FB Financial Corp (FBK) 2022 Q3 法說會逐字稿

Good morning, and welcome to FB Financial Corporation's Third Quarter 2022 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mettee, Chief Financial Officer; and Greg Bowers, Chief Credit Officer, who will be available for questions and answers.

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

Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. (Operator Instructions).

During this presentation, FB Financial may make comments, which constitute forward-looking statements under the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements.

Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K.

Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release, supplemental financial information and this morning's presentation, which are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov.

I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO.

All right. Thank you, Jason. Good morning, and thank you for joining us this morning. As always, we appreciate your interest in FB Financial. For the quarter, we reported EPS of $0.68 per share. We've grown our tangible book value per share, excluding the impact of AOCI, at a compound annual growth rate of 14.9% since our IPO.

We had good performance this quarter, both in the Banking segment and in the Mortgage segment. First, starting with the Bank, we had 22% annualized loan growth. As I've said before, asset generation has not been a problem for First Bank. And our continued loan growth is reflective of our experienced and trusted relationship managers operating in excellent markets that have strong underlying job growth and in-migration.

We're also proud of our noninterest-bearing deposit growth, which was 9.7% annualized this quarter and 13.7% year-over-year. Growing operating relationships and noninterest-bearing deposits has been a focus of management and our team continues to execute well, particularly in the interest rate and deposit environment that we find ourselves in, we believe that our noninterest-bearing growth is a signal of the strength and the momentum of our franchise.

Both balance sheet trends resulted in strong growth and profitability as our net interest margin expanded to 3.93% in the quarter, and our net interest income grew by 9% over the second quarter. As a result of that improvement, the Banking segment delivered a PTPP ROAA of approximately 1.9% in the third quarter, which is getting closer to where we expected to be.

For Mortgage, we had a loss for the quarter, but we also finalized our restructuring of the segment. We're now at a point where we feel comfortable with our staffing in the organization to weather this challenging environment while avoiding additional material losses. As a result of this restructuring, the Mortgage segment returned operational profitability in both August and September. While the seasonality of the fourth quarter and the first quarter -- while the fourth quarter and the first quarter exacerbate the current headwinds in the industry, we would expect to be close to breakeven for the next couple of quarters.

While we are pleased with our third quarter results, we're also looking ahead at gray skies. We're hoping for a drizzle but we're prepared for Jamie Dimon's hurricane. The macro factors of rising interest rates, strong employment, high inflation and good customer settlement would lead you to think that interest rates will continue to rise. Mixed with quantitative tightening, shrinking liquidity, the potential for significant market disruptions, a war in Europe and almost assurance of a recession, it makes this an important time to rely on fundamentals, discipline and messaging as the economic times are moving from boom to something less, we had to transition from aggressive growth of the franchise to ensuring that we take care of customers regardless of economic conditions.

In times like these, we say our balance sheet is reserved for our customers. So we have to be prepared to get them through challenges as we encounter difficult market conditions. Our people live and work in markets that are surrounded by customers that continue to experience strong demand, above-average population growth, robust housing markets, continuous wage growth.

And in some of our markets, they can't get to their office without driving past the sea of construction cranes. Our people are passionate about serving their customers no matter the circumstances and preparing for a slowdown when our markets are still so robust is a communication challenge. That being the case, we're emphasizing continue to grow our business aggressively on the deposit side.

We're avoiding significant new customer acquisition on the credit side right now, and we are trying to take care of the existing borrowing customers. We're managing our liquidity, credit and capital to be prepared for any range of economic scenarios, better safe than sorry. On our liquidity, we had $537 million of net deposit outflows during the quarter, and we expected that, as we referenced on last quarter's call, stripping out 2 large public fund accounts, which combined for $619 million in deposit reduction during the quarter. We had net growth from the rest of our deposit base.

One of these large public accounts was over $500 million and was a bit away from us in terms that we were not willing to match. We can increase and have increased our customer funding at less expensive rates while also freeing collateral that improves our overall liquidity position. Following this quarter's deposit activity, we're now at 91% loans -- HFI loans to deposits and securities assets of 12.1%.

