FB Financial Corporation (NYSE:FBK) Q4 2023 Earnings Call Transcript

FB Financial Corporation (NYSE:FBK) Q4 2023 Earnings Call Transcript January 16, 2024

FB Financial Corporation beats earnings expectations. Reported EPS is $0.77, expectations were $0.71. 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 FB Financial Corporation’s Fourth 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 session is Travis Edmondson, Chief Banking Officer. 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 Financials 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 the 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 the 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 website at www.sec.gov. I would now like to turn the presentation over to Chris Holmes, FB Financial’s President and CEO. Please go ahead.

Chris Holmes: Hi, good morning, and thank you, Andrea. Thanks, everybody for joining us this morning. We appreciate your interest in FB Financial. For the quarter, we reported EPS of $0.63 and adjusted EPS of $0.77. We’ve grown our tangible book value per share excluding the impact of AOCI at a compound annual growth rate of 13.8% since our IPO. We closed out ’23 and entered ’24 in what we believe is an enviable position due to three factors. One, we have a very strong balance sheet; two, we’ve redesigned and reinforced our operating foundation; and three, we had some profitability momentum after hitting an inflection point in the second half of 2023, and believe that we should be able to continue that momentum into 2024. So, my first point our strong balance sheet comes from our capital position, our liquidity position, our credit profile, and our granular diversified loan and deposit portfolios.

Capital reflects safety and we’ve got an imperative to maintain sound capital ratios at all times, but it gets extra attention in times of uncertainty and volatility. Our ratio of tangible common equity to tangible assets is among the highest of our peers at 9.7%. We keep no held-to-maturity securities, so 100% of our unrealized loss on our investment portfolio is reflected in that 9.7% TCE to TA ratio. Our regulatory capital ratios are also quite strong. When you adjust unrealized losses as regulatory ratios, we also rank with the top of the class. So those strong capital levels we had a comfortable liquidity profile as our ratio of loans plus security to deposits continues to stay near 100% and 103% currently. And we have access to $7.1 billion in available liquidity sources.

On the credit side, we keep a balanced granular diversified loan portfolio with only a handful of blending relationships over $30 million, and none approaching our legal lending limit of over $200 million. For time, following the Franklin Financial acquisition, we had a concentration in construction lending, but currently our ADC to Tier 1 ratio — I’m sorry, our ADC to Tier 1 plus ACL ratio is 93% and our CRE ratio is 265%. We’ve averaged less than 5 basis points of annual net charge-offs as becoming a public company seven years ago and we remain exceptionally well reserved as our ACL to loans held for investment is 1.6%. And finally, on the deposit side, we have a granular customer focus funding base. We’ve had a higher level of public funds and we like since our Franklin acquisition in 2020, but we continue to consciously remix those deposits into customer funds, reducing those public funds by 23% since the fourth quarter of 2022 to around 15% of our deposit base.

So a very strong balance sheet. To my second point to understand our redesign and reinforce operating foundation, we have to add some context. In the early months of 2022, we took stock of the economic conditions and forecast of higher interest rates, recession and quantitative tightening. Our view of challenges ahead was reinforced when we heard Jamie Dimon’s statement that he was preparing for the worst and forecast that the U.S. was facing an economic hurricane. Even though that economic hurricane never materialized, we made some decisions and we began working on capital, liquidity and loan concentrations to end up with the balance sheet that I just described. Also at that time, we had grown to $12.7 billion in assets from $3.2 billion at the time of our IPO in September 2016, and it grown loans and deposits at organic compound annual growth rates of 15.5% and 16.4%, respectively.

Over that period, it had completed four acquisitions over four years that added a total of $5.7 billion in assets. While we have made significant investments along the way, much of our organizational structure and the operating process had been reinforced through the additional headcount, incremental improvements and tackle on additions. Prior to our recent rebuild of that structure, we’re beginning to feel like it had been cobbled together reactively and added a necessity, no longer allowed for the proper efficiencies of scale and had led to some expense creep. The risk of a sluggish growth environment in the industry — that the industry has experienced over the past several quarters was a well time for us and we were able to focus on constructing the organizational structure to enable us to properly scale into the future.

The overall talent level and key support functions have increased while the expense base has shrunk. We’ve improved the accountability and efficiency of interactions between these important functions in our relationship managers. This has enabled us to maintain our local authority community banking model rather than moving to the centralized business line model that most banks say utilize. We view this model as a key differentiator for associate and customer satisfaction, which allows for organic growth, and we also believe that makes us a more attractive merger partner for smaller community banks. And so to my third point, we’ve be able to continue some of the earnings momentum in the past two quarters. We’re excited about the excess capital that can be put to work and proving your turn to profitability.

