FB Financial Corporation

Good morning and welcome to the FB Financial Corporation's fourth quarter 2022 earnings conference call. Hosting the call today at FB Financial is Chris Holmes, President and Chief Executive Officer, and Michael Marti, 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 the 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 risk 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 earning 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.

All right. Thank you, Rocco. Good morning. Thank you, everybody, for joining us this morning. We appreciate your interest in FB Financial as always. So as we put a bow on 2022, we're pleased with some of the results from the year and we're disappointed with some others. We grew loans by 22.3% while holding deposits flat and keeping deposits flat in 2022 wasn't a bad result. We made strategic investments in people, systems, and processes that will propel us into the future. And we exit the year with strong capital and liquidity positions. With an adjusted ROAA of 1.11%, an adjusted PTPP ROAA of 1.58%, our profitability was not where we expected to be, which was disappointing. The restructuring of a mortgage segment, our capital and liquidity management actions in the second half of the year, and our operational enhancements scheduled for 2023, we feel We feel well positioned with those for a range of potential economic scenarios entering 2023. For the quarter, we reported EPS of 81 cents and adjusted EPS of 85 cents. 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 reining in loan growth, particularly C&D and CRE, and focusing on liquidity and customer deposits. This quarter's performance is a reflection of those near-term priorities. Our deposit portfolio increased by $850 million this quarter, or 33.7% annualized, which we are proud of. When you exclude the change in mortgage escrow related deposits, the true growth is actually $915 million, or 37% annualized, which is even more impressive. The 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 at the expense of our profitability this quarter, we felt some urgency to increase the deposit balances now as we expect deposit competition to intensify in the coming months. On noninterest-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 in noninterest-bearing growth for 2023, we believe the fourth quarter is defined as an anomaly, and this is always going to be an area of focus for the company. Our interest-bearing deposits, on our interest-bearing deposits, our goal with rates is to be able to continue attracting customer relationships that 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 grow deposits to grow the balance sheet. So our incremental cost of deposits will be near market rates. We limited our loan portfolio to 8.4% annualized growth after producing 20-plus percent annualized growth in each of the prior three quarters. We could 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'd 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 balance has decreased $12 million during the quarter. We've not seen 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 the beginning of a trend of declining balances in that portfolio that we expect to continue throughout 2023. For mortgage, seasonality paired with market headwinds led to a loss of $4.2 million, free tax 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 hit new depths. The environment causes mortgage to be exceptionally difficult to forecast, so we're budgeting a positive contribution for 2023, and we're not comfortable right now getting a lot more precise than that. One last area that I'll touch on for the quarter is our commercial loans held for sale portfolio. We had a negative mark-to-market adjustment of 2.6 million in the quarter, primarily driven by one credit. 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 the 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 HFI loans to deposits comfortably below 90% and 85.7%. We also were able to pay down over $300 million in short-term borrowings at a cost of nearly 4% and have approximately $7 billion in contingent liquidity readily available should we ever need it. We maintained strong capital ratios 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 decline in our stock price in December. We would expect similar balance sheet management throughout the first half of 2023. Our actions have positioned the bank for improved profitability and to go on the offensive once we gain clarity on the economic environment. Touching on a couple of our longer-term priorities that we'll continue to prepare for and execute here in 2023 are First, improving efficiency and effectiveness of our core community banking model through a project that we've had going on that we call First Bank 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 codify the why and how of our community banking model. This allows us to better perpetuate our culture and our banking model as we grow. It also ensures consistency of processes that allows us to deliver efficient and effective customer service across our footprint while improving the associate experience. In 2022, we committed significant time and resources to what we wanted our community banking 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 in 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 bankers across the southeast, both in existing markets as well as in continuous geographies. Third, we'll continue to have a dialogue with a small number of banks that we find attractive as merger partners. We position the balance sheet and our internal processes and procedures to be able to act when one of these handful of banks decides to find a partner. The current uncertainty around the operating environment clouds the timeline for some of these management teams. With the scarcity of 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 gain comfort with the economic outlook. We've also undertaken a number of strategic initiatives that will benefit our customers and associates and make us more efficient operators. We believe this improvement will create superior returns for shareholders through strong organic growth and the capacity to capitalize on opportunities. I'll now turn things over to Michael to provide more detail on our financial performance in the fourth quarter.

Thank you, Chris, and good morning, everyone. I'll speak first to this quarter's results in our core bank. Our baseline run rate pre-tax pre-provision income was $55.5 million in the fourth quarter. Pointing 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 in 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 five of the slide deck, our net interest margin of 3.78% contracted by 15 basis points from the third quarter. Nine 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 trough in February of 2022 through the month of December, we estimate that we have experienced a roughly 40% beta for our interest-bearing deposit costs. Contractual yield on loans continues to get a lift from Fed rate hikes and was 5.61% for the month of December as compared to 5.45% for the quarter. While we repriced the existing deposit portfolio in the fourth quarter, which ultimately led to the decline in overall margin, our spread on contractual yield on new loans 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 non-interest expense was 66.9 million in the fourth quarter. We expect continued growth in our banking non-interest expenses due to higher regulatory costs and inflationary pressures. For 2023, we're 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 additional evaluation of staffing and organizational structure in order to position ourselves to return to operational profitability as seasonal headwinds dissipate. While we do not expect Q1 to be profitable, we would expect minimal losses if the environment holds in this current state. Moving to our allowance for credit losses, we saw our ACL to loans decrease by four 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, but we're closely watching inflation that we're experiencing and the increasing conviction of many economists that we will soon enter a recession. If conditions do not change, we would anticipate maintaining a similar level of ACL to lowest health or investment over the near term. With that, I'll turn the call back over to Chris. Thanks, Michael.