FB Financial Corporation (NYSE:FBK) Q1 2024 Earnings Call Transcript

FB Financial Corporation (NYSE:FBK) Q1 2024 Earnings Call Transcript April 16, 2024

FB Financial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the FB Financial Corporation’s First Quarter 2024 Earnings Conference Call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer; Mr. Michael Mettee, Chief Financial Officer. Also joining the call for the question-and-answer session is Mr. Travis Edmondson, Chief Banking Officer. Please note FB Financial’s earnings release, supplemental financial information and this morning’s presentation are available on the investor relations page of the company’s website at www.firstbankonline.com and on the Securities and Exchange Commission’s website at www.sec.gov. Today’s call is being recorded and will be available for replay on FB Financial’s website approximately an hour after the conclusion of the call.

At this time, all participants have been placed in a listen-only mode. The call will open for questions after the presentation. During the presentation, FB Financial may make comments which constitute forward-looking statements under federal securities laws. Forward-looking statements are based on management’s current expectations and assumptions and are subject to risks and uncertainties. Other factors may cause actual results to differ materially 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 place 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 reconciliation of the non-GAAP measures to comparable GAAP measures is available in the 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 Mr. Chris Holmes, FB Financial’s President and CEO. Please go ahead, sir.

Christopher Holmes : All right. Thank you, Chuck. Good morning, everybody, and thank you for joining us this morning. We always appreciate your interest in FB Financial. For the quarter, we reported EPS of $0.59 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 13.5% since our IPO. We’re pleased with our results for this quarter and believe that they show strong progress towards our goal of peer-leading financial performance. As we reported an adjusted return on average assets of 1.27% and adjusted PPNR return on average assets of 1.63% and grew adjusted earnings per share by 10% relative to the fourth quarter of 2023 and 12% relative to the year ago quarter.

When I provided my outlook for 2024 on our prior call, I noted that the bank was in an enviable position due to our strong balance sheet, the operating foundation that we spent the past two years reinforcing, and the earnings momentum that we were beginning to experience. I’m even more convicted on those points after our first quarter. Our capital ratios continue to improve. We now have a tangible common equity to tangible assets ratio of 10% and a total risk based capital ratio of 15%. The mix of our loan portfolio is trending towards optimal for a bank of our size operating in our growing markets. With a construction and development concentration of 83% and a CRE concentration of 255%, both of those as a percent of risk-based capital. Operationally, we’re performing well and there’s a cohesiveness across the team, as more direct communication lines have been established between our customer facing and back office associates.

The efficiencies of improved processes and procedures are also beginning to come through as our core efficiency ratio in the first quarter improved by over 500 basis points from the first quarter of last year. And finally, on our earnings momentum, we saw broad-based positive trends this quarter for net interest income — no, I’m sorry, net interest margin, non-interest income, and non-interest expense. On the net interest margin, our increase in the contractual yield on loans held for investment outpaced our increase in the cost of interest-bearing deposits for the second quarter in a row. And our net interest margin was steady at 3.42% versus last quarter’s 3.46%. For fee income, mortgage had a solid quarter with a pre-tax contribution of $3.1 million, which is a testament to our expense initiatives, because that contribution was on approximately the same amount of revenue as the first quarter of last year when we had only a $262,000 contribution.

The $11 million in fee income that our banking segment produced in the first quarter was also strong, and driven by the efficiencies of our operating platform that I mentioned before, core non-interest expense was down 3.3% from the fourth quarter and down over 10% year-over-year. All that led to growth in adjusted pre-provision net revenue of 12.8% compared to the fourth quarter of 2023. So a strong quarter of operating results that while not at our historical levels of profitability is trending in the direction that we wanted to. As we look to the remainder of the year, we’ll be focused on how we can effectively deploy the capital that we’ve built in order to create long-term shareholder value. As we seek to deploy that capital, we always target organic growth first, which was one ingredient that was missing from our performance this quarter.

While we’re not thrilled with the $120 million contracts — contraction in loan balances that we experienced during the quarter. We’re comfortable with it as it was driven by a $128 million decline in construction lending at a $49 million payoff — one of our very few SNC relationships, as our customer was acquired, which by the way was a strong relationship with the bank. As a reminder, we have a bias against SNC lending, but this was one of those very few that meets our criteria of relationship-based in geography with partners that we know. Excluding those two circumstances, we experienced slight growth on the remainder of our portfolio of around 2% annualized. We’re targeting mid-single-digit organic loan growth for the year, as we continue to feel confident about the economic health of our footprint, and we intend to return to our historical 10% to 12% organic growth target in 2025.