Our priorities for the deployment of that capital are organic growth first, strategic M&A second, and capital and profitability optimization through things like securities trade, share repurchases, and redemptions of capital third. Speaking of organic growth, in the fourth quarter, we saw our loan portfolio grow by $122 million, a 5.2% annualized pace, even as we’ve reduced our construction exposure by $135 million. 2024, we anticipate mid-single-digit growth as the economy slows, and as we continue to be selective in financing certain asset types that we see as being at higher risk in the short term. 2024’s loan growth will be funded by customer deposit growth. We saw deposit cost moderate in the fourth quarter. And while the competitive environment continues to make it difficult to grow deposits, we’re encouraged by the deposit pricing trends that we saw in the fourth quarter.

We remain active in relationship manager outreach and recruitment, focused primarily in footprint. We are also open to adding strong teams in markets adjacent to our addressing footprint. And as the economic environment continues to improve, we’d expect to return to our 10% to 12% organic growth target rate, given our exceptional markets across Tennessee, Alabama, North Georgia and Southern Kentucky. Based on what we hear from fellow bankers, there should be good opportunities for bank combinations over the next couple of years. Public valuations are moving in the right direction. And whilst credit uncertainty and interest rate marks remain a hurdle for those handful of banks that draw our attention, we know and are comfortable with their credit cultures and credit portfolios.

So we don’t view that as a significant obstacle. As a reminder, on our financial parameters, we value banks on their work and performance rather than our ability to pay. As we think broadly about the M&A landscape and more specifically about our place in that landscape, we believe that we are due for some consolidation, based on the lack of activity over the past 18 months, as well as how much more burdensome and expensive it’s becoming to run a community bank. Between the relative lack of acquirers, compared to our footprint — compared to what our footprint has had in the past, our operational platform in strong markets, we believe that we have a compelling story for those banks that are interested. Moving to our third priority, Michael and his team continue to evaluate opportunities such as last quarter’s securities trade that improved profitability, optimized capital while limiting any book value dilution.

So to summarize before I hand the call over to Michael. We spent significant time over the past two quarters laid a solid foundation — we — over the — I’m sorry, over the past two years laid a solid foundation. We’ve always felt strongly that the value of our local authority community banking model creates value in our footprint. We also feel strongly that we have the process, procedures systems and team in place to scale our model. To that end, we’ve constructed a balance sheet that should enable us to capitalize on our opportunities. I’m excited to see what our team built on this foundation over the coming years. And at this point, I’m going to let Michael go into a little more detail on our financial results.

Michael Mettee: Thank you, Chris, and good morning, everyone. This quarter had a number of moving pieces to it so I’ll take a minute to walk through our core earnings. We reported a net interest income of $101.1 million. Reported non-interest income was about $15.3 million. Adjusting for a loss of $3 million is the last loan in our commercial loans held for sale bucket left the balance sheet and a net loss of $300,000 between sales of OREO and securities. Core non-interest income was $18.7 million, of which $10.2 million came from banking. We reported non-interest expenses of $80.2 million, adjusting for $4 million of severance, early retirement and branch closure expenses, and $1.8 million of FTSE special assessment from the bank failures earlier this year.

Core non-interest expense was $74.4 million. $63.7 million of which came from banking. Altogether, adjusted pre-tax pre-provision earnings were $45.4 million, and banking adjusted pre-tax pre-provision earnings were $47.5 million. Going into more detail on the margin. At 3.46%, our net interest margin held in better than expected as the cost of interest-bearing deposits increased by 7 basis points in the quarter, while contractual yield on loans held for investment increased by 9 basis points. On the whole, yield on earning assets increased by 9 basis points versus the cost of interest-bearing liabilities increasing by 6 basis points. This was the first quarter that the increase in yield on assets has outstripped the increase on cost of liabilities in the first quarter of growth and net interest income since the third quarter of 2022, and we’re optimistic about that inflection.

Although it’s fewer days in the quarter, this will be — likely be difficult to replicate in the first quarter of ’24. For the month of December, our contractual yield on loans held for investment was 6.44%, and yield on new commitments in December were coming in around 8.1%. 49% of our loan portfolio remains floating with $2 billion in those variable-rate loans repricing immediately with moving rates, and $1.85 billion of those loans repricing within 90-days of a change in interest rates. As the $4.5 billion in fixed-rate loans, we have $336 million maturing in the first-half of 2024 with a yield of 6.4%, and $213 million maturing in the second half of ’24 with a yield of 6.37%, or a combined $550 million maturing through year-end 2024 with a weighted average yield of 3.39%.

