FB Financial Corporation

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 Mati, Chief Financial Officer. Also joining the call for the question and answer session 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 of 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 in 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 Holm, FB Financial's president and CEO.

All right. Thank you, Jason. Good morning. Thank you all for joining us on the call this morning. We always appreciate your interest in FBA Financial. From quarter, we reported EPS of 41 cents per share and an adjusted EPS of 71 cents. 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 over leveraging 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 quarter, 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, and we'll let Michael discuss our strategy there in more detail, but we continue to look for ways to continue to enhance our profitability. The 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 is 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 in 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.

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'll 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 sales securities and $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 came from banking. We reported non-interest expense of $83 million in 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 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 pre-tax loss at the end of September. So given the timing, we did not see any real benefit to 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're continually examining how we can increase our yield on our liquidity. We would be comfortable with another loss in the 10 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 in 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 of 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 continue to rise, but as Chris mentioned, we've 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 months 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 onto the balance sheet at around 3.6%. As a reminder, we'll have public funds accounts beginning to build in the fourth quarter. We would expect $400 million to $500 million to come back onto 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 for the second quarter. With all the moving pieces that I laid out above, we anticipate margin being in the 330 to 340 range for the next couple quarters. Moving to non-interest income, non-mortgage non-interest income continues to perform in the 10 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 than is typical of 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 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 to loans held for investment increased by six basis points for the quarter or a 5.5 million increase in the allowance. Much of that 5.5 million was related to a 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 development to bank level tier one 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.