FB Financial Corp
NYSE:FBK
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FB Financial Corp
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Good morning and welcome to FB Financial Corporation’s First Quarter 2023 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer; Michael Mettee, Chief Financial Officer; and Greg Bowers, Chief Credit Officer. He will also be available for questions and answers.
Please note FB Financial’s earnings release, supplemental financial information, and this morning’s presentation are available on the Investor Relations page of the company’s website at www.firstbankonline.com and on the Securities and Exchange Commission’s website at www.sec.gov.
Today’s call is being recorded and will be available for replay on FB Financial’s website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation.
During this presentation, FB Financial may make comments, which constitute forward-looking statements under the federal securities laws. Forward-looking statements are based on management’s currents expectations and assumptions and are subject to risk, uncertainties, and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial’s ability to control or predict and listeners are cautioned not to put undue reliance on such forward-looking statements.
A more detailed description of these and other risks that may cause actual results to materially differ from expectations. 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 non-GAAP measures to comparable GAAP measures is available in FB Financial’s earnings release, supplemental financial information, and this morning’s presentation, which are available on the Investor Relations' page of the company’s website at www.firstbankonline.com and on the SEC’s website at www.sec.gov.
I would now like to turn the presentation over to Chris Holmes, FB Financial’s President and CEO. Please go ahead
All right. Thank you very much. Good morning. Thank you for joining us this morning. We appreciate your interest in FB Financial. And as we get started this morning just couple of notes that aren't on the quarter.
First, I will say that our thoughts are with our colleagues at Old National, and just know that we want nothing but the best for you guys and our thoughts and support are with you as you move forward in the face of difficult circumstances, but we are with you looking forward to trying to pull the tragedy.
Second thing I would like to say is I'm going to ask the questioning to go easy. Today is our birth -- its Michael's birthday as our CFO and so happy birthday to Michael.
With that, I'm going to get into the financial results for the quarter. And we reported EPS of $0.78 and adjusted EPS of $0.76. We've grown our tangible book value per share excluding the impact of AOCI at a compound annual growth rate of 14.5% since our IPO. We also grew deposits by 12.2% annualized during the quarter, have on balance sheet liquidity to tangible assets of 12.5%, have on balance sheet liquidity to uninsured and uncollateralized deposits up 49%, and have $6.8 billion of available contingent funding sources, which is 2.1 times those uninsured collateralized deposits and so 2.6 times total coverage when you combine the old balance sheet and contingent funding sources.
As of quarter end, we had tangible common equity to tangible assets of 8.7%, common equity Tier 1 capital of 11.3%, and total risk-based capital of 13. 5%. If we were to include AOCI in those regulatory capital ratios, which as you know, we certainly don't have -- we certainly aren't required to do, our common equity Tier 1 capital would be approximately 10% and our -- and that’s versus a well-capitalized of 6.5% and a total risk-based capital would be approximately 12.2%.
Also, we have no securities that are classified has held to maturity, so we have no unrecognized losses on the investment portfolio buried on our balance sheet. We have no current liquidity needs that would result in the sale of any securities at a loss. But if regulatory capital rule change or if we were required to liquidate the entire securities portfolio for some months for same reason, we could do that without requiring any additional capital.
On last quarter's call, I referenced our work in 2022 to restructure our mortgage division, slow loan growth in the second half of the year, and raised significant deposits in the fourth quarter, putting us in strong capital and liquidity positions and preparing the company for a range of economic scenarios.
We certainly didn't expect two of the three largest bank failures in history to happen a couple of months later. But the turmoil experienced over the last five weeks has supported our cautious approach to managing our balance sheet and our continued investments in strong finance, risk, and operations personnel.
The elevated risk environment of the day also validates the value of our community banking model that allows our customers to have strong personal relationships with the decision-makers for their accounts. This customer philosophy and fortress balance sheet approach when executed with discipline, results in a known customer on the other side of every lending shift -- lending relationship, it also gives us financial flexibility when the unexpected happens.
As the Silicon Valley and Signature events were unfolding, they called the same anxiety at First Bank that I think all banks experienced to some extent. We've reflexively went into crisis management mode with frequent communications with the Board and executive management, a closer review of data funding flows in regular check ins with our regional presidents regarding our larger customers.
What we found after a week or two of this heightened activity was that the bank was fine. As I've often said before, our balance sheet is constructed with true customer relationships that make up every loan and every deposit. We know our customers and they know us.
As a result of our -- as a result, our depositors weren't spooked by the pundits on CNBC that were forecasting the demise of the regional and community banking system for what seemed like 45 minutes out of every hour.
Many of our customers came to us from Money Center or larger regional banks that the talking heads expected them to plead to. And they have little interest in going back to a customer service experience commensurate with being nothing more than an account number at some of those large banks.
We certainly continue to keep a finger on the pulse of inflows and outflows of customer funds, but we feel good about our liquidity position. We also understand this downturn and an industry-wide focus on liquidity could result in a credit crunch that's likely to result in losses.
To this point, we've not found any disturbing trends in our portfolio. Our customers are cautious, but generally feeling okay and our asset quality numbers continue to reflect that, with net charge-offs for the quarter of two basis points.
Despite the benign results to-date, we're even more conservative with our loan portfolio than typical as reflected by our ACL to loans increasing by four basis points this quarter and only growing our loans by 3% annualized.
