FB Financial Corp Q3 FY2024 Earnings Call

Good morning, and welcome to the FB Financial Corporation's Third Quarter 2024 Earnings Conference Call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer; and Michael Mettee, 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 this call. 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 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 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.

All right. Thank you, Wyatt. Good morning. Thanks for joining us this morning. We always appreciate your interest in FB Financial. For the quarter, we reported earnings of $0.22 per share and adjusted earnings of $0.86 per share. We've grown our tangible book value per share, excluding the impact of AOCI at a compound annual growth rate of 12.9% since our IPO. Over the past number of quarters, I've emphasized our operating foundation, our earnings momentum and the strength of our balance sheet and all of those trends continue. We reported an adjusted return on average assets of 1.25%, and adjusted earnings per share was up 2.4% from the prior quarter and up 21% year-over-year, while adjusted pre-tax pre-provision net revenue increased by 2.7% from the prior quarter and 20% year-over-year. Our adjusted efficiency ratio remained roughly flat with the prior quarter at 58.4%. We have very strong capital ratios with tangible common equity to tangible assets at 10.4%, a CET1 ratio of 12.7%, and a total risk-based capital ratio of 15.1%. Following a further $120 million decline in construction loans outstanding in this quarter, our construction and development concentration ratio is now at 69% and our commercial real estate concentration ratio is 245%. Our current focus is on deploying excess capital to grow earnings per share and create long-term shareholder value. Our first priority for developing capital will always be organic growth. This quarter, we saw 7.2% annualized loan growth and 5.4% annualized non-brokered deposit growth. We anticipate mid-single-digit growth in the fourth quarter due to some seasonality and we're aiming for low double-digit loan and deposit growth in 2025 with a bigger challenge there on the deposit side with customer deposit growth. We're confident in the strength of our local economies, which continue to benefit from strong demographic trends, corporate investment and corporate relocations, and we're well-positioned to capitalize on those economic trends. This quarter, we added an additional six senior revenue producers, bringing our total hires in 2024 to 20. We have also brought on 16 additional revenue producers in our wealth management and mortgage group so far this year. As part of those hires, we expanded into Tuscaloosa, Alabama in the third quarter, and we're excited at the way that new team has hit the ground running. As a conservatively run $13 billion asset bank with a younger management team, a local authority model and located in some of the South's most attractive markets, we have a compelling story to tell to talent in both our existing and contiguous markets. And we'll continue to expand as we find the right cultural fits. Our second priority for capital deployment is bank acquisitions. We remain interested in combination opportunities that align culturally, geographically, and financially. Our third priority for capital deployment is continued marginal improvement in earnings through balance sheet optimization. Michael and his team continue to execute on additive transactions. We had a securities trade this quarter as we sold $319 million of securities at a pretax loss of $40 million and reinvested those proceeds at a 3% higher rate than their previous yield. So to summarize, I'm proud of the team for delivering another strong quarter of profitability. We're well positioned to continue growing earnings per share and improving on net profitability. Now, I'm going to let Michael go into our financial results in 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 $106 million, reported non-interest income was a negative $16.5 million. Adjusting for the $40.1 million loss on our securities trade and a $289,000 loss on the sale of other real estate and other assets, core non-interest income was $24 million, of which $12.1 million came from the banking area. We reported non-interest expense of $76.2 million, $63.3 million of which came from banking. Altogether, adjusted pre-provision net revenue earnings were $53.8 million. Going into more detail on the margin, net interest margin was down a couple of basis points at 3.55% on a larger earning asset base, which led to an increase in net interest income of $3.4 million from the prior quarter. Yield on loans held-for-investment was flat at 6.7%, while yield on average earning assets increased by four basis points from the prior quarter, primarily as a result of our 39 basis point increase in yield on securities during the quarter. We completed our securities trade in late August, and so we had one month of impact baked into our results this quarter. On the liability side, the cost of non-brokered interest-bearing deposits increased by four basis points during the quarter from 3.49% to 3.53% and cost of total interest-bearing deposits increased from 3.52% to 3.58%. We made some changes with our wholesale funding composition as we increased brokered deposits by $369 million, while paying off $179 million of borrowings, including $130 million from the bank term funding program. For the month of September, our contractual yield on loans held-for-investment was 6.68% versus 6.62% for the quarter and yield on new commitments in September were coming in around 7.8%. About half of our loan portfolio remains floating rate with $2 billion of those variable-rate loans having repriced immediately with the recent move in rates and $2 billion of loans that were repriced by the end of the fourth quarter. Of our $4.8 billion in fixed-rate loans, we have $150 million maturing over the remainder of 2024 with a yield of 6.69%. In 2025, we have $459 million maturing with a yield of 5.83%. For the month of September, the cost of interest-bearing deposits was 3.55% versus 3.58% for the quarter and cost of non-brokered interest-bearing deposits was 3.49% versus 3.53% for the quarter. As I've noted previously, we now have a significant amount of indexed deposits to reprice immediately with the change in the Fed funds target rate. Those balances stood at $2.7 billion as of the end of the third quarter. For the fourth quarter, we expect margin to be in the 3.50% to 3.60% range following September's 50 basis point rate cut and expect to stay relatively flat around that range with future measured interest rate cuts. Moving to adjusted non-interest income at $12.1 million, core banking non-interest income was again stronger than expected, driven by investment services income. Our baseline expectation in the given quarter has moved slightly higher, now $11 million to $12 million. Mortgage had another profitable quarter with a total pre-tax contribution of $575,000. We expect mortgage to continue to perform in this range for the balance of the year and are focused on continuing improvement of our efficiency in this business in 2025. We continue to focus on managing our expenses and core banking expense was $63.3 million for the quarter as compared to $61.3 million in the second quarter and $63.9 million in the third quarter of 2023 as we added relationship managers and increased our accrual for short-term incentive compensation. We expect banking expenses of $63 million to $65 million in the fourth quarter, leading to total banking expenses for the year of $248 million to $250 million. For 2025, we would expect 4% to 5% expense growth for the company, excluding any large team lift-out opportunities. On the allowance for credit loss and credit quality, our credit quality remained sound this quarter as we experienced 3 basis points of charge-offs. Our nonperforming loans to loans held-for-investment did tick up and is at 0.96%. The increase was driven by two commercial credits, which we expect minimal, if any loss content and some softness in our consumer loans, specifically mortgage and some manufactured housing loans. These consumers are generally more affected by upticks in unemployment and inflation, and we've seen some impact of that in our portfolio as it appears to be returning to pre-COVID levels. Speaking to the allowance, our allowance for credit loss to loans held-for-investment was at 1.65% at the end of the quarter as our outlook on the economy remained roughly the same as the prior period. On capital, and as Chris mentioned, we have developed very strong capital ratios with TCE to tangible assets of 10.4% and common equity Tier-1 ratio of 12.7%. We continue to focus on the best ways to deploy that capital to deliver consistent long-term growth in earnings and tangible book value.