We feel our balance sheet mix is optimized in this environment for strong profitability. And we have ample liquidity sources that will allow us to continue serving our customers, even in the most extreme economic conditions. Going forward, we don't anticipate letting ourselves get above the current 91% loan-to-deposit ratio. We are also not willing to pay for unprofitable deposit relationships, and we still prefer not to use brokered CDs, although that's an available option.

That means we'll fund most of our additional loan growth with customer deposits. That also means that for the near term, we won't have outsized loan growth that you've seen over the last 3 quarters. We would anticipate not exceeding the bottom end of our long-term loan growth target of 10% to 12% during the fourth quarter and the first part of 2023.

While the past few quarters would tell you that there is still clearly strong demand for First Bank lending relationships, we're intent on throttling back our production. As a result, we've raised the bar for new loans. We feel confident that our underwriting standards should hold up through the cycle. If there's been a tweak, it's been that we've been stressing interest rates a little more given the current environment. Otherwise, we've not made changes to our credit process.

However, until we can gain clarity on which areas will be impacted by the slowing economy, we're cutting back on traditionally higher risk product types of construction, [A&D] and CRE. With the limitations around those assets, we're willing to put on -- around assets we're willing to put on the balance sheet, our growth should continue to be incrementally profitable.

Moving to capital. We maintain a very strong equity position with a CET1 ratio of 10.9%, our tangible common equity to tangible assets declined by 36 basis points to 8.54% due to a further increase in the unrealized loss on our securities portfolio. And I would reiterate that unrealized loss is all interest rate related and temporary.

And as I mentioned previously, we have no intention of turning those unrealized losses into realized -- I'm sorry, those unrealized losses into realized losses.

We're preparing for a slowdown and being cautious on credit and balance sheet management. We're balancing that with our longer-term strategic priorities. Our recently announced Vanderbilt sponsorship would be an example while that's an expense for us heading into a recession, we had an opportunity to become a bank for the most significant institutions and brands in our geography, and we acted on it.

Another such focus would be our recruitment efforts for both relationship managers and customers in the wake of recent acquisitions in our footprint. While we will not allow ourselves to grow loans at an outsized pace, there are certain once-in-a-career type customers that may be looking for new partners, and we will do that, and we will do what we can to accommodate them.

Similarly, we continue to be active in our discussions with a handful or so of banks that we've identified as Tier 1, high-quality potential partners. If one of those banks that we know will decide to sell over the next few quarters, we would not stay on the sideline solely because of the uncertain economic outlook. All that to say, we're proud of our performance in the quarter, but we're cautious about the operating environment for the next few quarters.

We're hoping for a mild downturn, but we're doing what we can to prepare for a potentially difficult stretch. We feel our conservative balance sheet management and underwriting standards will service well no matter what outcomes.

I'll turn it over to Michael for more color on our financial performance in the quarter.

Thank you, Chris, and good morning, everyone. I'll speak first to this quarter's results in our banking segment. Our baseline run rate pre-tax pre-provision income for the banking segment was $55.9 million in the third quarter. Pointing to the segment core efficiency ratio reconciliations, which are on Page 19 of the slide deck and Page 19 of the financial supplement, we had $112.1 million in segment tax equivalent net interest income this quarter. Along with that $112.1 million in net interest income, we had $10.3 million in core banking segment noninterest income.

Finally, we had $65.9 million of banking segment noninterest expense. You will remember that last quarter due to our lower level of taxable income, we had a geography shift of $1.4 million as tax credits were moved from a reduction in our tax expense to instead be a reduction in noninterest expense. This quarter, we had $700,000 in Banking segment noninterest expense as a result of that line.

Adjusting for that shift, core Banking segment noninterest expense would have been [$66.6] million. Together, that comes to our [$65.9] million in run rate segment PTPP, which has grown 30.9% over the comparable $42.7 million that we delivered in the third quarter of 2021. Moving on to our net interest margin with summary detail on Page 5 of the slide deck.

Our net interest margin of 3.93% showed significant improvement from the 3.52% that we reported in the second quarter. Part of that improvement was due to the continued deployment of liquidity and the loan growth. For the second quarter, we estimated that excess liquidity had a 14 basis point negative impact on our margin. With our average balance sheet composition during the third quarter, we estimate no impact to margin due to excess liquidity.