We're not eager to aggressively grow the asset side of the balance sheet until we can understand which sectors are due for outsized losses. At this point, we share broader concerns about CRE office loans and have increased our monitoring of that portfolio as a result. I will let Greg discuss that portfolio more later in the call, but we certainly -- what we generally feel okay with where we are currently.
We've also been actively managing our overall CRE and C&D portfolio down since April last year. While commitments made in 2021 and the first quarter of 2022 have continued to fund up, since then unfunded commitments in our construction portfolio are down by 16% year-over-year or $260 million. And we expect outstanding balances to decrease over the coming quarters.
And so given our desire to concretely [ph] manage our portfolio liquidity position near-term, we intend to focus on some internal improvements until the outlook changes.
We're not pleased with the return metrics that we've delivered over the past few quarters. We're intent on having pure leading profitability. I've mentioned the first takeaway initiative on the past call or two and this environment provides us with a perfect window to continue to focus management's attention on the successful implementation of that plan.
As a reminder, the First Bank weighs our effort around documenting and implementing best practices and procedures that will allow us to more effectively scale our local decision-making community banking model.
We believe this project enhances the customer associate experiences by enabling us to deliver our exceptional customer service more consistently and more efficiently focused our resources towards that goal. This puts some standards in place that will create efficiencies of scale as our balance sheet grows.
As far as M&A goes, downturns can result in some transformational transactions and we could see that being the case in the industry over the coming quarters and into 2024. However, we'll necessarily see that being the case for us.
Our goal is to be well-positioned to capitalize on the turmoil and displacement of customers and talent from competitors undergoing these transformational transactions.
We also will put ourselves in position to be the partner of choice as strong, smaller community banks decide they want to seek a partner. However, at present, we have plenty to focus on with our First Bank way initiatives and we don't want distractions that come with acquisition activity.
To summarize all that, we're constantly checking the gauges, but believe that we are positioned well for the near-term from our discipline over the last three plus quarters. We're using this time of market anxiety to continue our internal improvements with the intention of returning to pure leading profitability and growth that we're accustomed to and returning -- and doing that sooner versus later.
I'm now going to turn things over to Greg to provide an update on credit before Michael gives detail on our financial performance for the first quarter.
Thanks Chris. I'll start out by reminding everyone of what I said on this call about three years ago today. We are at our core, a community bank that makes loans to support the economic activities of our communities.
In our conversations in the past, we've highlighted our local operating model focused on relationships with our customers. This strategy at its heart means dealing with local people we trust and know to be good operators. Our portfolio reflects that bias.
We believe that has helped our credit results in the past and will continue to do so in the future. We believe in conservative underwriting standards with a focused toward cash equity or skin in the game and personal guarantees. We've long focused on keeping hold levels lower rather than higher. We're trying our best every day to underwrite for the long-term through the cycle, not counting on the greater pool parity.
Our strategy has always been about end market lending. We've never been big on buying into shared national credits. It just doesn't match our strategy relationship lending.
We want to bank the company, the owners and its employees. That was all true then and it remains true today. We still feel good about our lending philosophy and underwriting process.
Moving to the slides. On slide nine, you can see it outlines our overall portfolio, which we believe continues to be a good mix of industry segments. Product types. You've seen our credit metrics, which continue to reflect good results from past dues to NPAs.
We get the question in times like this about whether we have changed our underwriting criteria. For example, have you raised debt service, requirements, or loan to value maximums? Our answer is not really. That's more what you hear from big banks that run a line of business model where they give their customers whiplash turning the spigot on one quarter and off the next.
We simply work with our markets and explain our thoughts. We have a cautious outlook and we aren't looking to grow the book and as they change the focus of their teams to deposits not loans, all of the while trying to reserve our dry powder for our long-term relationship customers that are the reason for our success.
Now, that's easier said than done. So, what you see in the numbers is the result of that thoughtful process. Our commitments are way down over the past couple of quarters, as Chris pointed out. But as you would expect, balances have continued to increase as deals previously committed fund. Our analysis is that we will see that begin to come down over the next few quarters as properties rotate out.
Switching gears. For this quarter's presentation, we have included a page on our office exposure, you see that slide. Given our focus on that property tag and the concerns that we have heard from the analysts and investor community.
Those of you that have been in Nashville lately know just how many buildings are under construction here in the CBD. Like the old saying goes, so many cranes that they're going to call up State Bird before loan.
This activity is great for the city and the region's economy as we benefit from the large, inflow of companies and associated jobs. But let's make something clear we are not financing those projects. Frankly, we didn't even participate in the construction of the new building that we are moving into this year, not because it wasn't a good deal or not a good developer. It has both, especially a great tenant, right. But it was just not our type of deal given its size, not our risk appetite.
You can review this slide for yourself, but let me highlight a couple of things about our portfolio. Office non-owner occupied CRE accounts for only 4% roughly of our total loans out state. These are spread across our footprint with the largest concentration being in the Nashville region. Most of it in completed projects with only four still under construction accounting for less than $15 million in fee.
As part of our normal portfolio management, as our teams to put together a list of office loans with commitments greater than $2 million, which if you think about it, isn't a very big office, right?
It is interesting to see the granularity highlighted by this. The list showed a total of 48 loans with outstanding balances ranging from a low of $1.7 million, the largest has a balance of $26 million and the next largest is $20 million. The $20 million, frankly is actually a loan secured by four different buildings.