To that end, we’ve hired a handful of seasoned revenue producers across our footprint in the first quarter, and we continually look for additive team members. Given our size and excess capital, our building presence and market share in our metropolitan markets across our footprint, our local authority operating model headed by strong leadership teams, and our long-term prospects, we’re delivering a strong pitch to relationship managers to come join our team. We expect to continue to moderate our construction and CRE concentration ratios and focus more on operating accounts C&I relationships. We intend to operate in the 75% to 85% range on our C&D concentration and the CRE concentration of around 250% or less and will not become over-concentrated in those buckets in the name of growth.

We have strong commercial capabilities and a very strong treasury management team and will continue to benefit from the influx of corporate relocations that we’re experiencing across our footprint, in addition to taking [share] (ph) from some larger competitors that continue to be disrupted by M&A and internal changes. Our second priority for deployment of capital is strategic M&A. We’re well-positioned as a potential partner for smaller banks in and around our footprint. We have significant excess capital that should allow us to absorb the interest rate mark prevalent in today’s M&A. And we have very strong risk compliance and operations, functions that we believe will be able to navigate the current regulatory and operating environment. Our third priority for capital deployment is improving our balance sheet and earnings through capital optimization transactions.

Late in the quarter, you likely saw Michael and his team executed one such transaction as we sold just over $200 million of securities and reinvested the proceeds for a net pickup in spread of 3.8%. With an annual pre-tax income impact of just under $8 million, that’s real money that comes with no risk of integration and no further execution risk. And we would allocate capital to similar transactions. Additionally, we recently had our $100 million repurchase plan, stock repurchase plan, re-approved in order to have that arrow in our quiver also — and we purchased around $4.8 million worth of stock in this recent — in this current quarter. So to summarize, I’m proud of our team for the results this quarter. Our profitability metrics are trending in the right direction, I feel strongly that we have the team, the platform, and the footprint to be able to continue to build on this foundation.

Now I’m going to turn it over to Michael to give a little more detail on the financial results.

Michael M. Mettee : Thank you, Chris, and good morning, everyone. I’ll first take a minute to walk through this quarter’s core earnings. We reported net interest income of $99.5 million, reported non-interest income was $8 million, Adjusting for the loss of $16.2 million related to our securities restructuring trade and about $600,000 on the sale of OREO. Core non-interest income was $23.6 million, of which $11 million came from banking. We reported non-interest expense of $72.4 million and adjusting for $0.5 million of FDIC special assessment expense. Core non-interest expense was $71.9 million, $59.8 million of which came from Banking. Altogether, adjusted pre-provision net revenue earnings were $51.2 million, and banking segment adjusted pre-provision net revenue earnings were $48.2 million.

Going into more detail on the margin at 3.42%, our net interest margin held relatively flat with the prior quarter’s 3.46%. Contractual yield on loans held for investment increased by 12 basis points, but those gains were offset by a decline in loan fees of 8 basis points, due to a methodology update of our loan fee deferrals. Going forward, we anticipate loan fees remaining in the same relative band and having less quarterly volatility than we have seen in the past. Meanwhile, our cost of interest-bearing deposits increased by 9 basis points in the quarter. For the month of March, our contractual yield on loans held for investment was about 6.55% and yield on new commitments in March were coming in around 8.3%. As a reminder, 49% of our loan portfolio remains floating rate with $2 billion of those variable rate loans repricing immediately with the move-in rates and $1.8 billion of those loans repricing within 90 days of a change in interest rates.

Of our $4.7 billion in fixed rate loans, we have $478 million maturing over the remainder of 2024 with a yield of 6.73%. For the month of March, cost of interest bearing deposits was 3.5% versus 3.49% for the quarter. As I mentioned on last quarter’s call, we now have a significant amount of index deposits that will reprice immediately with a change in the Fed Funds Target rate. Those balances stood at $2.9 billion as of the end of the first quarter. As Chris mentioned, we are focused on building customer deposits and are continuing to target operating accounts. We also anticipate that public funds will begin to build seasonally over the course of the second quarter and into the third quarter. As we made a focused effort to minimize our reliance on public funds over the past two years, that build will be less dramatic for us than it has been in the years past.