The remaining 27 or so basis points of expansion was due to assets repricing faster than our liabilities as our cost of total deposits increased by 27 basis points, while our yield on loans, excluding nonaccrual interest recoveries, accretion on purchased loans and syndication fees in the prior quarter increased by 52 basis points. Our securities portfolio increased by 7 basis points, and our interest-bearing cash increased by 145 basis points.

Looking forward to our margin, we had a run rate margin for the month of September in the 3.95% range. Our cost of funds is increasing as we expected it to, and we put new deposits on the books in the third quarter at a cost of 1.54%. And that was up to 1.79% in the month of September. So we would expect our cost of total deposits to continue to increase over the coming quarters, particularly with the additional rate hikes that are anticipated over the coming months.

However, we have also seen an increase in our yield on loans. New loans in the third quarter had a yield of 5.96%, and that was up to 6.18% in the month of September. So that's a net spread of 4.42% on new loans versus new deposits for the third quarter and 4.39% for the month of September. So we feel that our growth remains profitable.

Our spot -- other spot numbers for you for the month of September would be contractual yield on loans of 5.12%, yield on securities of 2.15% and cost of interest-bearing deposits of 0.97%. With our margin approaching 4%, we would expect it to start to level out. There would be -- there should be continued upside to our asset yields with additional rate hikes.

The competition for deposits across our markets is causing betas to accelerate which should cap some of our upside. For Banking segment noninterest income, we continue to expect for our banking noninterest income to be in the $10 million to $11 million rate for quarter-to-quarter for the foreseeable future.

As I mentioned earlier, we view our core Banking segment noninterest expense of being $66.6 million versus the reported $65.9 million due to the $700,000 state tax credits that reduced noninterest expense this quarter. That number is higher than the $63.8 million to $64.3 million that we guided to for the quarter as we accelerated a few of our internal projects geared towards organizational efficiency into the third and fourth quarters.

As we expect continued growth in our banking segment noninterest expenses due to inflationary pressures on wages, and we continue to hire both customer-facing and back-office talent.

Moving to Mortgage. After a difficult start of the quarter, where we experienced a fair value reduction in both our pipeline and our mortgage servicing rights, the segment returned to profitability in spite of lower volumes.

We do not expect a contribution to earnings in the fourth quarter due to the seasonal volume pressure and margins that remained below our historical levels. The changes to structure that have been made put us in a position to be profitable on an annual basis going forward. Moving on to our allowance for credit losses. We saw our ACL to loans decreased by 2 basis points this quarter, and we recorded a sizable provision of $11.4 million.

Economic forecast for the third quarter deteriorated slightly from those that we utilized in the second quarter. We have continued optimism for the long-term health and growth of our local economies, but we are clinically watching inflation that we're experiencing and the increasing conviction of many economists that we will soon enter into a recession. If conditions do not change, we would anticipate remaining at similar level of ACL to loans held for investment over the near term.

With that, I'll turn the call back over to Chris.

All right. Thanks, Michael, for that color. We're pleased with our results for the quarter and feel prepared for what's coming next. And that concludes our prepared remarks. Thank you for everyone, again, for your interest in FB Financial. Operator, at this point, I'd like to open the line for questions.

(Operator Instructions) Your first question comes from Catherine Mealor from KBW.

Michael, you gave great detail into the margin, which was found really helpful such as the spot rates at the end of the quarter. And I have one follow-up to all the details. Just looking at the borrowings, it looks like you pulled out, and I think you'll be borrowing this quarter. And so just curious if that was more of a temporary thing just given the outflow of public funds we saw or if you think we'll see an increase in FHLB borrowing use over the next couple of quarters? .

Yes, it's a great question, Catherine. Yes, the FHLB borrowings were kind of a replacement for those public funds as we continue to grow our customer deposits, and we expect those to be paid down over the coming quarters.

Yes. Catherine. I would say, it's actually already moved down some from where it was at quarter end. So that's -- we don't anticipate -- that is more temporary.

Great. Okay. So move that down and increased customer deposits from here. And that as the loan growth slows, should be an easier balance, I would assume, you're not growing at 22% or the loans anymore.

You got the message.

