. We’ve had a number of questions on this, but I just want to think of – make sure I’m thinking about it the right way. So, the deposit growth was really a very accelerated effort in this past quarter. And then going forward, you expect – it’s put you in a position that now you’re expecting more deposit loan growth to be, kind of in-line and thus keeping the loan-to-deposit ratio roughly where it is. Is that correct?

Chris Holmes

Yes. Kevin, you’re thinking that correctly. When we ended – we were just over 91% of loan deposit ratio in the last quarter. We want to be in that 85% to 90% range. So, it doesn’t bother us to get up to that 90%. So, you’ll see it – we’ll manage it within that range. And so, what that means is, we’ll be growing loan deposits as we grow loan portfolio. It is – and so we’ll be – but we – again, we do feel like we gave ourselves some room. And we also – I mean, because of that – we pay – we don’t have short-term, I mean, we basically paid our – pay off any short-term borrowings and we feel we’re in a really good position.

Kevin Fitzsimmons

Okay. And as far as the margin, how to think that through, so I appreciate the color on the [3.75] December margin. And I think what was said was, you’re probably going to hold the margin roughly at that level. If we’re looking beyond that and just assuming we have a few more heights here of 25 basis points, is it reasonable to think about the margin just grinding lower from that level, but the balance sheet growth you alluded to before, still able to drive dollars of NII higher throughout 2023?

Chris Holmes

So, as we move forward with our budget and look at – into the year – we’ve traditionally said, we’d be 10% to 12% loan growth organically, and for the year, we could be a little less than that, but we certainly anticipate a healthy – some healthy loan growth during the year. We’ve been getting a good spread on that. I do think loan growth is going to get harder as we get into 2023. And so, demand could become an issue with generating loan growth. We’ve typically led our peers in terms of that metric and that ability to generate that, but if you look at it that way, we don’t see the NIM grinding significantly below this.

It could give us a little bit of range there, but we’re – as we look out in the year, we’re going to try to – we’re going to try to hold near at least where we are, again, with a little bit of flexibility – range for flexibility there.

Kevin Fitzsimmons

Got it. And just your comment before, Chris, about loan growth. So, really the [reining] [ph] in on loan growth was much more proactive in terms of participating out and letting some of that C&D and CRE runoff, but as far as core loan demand and the loans you want to book, you haven’t seen a dramatic fall-off in that yet?

Chris Holmes

No, we really haven’t. We have seen it slow late in the year. We did see loan demand slow some. It’s slower as we start the year as well. So, I do think all the things that the Federal Reserve has been trying to accomplish, I think some of them they are because we do see less demand than we did six months ago or even three months ago in terms of loan demand.

Now that being said, like I said, if you take – if you add those participations back to the balance sheet, we have grown 14% in the quarter on an annualized basis. So, that’s still pretty strong, but we were 20% plus the previous three quarters.

Kevin Fitzsimmons

Okay. Alright, thanks very much.

Chris Holmes

Thanks, Kevin.

Operator

[Operator Instructions] Today’s next question comes from Feddie Strickland with Janney Montgomery Scott. Please go ahead.

Feddie Strickland

Hey good morning.

Chris Holmes

Good morning.

Feddie Strickland

So, just going to clarify one more time on your earlier point. It sounds like you’re confident you can continue to grow deposits and manage loan growth accordingly. So, we really shouldn’t see wholesale funding increase over the next couple of quarters, is that right?

Chris Holmes

Well, let me put it this way, I think your premises is correct because our intent is to try to grow loans and deposits at about the same rate, okay? Now, we do have access to the wholesale funding, but we want – our view is, we won’t be able to use that to improve our profitability. We don’t want to use that because we have to have the funding in order to fund our own growth. And so, we want to use it as a tool, not as something we have to rely on because we get over – couldn’t get overextended.

Feddie Strickland

Got it. That makes sense. And kind of along that same line of questioning, as you’re managing your earning asset growth, whether it’s loans or securities, is [pluggability] [ph] of potential collateral to places like the Federal Home Loan Bank a consideration in terms of choosing what assets you decide to put on the balance sheet or do you already feel like you’ve got further enough collateral that that’s not really as much of a consideration?

Chris Holmes

Well, that’s always a consideration because almost always because you like to keep yourself as lean and flexible as possible. And so, we do think about assets for pledging, how much free collateral we have. And that causes us, for instance – I made reference to us not keeping some public funds that required collateral because we knew we could go get the money at the same rate or cheaper from customers and just by increasing customer deposits. And so, we take the approach of, we’d like to have as much free collateral as possible, again, because we like to be in a position to be opportunistic when opportunities present themselves.

And then one other thing, I haven’t talked about this in a long time, back when we – going back three or four years ago, we used to talk about it all the time, our balance sheet is almost 100% direct customer funding and direct customer loans. We utilize – we have almost no brokered CDs on the books. We have almost no – only broker CDs and Internet deposits that we have on the books came through acquisition and are still there. And they’re less than 2 million, I think.

So, less than 2 million in time deposits. And so, we just don’t utilize those broker deposits and deposits, we use direct customer assets and direct customer funding, which again, we think is how you build value in your franchise is by building customers. And so, when we think about wholesale, the terms that we’re tapping those channels is, like I said, is just to improve our profitability, not because we have to do it. So…

Feddie Strickland

Got it. That’s really helpful. And then just one last question for me. Just curious, in terms of deposit competition, in your markets are you seeing more from the bigger national competitors? Is it smaller local banks? Is it a mix of both? I was just curious whether one type of bank is a little more aggressive than another?

