FB Financial Corporation (FBK) Q4 2022 Earnings Call Transcript

FB Financial Corporation (NYSE: FBK) Q4 2022 earnings call dated Jan. 17, 2023

Corporate Participants:

Christopher T. Holmes — President and Chief Executive Officer

Michael Mettee — Chief Financial Officer

Analysts:

Matt Olney — Stephens Inc — Analyst

Catherine Mealor — KBW — Analyst

Brett Rabatin — Hovde Group — Analyst

Stephen Scouten — Piper Sandler — Analyst

Kevin Fitzsimmons — D.A. Davidson — Analyst

Feddie Strickland — Janney Montgomery Scott — Analyst

Jennifer Demba — Truist Securities — Analyst

Presentation:

Operator

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

Please note FB Financials 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] The call will be opened for questions after the presentation.

During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. Forward-looking statements are based on management’s current expectations and assumptions and are subject to risks, uncertainties and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial’s ability to control or predict and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks that may cause actual results to materially differ from expectations is contained in FB Financial’s periodic and current reports filed with the SEC, including FB Financial’s most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.

In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of 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.

Christopher T. Holmes — President and Chief Executive Officer

All right. Thank you, Rocco. Good morning. Thank you, everybody, for joining us this morning. We appreciate your interest in FB Financial as always. So, as we put a bow on 2022, we’re pleased with some of the results from the year and we’re disappointed with some others. We grew loans by 22.3%, while holding deposits flat, and keeping deposits flat in 2022 wasn’t a bad result. We made strategic investments in people, systems and processes that will propel us into the future. And we exit the year with strong capital and liquidity positions.

With an adjusted ROAA of 1.1% and adjusted PTPP ROAA of 1.58%, our profitability was not where we expected to be, which was disappointing. The restructuring of our Mortgage segment, our capital and liquidity management actions in the second-half of the year and our operational enhancements scheduled for 2023, we feel well-positioned with those for a range of potential economic scenarios entering 2023. For the quarter, we reported EPS of $0.81 and adjusted EPS of $0.85. We’ve grown our tangible book value per share, excluding the impact of AOCI, at a compound annual growth rate of 14.8% since our IPO in 2016.

On the last quarter’s call, I highlighted that we were prepared for a potentially challenging operating environment in 2023 by rating in [Phonetic] loan growth, particularly C&D and CRE and focusing on liquidity and customer deposits. This quarter’s performance is a reflection of those near-term priorities. Our deposit portfolio increased by $850 million this quarter or 33.7% annualized, which we are proud of. When you exclude the change in mortgage escrow-related deposits, true growth is actually $915 million, or 37% annualized, which is even more impressive.

The deposit growth include some seasonal increases in public funds, but the vast majority is customer funding spread across our customer base in both TAM and non-TAM products. The negatives to that stellar deposit growth this quarter were our decline in our non-interest bearing accounts, which were down $225 million during the quarter when you exclude the effect of the mortgage escrow deposits and the cost of our interest-bearing deposits, which were up by 93 basis points compared to the prior quarter. While our deposit growth came in spite [Phonetic] of our profitability this quarter, we felt some urgency to increase the deposit balances now as we expect deposit competition to intensify in the coming months.

On non-interest bearing accounts, we know some of that decline was a permanent move out of the NIB bucket. With Fed funds being over 4% for the first time in 15 years, we’re seeing less and idle funds sitting in non-interest bearing accounts. While we expect tough sliding in non-interest bearing growth for 2023, we believe the fourth quarter be defined as an anomaly, and this is always going to be an area of focus for the company. On our interest-bearing deposits, our goal with rates is be able to continue attracting customer relationships over the long-term high-value customers to the bank. Since we intend to maintain a loan and deposit ratio near its current level, we have to go deposits to grow the balance sheet, so our incremental cost of deposits will be near market rates.

We limited our loan portfolio to 8.4% annualized growth, after producing 20-plus-percent annualized growth in each of the prior three quarters. We could grow much more than the 8% by holding on to more of the balances that we originated as we sold $126 million in participations during the quarter. If we kept that $126 million in participations on the balance sheet, we would have had 14% annualized loan growth during the quarter. We take the current economic environment cost to caution around credit and liquidity. So we’ll continue to intentionally limit our loan growth to keep our loan-to-deposit ratio in the 85% to 90% range and be conservative on credit until we gain some clarity on which asset classes will be impacted in this economic environment.

