FB Financial Corporation (NYSE:FBK) Q3 2023 Earnings Call Transcript

FB Financial Corporation (NYSE:FBK) Q3 2023 Earnings Call Transcript October 17, 2023

Operator: Good morning and welcome to the FB Financial Corporation’s Third Quarter 2023 Earnings Conference Call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer; and Michael Mettee, Chief Financial Officer. Also joining the call for the question-and-answer section is 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 be open for questions after the presentation. During this presentation, FB Financial may make comments, which constitute forward-looking statements under the federal securities laws. Forward-looking statements are based on management’s 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.

Chris Holmes: All right. Thank you, Jason. Good morning. Thank you all for joining us on the call this morning. We always appreciate your interest in FB Financial. For the quarter, we reported EPS of $0.41 per share and an adjusted EPS of $0.71. We’ve grown our tangible book value per share excluding the impact of AOCI at a compound annual growth rate of 14% since our IPO. In recent quarterly calls, I’ve discussed priorities of maintaining the strength of the balance sheet and improving internal processes and procedures with the goals of efficiency and scalability. We’ve made significant progress on both of those priorities. First, let me talk about the balance sheet. Our capital positions are strong across the board, including a CET1 ratio of 11.8%, and a tangible common equity to tangible assets ratio of 9.2%.

And in doing that, we haven’t reclassified any of our available for sale securities as held-to-maturity. Our capital and reserve levels are prepared for difficult times, but we don’t expect economic conditions to become as severe as our preparation allows for. Our liquidity position, which is detailed on page 11 of the financial supplement that we provide each quarter, continues to be strong. We keep our securities portfolio plus our loans as a percent of deposits near or under 100% to keep from overleveraging our deposit base. If you use that metric to compare banks, you’ll find that we have one of the lowest levels of leverage — often the lowest on our deposit base among our peers. When you consider that our deposit base is quite granular and we make very little use of brokered and internet deposits, this keeps us in a strong liquidity position.

Our credit portfolio continues to perform well, although we did move one C&I loan to non-accrual in the quarter. Outside of that credit, we haven’t seen significant changes quarter to quarter. Again, we’re positioned very well with an ACL of 1.57% of our HFI loan portfolio. We also reduced our CRE and construction exposure over the last five quarters. CREs within our long-term tolerance level and construction will be there by the end of the year. And so, as we enter the fourth quarter, the balance sheet feels well positioned. We built some momentum there and we’re excited about the growth opportunities that lie ahead of us. From an operational perspective, we feel as strong as we ever have and we’re focused on improving profitability and returns.

In the late third and early fourth quarters, we executed on pieces of two broader initiatives to both increase revenue and reduce expenses. While actions were taken in the third quarter, the majority of the benefit will be felt in the fourth quarter and beyond. On the revenue side, as you’ve seen in the earnings release, we executed a securities trade that will lead to improvement in net interest income in Q4 and in 2024. Trade also resulted in a pre-tax loss of $14.2 million in the third quarter. I’m going to let Michael discuss our strategy there in more detail, but we continue to look for ways to continue to enhance our profitability. The margin, net interest margin has been difficult to forecast over the last several quarters, not only for ourselves, but for others as well based on the discussions we’ve had with our peers.

The margin’s becoming somewhat less volatile because the velocity of change in the variables has slowed. Models have been tweaked and in some cases overhauled and confidence in the forecast is increasing. Funding costs will continue to increase as long as we remain in this rate environment, but the rate of increase on our deposits has slowed materially, and we expect the NIM to remain in the same relative band that we experienced in the last two quarters for the next couple of quarters. Again, Michael is going to provide some deeper analysis in his commentary. On expenses, and significantly we reduced our run rate on core banking non-interest expenses by $15 million. The realization of most of those expense savings begins in late October, so we expect a couple of months of benefit in Q4.