The next five are in the $12 million to $16 million range and everything else is less than $10 million. I mentioned this just to highlight that this reflects my earlier comments about the type of lending that we do.
Most of these are just smaller projects owned by local real estate professionals. The average loan-to-value on this set is 62%, demonstrating our goal of having -- our borrowers to have a significant amount of skin in the game with sponsors who guarantee below.
We looked at the interest rate on the entire portfolio and found 58% is fixed, 42% flowing. But also at maturity risk found at 7% mature -- only 7% mature through 2024.
Interest rate increases have impacted everyone of course, but so far no problems. You'll never hear us say that our portfolio is perfect. There is no such thing. I've been doing this for about as long as Mettee has been alive, but we're proud of how it has fared so far and we'll continue to manage it to the best of our abilities.
I'll also touch briefly on our commercial loans held for sale. We have only two relationships left balances less than $10 million. We feel adequately marked on that. So, any additional gains or losses until sale or maturity there should be relatively inconsequential. We appreciate the work Scott McGuire [ph]; our Head of Special Assets has done to work this down over the past few years.
I'll now turn that over to Michael Mettee.
Thank you, Greg, and good morning, everyone. I'll speak first to this quarter's results in the core bank. Our adjusted pre-tax pre-provision net revenue from the bank of $45.9 million, showing growth of 12.6% year-over-year, but down 15.8% from the prior quarter as deposit costs outpaced yields on earning assets and loan fees declined due to lower origination volumes.
Moving to our liquidity position and deposit base, we've added some additional disclosures in the deck this quarter in the aftermath of SVB and Signature. And as the deck shows, we have on-balance sheet liquidity consisting of cash and unplanned securities of $1.6 billion, we have an additional $6.8 billion in brokered CD, FHLB, and discount window funding available to us.
And for tax purposes, we have a $2.3 billion of real estate loans held at our real estate investment trust, where we -- to fill the need, we couldn't move those loans back to the bank overnight to create additional Federal Home Loan Bank borrowing capacity.
There is also BTFP available and although we have not engaged with that program because we hadn't felt the need to, we could if we really needed to and we feel comfortable in our current and available sources of liquidity.
Moving to our deposit portfolio. In total, our deposits grew by 12.2% annualized or $327 million. Seasonal inflows of public funds accounted for $313 million of net increase, leaving non-public funds effectively flat.
As a reminder, that public fund balances tend to begin building in November, peak in May, and decline on June through October. A new line in the supplement this quarter is our estimated uninsured un collateralized deposits. At $3.3 billion, those deposits make-up 29% of our total deposit base.
We've not seen any concerning behavior from these customers and as mentioned previously, we have on-balance sheet and access liquidity of $8.4 billion or 2.6 times both uninsured and uncollateralized deposits.
In the supplement, we declared consumer, commercial, and public deposits. Average balances in those accounts are consumer $2,300, commercial $118,000, and public $1.8 million.
From the fourth quarter to the first quarter, consumer average balances were flat. Commercial average balances were down slightly from $122,000, somewhat driven by new accounts as we saw first quarter annualized growth in the number of commercial accounts of 10% and public balances were up around $150,000 due to those seasonal inflows.
For the entire deposit portfolio and on a customer basis rather than an account basis, 66% of our customers have less than $10,000 in deposits with us and 99% have less than $1 million with us.
And finally, 62% of our deposit balances are with customers that have been with us for more than five years. An additional 26% of balances are with customers that have been with us for more than one year. So, we believe that we have a pretty long tenured loyal customer base.
Briefly touching on our security portfolio, we have no held to maturity securities. Over the past few years, the portfolio maxed out around 13% of total assets and is currently at 11.3% and the current duration is roughly 5.3 years.
Moving on to our net interest margin, we saw a contraction in the margin as deposit costs accelerated, partially driven by an outsized increase in more cost public funds with average balances that were up $521 million from the fourth quarter to the first quarter.
Margin continues to be difficult to predict given continued pressures on funding cost. But Treasury back lower than Fed funds were hopeful that the dynamic of depositors leaving the banking system altogether due to higher risk-free yields will abate.
However, with the renewed focus on liquidity from banks and regulators in the wake of SVB and Signature, competition between community banks for funding is likely to intensify.
So, while there could be a larger pool of funding for us to compete ever, I think we all like a little bit more cushion than we currently have.
For some monthly trends, in March, we had a cost of interest bearing deposits of 2.67%, contractual yield on loans of 5.97%, and a net interest margin of 3.45% versus the cost of interest bearing deposits of 2.53% contractually on a 5.9% and NIM of 3.51% for the quarter. Our cost of interest bearing non-public funds was 2.57% in March versus 2.41% for the quarter.
Our goal for the next few quarters would be to keep in margin in the same relative range with March below the quarter and higher cost public funds continuing to fund up to the second quarter, we're likely to choose slight contraction in Q2 as compared to the first quarter. And as those funds begin coming back off the balance sheet, we're likely to see a little bit of lift from there.
Today, we value liquidity at our margin and the strength of the balance sheet versus maximizing the last of earnings available to us. On the other side of this, we're likely to review how much public funds are willing to carry given the outside data that many of our relationships in that space have shown and their impact on profitability.
