FB Financial Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 17, 2023

There are 11 speakers on the call.

Operator

Morning, and welcome to the FB Financial Corporation's Third Quarter 2023 Earnings Conference Call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer and Michael Matti, Chief Financial Officer. Also joining the call for the question and answer session is Travis Edmonson, 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.

Operator

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 of 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.

Operator

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 ks. Bernstein. 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 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.

Operator

1stbankonline.com and on the SEC's website at www.sec.gov. I would now like to turn the presentation over to Chris Holm, FB Financial's President and CEO.

Speaker 1

All right. Thank you, Jason. Good morning. Thank you all for joining us on the call this morning. We always appreciate your interest in FB Financial.

Speaker 1

For the quarter, We reported EPS of $0.41 per share and an adjusted EPS of $0.71 We've grown our tangible book value per share excluding the impact of AOCI at a compound annual growth rate of 14% since our IPO. In recent quarterly calls, I've discussed priorities of maintaining the strength of the balance sheet and improving internal processes Chris and his team are working with the goals of efficiency and scalability. We've made significant progress on both of those priorities. First, let me talk about the balance sheet. Our capital positions are strong across the board, including a CET1 ratio of 11.8% In a tangible common equity to tangible assets ratio of 9.2%.

Speaker 1

And in doing that, we haven't reclassified Any of our available for sale securities has held to maturity. Our capital and reserve levels are prepared for difficult times, but we don't expect economic conditions to become as severe as our preparation allows for. Our liquidity position which is detailed on page 11 of the financial supplement that we provide each quarter continues to be strong. We keep our securities portfolio plus our loans as a percent of deposits near or under 100 percent to keep from over leveraging our deposit base. If you use that metric to compare banks, you'll find that we have one of the lowest levels of leverage often the lowest on our deposit base among our peers.

Speaker 1

When you consider that our deposit base is quite granular and we make very little use of brokered and Internet deposits, this keeps us in a strong liquidity position. Our credit portfolio continues to perform well, although we did move one C and I loan to non accrual in the quarter. Outside of that credit, We haven't seen significant changes quarter to quarter. Again, we're positioned very well with an ACL of 1.57 and his team are working on a number of key areas. We also reduced our CRE and construction exposure over the last 5 quarters.

Speaker 1

CREs within our long term tolerance level and construction will be there by the end of the year. And so as we enter the Q4, the balance sheet Fields well positioned. We built some momentum there and we're excited about the growth opportunities that lie ahead of us. From an operational perspective, we feel as strong as we ever have and we're focused on improving profitability and returns. Majority of the benefit will be felt in the Q4 and beyond.

Speaker 1

On the revenue side, as you've seen in the earnings release, we executed a securities trade that will lead to improvement in net interest income in Q4 and in 2024. And Company. We continue to look for ways to continue to enhance our profitability. The margin, net interest margin has been difficult forecast over the last several quarters, not only for ourselves, but for others as well based on the discussions we've had with our peers. The margin is becoming somewhat less volatile because the velocity of change in the variables has slowed.

Speaker 1

Models have been tweaked and in some cases overall and confidence in the forecast is increasing. Funding costs will continue to increase as long as we remain in this rate environment, but the rate of increase on our deposits has slowed materially and we expect the NIM to remain in the same relative band that we experienced in the last two quarters for the next couple of quarters. Again, Michael is going to provide some deeper analysis in his commentary. On expenses and significantly we reduced our run rate core banking non interest expenses by $15,000,000 The realization of most of those expense savings begins in late October, so we expect a couple of months of benefit in Q4. By mid January, we anticipate achieving an additional $5,000,000 in annualized expense reduction, so $20,000,000 annualized in total.

Speaker 1

We currently expect core banking non interest expenses of $255,000,000 to $260,000,000 in 2024, which compares to 3rd quarter core banking expenses of $66,200,000 or $265,000,000 annualized. M and A conversations seem to be picking up across the industry and we're Chris. Increasingly receiving inbound calls asking to engage in those discussions. As we've said before, we don't believe in acquiring for the sake of growing our asset Bass, but there are some banks across our geography that we respect and believe would be great cultural and strategic fits. Following our internal efficiency and scalability initiatives over the last couple of years, we're very confident in our ability to effectively Acute on M and A should the right opportunities arise.

Speaker 1

So to summarize before handing the call over to Michael, we spent time and resources focused on internal improvements in enhancing our balance sheet. We made ourselves a better place to bank for our customers, a better place to work for our associates and in that process We've improved our operational efficiency. At the same time, we built our capital, maintain strong reserves and put ourselves in a great liquidity position. Increasing profitability and returns are in focus for us and we're ready to execute on attractive opportunities that may come our way. Now I'm going to let Michael go into our financial results in a little more detail.

