FB Financial Corporation

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 Mattei, 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 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 FEC, 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's 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.

Good morning and thank you, Andrea. Thank everybody for joining us this morning. We appreciate your interest in FB Financial. For the quarter, we reported EPS of 63 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 13.8% since our IPO. We close out 23 and enter 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 have 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. On 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 health and 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 out of the regulatory ratios, we also rank with the top of the class. For those strong capital levels, we had a comfortable liquidity profile as our ratio of loans plus security to deposits continues to stay near 100% at 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 lending relationships, over 30 million, and none approaching our legal lending limit of over 200 million. For a 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 five basis points of annual net charge-off since becoming a public company seven years ago, and we remain exceptionally well-reserved as our ACL to loans help for investment is 1.6%. And finally, on the deposit side, we have a granular, customer-focused funding base. We've had a higher level of public funds than we'd 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 pays. So a very strong balance sheet. To my second point, to understand our redesigned and reinforced 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 US 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'd 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. And it had completed four acquisitions over four years. that added a total of $5.7 billion in assets. While we had made significant investments along the way, much of our organizational structure and operating process had been reinforced through additional headcount, incremental improvements, and tack-on additions. Prior to our recent rebuild, that structure was beginning to feel like it had been cobbled together reactively and out of necessity. It no longer allowed for the proper efficiencies of scale and had led to some expense creep. The risk-off sluggish growth environment that the industry has experienced over the past several quarters was well-timed for us, and we were able to focus on constructing the organizational structure that enables us to properly scale into the future. The overall talent level and key support functions has increased while the expense base has shrunk. We've improved accountability and efficiency of interactions between the support functions and 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 our size utilize. We view this model as a key differentiator for associate and customer satisfaction, which allows for organic growth. And we also believe it makes us a more attractive merger partner for smaller community banks. And so to my third point, on being able to continue some of the earnings momentum that we've seen in the past two quarters, we're excited about the excess capital that can be put to work improving returns and 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 redemption 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 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 costs 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're also open to adding strong teams in markets adjacent to our existing 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 while 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 worth 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're 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 what our footprint has had in the past, our operational platform and 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 improve profitability, optimize capital, while limiting any book value dilution. So, to summarize before handing the call over to Michael, we spent significant time over the past two quarters laying a solid foundation. I'm sorry, over the past two years laying 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 builds 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.

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 net interest income of $101.1 million, reported non-interest income was about $15.3 million. Adjusting for a loss of $3 million as the last loan in our commercial loan help 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 expense of $80.2 million, adjusting for $4 million of severance, early retirement, and branch closure expenses, and $1.8 million of FDIC 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 cost of interest bearing deposits increased by seven basis points in the quarter, while contractual yield on loans held for investment increased by nine basis points. On the whole, yield on earning assets increased by nine basis points versus cost of interest bearing liabilities increasing by six. This was the first quarter that the increase in yield on assets has outstripped the increase on cost of liabilities And the first quarter of growth in net interest income since the third quarter of 2022. And we're optimistic about that inflection. Although with fewer days in the quarter, this will 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 the moving rates and $1.85 billion of those loans repricing within 90 days of a change in interest rates. Of 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 combined $550 million maturing through year-end 2024 with a weighted average yield of 6.39%. 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 and 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 those 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 Fund's 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 RAC rate for those deposits would be pricing 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 330 to 340 range over the next two quarters as public funds build seasonally. Moving to non-interest income, non-mortgage non-interest income continues to perform the $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 expense 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 had 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 to $50 million for 24. And all told, we anticipate total non-interest expenses of $305 to $310 million for 24. The caveats for that expense guidance would be that $255 million to $260 million of banking expenses do not include any significant revenue producer hires and that mortgage could take higher if interest rate lock volumes pick up. On the ACL and credit quality, credit remained benign this quarter as we experienced four basis points of recoveries and we experienced net charge-offs of less than one 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 two basis points or less. We had the last of our commercial loans held for sale and 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 is 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 moved to permanent financing. Our ratio of ACL to loans held for investment increased by three basis points during the quarter to 1.6%, but our provision expense was only 305,000 as continued decline and 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 have built significant excess capital and now stand at over 12% common equity tier one and have a 9.7% tangible common equity to tangible assets, which puts us solidly positioned. While there's 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. All right. Thank you, Michael.