And we anticipate our public funds topping out the $1.7 billion to $1.8 billion range in the second and third quarters, as compared to the $1.6 billion that we had on the balance sheet at the end of the first quarter. On the securities portfolio, we sold $208 million of securities with a yield of 2.14% and reinvested the proceeds of 5.94%. And we estimate the earn-back was just a little over two years. That transaction occurred in the second half of March, so we saw very little benefit from that trade in the first quarter. We’ll continue to look for profitable deployments of capital in order to improve earnings, but without sacrificing longer-term growth, intangible book value per share. With all of those moving pieces, we expect the margin to stay relatively flat over the coming quarters in the absence of any rate cuts, as repricing loan yields and rising deposit costs continue to mostly offset each other.

Moving to non-interest income, non-mortgage non-interest income continues to perform in the $10 million to $11 million range and we’d expect it to remain in that band plus or minus for the remainder of the year. Mortgage had a really strong quarter with a total pre-tax contribution of $3.1 million, which we were very pleased with. For the remainder of the year, we would expect quarterly contributions in the $1 million to $2 million range for mortgage, depending on seasonal activity and interest rate environment in any given quarter. Our non-interest expense continued to see the benefit of operational changes made over the past two years. And the core banking segment expense was $59.8 million for the quarter as compared to $62.6 million in the fourth quarter of 2023 and $66.8 million in the first quarter of 2023.

At this point, we’d bring our prior guidance for banking segment expenses down to $250 million to $255 million from our prior range of $255 million to $260 million. On the allowance for credit losses and credit quality, credit was mostly a non-event again this quarter as we experienced 2 basis points of charge-offs. As part of the operational improvements that we’ve made over the past couple years, our internal analysis on our credit portfolio continued to improve. As such, while our non-performers have ticked up over the past year, and while we’re paying close attention there, we feel reasonably confident with the quality of that portfolio, and we feel comfortable that we are very well-reserved. Speaking more to the allowance, our ACL to loans held for investment increased a further 3 basis points during the quarter to 1.63%.

But our provision expense was only $782,000 as continued decline in unfunded commitments led to $1.1 million release in reserves on those unfunded commitments. On capital, as Chris mentioned, we have developed very strong capital ratios with TCE to tangible assets of 10% and common equity tier 1 ratio that is now over 12.5%. We continue to balance, retaining excess capital for organic and strategic growth against optimizing near-term earnings through balance sheet restructuring with the goal of building long-term shareholder value through strong and consistent CAGRs for both earnings per share and tangible book values per share. With that I’ll turn the call back over to Chris.

Christopher Holmes : All right, thank you Michael. To conclude, we’re proud of our team for a strong start to the year and for the company that they’re building. So that concludes our prepared remarks. Again, thank you to everybody for your interest. And operator, at this point, we’d like to open up the line for questions.

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Q&A Session

Operator: Yes, sir. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Feddie Strickland with Janney Montgomery Scott. Please go ahead.

Feddie Strickland: Hey, good morning, guys.

Christopher Holmes: Good morning, Feddie.

Feddie Strickland: Just want to sort of clarify on the NIM guidance. Are you expecting that to remain flat, even including that securities restructure impact?

Christopher Holmes: Yeah. I mean – Feddie, we think it’s going to stay in that same range. I mean, you have a little bit of public funds coming in, which is a little bit of an offset, but that’s kind of [3.40%, 3.45%] (ph) range.

Feddie Strickland: Got it. And also on the funding side, I know there was a jump in other borrowings linked quarter, did you guys tap bank term funding before it closed or was that something else?

Christopher Holmes: Yeah, we actually did that on the last couple days of 2023. So you didn’t see it in your — in the average balances for the fourth quarter. But that’s actually with that $130 million-ish for the first quarter. And yes, it was done before it was [capped] (ph).

Feddie Strickland: Got it. Just one last question for me, and I’ll step back. I know there’s been some weakness in equipment finance, particularly over-the-road trucking at some of your peers. Am I correct in assuming you have some of that in your trucking equipment finance, maybe in that transportation segment that you break out in the deck? Can you speak to whether you’re seeing any weakness there?