As we signaled last quarter, our combined C&D and non-owner occupied CRE balances decrease $12 million during the quarter. We’re not seeing any negative credit trends in these portfolios to this point, but we were intent on managing our exposure down heading into 2023. With construction, we’ve been managing new commitments balances in the early part of the second quarter of 2022, but due to funding of existing commitments, the balances increased over much of the year. The balance decline we saw in the fourth quarter is the result of our management of commitments throughout 2022 and is the beginning of a trend of declining balances in that portfolio that we expect to continue throughout 2023.

For mortgage, seasonality paired with market headwinds led to a loss of $4.2 million — pre-tax loss of $4.2 million for the quarter, while we felt that this unit was rightsized following actions taken earlier in the year, we’ve continued to reduce the size and scope of the segment as the mortgage industry continues to hit new depths. The environment causes mortgage to be exceptionally difficult to forecast, so we’re budgeting a positive contribution for 2023, and we’re not comfortable right now getting a lot more precise than that.

One last area that I’ll touch on for the quarter is our commercial loans held for sale portfolio. We had a negative mark-to-market adjustment of $2.6 million in the quarter, primarily driven by one credit, and the portfolio is down to three relationships with $30.5 million in remaining exposure. We believe that we will see full pay-offs on two of those three remaining relationships in January, and should exit the quarter with one remaining relationship and less than $10 million of remaining exposure. As a reminder, we marked this portfolio conservatively when we had the combination with Franklin and have experienced net gain to $7.4 million since closing.

So, as a result of the actions taken during the quarter, we entered 2023 with loans — HFI loans to deposits comfortably below 90% and 85.7%. We also were able to pay down over $300 million in short-term borrowings at a cost of nearly 4% and have approximately $7 billion in contingent liquidity readily available should we ever need it. We maintained strong capital ratios with a CET1 ratio of 11% and our total risk-based capital ratio of 13.1%, while repurchasing $7 million worth of shares following the decline in our stock price in December. We would expect similar balance sheet management throughout the first half of 2023. Our actions have positioned the Bank for improved profitability and go the offensive once we gain clarity on the economic environment.

So, touching on a couple of our longer-term priorities that we’ll continue to prepare for and execute during 2023 are, first, improving efficiency and effectiveness of our core community banking model through a project that we’ve had going on, we call, FirstBank Way. We operate through a local authority Regional President model that has served us well and will continue to serve us well into the future. As we continue to grow the company, we saw the opportunity to better codify the why and how of our community banking model.

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

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

And third, we’ll continue to have a dialog with a small number of banks that we find attractive as merger partners. We position the balance sheet and our internal processes and procedures to be able to act with one of these handful of banks decide to find a partner. The current uncertainty around the operating environment across [Phonetic] the timeline for some of these management teams. However, with the scarcity of potential partners that have the quality that we value, we want to be in a position to act if the opportunity presents itself.

So, to summarize, we defensively positioned ourselves over the last half of 2022 to put the company in a position to improve profitability and go strongly on the offensive when we gain comfort with the economic outlook. We’ve also undertaken a number of strategic initiatives that will benefit the customers — benefit our customers and associates and make us a more efficient operator. We believe this improvement will create superior returns for shareholders through strong organic growth and the capacity to capitalize on opportunities.

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

Michael Mettee — Chief Financial Officer

Thank you, Chris, and good morning, everyone. I’ll speak first to this quarter’s results in our core bank.

Our baseline run rate pre-tax pre-provision income was $55.5 million in the fourth quarter, and I point to the core efficiency ratio reconciliations which are on Page 19 of the Slide Deck and Page 19 of the Financial Supplement. We had $111.3 million in core bank tax equivalent net interest income this quarter. Along with that $111.3 million in net interest income, we had $11.1 million in core bank non-interest income. Finally, we had $66.9 million of bank non-interest expense. Together, that comes to our $55.5 million in run rate PTPP, which has grown at 27.7% over the comparable $43.4 million that we delivered in the fourth quarter of 2021.

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

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

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

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

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

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

Moving to our allowance for credit losses, we saw our ACL to loans decrease by 4 basis points this quarter and we recorded a release of $456,000. Economic forecast deteriorating slightly from quarter-to-quarter were offset by improving overall portfolio metrics and a lower required reserve on unfunded commitments. We have continued optimism for the long-term health and growth of our local economies where we’re closely watching inflation that we’re experiencing and increasing conviction of many economists that we will soon enter a recession. If conditions do not change, we would anticipate maintaining a similar level of ACL to loans held for investment over the near-term.