Core banking non-interest income of $10.7 million was in line with our expectations, and we expect to continue to hover in that $10 million per quarter range plus or minus for the remainder of 2023.
Banking non-interest expense of $68.5 million was also in line with our expectations. At this point, we don't see a need to revise our prior guidance of mid-single-digit growth over 4Q 22's run rate of $267.6 million. However, expense management is top of mind for the company as revenue pressures do continue.
Closing with our allowance for credit losses, economic forecast deteriorated slightly during the quarter, specifically in March and we added four basis points to the allowance as a result. Proviso expense ended up being relatively neutral as our reserves or unfunded commitments came down, primarily due to the decline in our unfunded construction and development commitments.
We'll continue to be cautious on our reserves. If forecast continue to decline, then we'll likely continue to build. At this point, there are no industries that we're qualitatively funding additional reserves to, but we'll continue to monitor our portfolio to see if some additional protection is warranted.
And with that, I'll turn the call back over to Chris.
All right. Thanks Michael. Thanks Greg. And with that, I'd like open the line for any questions.
Thank you. [Operator Instructions] Today's first question comes from Catherine Mealor with KBW. Please go ahead.
Thanks. Good morning.
Good morning, Catherine.
Good morning.
I just want to start with the margin and see Michael, if you could just give us your thoughts on your outlook for the margin and particularly on the deposit side, maybe walk us through where deposit costs were towards the end of the quarter and where you see those betas going over the next couple of quarters?
And then also just on deposit mix, we've seen continued mix shift out of non-interest bearing and as you model out your outlook, how you see that mix change evolving over the course of the year? Thanks.
Yes, good morning, Catherine. So, net interest margin was 3.45% in March, yes, that’s down on the lower end for the quarter -- for the quarter reported 351%. So, interest bearing deposit costs around 2.67% and non-public funds was 2.57%. That run-up in public funds during the quarter puts pressure on net interest margin. They have a beta of really in the first quarter 100% plus actually. And so that really puts pressure on their overall deposit cost.
We do think that will start to come down middle of the year and so you could see some relief, which actually increases NIM. But we're going to kind of hold in the same relative range at 3.45% to 3.50%, but that is completely dependent on liquidity pressures and competition amongst our peers.
That I will tell you our -- the field -- the team does a really good job of keeping us informed of what's going on in and around the markets and we see a lot of really aggressive pricing on CDs, but also on money market from a lot of the smaller community banks in and around us. So, you could still see some pressure from there. And so we're trying to manage it the best we can, understanding that liquidity is top of mind. It has been for us for the last couple of quarters, so we expect that to continue to be the focus.
I would think deposit betas, if we get 25 basis point increase from the Fed this next one, I don't know what we're getting in June, are not experienced about 23%, 24%. So, you'd expect deposits beta or deposit cost to go up about 60% of that 25% and so you see incremental cost from there. So, it's a little bit of a -- yes, a little bit of a mixed bag.
And you mentioned money market rates. I noticed that your money market portfolio is now just under 3%. Is that where is -- where do you see that pricing today?
Well, we have a money market product that's priced off Fed funds. And so incrementally, you'll see 80% of Fed funds move on probably a third of those money markets. And so that's the increase you're seeing there.
Okay. And then my last -- second question is a little bit on the margin, but also just kind of thinking about just the commercial real estate portfolio. Can you kind of walk us through what you're seeing on the commercial real estate side just from a pricing and maturity schedule over the next couple of quarters? How much of that portfolio do you see repricing or maturing, excuse me, over the next year? And then generally where are you seeing those loans move to in terms of rate?
Greg you want to talk about what we see repricing in the commercial real estate?
Especially -- well, we specifically pointed out on the slide about the -- only 70% of that office portfolio is maturing through 2024 specifically. I do not -- I don't have that specific number. Michael--
Michael does.
Yes, Catherine. So, if we look at commercial real estate, about 30% of the total book reprices within the next 12 months. Only -- I'd say about 70% of that number is variable and so it's already taken into account. We'll take into account interest rate real clear and then fixed rates about a third of that. So, 50% of our portfolio reprices three years out. So, kind of a split and as a reminder, that's actually about 60% variable rate and about 40% or so fixed rate.
Okay, great. I'll pop out. Thanks so much.
Yes. Hey, Catherine. I would say this and Michael at some of his comments to say the margin is dependent on deposit cost and it has proven to be really difficult for us to predict. But as Michael said in his comments, we've really prioritized -- we continue to prioritize the strength of our balance sheet and that's really the priority.
And so we want to make sure we're maintaining deposits and funding and that's our priority right now. And that's made it really difficult to forecast. So, wish we had a pinpointed number for you, but it just changes actually very fast.
Yes. Understood very clear. Thanks, Chris.
All right. Thanks Catherine.
Thank you. And our next question today comes from Stephen Scouten with Piper Sandler. Please go ahead.
Hey. Good morning, everyone. If I could dig down a little bit deeper in that maybe marginal cost of deposits, I know Michael, but you gave some color on the money markets and being tied maybe to Fed fund. But do you have a feel at all for where you're adding new money market yields today, new CDs today just to give us a feel for those spot rates if you have it?
Yes. Morning, Stephen. So, our CD rates have maintained pretty standard over the past quarter. We had 24 months out around 4% and 18 months, 3.38%, 13 months around 3.13%, so that all comes in and there's -- the new rejections come in split, a third, a third, a third, really. And so that cost comes in around 3.40%.