Christopher Holmes: Yes. And I will – Travis — I’m going to let you comment on — make a comment. And then we do have two, three trucking companies that are sizable but long established companies, let’s say, privately owned companies and no is frankly the answer. We haven’t seen weaknesses in those clients. We don’t do any just long-term equipment leasing or we don’t do equipment leasing in that space, but we do have some trucking clients.

Travis Edmondson: Yeah, that’s correct, Chris. I mean, we have some well-established clients that we’ve been through several cycles with them. The trucking industry is obviously one that is up and down. But here recently with our trucking clients, we talked actually about this earlier this year. Very good reports from them, and we see no issues.

Feddie Strickland: Understood. That’s helpful. Thanks to the color guys, and congrats on a great quarter.

Christopher Holmes: Yeah, thank you.

Michael M. Mettee: All right, thanks, Feddie.

Operator: The next question will come from Brett Rabatin with Hovde Group. Please go ahead.

Brett Rabatin: Hey, guys. Good morning.

Christopher Holmes: Good morning, Brett.

Michael M. Mettee: Good morning, Brett.

Brett Rabatin: I wanted to start with the loan growth guidance of mid-single digit this year. And it’s obviously for ‘25, it’s low double digit. Can you guys talk about how much more you expect the construction portfolio to come in here? And then, you know, if you’re going to have mid-single digit growth in construction abatement, does that mean that loan growth this year could also be on a core basis, closer to your low double digit number?

Christopher Holmes: Yes so first off on the concentration, we’re at 83% of risk-based capital, and we really would make a good spot for us to operate is probably 75% to 85%, something like that. You know, sometimes — and I would support that this way, sometimes you could see maybe, especially even in this environment, things going lower, than some may want to go lower than that. If you look at our geography, you know, you actually live in our geography, so you know it well. And the number of long-term clients that we have and the — in-migration that continues in our geography, we feel pretty good at that level. Same way on the just commercial real estate concentration. We think that 250% is a pretty fair and risk thoughtful rate concentration level for us and so that’s where we — those are targeted, will be plus or minus on those, but that’s kind of the places that we target. Does that answer your question, Brett?

Brett Rabatin: Yeah, to some extent that’s helpful. So — if I’m thinking about loan demand, I think we talked about it, maybe some folks are waiting for rates, what have you, and so a lot of folks are saying demand is not as strong as maybe it might end up. Are you expecting demand to pick up that drives loan growth from here? What are you expecting in terms of loan demand and you guys being selective? I saw we get — we’re going to get a new highest tower downtown with a big new project.

Christopher Holmes: Yeah, we’re not on that one just for the record.

Brett Rabatin: I know who’s on that one. Yeah, it’s a big project.

Christopher Holmes: We’re not on that one just for the record. And so, yes, demand is softer. I’d say generally across the board it’s softer. It hasn’t evaporated, but it’s softer. And so when we look out and we go mid-single digits for the year, you know, there’s a little bit of hope in that, I guess is the way I would put it because we do see softer demand. But again, I’m kind of repeating myself here, but we still do see some demand. And it comes from all parts of our footprint, not just Middle Tennessee, but we’re seeing it in North Georgia, we’re seeing it in Alabama, we’re seeing it in East Tennessee. So we’re seeing it in all those places. We have a steady flow from West Tennessee, which is a legacy footprint. And so that’s kind of a flat at this point. Travis, would you add any color on that?

Travis Edmondson: Yeah. I mean, I think that demand has softened compared to 2022-ish, when everybody was growing gangbusters. We still see a lot of opportunities, but we’ve continued to be disciplined in going after relationships and not transactions. And so that’s part of it as well. And we will continue to do that. We will have some more runoff on ADC, but we’re getting to the point now on ADC and CRE where we’ll start replacing it with more relationships. So we just hope that the contrary from that is not as significant, as it has been the last few quarters.

Brett Rabatin: Okay. That’s helpful. And then my other question, Michael, was just around the loan fees and the change there. How much did that dollar-wise or margin impact the quarter relative to 4Q?

Michael M. Mettee:

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Brett Rabatin: Okay. Okay. That’s helpful. Thanks for all the color guys.

Operator: The next question will come from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor: Thanks. I want to ask on expenses. I know that you’ve lowered the expense target for the core bank, Michael, just by a little bit to $250 million to $255 million. But I know that Chris, you also mentioned that you had hired a few revenue producers this quarter. And so just kind of curious on the give and take there, is all of your new hires fully reflected in the guide that Michael gave. And maybe talk a little bit about places that you’re cutting and how you’re able to cut expenses while you’re still ramping up hiring. Thanks.

