FB Financial Corporation (NYSE:FBK) Q4 2022 Earnings Call Transcript

FB Financial Corporation (NYSE:FBK) Q4 2022 Earnings Call Transcript January 17, 2023

Operator: Good morning and welcome to FB Financial Corporation’s Fourth Quarter 2022 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer; and Michael Mettee, Chief Financial Officer. Both will be available for questions and answers. Please note FB Financial’s earnings release, supplemental financial information, and this morning’s presentation are available on the Investor Relations page of the company’s website at www.firstbankonline.com and on the Securities and Exchange Commission’s website at www.sec.gov. Today’s call is being recorded and will be available for replay on FB Financial’s website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode.

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The call will be open for questions after the presentation. During this presentation, FB Financial may make comments, which constitute forward-looking statements under the federal securities laws. Forward-looking statements are based on management’s currents expectations and assumptions and are subject to risk and 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 may cause actual results to materially differ from expectations.

This is contained in FB Financial’s periodic and current reports filed with the SEC, including FB Financial’s most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of 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: Alright. Thank you, . Good morning. Thank you everybody for joining us this morning. We appreciate your interest in FB Financial as always. So, as we put a 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 from 2022 was a bad result. We made strategic investments and 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 1.11% and an adjusted PTPP ROAA of 1.58%, our profitability was not where we expect it to be, which was disappointing. The restructuring of our mortgage segment, our capital 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 last quarter’s call, I highlighted that we were prepared for a potentially challenging operating environment in 2023. By 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’re proud of. When you exclude the change in mortgage escrow-related deposits, the true growth is actually $915 million or 37% annualized, which is even more impressive.

Deposit growth includes some seasonal increases in public funds, but the vast majority is customer funding spread across our customer base in both time and non-time 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 expense of our profitability this quarter, we’ve got some urgency to increase the deposit balances now as we expect deposit competition to intensify in the coming months. While non-interest bearing accounts, we know some of that decline was a permanent movement out of the NIB bucket.

With Fed funds being over 4% for the first time in 15 years, we’re seeing less in idle funds sitting in noninterest bearing accounts. While we expect tough sliding and noninterest bearing growth in 2023, we believe the fourth quarter decline is an anomaly, and this is always going to be an area of focus for the company. Our interest-bearing deposits €“ all our interest-bearing deposits with rates is to be able to continue attracting customer relationships. It will be 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 to deposits will be near market rates. We’ve limited our loan portfolio to 8.4% annualized growth after producing 20% plus annualized growth in each of the prior three quarters.

We could have grown 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 participation on the balance sheet, we would have had 14% annualized loan growth during the quarter. We think the current economic environment calls for 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 decreased $12 million during the quarter, we’re not seeing any negative credit trends in these portfolios to this point, but we’re intent on managing our exposure down heading into 2023.

With construction, we’ve been managing new commitments down since the early part of the second quarter of 2022, but due to funding of existing commitments, the balance has 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 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, pretax loss of 4.2 million for the quarter. While we felt that this unit was right sized 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 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. The portfolio is down to three relationships with 30.5 million in remaining exposure. We believe that we will see full payoffs 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 a combination with Franklin and have experienced net gains of 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 to us should we ever need it. We maintained strong capital ratios for the CET1 ratio of 11% and our total risk-based capital ratio of 13.1%, while repurchasing $7 million worth of shares following the 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 offensive once we gain clarity on the economic environment.

But touching on a couple of our longer-term priorities that we’ll continue to prepare for an execute during 2023. First, improving efficiency and effectiveness of our core community banking model through a project that we’ve had going on, what we call FirstBank way, we operate through a local authority, regional present 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 quantify 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 cost of 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 our 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 lift-outs of strong teams and we continue to hold discussions with the bankers across the Southeast, both in existing markets, as well as in continuous geographies. The third, we’ll continue to have a dialogue with a small number of banks that we find attractive as merchant partners.

We position the balance sheet and our internal processes and procedures to be able to act with one of these handful of banks to satisfy the partner. The current uncertainty around the operating environment clouds a timeline for some of these management teams. However, with the scarcity, our potential partners that have the qualities 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 get comfortable with the economic outlook. We’ve also undertaken a number of strategic initiatives that will benefit the customers business and our customers and associates and make us more efficient operators.

We believe this improvement will create a superior return 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.

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Michael Mettee: Thank you, Chris, and good morning, everyone. I’ll speak first in this quarter’s results in our core bank. Our baseline run rate pretax pre-provision income was 55.5 million in the fourth quarter. According 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 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 for 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 trial in February of 2022 through the month of December, we estimate that we have experienced a roughly 40% beta for our interest-bearing deposit cost.

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 reprice the existing deposit portfolio in the fourth quarter, which ultimately led to decline in overall margin, our spread on contractual yield on new lines originated as compared to cost of new deposits raised, continues to be in excess of 4%. With the increase in 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 noninterest expense was 66.9 million in the fourth quarter. We expect continued growth in our banking noninterest 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 locks 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 this additional evaluation of staffing and organizational structure in order to position ourselves to return to operational profitability at seasonal headwinds this pace.

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 decreased by 4 basis points this quarter and we recorded a release of 456,000. Economic forecasts 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 are experiencing and increasing conviction of many economists that we will see recession. If conditions do not change, we would anticipate maintaining 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.

Chris Holmes: 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.

Q&A Session

Operator: Thank you. Today’s first question comes from Matt Olney at Stephens Inc. Please go ahead.

Matt Olney: Hey, thanks. Good morning everybody.

Michael Mettee: Hey, good morning Matt.

Matt Olney: 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?

Chris Holmes: Yes. Hi, Matt. Good morning. Yes, I mean, we saw kind of the time deposits depending on term coming in around 350 basis points and that’s kind of an 18-month weighted average term there. And then €“ and money market came in like 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 market there.

Matt Olney: Okay. Thanks, Michael. And then on the non-interest 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?

Chris Holmes: Yes. I don’t really €“ yes, I think you heard it right, but let me shed some additional light on it. I mean, I think €“ yes, I don’t think that they’ll continue to move 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 even have to do much. The balance just grew, and, you know, 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 you think is sticky. How much of that you think is real? And we always answered the question, and I know others €“ most others did too.

We’re not sure. We don’t really know. And so, as a fact of matter, we still don’t really know. We knew that some of it would leave, you’re seeing consumer accounts finally begin to return to pre-COVID, and so we just think that’s going to be a tough market for non-interest 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 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: 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 incremental spread there in 2023 would be similar to December level. Did I catch that right? And just remind me what you saw in December again?

Michael Mettee: Yes. The net interest margin for December was about . So, the outlook, right now, we feel like we 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 number, I just pointed you to on your deposit cost question, I’d say that new loans are coming on in that plus range.

Matt Olney: Got it. Okay. Thanks guys.

Chris Holmes: Hey, Matt. I would just add this on the deposit side. One other 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 trending with three quarters and 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 it’d be expensive and we €“ 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: Understood. Thank you, guys.

Chris Holmes: Very good. Thank you.