FB Financial Corporation

Good morning and welcome to the FB Financial Corporation second quarter 2024 earnings conference call. Hosting the call today from FB Financial are Mr. Chris Holmes, President and Chief Executive Officer, and Mr. Michael Matee, 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, FB Financial may take 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 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 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 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 the 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 on the investors' 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, FE Financial's President and Chief Executive Officer. Please go ahead, sir.

All right. Thank you, Chuck. We appreciate that. And good morning. And thank you for joining us this morning. We appreciate your interest in FB Financial. For the quarter, we reported EPS of $0.85 and adjusted EPS of $0.84. We've grown our tangible book value per share, excluding the impact of AOCI, at a compound annual growth rate of 13.4% since our IPO. We reported an adjusted return on average assets of 1.28% and an adjusted PPNR return on average assets of 1.7%. Adjusted earnings per share was relatively flat with the prior quarter and up 9% year over year, while adjusted PPNR increased by 2.3% from the prior quarter and 16% year over year. The past few quarters, I have emphasized our operating foundation, our earnings momentum, and the strength of our balance sheet and this quarter continues those themes. Operationally, we continue to perform well. Our support areas are enabling our relationship managers to be responsive to our customers and we have a platform that will help us realize the benefits of scale and allow us to grow the balance sheet and revenue with limited additional near-term investments in the back office. For earnings momentum, we saw an inflection point in our margin last quarter and this quarter saw incremental improvement as it expanded by 15 basis points to 3.57%. With that expansion of the margin, net interest income grew by 3% from the prior quarter. Mortgage had a reasonable quarter in light of the interest rate environment with a pre-tax contribution of $700,000, while the banking segment delivered solid core fee income of $11.8 million. And we continue to focus on efficiency as our core banking segment efficiency ratio declined to 53.8% for the quarter. And finally, on the strength of our balance sheet, our capital ratios are exceptionally strong with tangible common equity to tangible assets of 10.2%, a CET1 ratio of 12.7%, and a total risk-based capital ratio of 15.1%. As we've built our capital ratios We have also continued to manage our C&D and CRE concentrations within a range that gives the company an attractive lower risk profile, especially when you consider the economic growth of our geography. Today, our C&D concentration ratio is 78%, while our CRE concentration ratio is 249%. At the same time, we've also reduced our exposure to rate-sensitive public funds. from 2.3 billion in the second quarter of 2022 to 1.5 billion today, or 35%. Michael will discuss in more detail, but almost 100% of our remaining relationships there keep checking accounts with us and our customers with whom we have strong working relationships. So while our balance sheet hasn't grown materially in recent quarters, it's been remixed so that it is safer, more profitable, and more valuable. Looking forward, we continue to explore how to most effectively deploy the capital that we've built. Our first priority for that capital is always organic growth. While net loan and deposit growth were basically flat this quarter, we expect some muted growth in the low to mid single digit range over the second half of the year. And there are a few trends that give us confidence in returning to our 10% organic growth targets next year. One trend is that we have increasing success in attracting new relationship managers. We've brought on 14 senior relationship managers in 2024, in addition to 11 revenue producers in our wealth management and mortgage groups. Our story is simple and consistent. You can count on us being here for the long term, and this is a great team that will help you advance your career. We are conservatively run, make a strong return, and have a deep management team with a long runway. We also think you'll enjoy working with us. We have a familial culture, a local authority model, and full capabilities to allow you to serve your clients. A second factor supporting this year's growth and supporting next year's growth is that we've managed our real estate portfolios to levels that are sustainable. These portfolios will no longer be shrinking and won't be headwinds for growth. For reference, excluding our C&D decline this quarter, we would have shown annualized organic loan growth of approximately 4%. Year-over-year, excluding our net construction decline, we've grown loans by approximately 5%. The last factor that supports our future growth is our comfort with the credit environment in our markets. We expect charge-offs for the industry to move more towards historical trends over the next 18 to 24 months, And we're seeing some one-off situations in our own portfolio that are the byproduct of a slowing economy. However, with most of our struggling credits, we have significant collateral and guarantees and don't see much loss content. And on the whole, we feel confident about our existing credit quality. With continued migration, with continued in-migration investment in development and corporate relocations, we have plenty of attractive growth opportunities. Our governing factor on asset growth will be the rate at which we generate core deposits. Our loan-to-deposit ratio is currently 89%, and currently we aren't comfortable operating at a much higher level than that. Our second priority for deployment of capital is opportunistic acquisitions. We continue to be interested in a handful of names that we believe would be additive to our franchise and are ready to act when those banks are ready to find a partner. When our third priority for capital deployment That's continuing our marginal improvement in earnings through balance sheet optimization. Michael and his team continue to execute on additive transactions. This quarter, that looked like stock buybacks as we purchased approximately 350,000 shares for $12.6 million. So to summarize, I'm very proud of our team for the results this quarter. We continue to enhance our profitability metrics. We feel like... We've done well in optimizing the balance sheet and we've added some really strong revenue producers that are going to help us grow into the platform that we've built. Now I'm going to let Michael go into the financial results in some more detail.