Money market, I'd say everything that's coming on, it's not everything, but the majority of it's coming on that money market, 80% of Fed funds, so it's coming on around 4%--
That's where the bulk of the volume is on the money market side.
Yes.
In that index product, so it changes as Fed funds changes.
Yes. So, that's why it made so much sense for you to pay off the FHLB at 4.89. So, that was still a really nice trade even with the high marginal cost of deposits.
Yes, exactly.
Okay, great. And I love the slide here on the office exposure, really appreciate you guys putting that in there. You have a feel for you guys look the credit detail by class on slide 11. How that weighted average occupancy, has that moved around much on those categories? I mean, it all looks pretty strong today, but are you seeing any sort of migration to the downside yet or is that one, maybe overblown or two, maybe you just haven't seen those trends shake out?
Hey, Stephen, its Greg Bowers. No, I have not. Matter of fact, that Class A portfolio that is a weighted average numbers. So, that's 82%, right? If you just look at the -- I think what -- that's eight projects -- total 11 projects, eight of those are 100%, couple of them are 94%, one of them is at 50%. That one at 50% just came out at the end of fourth quarter last year. So, overall, I think all of them are hanging in there. There is pressure out there and supply is coming on. So, it's a cautious outlook for everyone in the market.
Okay. That's helpful color. And maybe just one last thing for me. I'm curious what you're seeing on the mortgage side, and it's nice to see that breakeven. Obviously, you can see the purchase refinance mix you lay out. But are you seeing any pickup in demand on the refinance side with the tick down in rates? Are there people that are locked in at higher rates that are now able to come back to the table or is that move down not been substantive enough to drive that incremental volume?
Yes, Stephen, the rates have come down specifically, right, in Treasury, as I kind of put in my comment, the mortgage spread has actually not come down as much, not be overly technical.
So, certainly need mortgages to tighten in, rates continue to go down, but you've got 103%, so that there's a long way from I think refinancing unless they're taking equity out and there's still significant equity -- but the overall mortgage activity at first quarter was pleasantly surprising.
You have breakeven was a good quarter. We expect to be profitable in all cycles and so the work last year came to fruition, little bit slower in March, but we expect that to kind of pick back up with seasonality.
Perfect. Great. Thanks for all the color guys. I appreciate it.
Hey, Stephen. I'm going to make one more comment you talk about us paying in those, that FHLB. And I just -- as we still got a little bit of a jumpy borrowings on our balance sheet. We debate internally whether to pay it off because we're sitting on roughly $1.5 billion in cash every day. But we didn't need that when we borrowed it. We did it the day after the Monday after the Silicon Bank failure just to make sure we had access to put the money on our balance sheet. We paid a little bit of it back.
The cost of the spread is probably 15 basis points between the cost that we pay for it and then we reinvest the cash overnight. But that's -- frankly, we don't need what's there. We could easily pay it off. But during this, again, it's just opting for balance sheet strength over cost of the say 15 basis points to hold on to it for now in the face of just the market uncertainty.
So, that's an example of kind of the types of decisions that we're making every day at this timeframe that cost us a little bit of money, but we think it's smart long-term business.
No doubt. Gives everybody a little bit less to pick out in the in the regional bank space. So, we appreciate that -- the extra security for the group as a whole. Thanks, guys.
Exactly.
Thank you. And ladies and gentlemen, our next question comes from Brett Rabatin with the Hovde Group. Please go ahead.
Hey, guys. Good morning.
Good morning.
Wanted to first ask just on the unfunded commitments on construction -- the contraction linked quarter, was that intentional or did you have some input into that or did customers just pull back in terms of what they were doing?
And then secondly, Chris, you mentioned the word that Jamie Diamond didn't really like Credit Crunch. Are you seeing market participants not being able to get credit or maybe struggling to get favorable terms on things in the market or any color around that comment?
Yes, Brett. So, on the first one, on the reduction in the commitments, absolutely intentional. We -- if you go back actually into 2022, we're running at 120% of risk-based capital in terms of fundings on our A&D or construction and we don't like that. And so we -- that's viewed as high risk because it is high risk. We'll be ourselves as a high risk company. And so we -- it's our commitment to ourselves to get that under 100% because we don't like running that way. And so very intentional in that. So that one -- that's an easy one.
And then when it comes to -- and don't tell Jamie that I that I've violated his mantra, but -- because we hold immense respect for him in the way that they do things. That being said, the market is getting slower and credit is pulling back and we talked to our peers, we talked to our customers and folks out there right now.
Greg talked about all the cranes that you see in Downtown Nashville and look our other markets Nashville [ph], Chattanooga, Bowling Green, Kentucky, Huntsville, Alabama, they're all doing well and construction is harder to pull off these days because there are just less folks -- more folks that are like us that are one, have hit their thresholds and two, look out on the horizon and go and probably a time to not be matched in the accelerator. So, it is we've certainly seen some slowing among our customers and in our mortgage.
Okay, that's helpful. And I wanted to make sure I understood a little bit of the balance sheet management strategy from here. You obviously really improved the liquidity linked quarter. And so I was just kind of curious if you think about the profile of the balance sheet going forward if you might draw down some of that liquidity and cash and use that to fund loan growth, and it's a balance sheet's fairly flattish and you have mix shift change in deposits from here.