By mid-January, we anticipate achieving an additional $5 million in annualized expense reduction, so $20 million annualized in total. We currently expect core banking non-interest expenses of $255 million to $260 million in 2024, which compares to third quarter core banking expenses of $66.2 million or $265 million annualized. M&A conversations seem to be picking up across the industry, and we’re increasingly receiving inbound calls, asking to engage in those discussions. As we’ve said before, we don’t believe in acquiring for the sake of growing our asset size, but there are some banks across our geography that we respect and believe would be great cultural and strategic fits. Following our internal efficiency and scalability initiatives of the last couple of years, we’re very confident in our ability to effectively execute on M&A, should the right opportunities arise.

So, to summarize before handing the call over to Michael, we spent time and resources focused on internal improvements and enhancing our balance sheet. We made ourselves a better place to bank for our customers, a better place to work for our associates and in that process we’ve improved our operational efficiency. At the same time, we built our capital, maintained strong reserves and put ourselves in a great liquidity position. Increasing profitability and returns are in focus for us, and we’re ready to execute on attractive opportunities that may come our way. Now, I’m going to let Michael go into our financial results in a little more detail.

Michael Mettee: Thank you, Chris, and good morning, everyone. It’s a bit of a noisy quarter due to our securities trade and the charges related to our efficiency initiatives. So I will take a minute to walk through this quarter’s core earnings. We reported net interest income of $100.9 million, reported non-interest income was $8 million. Adjusting for the $4.2 million loss on sale of securities, $115,000 gain on a sale of OREO, we had core non-interest income of $22.1 million. Of that $22.1 million, $10.1 million came from banking. We reported non-interest expense of $83 million and adjusting for $4.8 million in charges related to the efficiency initiatives, we had core non-interest expense of $78.2 million. Of that $78.2 million, $66.2 million came from banking.

So we delivered consolidated core pre-tax, pre-provision earnings of $45 million and banking core pre-tax, pre-provision earnings of $44.8 million. Going into more detail on net interest income and our margin, I’ll touch first on our securities trade. We sold $77 million of securities at a $14.2 million pretax loss at the end of September. Given the timing, we do not see any real benefits in net interest income in the third quarter from that transaction. The trade should deliver approximately $4 million in additional net interest income annually. At this point, we are continually examining how we can increase our yield on our liquidity. We would be comfortable with another loss in the $10 million to $20 million range, if the trade met our parameters on earn-back, expected duration, earnings accretion and capital dilution.

We wouldn’t do a trade that would not meet our parameters, as there will be many options to deploy capital over the next couple of quarters. Next, our contractual yield on loans increased by 16 basis points during the quarter to 6.32%. For the month of September, our contractual yield on loans held was 6.35%. Yield on new commitments for the month of September were coming in a little over 8%. Remember, 48% of our loan portfolio remains floating rate, which leaves $4.9 billion in fixed rate loans. Of that $4.9 billion of fixed rate loans, we have about $200 million maturing in the fourth quarter at a yield of about 6.7%, $300 million maturing in the first half of 2024 with a yield of 6.05%, and about $175 million maturing in the second half ‘24 with a yield of 5.65%, so about $680 million maturing through year-end 2024, at a weighted average yield of about 6.13%.

Cost of deposits continued to rise. But as Chris mentioned, we have seen that rate of increase moderate recently. For the quarter, our cost of interest-bearing deposits increased by 27 basis points to 3.33%. For the month of July, August and September, our cost of interest-bearing deposits was 3.2%, 3.43% and 3.35%, respectively. Incremental interest-bearing deposits for the month of September were coming out of the balance sheet at around 3.6%. As a reminder, we’ll have public funds accounts begin to build in the fourth quarter. We would expect $400 million to $500 million to come back out of the balance sheet in the fourth quarter with a cost of a little over 5%. Those gives and takes left our margin for the quarter at 3.42%, effectively flat with the second quarter.

