FB Financial Corporation

Good morning and welcome to the FB Financial Corporation's second quarter 2023 earnings conference call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer, and Michael Metis, Chief Financial Officer. Also joining the call for the question and answer section is Greg Bowers, Chief Credit 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, FP Financial may make comments which constitute forward-looking statements under the Federal Securities Law. Forward-looking statements are based on management's current 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 that may cause actual results to materially differ from expectations is contained in FP Financial's periodic and current reports filed with the SEC, including FP Financial's most recent form, 10-K, except as required by law. FP Financial disclaims any obligation to update or revise any forelooking 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 regulations. A presentation of the most directly comparable gap in financial measures and a reconciliation of non-gap measures to comparable gap measures is available in FP 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, FP Financial's President and CEO.

All right. Thank you, Anthony. Good morning. Thank you for joining us this morning, and we always appreciate your interest in the company. For a quarter, we reported EPS of 75 cents and adjusted EPS of 77 cents. We've grown our tangible book value per share, excluding the impact of AOCI at a compound annual growth rate of 14.4% since we became a public company. As a quarter end, we had tangible common equity to tangible assets of 9%, common equity tier one capital of 11.7%, total risk-based capital of 13.9%. If we include unrealized losses on securities in those regulatory capital ratios, common equity tier one capital would be approximately 10.6%, and total risk-based capital would be approximately 12.9%. As we've discussed on the last few calls, our two current priorities are maintaining the strength of the balance sheet and improving internal processes and procedures to become more effective and efficient. Behind these dual focuses is a desire to be able to act aggressive, to be able to act, sorry, act aggressively, sorry for that, when we feel more comfort and clarity around the overall economic and credit environment. Our first priority of balance sheet strength, we feel very comfortable positioned with our current capital levels. Our continued priorities for capital use are organic growth first and acquisition second. Given our current caution around organic growth, growth and the general lack of M&A activity industry ride right now, we're content to build capital until we have an attractive use for it. On credit, we continue to de-risk our balance sheet this quarter as our C&D and non-owner-occupied CRE balances declined by 118 million dollars, leading to a decline in total loans held for investment of 40 million dollars. Our unfunded commitments in those categories also continue to decline and are now down 454 million, or 27%, from March of 2022, which is about the time we began limiting our new commitments on those products. We're intent on limiting our exposure to construction and commercial real estate, even in a geography that's among the best, given the risk inherent in these products. We've also had a concentration in construction that exceeded regulatory guidance of 100% of risk-based capital, and we anticipate that this will be the last quarter where that's the case. Excluding our C&D and CRA loans, the remainder of our portfolio was up slightly at 5.5% annualized. Overall, the current credit environment remains benign as reflected in our continued strong credit metrics of three basis points of net charge-offs, to average loans, and 47 basis points of NPLs to loans held for investment. Demand for loans is still out there if you're seeking growth, and the credits actually look reasonably good. However, given the uncertainty of the coming quarters, we feel it's prudent to take care of the existing clients and focus on rifle-shot approaches to new business right now as a result. when you consider additional reductions in our C&D and non-owner-occupied CRE balances, we would expect overall loan growth to be relatively flat for the second half of the year. On liquidity, the seasonal decline in public funds that Michael telegraphed on our prior call began in May, and public funds ultimately declined by $463 million during the quarter, some of which we backfilled with broker funds, which actually have a lower cost and provide more unencumbered liquidity than the public funds that ran off. Outside of public funds and broker deposits, deposits were down slightly for the quarter. While deposit pressures remain very real, they continue to be more interest rate driven than the fear-driven exodus that many forecasted for regional and community banks after Silicon Valley. From a safety and soundness perspective, we feel great about where we are between the current on balance sheet liquidity, and contingent sources of funding. So we're just walking the tightrope of paying customers market rates on their deposits while also trying to defend the margin. Moving to our second priority of internal improvements, we're focused on improving our processes and procedures during this time of slow growth. which is the primary focus of our First Bank Way initiative that I've talked about on the past couple calls. This has been a time where we've been reevaluating our community bank business model following our five acquisitions, quadrupling the size of a company since our IPO and crossing the $10 billion asset threshold. We spent time refocusing on customer and associate experiences, streamlining our corporate structure, eliminating redundancies, and enhancing accountability. During the implementations associated with the First Bank Way project, we're also limiting outside hiring with exception of revenue producers, and we're also making reductions of discretionary expenses like travel and contributions. We'll continue to make some structural and operational improvements that will help us work on efficiency and lead to additional expense reductions, and we will provide updates on our plans along the way. So to summarize, before handing the call over to Michael, we are focused on strengthening the balance sheet and improving the company internally until the current environment changes. We were early in taking our foot off the gas in April of last year, And our goal right now is to be in a position to be able to match the accelerator when we feel comfort in the economic and credit outlook. I'll now let Michael go into our financial results in more detail.