All right. Thank you, Michael. And just a couple of things in conclusion here. First, I want to say we usually start this call at 8 O'clock in the morning when we release. We started at 10 this morning because we had two members of our Board of Directors that were inducted into the Tennessee Healthcare Hall of Fame this morning at a ceremony. One of those, Dr. Wright Pinson, who is the Deputy CEO and the Chief Health System Officer at Vanderbilt University Medical Center. The other one of those, Milton Johnson, who is the former Chairman and CEO of HCA Healthcare. So congratulations to both of those guys and that's the reason that we started a little later than normal. And I just want to say I'm proud of our entire team, including the Board for the results this quarter, and we look forward to building on that momentum, and we will open it up for Q&A.

The first question comes from Russell Gunther with Stephens. Please proceed.

Hi, good morning, guys.

Good morning, Russell.

Just a big picture question to start. Just looking at the press release, you guys mentioned the optimism for '25 given the current momentum and also the expected future rate decreases. So just big picture, could you walk us through how lower rates are an earnings growth catalyst for FBK?

We are in a good position with our balance sheet, as our assets and liabilities are well balanced. Approximately half of our loan portfolio is fixed, while the rest is variable, and around $2.7 billion of our deposits are indexed, which allows them to adjust quickly. Only 17% of our deposits are in CDs or fixed terms, giving us the flexibility to respond to rate changes. As long as changes are gradual, we believe we can maintain and potentially increase our margin. Our economies have maintained their momentum, albeit at a slower pace than in previous years, but the demand remains strong. Additionally, with ongoing market disruptions and a stable, experienced team, we are optimistic not just for 2025 but for the next two to three years from a macroeconomic standpoint.

I appreciate that. That's what I was looking for. Thank you. Could you provide a little more detail on the margin guidance? The 3.50% to 3.60% in the fourth quarter and then remaining flat from there suggests a measured pace of cuts. Can you explain your expectations regarding deposit betas as they decrease? You mentioned the level of indexed deposits, which seems healthy. What assumptions are you making about deposit betas as they decline, and when do you expect to reach that point? Is it possible to retrace the up-betas, and if so, when?