With all the moving pieces that I laid out above, we anticipate margin being in the 3.30% to 3.40% range for the next couple of quarters. Moving to non-interest income. Non-mortgage, non-interest income continues to perform in the $10 million to $11 million range and we expect that to remain in the band plus or minus the next few quarters. Our non-interest expense also needs more explanation that is typical at this quarter. At this point, we’ve taken $15 million in annual expenses out of our run rate, most of which occurred in September and early October. We’ve also acted on an additional $5 million in annual expense reduction that will be realized by the end of January. These reductions have come through a combination of a voluntary early retirement program and some position eliminations, reduction of redundant processes, limiting utilization of professional services and contract renegotiations and cancellations.

Most of the expense reductions still to be realized will come from a closure of seven branches, which we have communicated internally and to customers. For the fourth quarter, we expect banking non-interest expense to be in the $64 million to $66 million range and for 2024, we anticipate annual banking non-interest expenses of $255 million to $260 million. To achieve this reduction, we took a $4.8 million in charges in the third quarter in connection with the early retirement program and related severance costs. We also took $1.4 million in charges related to this project in the second quarter. So we’re at about $6.2 million so far. We anticipate an additional $5 million to $7 million in charges through the fourth and first quarters as we continue our focus on efficiency and profitability.

On the ACL and credit quality, our ACL on loans held for investment increased by 6 basis points for the quarter, or a $5.5 million increase in the allowance. Much of that $5.5 million was related to specific reserve on the credit that Chris mentioned earlier. That credit was also almost entirely responsible for our $10.4 million increase in non-performing loans held for investment this quarter. Excluding this credit, our ACL to loans held for investment would have remained roughly flat as economic indicators remained in line with the prior quarter. I’ll close by speaking to the progress that we’ve made in the past year on our recent priorities of balance sheet strength through liquidity and capital management. In the past 12 months, we’ve increased our TCE to tangible assets by 60 basis points and total risk-based capital by 110 basis points.

Our loan to deposits have declined from 91% to 87%. Our construction and development bank level Tier 1 capital plus allowance has declined from 124% to 104%, and we’ll continue to move lower and closer to our long-term operating target for that ratio of 85% to 90%. On balance sheet liquidity to tangible assets has increased from 7.4% 12 months ago to 11% today, and we have grown our available sources of liquidity from $6.2 billion in the third quarter of 2022 to $6.8 billion today. As Chris said, we feel very well prepared for any economic downturn. And our current view is that any downturn we experience will be milder than what we have prepared for. I’ll now turn the call back over to Chris.

Chris Holmes: Thanks Michael for that color. And to summarize before going into questions, our balance sheet’s situated in the position of strength, we’re focused on improving profitability and returns. We’re excited about the future and from a financial perspective, we feel very prepared to execute on any opportunities that may come our way, so both financially and operationally. So that concludes our prepared remarks. Again, thank you for your interest. And operator, we’ll open up the line for questions.

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Q&A Session

Operator: We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Stephen Scouten from Piper Sandler.

Stephen Scouten: I wanted to get some more information on the security sale. I think last quarter, you had said kind of bands you were looking at was 9 to 27 months on the earn-back. It looks like this is a little higher than that. Kind of curious a couple of things, what sort of securities did you reinvest in it that 6.43% yield? And maybe what did you sell that kind of precipitated that longer earn-back where — was it a longer duration portion of your securities book. That would be helpful.

Michael Mettee: Yes, it was a little bit longer. It’s a little over a three-year earn-back. As we went through the process, we thought about even if rates move down 300 basis points, these securities we sold which are mostly mortgages and some CMOs would be with us in any rate environment. So that has extended out so far that it just made sense to kind of get rid of the dogs, as I’m calling them internally. Reinvestment of some government agency stuff, FHLB type paper and so that’s where the yield came from, although we are seeing current market securities all in that range. It’s all well within our guidelines and duration, not any extra credit risk there.