Thank you, Chris, and good morning, everyone. I'll start first with adjusted pre-tax, pre-provision trends from the bank. For the quarter, we showed adjusted banking segment pre-tax, pre-provision of $46 million. That's slightly up from the prior quarter of $45.8 million and down 17% from the second quarter of 2022. The primary driver of the year-over-year decline is growth in banking segment core non-interest expense of 12%. While funding pressures have certainly hurt as well, segment net interest income is down less than 1% from the second quarter of 2022. As loan growth and balance sheet remixing pair with increases in yields on earning assets, have offset much of the funding pressure of the past year. We expect funding pressures to continue in the near term and are taking steps to address our expense load. Moving to our liquidity position and deposit base, we have on balance sheet liquidity consisting of cash and unpledged securities of $1.4 billion. We have an additional $6.4 billion in unsecured borrowing capacity available, including broker deposits, federal home loan bank, and discount window. For tax purposes, we have $2.2 billion of real estate loans held at our REIT. Were we to fill the need, we could move those loans back to the bank overnight to create additional federal home loan bank borrowing capacity. We feel comfortable in our current and available sources of liquidity. I'll touch very briefly on our securities portfolio. As a reminder, we have no held to maturity securities. The portfolio is currently around 11% of total assets. which is in our desired range of 11 to 13 percent of assets, and the current duration is roughly 5.4 years. With net loan growth being generally flat, given our ongoing construction and CRE rebalancing, paired with our continued strong capital build, we have considered getting out of some of our securities that are in a lost position, and we have the potential to apply a portion of our excess capital towards an opportunity trade in the portfolio. Moving to deposits, in total, our deposits declined by $311 million versus the prior quarter. Outflows of public funds accounted for $463 million of that decline and were partially offset by $238 million in new brokered CDs, leaving non-public, non-brokered funds down roughly $86 million. As a reminder, those public funds balances tend to begin building in November and decline in June through October, so we'd expect another $200 million to $400 million decline in public funds in the third quarter. We continue to experience increased cost of deposits due to both deposit mix and pricing pressures. On the deposit mix, non-interest-bearing accounts were down by $89 million, or 14% annualized. However, after a decline in April, non-interest-bearing deposit balances remained fairly constant through May and June, so we are hopeful that we can continue to hold NIBs relatively flat in the third quarter. On the cost of interest-bearing deposits, competition remains fierce in our markets and was really not helped by the termination of the First Horizon merger. Moving on to our net interest margin, the margin was 3.4% for the quarter, down 11 bps from the first quarter. We expect some continued compression in the margin due to funding pressures. However, the margins for each of April, May, and June, respectively, were 3.4% 3.38%, and then back up to 3.41% in June. So we hope to limit the size of that compression over the next couple of quarters. That said, margin continues to be difficult to predict. For some monthly trends, our yields on newly originated loans left the cost of new interest-bearing deposits has been in the 3.4% range as well over the past eight weeks. In June, we had a cost of interest-bearing deposits of 3.22%. and a contractual yield on loans held for investment at 6.24% versus a cost of interest-bearing deposits at 3.06% and a contractual yield of 6.16% for the quarter. Our cost of interest-bearing non-public, non-brokered deposits was 2.59% in June versus 2.39% for the quarter. Core banking non-interest income of $11 million was in line with our expectations, and we expect to continue to hover in that $10 million per quarter plus or minus range in 2023. Non-interest expense is top of mind for the company as we expect the margin to continue to struggle. For the quarter, core banking segment expense was $66.7 million compared to $68.4 million in the prior quarter. As Chris mentioned, we have halted hiring outside of revenue producers and have cut back on more discretionary expenses such as travel and contributions. We continue to work through what an optimized level of expenses will look like for us as we implement some identified efficiency projects from our First Bank Way initiative, and we would expect to be able to get more guidance there by the end of the year. In the third quarter, outside of the FDIC insurance assessment related to the recent bank failures, we would expect controllable expenses to be down slightly to flat as compared to the second quarter due to the measures we already have put in place. Closing with our allowance for credit losses, economic forecasts deteriorated modestly during the quarter, and we added a further three basis points to the allowance as a result. However, provision expense ended up being a release rather than a build as our reserves on unfunded commitments came down once more. This was primarily due to the decline in our unfunded construction and development commitments. We will continue to be cautious on our reserves. At this point, there are no industries that we are qualitatively assigning additional reserves to, but we will continue to monitor our portfolio to see if some additional protection is warranted. I'll now turn the call back over to Chris.