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

Christopher T. Holmes — President and Chief Executive Officer

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

Questions and Answers:

Operator

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

Matt Olney — Stephens Inc — Analyst

Hey. Thanks. Good morning, everybody.

Michael Mettee — Chief Financial Officer

Good morning.

Christopher T. Holmes — President and Chief Executive Officer

Good morning, Matt.

Matt Olney — Stephens Inc — Analyst

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

Michael Mettee — Chief Financial Officer

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

Matt Olney — Stephens Inc — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

Yeah, I don’t really — yeah, I think you heard it right. But let me shed some additional light on it. I mean, I think — yeah, I don’t think that they’ll continue to move down like they did in the fourth quarter. As a matter of fact, I think they’ll likely stabilize to a large degree. But I do think that that’s going to be a point of pressure. I mean, you’ve seen it frankly over the last couple of years grow pretty easily. You didn’t have to do much, the balance just grew.

And if you go back to when we were having these calls in the latter half of 2020 and throughout 2021, there was a common question of how much of that do you think is sticky, how much of that do you think is real, and we always answered the question and I know most others did too, we’re not sure. We don’t really know. And so, the fact of the matter is, we still don’t really know. We knew that some of it would leave, you’re seeing consumer accounts finally begin to return to the balances they had in pre-COVID. And so, we just think that’s going to be a tough market for noninterest-bearings in 2023. But we also think that, especially in the last half of the year, you begin to see balances leave those and we think that a lot of the, I guess, I call it the low-hanging fruit for that you knew would likely be leaving — probably left in the fourth quarter or, I’d say, in the second half of the year. But I’m also qualifying that by saying we’re not sure, to be honest with you.

Matt Olney — Stephens Inc — Analyst

Understood. Okay. And just finally, as far as the outlook on the net interest margin, Michael, you mentioned, I think, a few things. I think you mentioned the kind of the incremental spread there in ’23 would be similar to December level. Did I catch that right? Just remind me what you saw in December again?

Michael Mettee — Chief Financial Officer

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

Matt Olney — Stephens Inc — Analyst

Got it. Okay. Thanks, guys.

Christopher T. Holmes — President and Chief Executive Officer

Hey, Matt.

Matt Olney — Stephens Inc — Analyst

Yeah.

Christopher T. Holmes — President and Chief Executive Officer

I would just add this on the deposit side, one thing. We did feel a need to get out front on deposits. And so, obviously we had a big deposit quarter and it was expensive, and we expected it to be, especially as we get deeper in. But if you look at where we were headed from a loan-to-deposit ratio in sort of the way that our arrows are trending with three quarters 20%-plus loan growth and knowing that deposit growth is going to get difficult and also, remember, we did have a reduction back in July of one account that we didn’t renew, that was a $500 million-plus account, actually plus. And so, with all that, we felt the need to really get out front. And so, we knew of the expenses and — but when we look at the balance of 2023 and look at our projections, we feel pretty good about where we put ourselves with regards to how margin looks moving forward.

Matt Olney — Stephens Inc — Analyst

Understood. Thank you, guys.

Christopher T. Holmes — President and Chief Executive Officer

Very good. Thank you.

Operator

Ladies and gentlemen, our next question today comes from Catherine Mealor at KBW. Please go ahead.

Catherine Mealor — KBW — Analyst

Thanks. Good morning.

Christopher T. Holmes — President and Chief Executive Officer

Hi, Catherine.

Catherine Mealor — KBW — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

Yeah. Sure, Catherine. So, a couple of things. When I talk about efficiency initiatives, again, remember also historically where we’re coming from, we went from $6 billion at the start of 2020 to $13 billion today in asset size over two acquisitions that we closed in there both in 2020. One was converted later, but we closed two acquisitions in 2020 remotely by the way during COVID. And then, we went through the $10 billion barrier. And so with all that, we just said, you know it’s a good time in 2022 to be able to really do a deeper dive on our core banking model, make sure that it’s scalable. We refer to ourselves as a scalable community bank, and so make sure that we’ve got the right scalability. We’ve got the right model that we will move forward with, that’s a collection of the things we’ve learned over the years. And so, we’ve done that.

