FB Financial Corporation

Good morning and welcome to the FB Financial Corporation's first quarter 2024 earnings conference call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer, Mr. Michael Mati, Chief Financial Officer. Also joining the call for the question and answer session is Mr. Travis Edmondson, Chief Banking Officer. Please note FB Financial's earnings release, supplemental financial information in 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 open for questions after the presentation. During the presentation, SB Financial may make comments which constitute forward-looking statements under federal securities laws. Forward-looking statements are based on management's current expectations and assumptions and are subject to risk and uncertainties. Other factors may cause actual results to differ materially in performance or achievements of SB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many sets of factors of beyond FB Financial's ability to control or predict and listeners are cautioned not to place 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 reconciliation of the non-GAAP measures to comparable GAAP measures is available in the 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 Mr. Chris Holmes, FB Financial's president and CEO. Please go ahead, sir.

All right. Thank you, Chuck. Good morning, everybody, and thank you for joining us this morning. We always appreciate your interest in FB Financial. For the quarter, we reported EPS of 59 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 13.5% since our IPO. We're pleased with our results for this quarter and believe that they show strong progress towards our goal of peer-leading financial performance. As we reported an adjusted return on average assets of 1.27% and adjusted PPNR return on average assets of 1.63% and grew adjusted earnings per share by 10% relative to the fourth quarter of 2023 and 12% relative to the year ago quarter. When I provided my outlook for 2024 on our prior call, I noted that the bank was in an enviable position Due to our strong balance sheet, the operating foundation that we'd spent the past two years reinforcing, and the earnings momentum that we were beginning to experience. I'm even more convicted on those points after our first quarter. Our capital ratios continue to improve. We now have a tangible common equity to tangible assets ratio of 10%, and a total risk-based capital ratio of 15%. The mix of our loan portfolio is trending towards optimal for a bank of our size operating in our growing markets, with a construction and development concentration of 83% and a CRE concentration of 255%. Both of those has a percent of risk-based capital. Operationally, we're performing well, and there's a cohesiveness across the team. as more direct communication lines have been established between our customer-facing and back-office associates. The efficiencies of improved processes and procedures are also beginning to come through as our core efficiency ratio in the first quarter improved by over 500 basis points from the first quarter of last year. And finally, on our earnings momentum, we saw broad-based positive trends this quarter for net interest income, no, I'm sorry, net interest margin non-interest income, and non-interest expense. On the net interest margin, our increase in the contractual yield on loans held for investment outpaced our increase in the cost of interest bearing deposits for the second quarter in a row. And our net interest margin was steady at 3.42% versus last quarter's 3.46%. For fee income, mortgage had a solid quarter with a pre-tax contribution of $3.1 million. which is a testament to our expense initiatives because that contribution was on approximately the same amount of revenue as the first quarter of last year when we had only a $262,000 contribution. The $11 million in fee income that our banking segment produced in the first quarter was also strong. And driven by the efficiencies of our operating platform that I mentioned before, core non-interest expense was down 3.3%. from the fourth quarter and down over 10% year over year. All that led to growth and adjusted pre-provision net revenue of 12.8% compared to the fourth quarter of 2023. So a strong quarter of operating results that, while not at our historical levels of profitability, is trending in the direction that we want it to. As we look to the remainder of the year, we'll be focused on how we can effectively deploy the capital that we've built in order to create long-term shareholder value. As we seek to deploy that capital, we always target organic growth first, which was one ingredient that was missing from our performance this quarter. While we're not thrilled with the $120 million contraction in loan balances that we experienced during the quarter, we're comfortable with it as it was driven by a $128 million decline in construction lending and a $49 million payoff of one of our very few SNCC relationships as our customer was acquired, which, by the way, was a strong relationship of the bank. As a reminder, we have a bias against SNCC lending, but this was one of those very few that meets our criteria of relationship-based in geography with partners that we know. Excluding those two circumstances, we experienced slight growth on the remainder of our portfolio of around 2% annualized. We're targeting mid-single-digit organic loan growth for the year as we continue to feel confident about the economic health of our footprint, and we intend to return to our historical 10% to 12% organic growth target in 2025. To that end, We've hired a handful of seasoned revenue producers across our footprint in the first quarter, and we continually look for additive team members. Given our size and excess capital, our building presence and market share in our metropolitan markets across our footprint, our local authority operating model headed by strong leadership teams, and our long-term prospects, we're delivering a strong pitch to relationship managers to come join our teams. We expect to continue to moderate our construction and CRE concentration ratios and focus more on operating accounts, C&I relationships. We intend to operate in the 75% to 85% range on our C&D concentration and the CRE concentration of around 250% or less and will not become over-concentrated in those buckets in the name of growth. We have strong commercial capabilities and a very strong treasury management team, and we'll continue to benefit from the influx of corporate relocations that we're experiencing across our footprint. In addition to taking care from some larger competitors that continue to be disrupted by M&A and internal changes. Our second priority for deployment of capital is strategic M&A. We're well positioned as a potential partner for smaller banks in and around our footprint. We have significant excess capital that should allow us to absorb the interest rate mark prevalent in today's M&A. And we have very strong risk compliance and operations functions that we believe will be able to navigate the current regulatory and operating environment. Our third priority for capital deployment is improving our balance sheet and earnings through capital optimization transactions. Late in the quarter, you likely saw Michael and his team executing one such transaction as we saw just over $200 million of securities and reinvested the proceeds for a net pickup and spread of 3.8%. With an annual pre-tax income impact of just under $8 million, that's real money that comes with no risk of integration and no further execution risk. And we would allocate capital to similar transactions. Additionally, we recently had our $100 million repurchase plan, stock repurchase plan, re-approved in order to have that arrow in our quiver also. And we purchased around $4.8 million worth of stock in this current quarter. So to summarize, I'm proud of our team for the results this quarter. Our profitability metrics are trending in the right direction. I feel strongly that we have the team, the platform, and the footprint to be able to continue to build on this foundation. Now I'm going to turn it over to Michael to give a little more detail on the financial results.