For the month of December, cost of interest-bearing deposits was 3.44% versus 3.40% for the quarter. As we focus on exiting some of our more transactional higher-cost public funds in ’23, we expect to have less build-in subsequent runoff of public funds than we have in years past. We ended the year with $1.6 billion on balance sheet at year-end, and expect that balances to increase slightly during the first quarter before they begin their seasonal outflow in the second quarter. Another evolution in our deposit base is the amount of index deposits that we currently have, which was not a significant number for us in the past. We now have $2.8 billion in deposit accounts that will reprice immediately with a change in the Fed funds target rate.

Looking at CDs, we have $694 million at a weighted average cost of 4% set to reprice in the first half of the year. The current weighted average rack rate on those — for those deposits would reprice is approximately 30 basis points higher than the maturing deposits. We do expect some slight contraction in the margin and are maintaining our prior guidance for the margin being in the 3.30% to 3.40% range over the next few quarters as public funds build seasonally. Moving to non-interest income. Non-mortgage non-interest income continues to perform at $10 million to $11 million range, and we expect that to remain in that band plus or minus the next few quarters. Our non-interest expenses saw the benefit of the actions we took in the third quarter as adjusted banking segment expenses were $63.7 million.

As I discussed previously, we have some expected noise this quarter, and as of now, we are unaware of any one-time charges to expect in 2024. As I mentioned last quarter, our expectation for banking segment expenses for ‘24 would be approximately $255 million to $260 million. We would anticipate mortgage-related expenses of $45 million to $50 million for ’24, and all told, we anticipate total non-interest expenses of $305 million to $310 million for ’24. The caveat to that expense guidance would be that $255 million to $260 million of banking expenses do not include any significant revenue producer hires and then mortgage could kick higher interest rate like volumes pick up. On the ACL and credit quality, credit remains benign this quarter as we experienced 4 basis points of recoveries, and we experienced net charge-offs of less than 1 basis point for the year.

In six of our eight years as a public company, we’ve had charge-offs of less than 10 basis points, and in four of those years, we’ve had charge-offs of 2 basis points or less. We had the last of our commercial loans held for sale leave the balance sheet. From close of the Franklin merger to today, we ultimately realized a $7.2 million net gain on that portfolio relative to our initial mark. And as Chris mentioned, we reduced our outstanding construction balances by 16%, or $260 million during the year, and we reduced unfunded commitments for construction loans by 56%, or $913 million as well. Our ratio of construction loans to bank-level Tier 1 capital plus ACL was 93%, which is just outside of our targeted operating range of 85% to 90%. Related to the decline in construction balances this quarter, we did see our multifamily increase as construction projects move to permanent financing.

Our ratio of ACL to loans held for investment increased by 3 basis points during the quarter to 1.6%, but our provision expense was only $305,000 as a continued decline in unfunded commitments led to a $2.8 million release in reserves on unfunded commitments. We feel well reserved for the current economic outlook and don’t expect material movements in our ratio of ACL to loans absent a material change in the consensus outlook. On capital, we’ve built significant excess capital and now stand at over 12% common equity Tier 1, and have a 9.7% tangible common equity to tangible assets, which puts us solidly positioned. Well, there is still a broad range of potential economic outcomes for 2024, we feel very comfortable with where we stand should there be any downturn and are increasingly ready to deploy that capital across profitable, strategic and financial opportunities as they arise.

I will now turn the call back over to Chris.

Chris Holmes: All right. Thank you, Michael. And this concludes our prepared remarks. Again, thank you for your interest. And operator, at this point, we’d like to open the line for questions. Michael and myself are here together. Travis Edmondson is on the phone with us, our Chief Banking Officer. He was not able to be here in person, because we’re under the same snowstorm that a lot of folks around the country are. And we’re snowed in, in downtown Nashville and he is in downtown North, so — but he is with us on the phone. So, operator, we’ll open it up for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Catherine Mealor of KBW. Please go ahead.

Catherine Mealor: Thanks. Good morning.

Chris Holmes: Good morning, Catherine.

Michael Mettee: Good morning, Catherine.

Catherine Mealor: I start with the margin, and it was you had some nice kind of positive momentum in the margin this quarter and I can truly appreciate the guidance for the first part of the year, still coming down a little bit in the 3.30% to 3.40% range just given public funds and kind of movement in the funding base. But I’m just kind of curious more broadly, how you’re thinking about how your balance sheet will react if — when we start to get rate cuts? And as at the index deposit information you gave Michael was really interesting that feels like a bigger number than I appreciate it at $2.8 billion. And so, I think if you could just kind of walk us through how you’re thinking about how quickly your deposit base could respond when you start to see rate cuts, and then how you think about the kind of — the balance or the loans side as well, just so we can kind of price in potentially where that margin could go once we start to see Fed cuts? Thanks.

Michael Mettee: Yes. Perfect, Catherine.

Catherine Mealor: Good morning.