Loud and clear. Loud and clear. And then one other just switching to credit. It was interesting, looking at your reserve. It looks like a lot of the higher provision this quarter was really just from the loan growth. But I did notice on your CECL slide that you increased your reserve on the residential mortgage portfolio. Is there just any -- just curious what drove that. And then bigger picture, how you're thinking about where the ACL could go.

As I look at that, I feel like it's a very high reserve. So I would think you would be a bank that would have relatively less risk for reserve buildings from here. But just kind of curious how you're thinking about that as we get into maybe a more recessionary period.

Yes. Catherine, it's Michael. Good question. So the reserve around consumer and residential was impacted more so this quarter by the Moody's scenario. So that's really the number you're seeing there on 1 to 4 family, it's strictly model driven. And so it's really around that change in GDP and unemployment being slightly higher, which tends to impact the consumer more so than some of our other asset classes.

So that drove that higher. We agree we feel like our ACL is very prudent for what's in front of us and where we've been. And we feel like we're in pretty good shape there. And we expect (inaudible) to maintain the same level of [145 to 150] on a go-forward basis given our kind of economic outlook here, which is probably a little bit more bearish than some others.

But yes, and I think maybe also you're asking, Catherine, if we're going to build above this 148 for the quarter, actually, it could go to 150, but now -- we never know what the model spits out exactly until it spits it out, but I couldn't see it going to 170 or anything like that in terms of what we -- if that's what you're asking on the build side.

The next question comes from Stephen Scouten from Piper Sandler.

Great. So I guess one of the strengths I'm seeing here is just the spreads you saw in the quarter on new production even versus the new funding, Michael, that you referenced. Do you think that's a trend that can continue? Or some of what you're saying around the increase in deposit cost, would you expect those incremental spreads to narrow and for kind of the -- let's call it, the incremental deposit betas to exceed incremental asset yield betas moving forward?

So Stephen, we're still seeing loan yields move higher, and so they've moved pretty much in line. We don't see a whole lot of expansion in margin by this 4% range kind of going forward. I think one of the -- what it sounds to be balance sheet mix a little bit as our deposits grow, put a little bit of pressure on NIM.

But for now, we are seeing increased deposit costs. They are higher betas relative to new production where rates are 3.5% Fed funds but we're seeing that incremental loan yields as well. So right now, they're moving kind of lockstep, whereas earlier in the year, obviously, loan deals were outpacing deposits. Deposit costs were able to stay lower for longer.

Okay. That's extremely helpful. And then in the quest kind of keep the loan-to-deposit ratio around this 91%. Obviously, again, hearing the guidance around loan growth expectations. But in terms of still filling the gap on the deposit side, would we expect to see that come more within customer CDs? And if so, where are you seeing new CD yields in particular come on at?

Yes. So kind of a mix of money market and new CDs, we're seeing, call it, odd term, 13 months at around [3.10% to 3.15%], 18 months around [3.35% to 3.40%-ish]. And yes, some of the shorter terms in the upper 2s. But I will say, depending on the market, you'll see some wildly various competitive rates, and we see well above that. And some of our more community markets on CDs and then in some of our more metro markets, you'll see much higher money market rates in some cases. So it's a pretty broad competitive landscape at this point. .

Okay. Great. And then I guess last thing for me. I'm encouraged by the commentary around mortgage, and I think you said material losses should be kind of behind us, which is great. What's the big driver for that? Is that just that the efficiency ratio has been brought down more in line? Or will we see less variance around some of the MSR losses moving forward or change in fair value of MSR moving forward. What's kind of the biggest drivers within those moving parts in mortgage that will lead to kind of some normalcy there, I guess?

Yes. I mean staffing is built for kind of a go-forward basis in the range we're in now, probably a little bit of capacity for some growth going into the second quarter. One of the challenges with fair value in March market as you take a hit on when your pipeline shrinks. And so we incurred that in July as we moved out of the direct-to-consumer business and retail business slowed as well.

You can see our volume drop a couple of hundred million on the interest rate locks. And then on the MSR side, there was a valuation kind of as rates get high, the valuation starts to taper. We don't see as much increase. And we keep the assets pretty much hedged at around 100%. And so we've had to modify some of our hedges there to kind of maintain current valuation.

