FBK - NYSE

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. [Operator Instructions] 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. 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 asset 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 being 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 compelling story 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 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 $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 in our results this quarter. On the liability side, 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, 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 index 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 in 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. I'll now turn the call-back over to Chris.

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 Board for the results this quarter, and we look forward to building on that momentum, and we will open it up for Q&A.

[Operator Instructions] The first question comes from Russell Gunther with Stephens. Please go ahead.

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?

Yes. So a couple of things. You know, we are relatively well matched between the asset side of our balance sheet and liability side of our balance sheet and we have about half of our loan portfolio is fixed, the remainder variable and about $2.7 billion of our deposits are indexed. So they move immediately and frankly, we only have 17% of our deposits that are in CDs or fixed term. And so we think we have a lot of variability there and we can execute as rates move. And as long as rates move gradually, then we think we're in actually good shape to maintain margin perhaps and look for some areas to expand margin. And so -- and then with our -- with our economies that have frankly never totally lost momentum, they have -- certainly the momentum is less than it would have been two or three years ago, but they continue to be quite good. And so we think there's demand there. We think with other -- just other activities that create disruption in the markets and the fact that we've got a stable team that's been together for a long time, we think that not only '25, but we look out over the next two or three-year time horizon and we're very optimistic from a macro -- so that's kind of a macro pic.

I appreciate that. That's what I was looking for. Thank you. And then just perhaps a little more specific on the margin guidance. So the 3.50% to 3.60% in 4Q and then kind of flat from there, can you -- and it sounds like that's with sort of a measured pace of cuts. Can you walk us through what you guys are thinking about for deposit betas on the way down? You mentioned the amount of indexed, which is a healthy amount. But what are you guys assuming from a deposit beta perspective on the way down and sort of when you get there. Can you retrace the up-betas or 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%-ish 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. And then on loan yields, you gave us the amount of fixed versus floating versus the fixed rate repricing. Is there any -- there's a lot of moving parts within that too. And so just kind of curious your thoughts on loan yield, maybe just over the next couple of quarters, how much of a downside you see to that? And just any commentary on what has happened so far with new loan production just given the rate cut we've already seen.

Yes. And I'll start and then I'll let Travis talk about kind of market conditions. So one of the things you see in our loan yields been relatively flat, right, is we had $120 million in construction balances that moved to permanent or left the bank in the quarter. And so those tend to be higher-yielding loans and we have some of those coming off in the fourth quarter, which is why you have such a higher yield on that book that's -- it's coming down. So new originations funding up type business was around 7.80 the third quarter. And quite frankly, I know we've talked about this before, our customer base, the market has responded very well to higher rates. We've been north of 8% for the better part of 18 months and still hovering right around that number in the third quarter. So Travis, anything on 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 in manufactured housing?

Yes, I'll start. It's Michael. So we did see that. We knew that book well, the team well. Yes, we're -- so I guess 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, pretty normalized to pre-COVID for us. And we still like the business like 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, 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 -- 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 work 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 -- it should level off here. If it continued 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.

[Operator Instructions] Our next question comes from Steve Moss with Raymond James. Please go ahead.

Hi, good morning. Maybe just starting on the --

Morning, Steve.

Morning, Chris. Maybe just starting off on the loan growth here. Maybe just a little more color on what were the drivers of C&I loan growth this quarter? And maybe take that a step further, just how -- as you think about definitely more constructive on the loan growth outlook going forward, where do you see those drivers in the upcoming year?

Yes. Chris, I'll let you comment, but I will make this kind of overriding comment. Is the good news from my perspective is we don't see single drivers that are major -- we see it broad-based as opposed to being a single or double large credits. We did have a couple of nice ones in there, one of which we won from call it a very, very large regional banks, both of them, the ones that I'm thinking of that were -- the two that were actually noteworthy, but still again not oversized would have been a business that moved over from two different large regionals. And then the rest of it, I'd say, is very much out I'll call it community bank type C&I. Travis, would you 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 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. And just in terms of your commercial real estate and construction concentrations are way down from where they were 12 or 18 months ago. So curious here kind of is this -- do you think this is the bottom for the decline in those ratios? And just how do we think about those portfolios?

Yes, we're -- I would characterize it as comfortable. It's very comfortable where they are. And when we evaluate our entire risk profile and I'm going to back up from a macro standpoint for a minute and say, when we just evaluate the risk profile of the company and look at the risk that we take on in our balance sheet, we actually feel pretty good with -- if you look at capital level, if you look at overall all credit and then you look at various concentrations, not just those two, we publicized those two, but we have others. We actually are very confident in our risk profile at the current time, add liquidity to that. And so we think we've got room to -- within our policy, we have room to even grow those a little bit, not a lot from there, but we would have room to even grow those a little bit. That's not saying that that's really in the cards for us. We like them, frankly, about where they are. Again, we run close to 250 on CRE and we're in really good geographies. And so that's a factor. And once we're under 70% on a construction concentration given our geography and our credit history, we feel pretty good about those. And so I'd say you'll see them keep in that same relative range. I wouldn't exactly call it bottom, but you'll see it in that relative range. See both of those.

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 are the direct sort of 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, maybe a little bit of increase there. And part of that's on our part because our geography continues to grow. We mentioned one in the 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. Hi, this is Travis. We still see cost and flow both in and out. It's still business as usual. It takes time to work these things through the process of getting them either upgraded or back on track or even out of the bank, but we're still seeing a lot of activities on the outflows. Just it was not as robust in the third quarter. We still have several that we're working through and really close of getting them either upgraded or out of the bank. We obviously, Michael referenced two big inflows on the commercial side. We did have two loans. They total -- combined, they total around $10 million. That was a big influx. We feel good about them even though they're adversely classified and we have to keep a close eye on them. But from a collateral standpoint and the guarantor support standpoint, we feel pretty confident that we'll have very little, if any losses on those. So --

Yes, okay. And I would add one thing from really reviewing those -- this lot over the last month. And that is -- it seems to me something that's a little different. Unfortunately, I'm still scarred from 2008 to 2009 and I remember some of that. But -- and maybe this is a change in the underwriting. Of course, I was at a different institution at that time, but the -- you do encounter some issues and you have to work through those issues, but it just doesn't seem like the losses are there and so it takes a little bit of time to work through some of these, but the lost content doesn't seem to be -- even when there is lost content, it doesn't seem to be the same magnitude. So it's just one bit of commentary.

Yes. And then I guess your second -- your second question on the rate change impact, I don't think it's going to have a material impact, but the issues we're seeing are the one-off issues that have nothing to do with the elevated rates, just it's a partner dispute or something like that is what we're experiencing. So within our portfolio, I guess it -- it's going to ultimately help our borrowers, but I don't think it's a meaningful either way 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.