Chris Holmes

Yes, it is the answer. So, I’d say, it comes in pockets. We’ve seen a couple of products – one particular product, I guess, from some of the big banks that has some attraction to it, but that’s it, from, I’d say, from the bigger banks. And they’re still not very reactive as you move money away from them. The regionals – and I would say they’re – almost versus size of the bank, it’s almost more profile of bank.

Those banks that are, I’m going to call them high-performing, rapidly growing banks are really competitive on the deposit side because they’re in the same position that we are. They’re growing their franchise and they’re growing their business, and you can’t do that without deposits. And so, they’re aggressive. And so, I’d say it depends more on the profile versus the size, but the other thing I would say, and this is – just frustrates the heck out of us, is we see some crazy things from some small banks in some of our markets.

I mean 3x a week, one of our markets is sending over an ad, I mean literally an ad, for folks running [5.25] [ph] CD campaigns, folks running a 5% money market. And it will be – I’ll call it, a less than $1 billion bank that apparently needs funds, but we see – we do see quite a bit of that from small banks.

Feddie Strickland

Interesting. Appreciate the color guys and thanks again.

Chris Holmes

Thanks Feddie.

Operator

Thank you. And our next question today comes from Jennifer Demba at Truist Securities. Please go ahead.

Jennifer Demba

Thanks. Good morning everybody.

Chris Holmes

Good morning, Jennifer.

Jennifer Demba

You know, your asset quality has stayed really, really strong. I’m just curious, Chris, what categories in your loan portfolio concern you most as – if the economy weakens significantly here?

Chris Holmes

Yes. So, I’d say three things. Construction and CRE would be the ones that would concern you most. Certain pockets of the CRE. I say construction because it’s a risky asset and you can get surprised, but – I just go stick my head on the credit folks [indiscernible], especially often just go, hey, how we feeling, how’s your day going.

And so, and I ask about construction, and we know our construction customers well. And so, while I think that’s probably a bigger – a concern for the industry, and I say all the time, every bank thinks their credit is great, and they’re not going to be the ones. And I always say, I didn’t come up on the credit side or the commercial side of the bank, so I don’t say that.

That being said, I know most of our big construction customers, and we’ve had them for a long, long time, and we feel really good about them. So frankly, I don’t worry about it quite as much for our portfolio, as I do for the industry. I do worry about pockets of commercial real estate because there are things that can – office can get – again, we don’t have a lot of office, but I think the office space could get soft. I think it has gotten soft in places.

Our residential book, again, we can have some small – we could have some small stuff in there on construction or other residential, but again, the big stuff we have, we feel quite good about. The other one I think about is, remember, we have a specialty portfolio in manufactured housing.

And so, I watch past dues on that quite a bit. I’ll watch anything else from a nonaccrual standpoint. And again, it’s performed as the [indiscernible] we’ve been – if you go back to the acquisition of Clayton, we’ve been in that business for 14 years. And before – you know the [indiscernible], they’ll go, well, here’s what’s going to happen in the past dues and they’ve been calling it right. And so, past dues are up a little bit, but they’re not out of line with where they were back in 2019 or so. So, those are the – but those are all the ones that I stay particularly vigilant on.

Jennifer Demba

Could you give us a sense of what the office portfolio does look like for FBK?

Chris Holmes

Yes, there’s a slide in the deck. On our CRE, we got – about 23% of our CRE exposure is office-related. We don’t have any high rises in downtown Nashville, downtown Memphis or any other downtown right now, at least I don’t think we do. I don’t think we have that. We do have some smaller office buildings with really, really good clients that are sitting out there, but again, we feel pretty good about that.

As I said, it’s not – we don’t have big – and we don’t have pieces of $250 million office buildings. We just don’t have those in our portfolio. It’s going to be, again, direct to a customer that we know, we originated and it’s going to be a manageable balance is what would be in that office portfolio for us.

Jennifer Demba

Okay. And one last question, if I could. What kind of economic scenario is assumed in your loan loss reserve as of the end of the year?

Michael Mettee

Hi Jennifer. We actually have a mix between baseline and [S2] [ph]. It’s about 75% baseline, 25% S2, but there’s some [indiscernible] in there as well. The economic scenarios change pretty rapidly here between third quarter and fourth quarter.

Jennifer Demba

Thanks so much.

Chris Holmes

Yes, Jennifer, one thing that we haven’t touched on, I don’t figure any question on is, of course, we did have a [indiscernible]. If you look at our loans of HFI, we actually had a very small provision, which would have added again, a small amount to our ACL. We did have a negative provision – or a provision release related to our unfunded commitments and those unfunded commitments.

Again, we’ve been managing those commitments down, particularly in the construction area, and that’s what led to the small release. And we were comfortable with that even though we’ve tried to be absolutely as conservative as we could be in managing the loan portfolio and in managing that ACL, and we’ve kept it at – it’s still at 1.44% of loans held for investment, which we, again, find to be quite high actually in terms of – if you look at it relative to loss experience. And so, we still – we feel pretty good about where it sits.

Jennifer Demba

Great. Thank you.

Chris Holmes

Thank you.

Operator

And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Holmes for any closing remarks.

Chris Holmes

All right. Once again, thank you very much. We appreciate you being with us. We always appreciate your interest in FB Financial. And operator, at this point, we’re finished. So, thanks very much.

Operator

Thank you, sir. This concludes today’s conference call. You may all disconnect your lines, and have a wonderful day.