So I wouldn't expect swings in the MSR widely unless interest rates just get more and more volatile. And hopefully, most of that behind us as well. We have mortgages -- seems to be stabilized, but we've got some seasonality ahead of us, and hopefully, the waters will be much calmer from here.

And I would just -- Steve, I'll just add to that on the mortgage side a couple of things. It's been a painful restructure for us because we've had about a 60% reduction in staff there overall from where -- from our peak. And so again, that was painful.

But if you just -- the second thing -- we'll go back to what Mike was talking about a little bit mark-to-market, you have to mark your mortgage loans held for sale. And so if you go back to the third quarter of last year, we had $750 million in mortgage loans held for sale, end of this quarter we had $97 million.

And so if you think about that reduction in what you're marking and you have to step that down as we've had to step down over the last 4 quarters. And so -- and that's down to $97 million at this point. So it can't drop that much further from there.

The next question comes from Jennifer Demba from Truist Securities.

Just wondering what kind of merger disruption opportunities you're seeing -- or saw in the third quarter and are seeing over the near term right now?

Yes, I'll comment on a little bit of that. So well, we don't usually speak specifically to other institutions, but we do have some institutions that are undergoing big transactions and right here in our core markets.

And so we hear a lot about that. We see a movement from that both customer and associates. And so that leads to just a lot of conversations with folks. And so as we go back to -- in my prepared remarks, I made the comment, sometimes you see a customer become available that you've coveted for maybe years or decades, and they just don't come -- they're not going to come available, again, probably in at least in my career over the next decade.

And so we're going to make a hard move for those whenever that's the case. And it's the same way with some of these associates. We've hired a lot of -- we're looking at revenue producers across our footprint. But in addition to that, the banks -- FirstBank, if you go back to 2000, it was about $6 billion asset institution. Now in -- I'm sorry, in 2020, it's about a $6 billion institution.

And then you look at 2022, it was $12 billion institution. So we've also gotten an opportunity on the operations side, on the risk management side, even places, especially in Birmingham, we've really grown our operational muscle and our administrative muscle in Birmingham, there is some disruption down there.

And we've even -- our Chief Risk Officer came to us from Texas. And so by the way, it's never easy to move people out of Texas. And so we -- and so it's really coming from all around. And it's not only on the revenue side, it's on accounting and finance. It's on risk management, it's on operations, where we've really been able to beef up.

Great. And a question on asset quality. What do you feel like is a normal level of annual loan losses for this company? I mean I think that's probably one of the biggest variances in earnings models for the industry going forward is -- what should we assume as the economy gets a bit weaker?

Yes. Well, we had $15,000 net recoveries this quarter and I'd like to just assume that we're going to have net recoveries in perpetuity, probably not going to be the case. And frankly, you're asking that question. It's a hard question, which we ask internally because -- it's a little like some of the weather extremes that we see these days, normal losses have not been "normal" and (inaudible) that we're not sure what that is.

We have traditionally said somewhere in the 20 to 25 basis points has kind of been something that we modeled. But we're not sure that that's -- I'd say, there's a chance that it could be higher and especially in the latter half of '23 or in '24, charge-offs are lagging the economy. And so I'd say they potentially could be higher than, and of course, they'd be followed by lower.

One of the things that we watch closely, Jennifer, is our MH portfolio. And I've said once on this call, and I'll say it again, in that portfolio, if you go back to '20 and '21, we saw record low past dues, we saw record low charge-offs. We saw record low nonaccruals because of all the stimulus money that put money in everybody's pockets. And today -- but if we didn't see -- we think something was wrong with our tracking systems or something we -- we didn't see those go up, we have seen past dues go up to a normal level, which is closer to, say, 40 to 65 -- 0.4 to 0.65 of the balance is sort of a range. And we've seen it come back up to that range from being down to 0.2, 0.21 in '20, '21. And so -- and so we mix all those together and roughly, I'd say, 20 to 30 basis points, something like that.

The next question comes from Kevin Fitzsimmons from D.A. Davidson.

I wanted to take a step back with all the talk about the balance sheet and then talk about the margin. Definitely, we've had a reversal where a couple of years ago, we were all talking about the percentage margin getting hurt, but the balance sheet driving growth in NII. So now we -- it seems like we've had a bit of a handoff of reversal on those contributors.