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

On the mortgage front, the second part of your question, we’ve been through, I’d call it, two phases of expense reduction there. And at this point, it’s now sort of also, I’d say, a very vigilant approach to expenses in that part of the business. And when we look, again we — I said, it’s been hard to try to forecast mortgage, it’s hard, we’re forecasting it to have a — certainly have a positive contribution next year, but we’re frankly not comfortable saying much more than that other than we’ll experience the normal seasonality, we’ll be able to low — lower in the first quarter or lower in the fourth quarter, but the second, third quarters should be — should — that’s where we should really see a higher level of contribution. So, I don’t know if that helped you on mortgage other than the fact that it’s given where it is, it’s a constant expense initiative for us.

Catherine Mealor — KBW — Analyst

Got it. And then, if I — so your comment on the 6% to 7% growth rate, so for that, are you saying I should take this fourth quarter ’22 ex-mortgage expense base of about $67 million and then grow that at 6% to 7% and that’s my annual expense number for ’23?

Michael Mettee — Chief Financial Officer

That’s right, Catherine. Basically when I was in my comments then, you take that $67 million, annualize that and then grow it off that base at 6% to 7% is where we think we’d end up. And yeah, I will say, there are some regulatory stuff in there, and you’ll have to [Indecipherable] expense going up and some of that as well, so a little bit fungible, but that should be the range.

Catherine Mealor — KBW — Analyst

Got it. And then, with that, should we assume, you’re still growing at a slower pace than obviously you were last year, but still I feel like you’ve still got kind of expectation for balance sheet growth into next year. And if that’s coming, it’s still an incremental 4%-ish margin just given your kind of December NIM guide and the difference in your deposit costs and new loan yields, I mean, that 7% to 8% — or that 6% to 7% expense growth is still coming with NII growth in 2023, is that correct?

Christopher T. Holmes — President and Chief Executive Officer

You’re right. You’re right. Yes.

Catherine Mealor — KBW — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

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

Catherine Mealor — KBW — Analyst

Great. All right. Thanks for the commentary.

Christopher T. Holmes — President and Chief Executive Officer

Thank you.

Operator

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

Brett Rabatin — Hovde Group — Analyst

Hey, guys. Good morning.

Christopher T. Holmes — President and Chief Executive Officer

Good morning, Brett. How are you doing?

Brett Rabatin — Hovde Group — Analyst

Doing great. Thanks. Wanted to use a football analogy, Chris, and college football analogy, and you guys are usually in the playoffs in terms of profitability. But obviously, mortgage banking has been [Indecipherable] to that here in the past year. And so, my question is, you’re obviously in a better position than a lot of the industry related to reserve build need, but my question is, do you really need mortgage banking to get back to a solid level of profitability to get back in the playoffs or do you think that this FirstBank Way and the initiatives you have in place could get you back in the playoffs?

Christopher T. Holmes — President and Chief Executive Officer

Yeah, I like your analogy, by the way. And so, I’m going to give you one back. I mean, at the risk of — Michael was pointing to his University of Alabama socks which he has on, and so at the risk of — I’ll keep this short, but I use an analogy. I do orientation for all of our folks. Every single new hire, I spend about two hours with all the new hires going through culture and mission and values, and Brett, I use a football analogy. I use a college football analogy because that’s big in our part of the world.

And one of the things I tell them is, hey, you’ve joined FirstBank, you need to feel like you could — and some people by the way would really like this analogy and some people are in the end, so that — but I say, you need to feel like you just signed a scholarship with the University of Alabama to play football, because that’s exactly what — I’d say, we compete for the national championship every year, okay. We go to college football playoff almost every year. We expect to be there all the time and realize that’s what you’ve just signed on for when you took a job with FirstBank. So, I use the almost a very, very similar analogy when I talk to all of our folks.

And when you said you missed the playoffs this year, I’d say another term I use, somebody referred to the book, Good to Great, is confront the brutal facts. I use that word internally a lot. And I would say, our internal talk is a little tougher than you missed the playoffs this year. You need to confront the brutal facts that we haven’t had a good year in terms of profitability. And if you go back, since we’ve been a public company, we’ve never had a return on assets less than 1.5% until this year. And so, Catherine, right in front of you asked about what levers we could pull? We have levers that we can and we’ll pull because this organization doesn’t miss the playoffs.