Obviously, CDs were bigger percentage of funding two years ago, maybe just any color you could give on how you see the balance sheet liquidity and then maybe absolute size from here?
Yes. So, just I'll just comment on a few things that we're managing. And the first thing I'm going to repeat is right now balance sheet strength from squeezing the last nickel out of profitability as Michael said in his comments. And so we want to manage liquidity above everything else and so we'll continue to do that. We want to manage credit and capital very closely.
That being said, if you look at what's happened to our liquidity ratios, if you look at what's happened to our loan to deposit ratio, we feel like we've created a place where we've got some flexibility and more levers to pull as we move forward when it comes to profitability.
Michael gave an example when he talked about managing public funds. The public funds are funded up, most of those relationships are contractual for a period of time. Some of those are actually quite high rates on those funds and so that's driving our cost up.
As those move down some -- and some of those that money moves out later this year, it's going to move our cost down some, again, gives us a profitability lever to pull there on whether we do exactly what you're suggesting. Do we ramp up the growth rate a little more? We certainly could be growing the asset side of the balance sheet faster than we are without really having to strain from a pricing standpoint or other standpoint.
And so -- but we are comfortable and I'm going to call it a mid to even low single-digit loan growth rate right now until -- because the other side has credit that we're managing. And so we want to be cautious especially in as we -- as asset classes continue to emerge that cause you concern, we just aren't crazy about matching the accelerator right now. And so we're going with a slower growth rate and have created ourselves hopefully some levers that we can pull into the latter half of the year to improve profitability.
Okay.
Yes. Brett, I just add that when you come out balance sheet and I mentioned the investment portfolio that we haven't actually bought a bond like May or late June of last year just believing right in the rising rate environment. Now, if we're Fed fund and Chris mentioned parking money as I said, which is where most of that cash is. I mean you're earning a pretty good relative number versus kind of reinvesting.
So, we've been thin on cash and it hasn't been a huge drain on profitability from alternative investment scenario and of course, you're not adding any duration there. So, we're still a little bit cautious there in keeping it in cash and maybe one day we redeployed, but it's not really in their plans at this point.
I think I understand the strength of the balance sheet is key. And then just lastly, appreciate all the color in the slides on the office stuff in particular. I'm curious, I've had several local lenders tell me that if there's any pressure of meaningful nature on office or maybe other classes that there's a lot of deep money that's just waiting to swoop in and maybe grab some properties if the cap rates move up any at all.
Have you guys had those conversations as well or any thoughts on liquidity as you see it from other sources of capital locally that are looking to deploy if maybe prices come down a little bit?
I have not seen a specific example of that, but in previous cycles you always do and we know that there are people that watch those cap rates. So indeed.
Yes. And Brett, I just add a little bit of commentary from just personal conversations with folks that shape the real estate more in some of our local geographies. Most of those would come in our biggest geography, which is Nashville and that is there are some folks that are on the sidelines I know that have liquidity that are -- that would love to get opportunities. They've been waiting for some slowdown or downturn to be able to deploy.
I've also heard they're not sure if there's going to be enough of a slowdown at least, especially in Nashville for them to be able to deploy and where they think they should. And so I would echo that yes, I do think there's money both local and out of market that would like to get into the market on the real estate side. And so I think there's I think there's money on the sidelines that's available.
Okay. Appreciate all the color and happy birthday, Michael.
Thanks Brett.
Thanks Brett.
[Operator Instructions] Our next question today comes from Matt Olney with Stephens Inc. Please go ahead.
Hey, thanks. Good morning.
Good morning Matt.
Good morning. On the January call, Chris, I think you mentioned that you guys executed some loan sales to help manage liquidity, manage credit, and kind of, growth late last year. Any loan sales to speak of more recently? And just what's the overall plan as far as loan participations this year? Thanks.
No. Nothing recent in terms of loan sales to move the numbers. You're exactly right, we had some in the fourth quarter as we were -- some of the things that we're talking really focused on today. We're talking about how to manage liquidity and to manage the outstandings on both CRE and C&D and that's what -- and so that -- those were things that drove those, but we didn't have any new activity to speak of this quarter.
Okay. And then I guess maybe a question more for Greg on the construction side. I know you've been talking about seeing balance -- construction balances peak here pretty quickly. Can you just speak and provide some commentary about the absorption rate into the secondary market for some of those projects that have been completed? And I know there can be a big difference there of absorption by product type. So, any commentary you have with respect to types of commercial or residential construction?
Yes, good morning. I think that right now most of the -- when I talked about projects rotate out, I think most of my comment there is as it pertains to the residential side, that's the bulk of that segment. And so we're in the -- what we're seeing right now and expect to see over the next quarter. So, as a result of sales of residential here in the peak seasons for residential.
And so that's where when you're talking earlier about the commitments coming down, you'll see -- I think you'll see the benefit of that in those residential properties being. So, I think the bulk of the rotation will be in residential.
Yes, Matt. This is Michael. I'll get from time-to-time get phone calls from those permanent market, kind of, take out asking if they can use our balance sheet to [Indiscernible] and of course the answer is no. No, thank you. But that tells you anything about what the secondary market looks like, I don't know -- but I don't know how active it is.