Yes. I'll start out. I'm expecting 100%. Michael and Travis, what do you say? I'm just kidding, Russell.

Yes, I'll take that, Russell. Yes. So first, good morning. And really, really actually proud of the team and the work that was done on the first 50 basis point rate cut. Quite frankly, I was expecting 25 and that was kind of what we set the team up for. And when it was 50, they responded well. The goal would be, right, if it was 60% on the way up, it would be 60% on the way down. And so that's what the goal is. Positive momentum after the first rate cut. As you know and everybody on the call knows, our markets tend to behave a little bit differently because of some of the growth characteristics that Chris mentioned. So we may see a little bit less than that, but part of the reason we did some brokered deposits in the third quarter was to be prepared for optionality on the balance sheet, right? So if we see higher-cost deposits that can't move lower, we can manage some of those differently, if they have to leave, that gives us opportunities and so really a lot of that was about kind of prefunding any higher-cost deposit runoff and creating optionality for the company. So we think we can execute on betas just like we did on the way up. And so far, the team has responded really well.

Great. I appreciate it. Thank you both for taking my questions.

Thanks, Russell.

The next question comes from Catherine Mealor with KBW. Please go ahead.

Thanks, good morning.

Good morning, Catherine.

One follow-up just within the margin, just a nitty question. As we think about bond yields in the fourth quarter just to fully reflect the restructuring you did, where did you end the quarter for the whole portfolio?

A little north of four, Catherine. So you can be right in that range within the fourth quarter.

Okay, perfect. You provided details on fixed versus floating loan yields and the fixed rate repricing. I'm curious about your perspective on loan yield for the next couple of quarters, particularly regarding any potential downside. Additionally, could you share insights on new loan production in light of the recent rate cut?

Yes. I will begin and then let Travis discuss market conditions. One reason our loan yields have remained relatively stable is that we had $120 million in construction balances transition to permanent loans or exit the bank during the quarter. These typically yield higher returns, and some of these will be coming off in the fourth quarter, leading to a decrease in yield on that segment. New originations were funded at around 7.80 in the third quarter. Frankly, our customer base has reacted positively to higher rates, remaining above 8% for most of the last 18 months and still close to that figure in the third quarter. Travis, do you have any insights on the market?

No, I don't think the market has moved drastically on fixed repricing. I think that 7.5% to 8% depending on the credit quality is still much in line in the market.

Okay, great. And then a follow-up on credit. We saw one of your peers sold their manufactured housing book. Just any commentary from you on how your book looks, any kind of credit concerns you're seeing on manufactured housing?

Yes, I'll start. It's Michael. So we did see that. We knew that book well, the team well. Yes, we've been in the business since 2005 and the highest charge-offs we've ever seen in that business is about 91 basis points. On the retail piece, the channel piece were reserved at about 5% and that's for kind of some of these unknown reasons coming out of COVID, government stimulus, inflation. And so pretty thoughtful in how we're approaching that and any concerns with it. That being said, we've seen an uptick in past dues, but we haven't seen a whole lot of losses materialize. It's probably running 30 basis points or so in charge-offs. So pretty normalized to pre-COVID for us. And we still like the business a lot actually and think we can do really good things there.

So yes, I would just add this, Catherine. Like Mike said, we were familiar with that team in that book and that's the old Reliant team. And so if you look at our charge-off history since 2019, we've had one year where we had 53 basis points of charge-offs. The rest of those would have been somewhere between 16 basis points and about 33 basis points. And so that's a five-year history. And I think that's kind of different than what they'd experienced. So there's some differences, I think in the methodology in the book there. I would say this, we're watching past dues in that portfolio carefully, because we expected, if you go back to '20, '21, '22, you had so much stimulus money that the past dues were really abnormally low and the charge-offs were abnormally low if you compare it to our previous history. And so we've seen the past dues return to a level that we saw in 2018, 2019. And so I would say this thing that we watch going forward is that it should level off here. If it continues to go up from here, then we may readjust, but it should level off here. But at this point it's just returned to what we consider to be normal.

Okay, great. Very helpful. Thank you.

Our next question comes from Steve Moss with Raymond James. Please go ahead.

Hi, good morning. I would like to start by discussing the recent changes we've observed.

Morning, Steve.

Good morning, Chris. Could you provide more details on the factors driving C&I loan growth this quarter? Additionally, as you look ahead at the loan growth outlook, where do you anticipate those drivers emerging in the coming year?