We do not — we also don’t like — I tell them, unless we’re in the top quartile, then it’s not acceptable performance. And so, now to a couple of specifics, mortgage has been a great contributor for us. You might have to go back to 2020 when we had $105 million contribution for mortgage. And so, it’s been a great contributor for us, it’s been an important additive for us. We do not have to have a mortgage and we’re very specific, you’ll notice a lot, we talked about the Bank segment a lot. That Bank segment actually had a pretty good year. And if you look at some of the numbers on the Bank segment, again, a pretty good year there. And we would be certainly well into the top half of our peer group, probably top quartile of our peer group the bank stand-alone. We had a significant more than a $0.20 EPS — closer to between $0.20 and $0.30 impact, $0.30 impact of mortgage negative this year. And we’ve made some changes there and we’ll continue to make a few more. So, we don’t have to have a mortgage to be that 1.5% ROA, but with it we expect to be actually higher than that. So, that’s the way that we view it.

Brett Rabatin — Hovde Group — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

Yeah, just — Michael, I’ll let you comment. I’ll make a couple of comments. So, we had some Federal Home Loan Bank borrowings actually $540 million at the end of the third quarter. We paid that down significantly by the end of the year. We subsequently by the way paid it off, and so it’s zero today. That’s pushed the end of the year. And so, we expect to — we have always funded our balance sheet through customer deposits and we intend to continue to do that.

On the public funds, they usually actually stay pretty robust through the first quarter. And so, it will be late second quarter when they start to pay down some and they’ll pay down into the third quarter, but then start funding up usually at the end of the year. And so, that’s the cycle we see and we manage around that. Michael is saying, nice pick up. [Phonetic]

Brett Rabatin — Hovde Group — Analyst

Okay. Yeah, that’s a great color. Appreciate it.

Christopher T. Holmes — President and Chief Executive Officer

All right.

Operator

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

Stephen Scouten — Piper Sandler — Analyst

Hey. Good morning, everyone.

Christopher T. Holmes — President and Chief Executive Officer

Good morning.

Michael Mettee — Chief Financial Officer

Good morning.

Stephen Scouten — Piper Sandler — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

Yeah, on the public funds first, and Stephen, I don’t have exactly how much of that is tied to an index. But I will say this, it’s a mixture, we have a mixture in there, Stephen, noninterest-bearing some indexed a little bit of time, and some that sits in a non-time instrument that is not indexed. And the bulk of it would be in the non-time not indexed as well as the non-time indexed would be the bulk of it. There’s not a lot in time, but there is a little bit and those are all negotiated over time. And frankly, we don’t — that’d be the least, we don’t have a lot of time, but there’s just a little bit so.

Michael Mettee — Chief Financial Officer

Yeah. And Stephen, on the go-forward beta, I mean the fourth quarter obviously with our deposit rate there you saw our betas accelerate significantly. That was a cycle, if you look back during February where we came to that kind of 40% range on interest-bearing and low 30%s on total deposits. Yeah, I would expect that we’ll see in that mid-40% beta range kind of as we look in ’23, but it is highly dependent on really what our peers do. We feel like we can maintain this level and recognizing deposit costs are going to go up, I will say on indexed, we don’t have a whole lot of stuff that’s indexed a 100% to any rate.

So, just as Chris mentioned, don’t have that exact number, but it’s not 100% one-to-one Fed fund goes up deposit cost goes up on an account, so it’s not a kind of that stuff. So, what is the percentage, it varies and we have certainly seen deposit costs go up expecting to incrementally move higher, but hopefully rate hike will kind of settle in here with the Fed and we get a normal operating environment.

Stephen Scouten — Piper Sandler — Analyst

Yeah. Okay. That’s helpful. And I guess, overall, I mean, if I’m listening to your comments kind of holistically, it feels like you guys think maybe you — growth maybe put you behind the curve on deposits to some degree throughout the year with really strong growth, and this quarter may have put you ahead of the curve relative to peers for the rest of ’23. Is that the right way to think about it?

Christopher T. Holmes — President and Chief Executive Officer

Well said.

Stephen Scouten — Piper Sandler — Analyst

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

Michael Mettee — Chief Financial Officer

Nothing too noticeable. I think the difference third quarter over fourth quarters is kind of existing franchise, excess taxes, well through their, that was a major piece, but it wasn’t in the third quarter, it was in the fourth quarter.