But if you look at dollars of NII or do you feel you will be able to, on a quarterly basis, continue to grow that? I mean maybe not to the pace -- 9% pace we saw this quarter, but do you feel that NII is going to be able to continue to grow in this environment? .

Yes. Kevin, it's Michael. Yes, we still expect a couple more rate hikes of the variable rate portfolio should still reprice higher. We still expect, I guess, relative to the last 3 quarters, we had modest loan growth over the next couple of quarters. So you'll still see some balance sheet growth and deposit costs, like I say, the change, right, it's going to increase, but I still think that there's net interest income expansion in that...

Sure. Yes. Because there should be some modest margin in there and some balanced growth. And so between the 2, yes, that should -- the absolute dollars should increase.

Okay. And just to clarify, so Michael, when you talked about the margin now approaching 4% starting to stabilize. Are you kind of saying literally at 4%, which is only 7 basis points from here? Or are you just talking more of like a low 4% hand -- type margin, if we assume (technical difficulty) continue to get more of a benefit from the Fed rate hikes over the next quarter or 2? And then it levels off in a low 4% level. I just wanted to clarify.

Yes, it's not a ceiling for sure. So I'm not trying to imply that. I think it's in the low 4s in there over the next couple of quarters, pending deposit costs for sure.

Okay. And then, Chris, when you were talking initially about the loan growth relative to your long-term guidance, I definitely get the message that it's going to moderate from what you've been putting up here in recent quarters. But can you -- I just didn't catch what you had said relative to that long-term outlook.

Yes. We have -- our long-term target has been 10% to 12% annually. And typically frankly, been, if you go back last 5, 7 years, even we've typically been on the high side of that. When we look out into the fourth quarter and the first part of the third quarter, we'd be on the low side of that, maybe we could even be below that.

I think it's a good time to really focus on liquidity, credit, capital, make sure right now -- again, we'll continue to grow but it's just going to be a slower and measured pace. We're doing some additional reviews on internal credits, things like that. Just again, we don't know exactly what's on the horizon. We feel certainly that the economy is going to be slower, likely, even a recession. But that being the case, we look around and go, well, you know our markets continue to outperform, and we'll likely continue to outperform in a recession.

So we put all those things into the mix and consider them all. And that's what we come up with is -- we're going to be on the low side of that 10% to 12%, maybe even below but we think we'll continue to see growth. And with that level of growth, we think it will actually be quite profitable growth through both the loans and deposits that we had.

And one last one on deposits. Do you guys feel you're at -- third quarter will prove to be the bottom for deposits. I know you were proactive in moving out those higher-cost public fund deposits. Just wondering, if there's more of those to go in fourth quarter or can you say you believe you're at a bottom here?

Yes is the answer. We don't -- I mean because we're -- we've increased since the end of the quarter, we think that to continue. So yes, we would think so.

Yes. I think (inaudible) public funds as well would kind of naturally go back up here in the fourth quarter as well.

Yes. They bottomed out in the third quarter as well for us on just the annual cycle. And so we feel like we're at a low point.

Next question is from Matt Olney from Stephens.

My question is similar to Jenny's question around investments, but besides merger disruption opportunities, I think the slide deck also mentions investments in technology via the innovations group. Would love to dig more into this and appreciate kind of what the investments are on this side.

Go ahead.

Yes. Matt, we've -- we're going to continue to operate and look, we're getting a lot of opportunities come our way, a lot of different opportunities. And so we continue to kind of investigate things that augment our business and things that can ultimately provide a lot of efficiencies and really help grow some of our businesses.

And example, really is there's a recent press release on our relationship with Treasury Prime, which supports our strategy for open API banking [declines] and potential FinTech partners. And maybe even deploying niche offerings of our own. So we see strong demand on our customer base for embedded banking services and solutions that will kind of create competitive technology that augments our community banking model.

And I think ultimately, we're focused on these relationships because they bring deposits to the balance sheet. And they are going to create core customers there. So that's one example of things we're doing, and there's a laundry list of things we haven't really publicly talked about yet that are exciting opportunities that we're working on.