Michael Mettee: So yes, the $2.8 billion in index deposits is something, as Chris mentioned kind of the balance sheet over the last two years that we’ve really been cognizant of. In years past, we didn’t have that lever and so our deposit cost lagged when rates went down. So that’s been something we’ve really focused on. We are slightly asset-sensitive still so I would expect if there were material rate cuts that you would see some NIM compression, but we feel like we’ve taken a lot of that staying out if you think back to 2020 when we saw some pretty large NIM compression with the rapid drop in rates. So we are prepared for that but we feel like we’re in a much better balance. The deposits reprice effectively, the index loans will reprice as soon as the Fed cuts.

A lot of the loan side is either indexed to prime or to some other treasury rates and take sometimes 90 days. So it’s a slow — slower move down on the loan side. And then of course for the non-indexed deposits, we have to be very cognizant of moving those down in line with rates from a management perspective as well.

Chris Holmes: Hey, Catherine, I would just add one other point. Remember, we were probably faster to rise on deposit costs than some others, especially the bigger national and super-regional banks. And listening to a few of results on Friday from some of those banks, they think their costs are going to continue to rise. So part of our index was a value play for customers, but it’s also a play that we thought they were going to rise anyway. And we think that index should allow those to move down a little more — with a little more speed than maybe some others. So a little faster rise, but we think a little faster drop on the deposit side.

Catherine Mealor: And then in terms of growth, I know Chris you mentioned at some point you think you’ll return to that 10%, 12% loan growth rate. Yes, but what’s your — I know it’s a crystal ball turning on the timing, but just as you kind of see your pipeline and the outlook near-term, where do you think the growth looks like maybe for the first part of the year, or at least for ’24 kind of how you’re thinking about the size of the balance sheet?

Chris Holmes: Yes. So — and I’ll say this before — I’m joking here Catherine, but no, I did not say 10% to 12% loan growth rate. I said 10% to 12% growth rate, and I’d make that sort of washback, because I specifically took the word loan out of that for our whole team, because that growth rate has to be both loan and deposit growth rate ultimately for us to be successful. And so we’re thinking both sides of the balance sheet when we say that 10% to 12%. And we’ve lagged sometimes on the deposit side, but that’s an important — really important metric for us. But specifically to your question, on the loan side — or I’m sorry — in terms of growth in the first-half of the year, how are we going to get be able to slower that — we’re saying mid-single-digits.

Frankly, we’re not terribly confident one way or another in what growth is going to look like in the first-half of the year, so we’re kind of projecting mid-single-digits and we’re hopeful that, that’ll be the case. We don’t think it’ll be higher than that in the early part of the year, but we think the later part of the year actually, we could pick up some momentum as where our head is.

Catherine Mealor: [Multiple Speakers]

Chris Holmes: And part of that — sure. Part of that is because we’re still doing a little bit of really managing our concentrations and have a still — while we’re optimistic and we actually think good things about the economy, both locally and nationally, we think it’s still a time to be fairly prudent — really prudent actually on concentrations over the next couple of quarters as we think they can be gained throughout the year.

Catherine Mealor: Great. I totally appreciate that loan and deposit clarification so really important. So thank you for highlighting that on recording, I think.

Chris Holmes: Yes. It’s supportive for us to reinforce it to our team seems like daily so I want to make sure we reinforce it to everybody. It’s an important metric for us.

Operator: The next question comes from Brett Rabatin of Hovde Group. Please go ahead.

Brett Rabatin: Hey, good morning, Chris and Michael.

Chris Holmes: Hey, Brett. Good morning.

Brett Rabatin: Wanted just to start off with the deposit strategy from here. Your cost of funds has leveled out, but you’re still having some creep in the various components away from non-interest-bearing DDA. And I know that the public funds have a bit of decision process with what those costs. Can you maybe talk about — I saw the High Circle Partners announcement this morning. Can you maybe talk about your deposit strategy this year? And as Catherine noted, it’s great to see that you’ve got quite a bit of indexed deposits already repriced lower. But maybe if you’re growing loans at a good pace, how do you grow deposits at a similar level?

Chris Holmes: Yes, Brett, a couple of things. Growing deposits is a longer-term business proposition, and it’s just hard work, and so that’s what we meant. I wish I could tell you, we had a magic bullet, but we don’t. We do – again, it’ll be growing customer deposits. We say often our balance sheet is not wholesale. It’s customers on both the loan and deposit side. So it’s hand-to-hand combat, and that’s also why when we were answering Catherine’s question that we emphasize it all the time. So no magic bullets. It’s just — we do have — but some advantages. We do have a retail component as well as a commercial component to that. We are doing some work to really redefine, reinforce our value proposition on that side and just takes focus and execution.