Stephen Scouten — Piper Sandler — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

Yeah, it’s total balance sheet management. If you think about it from a risk management side, the folks that we’re going to participate to are going to be friends of ours, and so we’re not going to participate in anything that’s going to create credit risk. Well, we’re never going to knowingly participate in anything that’s going to create credit risk for them. So, it’s all about balance sheet management for us, and the bulk of that would be CRE. Occasionally we can do some construction. Construction is harder to do a participation on, because it’s loans, withdrawals against it, and it’s just a little more work on the participation side versus CRE. And we’re usually participating with either peers that are our size or one or two that are quite a bit larger than us that are good friends that we would participate with regularly, but the rest of them are smaller than us, community type banks and frankly they love it if they can get that CRE when we’re willing to sell it down.

Stephen Scouten — Piper Sandler — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

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

Stephen Scouten — Piper Sandler — Analyst

Got it. Very helpful. Thanks, guys, for all the color. I appreciate it.

Christopher T. Holmes — President and Chief Executive Officer

Thanks, Stephen.

Operator

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

Kevin Fitzsimmons — D.A. Davidson — Analyst

Hey. Good morning, guys. How are you?

Michael Mettee — Chief Financial Officer

Good morning, Kevin.

Christopher T. Holmes — President and Chief Executive Officer

We’re good, Kevin. Hope you are.

Kevin Fitzsimmons — D.A. Davidson — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

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

Kevin Fitzsimmons — D.A. Davidson — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

So, as we move forward with our budget and look at into the year, we have traditionally said we’d be 10% to 12% loan growth organically for the year. We could be a little less than that. But we certainly anticipate a healthy — some healthy loan growth during the year. We’ve been getting a good spread on that. I do think loan growth is going to get harder as we get into ’23 and so demand could become an issue with generating loan growth. Again, we’ve typically led our peers in terms of that metric and that ability to generate that. But if you look at that way, we don’t see the NIM grinding significantly below this. It could give us a little bit of range there, but we’re — as we look out in the year, we’re going to try to — we’re going to try to hold near at least where we are, again, with a little bit of flexibility — range for flexibility there.

Kevin Fitzsimmons — D.A. Davidson — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

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

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

Kevin Fitzsimmons — D.A. Davidson — Analyst

Right. Okay. All right. Thanks very much.

Christopher T. Holmes — President and Chief Executive Officer

Thanks, Kevin.

Operator

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

Feddie Strickland — Janney Montgomery Scott — Analyst

Hey. Good morning.

Christopher T. Holmes — President and Chief Executive Officer

Good morning.

Michael Mettee — Chief Financial Officer

Good morning, Feddie.

Feddie Strickland — Janney Montgomery Scott — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

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

Feddie Strickland — Janney Montgomery Scott — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

I’d say, it’s always a consideration, because — almost always, because you like to keep yourself as lean and flexible as possible. And so, we do think about assets for pledging, how much free collateral we have and that causes us, for instance, I made reference to us not keeping some public funds that required collateral because we knew we could go get the money at the same rate or cheaper from customers by increasing customer deposits. And so, we take the approach — we’d like to have as much free collateral as possible, again, because we like to be in a position to be opportunistic when opportunities present themselves. And then, one other thing and I haven’t talked about this in a long time, but back when we go back three or four years ago, we used to talk about it all the time. Our balance sheet is almost 100% direct customer funding and direct customer loans.

We utilize — we have almost no brokered CDs on the books. We have almost no — only brokered CDs and Internet deposits that we have on the books came through acquisition and are still there, and they are less than $2 million, I think. So, less than $2 million in time deposits. And so, we just don’t utilize those broker deposits or in time deposits. We use direct customer assets and direct customer funding, which again we think is how you build value in your franchise is by building customers. And so, when we think about wholesale, the TAMs that we’re tapping those channels is — actually is just to improve our profitability, not because we have to do it.

Feddie Strickland — Janney Montgomery Scott — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

Yes is the answer. So, I’d say, it comes in pockets. We’ve seen a couple of products, one particular product I guess, from some of the big banks that has some attraction to it, but that’s it from I’d say from the bigger banks. And they’re still not very reactive as you move money away from them. The regionals — and I would say, they’re — almost versus size of bank, it’s almost more profile of bank, those banks that are, I’m going to call them high performing rapidly growing banks, are really competitive on the deposit side, because they are in the same position that we are. They’re growing their franchise and they are growing their business and you can’t do that without deposits.