Yes. Chris, I'll let you comment, but the good news from my perspective is that we don't see major single drivers; instead, it's broad-based rather than being tied to just one or two large credits. We did have a couple of notable accounts, including one from a very large regional bank. The two noteworthy ones I have in mind involved business coming over from two different large regionals. The rest of the growth is primarily from community bank type commercial and industrial loans. Travis, would you like to add anything to that?

Yes, I would agree. I mean, I think some of the new revenue producers we hired in late '23 and early '24 are starting to hit the ground and bringing over some of their more established clients. And then there's not one particular industry or area, it's really broad-based both geographically and industry. And we're seeing a lot to Chris' point, we're seeing a lot of just core, you know, smaller top C&I growth that brings over the full relationship.

Okay, great. In terms of your concentrations in commercial real estate and construction, they have significantly decreased from 12 or 18 months ago. I'm curious if you believe this is the lowest point for the decline in those ratios and how we should consider those portfolios.

Yes, I would describe it as comfortable. We feel very good about our current position. When we assess our overall risk profile, especially regarding our balance sheet, we are confident in our capital levels and credit metrics, as well as various concentrations beyond just the two we've mentioned. We believe we have some flexibility within our policies to make slight increases, though we're not actively planning for that right now. We prefer keeping things as they are. We maintain close to 250 in commercial real estate and operate in strong geographic areas. Additionally, having a construction concentration below 70% gives us reassurance based on our geography and credit history. Therefore, I anticipate these ratios will remain stable within a similar range. While I wouldn't say we're at a definitive bottom, I expect them to stay in this relative range.

Okay. I appreciate that. And then just in terms of capital deployment, you know, obviously organic growth is first, I hear you on M&A being second. Just kind of curious if Chris, if discussions have picked-up here in the last couple of months or has there been any change in your opinion with activity there?

I never know Steve exactly how to answer this question because those conversations are just kind of a part of what you do and when you're in a consolidating industry and we're in a consolidating industry. And so I guess I would say maybe the intensity of some of those conversations or the direct nature of some of those conversations maybe has picked up a little bit that would indicate that there are entities out there that probably have a little more intent than they had a year or two ago. And so I would say that, but in terms of the volume or the ones that we speak with, there may be a little bit of increase there. And part of that's on our part because our geography continues to grow. We mentioned one in Tuscaloosa that our geography continues to grow. And so we perhaps are a little more intentional in reaching out further geographically than we have been previously.

Awesome. I appreciate all the color there. Thank you.

Sure.

Our next question is a follow-up from Russell Gunther with Stephens. Please go ahead. Hi, thanks for the follow-up, guys. On the asset quality commentary, appreciate the color that you guys gave. Last quarter, you mentioned you were seeing more inflows than outflows into the adversely classified loan buckets. So one, wondering if that was still the case again in 3Q? And two, as you guys contemplate further rate cuts, how do you anticipate the inflow-outflow puts and takes?

Yes, this is Travis. We continue to observe costs and flows both in and out, and it remains business as usual. It takes time to navigate the process of upgrading or getting things back on track, or even out of the bank, but there is still considerable activity concerning outflows. The third quarter was not as robust in this regard. We have several cases we are working on and are close to either upgrading them or removing them from the bank. Michael mentioned two significant inflows on the commercial side. We received two loans that total around $10 million combined, which was a noteworthy influx. We are optimistic about these loans, despite them being adversely classified, and we will closely monitor them. From both a collateral and guarantor support perspective, we are quite confident that we will incur very little, if any, losses on those.

Yes, I would like to add something after reviewing this situation over the last month. I feel there is something different here. I still have memories from 2008 to 2009 that affect my perspective. This might relate to changes in underwriting. Though I was at another institution during that time, I understand that issues come up and must be addressed, but it seems that the losses are not as significant this time. It takes time to resolve some of these matters, yet even when there are losses, they do not appear to be on the same scale as before. This is just a point I wanted to mention.

Yes. Regarding your second question about the impact of the rate change, I don't believe it will have a significant effect. The challenges we're facing are mainly one-off issues unrelated to the raised rates; they stem from partner disputes or similar matters we're encountering. Overall, our portfolio should eventually benefit our borrowers, but I don't see it having a substantial impact on our asset quality.

I appreciate all the color, guys. Really helpful. Thanks for the follow-up.

Sure. Thanks, Russell.

That concludes our question-and-answer session. I would like to turn the conference back over to Chris Holmes for any closing remarks.

Okay. Well, thank you all very much for joining. We always appreciate your support, and we look forward to moving into the final quarter of the year and making that a good one.

All right. Everybody, have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.