Yes. And I'd just add, our relationship with USDF consortium there and some of the founding entities and just the fact that we're active in the market just brings -- I mean a lot of exciting opportunities. Now we're -- those don't have a cost attached to them -- the material costs attached to them. They do have some, but not of material costs attached to them today because we've got Wade Peery who some of you know on the call who is on the road most of the time, and he's pursuing these opportunities or actually -- I guess at this point, it's just opposite, they're pursuing him and us. And so it's a matter of waiting through.

Okay. That's helpful. And then I guess kind of following up on that. Michael, given these investments are being accelerated, it sounds like core expense levels at the bank will continue to build from that [66.6%] core level. Is that right? Anything you would point us towards for the fourth quarter or towards next year? .

We're working through next year right now. So we'll have more update early in '23. But for the fourth quarter, I thought they're going to be in and around this range, maybe some modest growth, but we really did accelerate a lot of the expenses into the third quarter. And that's some stuff that, that could create modest growth but nothing material.

Yes. And we've got a couple of -- I'll just add, we've got a couple of efficiency initiatives with -- working with some -- in one case, anyway, third party, and we really accelerated the initiative to try and get it done this year. Again, in anticipation of next year, could potentially be a tougher year. And so we've just accelerated that whole project, including the expense of the project and the implementation. So...

Okay. That's helpful. And then switching over to the funding side and deposit side. I think you've been targeting cumulative deposit beta for the cycle around 30%. Is that right in the past? And is that still the case? Any color on what you expect more near term, given some of the changes you've mentioned previously.

Yes. Matt, that's right. I mean we kind of -- look I said about models, I guess, going to be careful. But we modeled in and around 30%. That's probably historical, maybe a little bit higher than that. We've been well below that. If you kind of look from the base to where we are now, so I do expect that to accelerate and work its way back towards that 30% with the newer deposits that are coming on repricing of some existing deposits.

But that's why we continue to focus on noninterest-bearing deposits as well and growing that core customer base is -- it certainly helps to offset some of the increase in deposit costs for the franchise.

The next question comes from Brett Rabatin from the Hovde Group.

I wanted to circle back around on loan growth and the expectations for growth to slow. I know you've talked about it quite a bit. But I was looking at the construction commitments and noticed those were up quite a bit linked quarter. And I kind of feel like that's one of the segments that you kind of keyed in on as a slower growth engine going forward.

I want to make sure I understood your comments around construction specifically. And then just is there anything to read into the linked quarter increase in construction for the quarter.

Yes. And I'm going to let Michael address it, but I will say this. That as you may or may not understand, construction bucket is not easy to project because you make commitments and then those commitments may be drawn on at any time.

And so sometimes, you make the commitment and you don't expect it to be drawn on for 9 months or a year even. And then some of them may never be drawn on. And so you're always trying to project that. Really what you have to manage in the present is the commitments versus the balances. And so we are really focused on the commitments and have been actually -- but that doesn't -- but of the commitments you have made, those can be drawn.

And so that means that balance you can start making -- let me take that back. You can pull back on commitments, but then the balance may continue to go up from draws that have been previously been committed.

Yes, I mean, that's good commentary. I think we did have commitment increases from -- in the quarter, but most of that was things that we were working on prior to the third quarter. And if you just look at the balances in that bucket, as Chris mentioned, about 65%, 70% of that was prior commitments that funded up versus any type of new origination type of business in the quarter.

Okay. That's helpful. And then I wanted just to ask Chris, you alluded to Jamie Dimon's storm and not necessarily knowing for sure what next year is going to look like. Are there any loan segments that you're looking to maybe specifically be more conservative with -- and I know everyone's worried about consumer but are there any things that you're specifically thinking about in terms of credit where we might see credit become softer next year? .

Yes. We're -- I think it's your typical segments. We -- our construction will be one, residential within that. But as you know, Brett, because you live in (inaudible) that then in our market, even though the world's getting softer in residential, and it is in our mortgage as well, but it's still strong.

Most of our folks describe it as in most of our economic [recency] here, you'd start, you'd say it's kind of getting back to normal. And -- if you look at days in inventory and things like that. So -- so that's one. [A&D], land, all of those things, CRE, all those things would be the major things we focus on. Again, remember, we have a manufactured housing portfolio. We look at our -- with that's -- there are 2 pieces of that. One is communities, which has about $290 million in it. The other is retail, which has about $270 million in it.