And so, if they’re aggressive and so I’d say, it depends more on the profile versus the size. But the other thing I would say, and this is just frustrates the heck out of us, is we see some crazy things from some small banks in some of our markets. I mean, three times a week, you know one of our markets is sending over an ad, I mean literally in an ad for folks running 5.25% of CD campaigns, folks running a 5% money market, and it will be, I’ll call it, a less than a $1 billion bank, that apparently needs the funding, but we do see quite a bit of that from small banks.

Feddie Strickland — Janney Montgomery Scott — Analyst

Interesting. I appreciate the color, guys, and thanks, again.

Christopher T. Holmes — President and Chief Executive Officer

All right. Thanks, Feddie.

Operator

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

Jennifer Demba — Truist Securities — Analyst

Thanks. Good morning, everybody.

Christopher T. Holmes — President and Chief Executive Officer

Good morning, Jennifer.

Michael Mettee — Chief Financial Officer

Good morning, Jennifer.

Jennifer Demba — Truist Securities — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

Yeah. So, I’d say, three things. Construction and CRE would be the ones that would concern you most — certain pockets of the CRE. I’d say construction, because it’s a risky asset and you can get surprised. But I’ll just go stick my head around the credit folks, Greg Bowers especially often and just to go, hey, how we’re feeling, you know, how is your day going? And so — and I ask about construction and we know our construction customers well. And so, while I think that’s probably a bigger concern for the industry and I say all the time, every bank thinks their credit is great and they’re not going to be the ones. And I always say, I’m not — I didn’t come up on the credit side or the commercial side of the banks, so I don’t say that.

That being said, I know a lot most of our big construction customers and man we’ve had them for long, long time, and we feel really good about them. So, frankly, I don’t worry about it quite as much for our portfolios, I think for the industry. I do worry about pockets of commercial real estate, because there are things that can — office can get, again we don’t have a lot of office, but I think an office space could get soft. I think it has gotten soft in places. Our residential book, again, we could have some small stuff in there on construction over other residential. But again, the big stuff we have, we feel quite good about. The other one I think about is, we — remember, we have a specialty portfolio in manufactured housing.

And so, I watch past dues on that quite a bit. I watch anything else from a non-accrual standpoint and get it performed as the gas as — we’ve been, if you go back to the acquisition of Franklin, we’ve been in that business for 14 years and before the cycles hit, they’ll go, well here’s what’s going to happen in the past dues and they’ve been calling it right. And so, past dues are up a little bit, but they’re not out of line with where they were back in 2019 or so. So, those are all the ones that I stay vigilant on.

Jennifer Demba — Truist Securities — Analyst

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

Christopher T. Holmes — President and Chief Executive Officer

Yeah, there’s a slide in the deck. And on our CRE, we got about — 23% of our CRE exposure is office-related. We don’t have any highrises in downtown Nashville, downtown Memphis or any other downtown right now, at least I don’t think we do. I don’t think we have that. We do have some smaller office buildings with really, really good clients that are sitting out there. But again, we feel pretty good about that. It’s not — we don’t have big and we don’t have pieces $250 million office buildings. We just don’t have those in our portfolio, it’s going to be again direct to a customer that we know, we originated and it’s going to be a manageable balance is what would be in that office portfolio for us.

Jennifer Demba — Truist Securities — Analyst

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

Michael Mettee — Chief Financial Officer

Hi, Jennifer. We actually have a mix between baseline and S2, it’s about a 75% baseline and 25% S2, but there’s some qualitative in there as well. The economic scenario has changed pretty rapidly there between third quarter and fourth quarter.

Jennifer Demba — Truist Securities — Analyst

Thanks so much.

Christopher T. Holmes — President and Chief Executive Officer

Yeah. And Jennifer, one thing that we haven’t touched on, I don’t think there are any questions on is, of course we did have a small — if you look at — actually, if you look at our loans with HFI, we actually had a very small provision, which would have added, again, a small amount to our ACL. We did have a negative provision release related to our unfunded commitments and those unfunded commitments, again, we’ve been managing those commitments down, particularly in the construction area. And that’s what led to the small release. And we were comfortable with that even though we’ve tried to be absolutely as conservative as we could be in managing the loan portfolio and in managing that ACL and we’ve kept it at one — it’s still at 1.44% of loans held for investment, which we again find to be quiet high actually in terms of if you look at it relative to loss experience. And so, we feel pretty good about where it sits.

Jennifer Demba — Truist Securities — Analyst

Great. Thank you.

Christopher T. Holmes — President and Chief Executive Officer

All right. Thank you.

Operator

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

Christopher T. Holmes — President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]