A lot of our -- it's really -- it's a little bit of a boring portfolio sometimes. These are just loans that are many firms that will then go into perms on our balance sheet, start amortizing. So, not a lot of -- if you're thinking about a lot of projects that we're going into a CMBS mark or something like that or going into a life company, that's really not what these are.
Okay. Okay, appreciate that. And then I guess circling back on the margin. Appreciates to have to get much guidance around now all the moving parts, especially in kind of the excess liquidity position. Michael, what about with respect to just the NII? There'll be some pressure there, it sounds like from 1Q levels. Any commentary if you think the bank can grow NII in 2023 versus 2022? Thanks.
Yes. Matt, I think the loan growth from last year's second, third quarter, really puts us in a position to be able to grow net interest income this year. If you just look at first quarter this year versus first quarter of last year, we're ahead of pay based off of that growth. So, we do believe we can grow net interest income in 2023. However, that had -- interest expense number is the key there and as we've slow loan referenced, Chris talked about, but we think it's fine.
Yes, you zeroed in on a good question. And one that we that we debate, but we think we can actually for the year. And we're trying to create more flexibility. And as the industry continues to gain, I'll say additional foundation. We hope that in the back half of the year, we'll be able to do some good things. But we think when we project out today, that we'll be able to grow net interest income.
Okay, that's helpful. And then I guess just lastly kind of a bigger picture question. I think Michael mentioned that low origination fees this quarter were recognized just from obviously slow originations. I guess just any commentary just on how overall origination level volumes in the first quarter at the bank compared to previous quarters.
Just looking for read-throughs, I think obviously investors are concerned that a slowdown in bank lending could slow the overall economy. So, just any general commentary on originations that you're seeing now versus before? Thanks.
I don't have a line of additional commentary. We've seen it slower. Some of that is because we're not -- but some of that is because we're not beating the bushes as hard, okay, but sometimes also because there's less demand. I can't exactly parse it between the two, but there is less demand, but we're also not beating the bush quite as hard. And there are certain product types where we're just not beating the bushes at all.
Now -- and I would say this when I talk about not beating the bushes at all. We do have customers that are absolutely great long-term customers that we got to take care of and so when you see that our construction commitments are down close to $300 million in the quarter, then remember, we're taking care customers in there too. And so that's a net number that you end up looking at because we're -- we've got customers that we are going to take care of. And so that's part of the art of managing the bank is it's how you do that. So, we are making commitments just net-net, we're down.
Got it. Okay. Thanks guys.
All right. Appreciate it.
And our next question today comes from Feddie Strickland with Janney Montgomery Scott. Please go ahead.
Hey, good morning, and happy birthday, Michael.
Thanks Feddie. Good morning.
Morning. Appreciate all the detail on the office portfolio. I was just curious when you did the review on the office credits above $2 million, are those LTVs using existing appraisals or did you get new ones for the review?
Yes, good morning. That was where the existing at inception.
Got you. And do you happen to know what kind of the average age of the appraisals might be on that portfolio?
I do not specifically as we continue the call, I'll look at a couple of things and see if I can get some origination dates. Might have a little flavor.
Okay. That works. Just was curious. And while you're looking at that, I really appreciate liquidity detail in the deck. Was just curious what your thoughts were on the bank term funding program. I know you guys said you haven't accessed it thus far. I'm just curious how you view it versus other potential sources of potential liquidity?
Yes, Feddie. We -- like I said, we haven't tapped it cost wise. It's roughly in line with Federal Home Loan Bank borrowing with the way we do it and I think we probably got a discount window first, but I mean they're basically the same.
But Federal Home Loan Bank has been are typical partners, kind of, look and so we continue to do that. But there's nothing against the bank term funding program or discounting or anything else. It's just then the way we've operated. We certainly test the midline to make sure that if we ever needed it, we would.
Yes. And I would just add this. I mean, we've got close to $7 billion in sources and so, and we -- the only times we tap those sources, I mean, we'll tap Federal Normal Bank, but even that is usual. We don't -- we'd like -- we'd say this around First Bank. We don't borrow money to lend, okay, we lend out deposits.
And so we don't go and borrow money from the Federal Home Loan Bank to satisfy our lending appetite. So, when we tap any of those, even Federal Bank, it's a little bit of a new event for us and so we don't -- we're glad they're there. We're glad the bank term funding program is there. But we haven't frankly studied it that much because we -- it's way down the list of things that we would get to. And so that -- and that's really our approach to it.
And so I'm glad it's there. That all those sources are there. And by the way we're not -- we're realistic when things really, really get tough, those things start to dry up and that's one that's probably -- that's not going to dry up. Okay. That's one that's going to be there. We understand, hey, I mean your lines are going to pulled from your correspondent banks, Federal Home Loan Banks going to get tight. And so we -- but that's the reason we're glad it's there, but we've not had to really think about tapping it. So, -- and then I will go back to Greg for just one minute.
I don’t have the detail that maybe we could include on a future slide or something, but just looking at top five exposures as far as these appraisal dates that's 2021, 2022, 2021, 2022, 2021. So, just anything else is pretty recent.
Yes. So, they're all quite recent 2021.
Got you. No, just want to make sure I understood. And it sounds like -- got it. And it sounds like with the banks from funding primary and Federal Home Loan Bank, everything else, it's just you guys truly view it as contingent liquidity. It's just not how you fund loan growth. It's really the way we should think about that.