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 102.6 million. Reported non-interest income was 25.6 million. Adjusting for a $2.1 million cash life insurance benefit, $300,000 in loss on sale of assets, core non-interest income was $23.8 million, of which $11.8 million came from the banking world. We reported non-interest expense of $75.1 million. Adjusting for a million in separation cost, core non-interest expense was $74.1 million. 61.3 million of which came from the banking segment. And altogether, adjusted PPNR earnings were 52.4 million. Going into more detail on the margin, we grew net interest income by 3.1 million or 3% for the quarter, despite a slight decline in average earning assets. We reaped the benefit of our securities restructuring activities in the first quarter as yield on securities increased by 58 basis points. and interest income on the securities portfolio was up $2.5 million. We also allowed some higher cost deposits to leave the bank, which helped us hold on to our cost of interest bearing deposits to a three basis point increase over the first quarter. That three basis point increase in cost of interest bearing deposits compared to a five basis point increase in contractual yield on loans held for investment. It marks the third straight quarter that we have grown our contractual yield by more than our cost of interest bearing deposits. For the month of June, our contractual yield on loans held for investment was 6.62% and our yield on new commitments in June came in around 8.1%. Half of our loan portfolio remains floating rate with 2 billion of those variable rate loans repricing immediately with the moving rates and 1.9 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 314 million that mature over the remainder of 2024 with a yield of 6.93%. And in 2025, we have 412 million maturing with a yield of 5.57%. For the month of June, cost of interest-bearing deposits was 3.56% versus 3.52% for the quarter. As I've noted previously, we now have a significant amount of index deposits that will reprice immediately with a change in the Fed funds target rate. Those balances stood at about 2.7 billion at the end of the second quarter. While I'm discussing our deposit base, I want to spend some time giving detail on our public funds relationships. As Chris mentioned, we've made a concerted effort over the past two years to minimize our exposure to rate sensitive accounts that act more like broker deposits than true customer relationships. As of the second quarter, we had 1.5 billion in public funds outstanding. Our cost of interest-bearing public funds accounts in the second quarter was 4.37% compared to 3.52% for our overall cost of interest-bearing deposits. 97% of our public funds customers have checking accounts with us, and 78% of our public funds balances are in checking accounts. We also process payroll for nearly every public funds customer that keeps a checking account with us, which we view as indicative of our being those accounts primary banking relationships. For the remainder of the year, we expect margin to settle more into a 3.47% to 3.53% range, and for net interest income to be relatively stable to modestly higher as we concentrate on creating core relationships across the footprint. Moving to non-interest income, at $11.8 million, core banking segment non-interest income was stronger than typical, driven by swap fees. For the remainder of the year, we would expect to be more in our $10 to $11 million range per quarter than we've been experiencing recently. Mortgage had another profitable quarter with a total pre-tax contribution of $700,000, which was a reasonable result given the challenges in the housing market and the volatility of the current rate environment. Our non-interest expense continued to see the benefit of operational changes that we discussed on prior calls, and core banking segment expense was $61.3 million for the quarter as compared to $59.8 million in the first quarter and $65.2 million in the second quarter of 2023. We would still expect banking segment expenses of $250 million to $255 million for 2024 as we expect performance to drive an increase in our short-term incentive compensation. We also continue to focus on recruiting talented and experienced relationship managers to the First Bank team. On the allowance for credit loss and credit quality, credit remained fairly benign this quarter as we experienced two basis points of charge-offs. That said, we did have one relationship that we added an additional $5 million specific reserve, a total of $6.7 million against, and would expect resolution on that credit in the third or fourth quarter. Speaking more to the allowance, our allowance credit loss to loans helper investment increased a further four basis points during the quarter to 1.67%. The economic environment would have kept us reasonably flat relative to the first quarter, and the specific reserve I mentioned led to the majority of that increase in the ratio. Total provision expense was again impacted by a release on reserve fund commitments of $1.7 million due to the continued decline in those balances. On capital, and as Chris mentioned, we have developed very strong capital ratios with TCE tangible assets of 10.2%, and a common equity tier one ratio of 12.7%. We continue to focus on the best way to deploy that capital to deliver consistent long-term growth and earnings in tangible book value. I'll now turn the call back over to Chris.