We watched very closely communities performing extremely well in terms of any kind of pickups where we watch it closely and then -- and retail continues to perform. We've seen some things, again, tick up there. But there's been several years of really strong performance in that manufactured housing and retail.

And so we reserve 5% on that just because at some point, it could -- at some point, you can see that tick up because it has -- where we've had the portfolio now, including [Clayton]for 14 years. And at least for, I'd say, the last 7 or 8 charge-offs have been really low. So those are the things that we keep really close eye on.

The next question comes from Feddie Strickland from Janney Montgomery Scott.

Just wanted to clarify on Kevin's question from earlier. Average earning assets were down this quarter despite the loan growth. Should we expect earning assets to grow from here closer to level of loan growth. Just given where loans deposits are today? A lot of that cash has been deployed.

Yes, that's a reasonable assumption. The average earning assets haven't grown a lot because we've taken up the liquidity that we had as did everybody. We all had excess liquidity on the balance sheet. And we've taken a lot -- we've taken that excess liquidity up on loans. And so from here, I think you would see the average earning assets -- you will see that go up as our deposits increase and our loan increase at close to the same percentage.

Got you. That makes sense. And that does play in your earlier comments about spread growth, too. Switching gears for a second. You've talked about bringing more mortgage producers line over time. Was just curious what the level of opportunity is that you see there. And did you bring anyone online or have you hired anyone, any mortgage producers since last quarter?

Yes. Fred, this is Michael. Welcome. Glad to have you. Yes, we're actually seeing quite a bit of opportunity on mortgage producers across our footprint. We've actually been able to bring back a couple that we -- that've left over the last year or so, and so we're super excited about those joining the team, coming back to the team. And then in reality, we've had a lot of opportunity people coming to us over the past 60 days generally from IMBs, independent mortgage companies, banks as they're kind of leaving that space and looking to join a bank.

So we're being selective in that. As you kind of look over the next 6 to 9 months, we have volumes depressed. And so we're kind of being selective there and making sure that fit our culture and can work within our model, which is realtor builder base, customer focused. And so yes, a lot of opportunity out there, and we expect that to continue over the next 15, 18 months, that there will be a lot of originator talent coming to (inaudible).

Got it. And the last question, kind of along those same lines, I sense we've already just dropping to about 9% of revenues this quarter. I think it was [16%] last quarter, 31% a year ago. Do you have any sort of target or sense for where you want that number to be by next year's peak season? Do we see that rising back to something like 15%? Or is it just kind of too hard to tell at this point?

Yes, it is definitely too hard to tell at this point, but we're really focused on the contribution and running a variable business that's profitable through all cycles. And so we would expect a contribution in the range of about 10% or lower in the mortgage space. And so revenues highly unpredictable because of the rate lock volume and originations is fairly foggy at this point in time. But we're focused on the core profitability of the business.

Yes, I'll just make a comment. We -- it won't return to anywhere near the level that it has been -- it was in '20 or '21, nowhere near that. Like I said, contribution would stay down below 10%. And so that's what we would see. And then the other thing I want to mention that Michael just mentioned that it's really a point of pride. We have had really -- again, it's a tough time in the mortgage business.

And you've had some, especially, in a bit of mortgage banks, it is really aggressive in recruiting and offer really significant upfront payments to people to come work for them. And we lost some large key producers, and we've seen some of those folks that are great folks and great producers, actually, come back in a relatively short period of time. And they attributed that to, hey, the culture is really good. And they just appreciate the fact that it's a place where they can be successful and it's a good culture for those folks.

And so we're proud of the fact that -- and we think it's a very good sign when folks, especially really high producers that get recruited away in a relative short period of time, come back and go, hey, wait a minute, we didn't -- we appreciate what we had. So just make that commentary.

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. Very good. Thank you for all the questions. Thank you for all the -- everybody following FB Financial. We always appreciate your interest, and we will look forward to seeing some of you throughout the quarter at some investor events. Bye. Have a great day.

Conference has now concluded. Thanks for attending today's presentation. You may now disconnect.