Yes, exactly.
Got it. Thanks for taking my question.
Absolutely.
[Operator Instructions] Our next question today comes from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.
Hey, good morning guys.
Good morning Kevin.
Most of my questions have been asked, but just one, it seems, Chris, your main kind of message here is you've said it a number of times, this balance sheet strength is going to trump any kind of stretching for incremental profitability.
So, I'm just wondering, you guys have definitely been deliberate about that and with the loan to deposit ratio down now below 84%, your CET1 ratio is looking healthy, your ACL ratio, I know determined by CECL has ticked up, talked about specific loan exposures that you've been kind of managing down.
So, is that -- given a likely economic slowdown, are you on those measures or maybe there's other measures you look at? Are you where you want to be or is that incremental work over the next quarter or two? Like, do you have a certain bogey for loan to deposit rates or CET1 that you're, for instance, targeting or would aim for to -- consistent with that concept about balance sheet strength, trumping everything else? Thanks.
Yes, good question, Kevin. And we are generally about where we want to be is the way you should view us. We're not going to turn down deposit growth, okay. And so even if it's -- if we can get it -- if we can get deposit growth and its discount into the Fed funds and some reasonable discount to Fed funds and we're not going to turn down deposit growth.
And so if that -- if our loan to deposit ratio went down from here, that would not bother us, okay, but we would -- but you'd probably also see us continue -- we'll probably need to make a few more loans just to kind of keep that range.
So, we feel good about the position we're in in terms of where we are liquidity, frankly, our on balance sheet liquidity is higher today than it was at quarter end. And so we feel good about trends there. But also remember, we're keeping in the background on some of the public funds that have come in are going to go out in the let's say the June, July, August range. And so again, we're just managing through that. We're not going to turn down additional deposit growth even if it's -- not certainly not at 5%. We're not looking at trying to grow deposits at 5%, but if it comes down in 3% to 4%, yes, we would continue to take that and then we would look to add on the asset side is how we're thinking about that.
So, we're in good position. We're comfortable with the position we're in. We don't feel like we've got to go out and build more liquidity. I would say the other thing that we want to do is continue to grow the customer -- the commercial retail customer deposit base. We want to continue to grow those and that's full time, 365 days a year. So, we want to continue do those.
On the capital side, ratios are actually quite good. We don't think we need to build from here. We're not against building, but we don't feel like we need to build more capital other than just to keep -- make sure we're keeping up with the growth in our business.
Got it. Great. Very helpful. And 1 quick follow-on on M&A. You kind of -- it sounded like you kind of laid out on one hand, we don't need it. And you see opportunity from M&A happening in your market, you being able to benefit from disruption at others.
But you did mention that you're in a position to be a larger partner for community banks. Can you just remind us is that -- because I think what you've said in the past is you have a specific list of certain community banks that fit criteria from where they operate the management teams, their model, and if and when they ever looked to -- for that larger partner that you'd be willing, but you're just not -- you're not out there on the hunt, in other words, right? Is that how to think of it?
Yes, Kevin, I think that's generally fair. And I'll make two or three statements there. We're not out trying to do, eliminate especially in this current environment, we're certainly not. And given where stock prices are, it'd be tough to make a transaction work financially.
And we're not out there doing and there's a couple of reasons. One is we are really intensely focused on -- we've grown on some profitability metrics and some sustainability of those.
And as we've grown the company, we've grown it fairly rapidly. There are times in those growth cycles where you need to make sure you've got everything operating like you wanted to. You've heard me over the years referred to us as a good operator. We always want to be known as a bank that operates very effectively, very efficiently, very well-managed from a risk standpoint. And so that's really our focus right now. And that will bring organic growth in normal times and I'm not calling this or what I anticipate in the quarter or what I anticipate in the next couple of quarters normal times.
But that typically would bring us a double-digit growth rate, which is pretty attractive from the growth standpoint and it typically brings us very strong profitability. So, that's where we are, that's what we're focused on. And so we're really not thinking about acquisition related transactions right now.
Now, we do keep a list of banks, very short list that we would be interested in if we got the opportunity, we don't think we're going to get that in the near-term, which again that's another reason we're not focused on. We don't think we're going to get that opportunity in the near-term.
But those banks, the reason we're interested is this environment perfectly illustrates why we're in those. They're very granular, I call them generational banks, the generational community banks with generational customers that have been with them for decades and they've got usually great funding profiles in there. Again, I like to say they're exactly like us.
In some cases, maybe even a better profile because we've gotten big and have some -- have a few lumpy pieces of our balance sheet just because size creates that and gives you that that opportunity.
So, if anything probably even improve your overall profile from what I consider to be a great highly valuable bank and I talked about that earlier having customers on the other side of your loans and deposits is very important to us and that's the kind of banks that we're talking about.
So, we keep that list. We're not anticipating anything happening with that list in in the near-term and so we're focused on continuing our really transformational improvements in becoming a better and better operator.
Great. Thanks Chris. Appreciate it.
All right. Kevin. Good to talk to you.
And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Chris Holmes for any closing remarks.
All right. Thank you all again for being with us today. We appreciate the questions. If there are things we need to clarify or talk about after the call, we're glad to do that. We appreciate your interest and appreciate your support of FB Financial and we look forward to -- moving forward this quarter into the next.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.