Thank you, Chris, and good morning, everyone. I'll first take a minute to walk through this quarter's core earnings. We reported net interest income of $99.5 million. Reported non-interest income was $8 million. Adjusting for the loss of $16.2 million related to our securities restructuring trade and about $600,000 on the sale of Oreo. Core non-interest income was $23.6 million, of which $11 million came from banking. We reported non-interest expense of $72.4 million and adjusting for a half a million of FDIC special assessment expense. Core non-interest expense was $71.9 million, $59.8 million of which came from banking. Altogether, adjusted pre-provision net revenue earnings were $51.2 million, and banking segment adjusted pre-provision net revenue earnings were $48.2 million. Going into more detail on the margin at 3.42%, our net interest margin held relatively flat with the prior quarter's 3.46%. Contractual yield on loans held for investment increased by 12 basis points, but those gains were offset by a decline in loan fees of 8 basis points due to a methodology update of our loan fee deferrals. Going forward, we anticipate loan fees remaining in the same relative band and having less quarterly volatility than we have seen in the past. Meanwhile, our cost of interest-bearing deposits increased by nine basis points in the quarter. For the month of March, our contractual yield on loans held for investment was about 6.55%, and yield on new commitments in March were coming in around 8.3%. As a reminder, 49% of our loan portfolio remains floating rate, with $2 billion of those variable rate loans repricing immediately with a move in rates and $1.8 billion of those loans repricing within 90 days of a change in interest rates. Of our $4.7 billion in fixed rate loans, we have $478 million maturing over the remainder of 2024 with a yield of 6.73%. For the month of March, cost of interest bearing deposits was 3.5% versus 3.49% for the quarter. As I mentioned on last quarter's call, we now have a significant amount of index deposits that will reprice immediately with a change in the Fed Fund's target rate. Those balances stood at $2.9 billion as of the end of the first quarter. As Chris mentioned, we are focused on building customer deposits and are continuing to target operating accounts. We also anticipate that public funds will begin to build seasonally over the course of the second quarter and into the third quarter. As we made a focused effort to minimize our reliance on public funds over the past two years, that build will be less dramatic for us than it has been in the years past, and we anticipate our public funds topping out in the $1.7 billion to $1.8 billion range in the second and third quarters as compared to the $1.6 billion that we had on the balance sheet at the end of the first quarter. On the securities portfolio, we sold $208 million of securities with a yield of 2.14%. and reinvested the proceeds at 5.94%, and we estimate the earn back was just a little over two years. That transaction occurred in the second half of March, so we saw very little benefit from that trade in the first quarter. We'll continue to look for profitable deployments of capital in order to improve earnings, but without sacrificing longer term growth in tangible book value per share. With all of those moving pieces, we expect the margin to stay relatively flat over the coming quarters, in the absence of any rate cuts, as repricing loan yields and rising deposit costs continue to mostly offset each other. Moving to non-interest income, non-mortgage non-interest income continues to perform in the $10 to $11 million range, and we'd expect it to remain in that band plus or minus for the remainder of the year. Mortgage had a really strong quarter with a total pre-tax contribution of $3.1 million, which we were very pleased with. For the remainder of the year, we would expect quarterly contributions in the $1 to $2 million range for mortgage, depending on seasonal activity and the interest rate environment in any given quarter. Our non-interest expense continued to see the benefit of operational changes made over the past few years. And the core banking expense was $59.8 million for the quarter, as compared to $62.6 million in the fourth quarter of 2023. and $66.8 million in the first quarter of 2023. At this point, we'd bring our prior guidance for banking segment expenses down to $250 million to $255 million from our prior range of $255 to $260 million. On the allowance for credit losses and credit quality, credit was mostly a non-event again this quarter as we experienced two basis points of charge-offs. As part of the operational improvements that we've made over the past couple years, our internal analysis on our credit portfolio continued to improve. As such, while our non-performers have ticked up over the past year, and while we're paying close attention there, we feel reasonably confident with the quality of that portfolio, and we feel comfortable that we are very well reserved. Speaking more to the allowance, our ACL to loan tougher investment increased a further three basis points during the quarter to 1.63%, but our provision expense was only $782,000. as continued decline in unfunded commitments led to a $1.1 million release in reserves on those unfunded commitments. On capital, as Chris mentioned, we have developed very strong capital ratios with TCE to tangible assets of 10% and common equity Tier 1 ratio that is now over 12.5%. We continue to balance retaining excess capital for organic and strategic growth against optimizing near-term earnings through balance sheet restructuring with the goal of building long-term shareholder value through strong and consistent CAGRs for both earnings per share and tangible book values per share. With that, I'll turn the call back over to Chris.