Christopher Holmes: Yes. So as we — last year, as we were planning – and we – as you know, we underwent some fairly significant expense reductions last year, but we also planned through that for some hires on the revenue side and some hire — in some investments. And so it was a thoughtful cut process. Now I will add to that though, Catherine, we say to our leadership team and to our managers, we say when we have a chance to get a, bankers in our footprint, we’ll take them, — we’ll do it regardless of the expense environment. We’ll take them any time. And so, you know, that could adjust it some. Let’s say we got a chance to hire 50 this quarter, we hire 50 and our expenses would be outside of that. I don’t think we’re going to get the chance to hire 50, but we could get the chance to hire four or five, and that might impact us a little bit, but it wouldn’t have a huge impact because we’ve got some of that built into our plan.

Catherine Mealor: Okay, great. And then — so then maybe as a follow-up to just the deferred fees conversation a minute ago, it was really the main change in the expense guide related to that fee change, Michael, more so than anything else?

Michael M. Mettee: So partially, I’d say – it was a quick math, right? If you go down, it’s probably 50% of it or so was the fee change. And then part of it is, we said this last quarter, and you’ve known us for a while, right, we’re going to deliver and then talk about it. And so we continue to try to be mindful of those expense numbers and getting better about it every day through the management process. So a little bit of it’s over delivery and then a little bit of it’s the loan deferral change, fee deferral.

Catherine Mealor: Okay, perfect, great, that’s helpful. And maybe just on the buyback, it was great to see you buy back a little bit this quarter. I know, you said it’s organic growth first and then buyback and maybe M&A’s after that when that comes back, but is it fair to think as we move through the rest of the year, as organic growth remains slow that you’ll continue to be active in the buyback really kind of until growth comes back or how do we think about that balance?

Christopher Holmes: Yeah, I would, you know, part of the [buying] (ph) back is a function of price, and when you’re really — when you feel like your stock is discounted, you feel like it’s a good buy, And so I’d say, that’s an impacting factor. And then M&A would probably be the other impacting factor. Otherwise, we’ll be active to the extent that we have an approval. And so that – so we’ll continue to buy back as long as the stock continues to be discounted in their opinion. We always look at earn back on that capital those kinds of things and we stay within certain parameters.

Catherine Mealor: Great okay, thank you.

Christopher Holmes: Catherine I’ll say one other thing on the expense side that just to kind of put maybe an exclamation point on one of Michael’s comments, especially when it comes to things like expense initiatives. We don’t generally [tattle] (ph) them on the front end and we don’t generally tattle them on the back end. But when we — last quarter in our call, we said we had taken $20 million out of the run rate. Again, you’ve known us a long time, so you ought to know that it’s going to be $20 million or more, whenever we say on a call that it’s going to be $20 million, that means — we’re confident we’ve got at least that. And so that’s partly why we gave a little additional guidance this quarter.

Catherine Mealor: That makes sense. And yes, you’re right on that. All right, thank you, Chris.

Christopher Holmes: All right, thanks.

Operator: The next question will come from Stephen Scouten with Piper Sandler. Please go ahead.

Stephen Scouten: Hey, good morning, everyone.

Christopher Holmes: Good morning, Stephen.

Stephen Scouten: Chris, I want to remember, when you talk about organic growth first, that does, if I remember correctly, include kind of these new hires and any team lift-outs and such that might occur. And so I want to confirm that — and then kind of, if you could talk about how you’re seeing that versus M&A opportunities today given the rate environment, earn back on securities and such and kind of how you think that might play out through this year and maybe even into ‘25?

Christopher Holmes: Yeah. So — on the, we do — when we’re talking about organic growth, yeah, part of what we’re thinking about there is bringing on new people and new teams and the opportunities there in the capital that, that takes. When you bring those on, of course you bring on the expense first, but if you — if it pays off in the way that you always anticipate it will whenever you make those moves, it’s a very good return on capital, relative to just about anything we can do. And so that’s always what we are looking to do. And we feel like there’s some tailwinds. We’ve got some tailwinds when it comes to that. Right now, we’re kind of where the company sits from a size standpoint, from some other disruption in the market, from our value proposition for associates that are looking for good long-term places to be.