Stephen Scouten: Okay. That’s helpful. And then maybe thinking about just that one C&I credit that you noted that kind of encapsulates a lot of the move into credit metrics. Any additional information you can give us there, kind of what sector that is and if there’s any lingering issues along the same lines and then the other similar sectors?

Chris Holmes: Sure, Stephen. It’s Chris. And Travis Edmondson, our Chief Banking Officer is in here with us as well. So let me just make a comment. It’s a C&I credit you’re familiar with — there was a bankruptcy that reportedly was Mountain Express. We are not involved in that credit, as you guys, I think know. We were not involved in that at all. We do have a client of which that bankruptcy, they — was a vendor to that client. And so that was the one C&I credit, roughly a $10 million credit for us. And it is actually pretty well secured and has guarantors on it as just about all of our credits of that type do. But once it goes into bankruptcy, we’re fairly conservative, and this is not, but there’s a major vendor that is, in bankruptcy. And so, we are fairly conservative with how we handle those. And so, we went ahead and just put it on nonaccrual and took some extra reserve on it, even though we are pretty optimistic on it.

Stephen Scouten: Got it. Okay. And I know — I think Michael said no real changes in your ACL kind of mindset and underlying economic scenarios, but obviously, you took the reserve up, even in light of only 2 basis points of charge-offs. So, it feels like most of that is really just conservatism on your end. And you never know what you don’t know is coming down the pipe. Is that the right way to think about it, or would we expect additional reserve build moving forward?

Michael Mettee: Yes.

Chris Holmes: Go ahead, Mike.

Michael Mettee: Well, I think we’re well positioned, Stephen. And I think this range, it didn’t move up because of the credit we’re talking about individually evaluated loan. But I think you’ll sort of stay in this range. We feel comfortable with where we are. And like I said, we haven’t seen deterioration in the portfolio. And so, right now, that $155 million range where we’ve been is likely where we’ll stay.

Chris Holmes: Stephen, I would just add, and Michael and I both alluded to this in comments, both our capital levels and reserve, we’re prepared for difficulties moving forward. We don’t really actually expect things to get that difficult. But our preparation allows for things to get more difficult than we anticipate they will.

Operator: The next question comes from Catherine Mealor from KBW. Please go ahead.

Catherine Mealor: I just wanted to ask about your outlook for balance sheet growth. You’ve been really conservative on your outlook for loan growth over the past couple of quarters. And you saw loans pull back again this quarter. Just curious how many more quarters your gut would be that we’ll see a decline in loan balances before we kind of hit that inflection and start to see growth again?

Chris Holmes: Yes. So, Catherine, just a couple of comments. You’re right. We have been conservative on the loan growth side. And we’ve said right now for us, and I talked about — when I was talking about the liquidity, not overleveraging our deposit base. And so that’s a real governor for us. And so, we have been conservative on that side. We still see opportunities, and we still see some growth. But remember, we’re also taking balances down, particularly in our construction portfolio, and we’re not growing our overall CRE portfolio. So, when you put those dynamics in there, it’s going to probably be muted for another quarter, maybe two, but we do expect some growth in ‘24. And so — and again, I’ll come on C&I, and we’ll be in a different position.

Also, it also depends on economic circumstances. And we’d like to see clear through interest rate increases and we’d like to see clear through not seeing significant economic deterioration into some kind of thrown out recession. So, Travis, is that — do you have anything to add to that?

Travis Edmondson: First off, good morning, Catherine. Nice to talk to you. Nothing much to add to that. I think you’re spot on. We still have a lot of opportunities in our markets. We’re in a lot of growth markets, Birmingham, Huntsville, Memphis, Knoxville, and the list goes on and on. It’s more of a self-imposed governor at this point. And when we decide that the economies looks better for us, where we can see more clearly into the future, we will turn on some more growth initiatives internally.

Catherine Mealor: Are you seeing opportunities on the C&I side? It seems like your — you talked about construction and CRE that you’re really not lending in right now. Can you just kind of talk generally about what the landscape is in C&I lending today?