Speaker 2

Thank you, Chris, and good morning, everyone. It's A bit of a noisy quarter due to our securities trade and the charges related to our efficiency initiatives. So I'll take a minute to walk through this quarter's core earnings. We reported net interest income of $100,900,000 reported non interest income was 8,000,000 Adjusting for the $4,200,000 loss on sale of securities and $115,000 gain on the sale of OREO, We had core non interest income of $22,100,000 Of that $22,100,000 $10,100,000 came from banking. We reported non interest expense of $83,000,000 and adjusting for $4,800,000 in charges related to the efficiency initiatives, We had core non interest expense of $78,200,000

Speaker 3

of that

Speaker 2

$78,200,000 $66,200,000 came from banking. So we delivered consolidated core pre tax pre provision earnings of 45,000,000 and banking core pre tax pre provision earnings of 44,800,000. Going into more detail on net interest income and our margin, I'll touch first on our securities trade. We sold $77,000,000 of securities at a $14,200,000 pre tax loss at the end of September. So given the timing, we did not see any real benefit to net interest income in the Q3 from that transaction.

Speaker 2

The trade should deliver approximately $4,000,000 in additional net interest income annually. At this point, we're continually examining how we can increase our yield on our liquidity. We would be comfortable with another loss in the $10,000,000 to $20,000,000 range if the trade met our parameters on earn back, expected duration, earnings accretion and capital dilution. We wouldn't do a trade that would not meet our parameters as there will be many options to deploy capital over the next couple of quarters. Next, our contractual yield on loans increased by 16 basis points during the quarter to 6.32%.

Speaker 2

For the month of September, our contractual yield on loans held was 6.35%. Yield on new commitments for the month of September were coming in a little over 8%. Remember, 48% of our loan portfolio remains floating rate, which leaves $4,900,000,000 in fixed rate loans. Of that $4,900,000,000 of fixed rate loans, we have about $200,000,000 maturing in the 4th quarter at a yield of about 6.7%, $300,000,000 maturing in the first half of twenty twenty four with a yield of 6.05 percent and about $175,000,000 maturing second half of twenty twenty four with a yield of 5.65 percent. So about $680,000,000 maturing through year end 2024 at a weighted average yield of about 6.13%.

Speaker 2

Cost of deposits continue to rise, but as Chris mentioned, we've seen that rate of increase Moderate recently. For the quarter, our cost of interest bearing deposits increased by 27 basis points to 3.33%. For the month of July, August September, our cost of interest bearing deposits was $3,200,000 $3,430,350,000 respectively. Incremental interest bearing deposits for the month of September were coming onto the balance sheet at around 3.6%. As a reminder, we'll have public funds account begin to build in the Q4.

Speaker 2

We would expect $400,000,000 to $500,000,000 to come back on to the balance sheet in the 4th quarter with a cost of a little over 5%. Those gives and takes left our margin for the quarter at 3.42%, effectively flat for the 2nd quarter. With all the moving pieces that I laid out above, we anticipate margin being in the 3.30 to 3.40 range for the next couple of quarters. Moving to non interest income, non mortgage non interest income continues to perform in the $10,000,000 to $11,000,000 range, and and we expect that to remain in the band plus or minus the next few quarters. Our non interest expense also needs more explanation than is typical at this quarter.

Speaker 2

At this point, we've taken $15,000,000 in annual expenses out of our run rate, most of which occurred in September early October. We've also acted on an additional $5,000,000 in annual expense reduction that will be realized by the end of January. C. These reductions have come through a combination of a voluntary early retirement program and some position eliminations, and Company, the company's Chief Financial Officer, the company's Chief Financial Officer, the company's Chief Financial Officer, the company's Chief Financial Officer, the company's Chief Financial Officer, the company's Chief Financial Officer, the company's Chief Financial Officer, the company's Chief Financial Officer, the company's Chief Financial Officer, the company's Chief Financial Officer, the company's Chief Financial Officer, Most of the expense reduction still to be realized will come from a closure of 7 branches, which we have communicated internally and to customers. For the Q4, we expect banking non interest expense to be in the $64,000,000 to $66,000,000 range.

Speaker 2

And for 2024, we anticipate annual banking non interest expenses and Chris. In connection with the early retirement program and related severance costs. We also took $1,400,000 in charges related to this project in the second quarter. Citi. So we're at about $6,200,000 so far.

Speaker 2

We anticipate an additional $5,000,000 to $7,000,000 in charges through the 4th and 1st quarters as we continue our focus on efficiency and profitability. On the ACL and credit quality, our ACL to loans held for investment increased by 6 basis points for the quarter or a $5,500,000 increase in the allowance. Much of that $5,500,000 was related to specific reserve on the credit Chris mentioned earlier. That credit was also almost entirely responsible for our $10,400,000 increase in non performing loans held for investment this quarter. Excluding this credit, our AECL to loans held for investment would have remained roughly flat as economic indicators remained in line with the prior quarter.

Speaker 2

Smith. I'll close by speaking to the progress that we've made in the past year on our recent priorities of balance sheet strength through liquidity and capital management. In the past 12 months, we've increased our TCE to tangible assets by 60 basis points and total risk based capital by 110 basis points. Our loan to deposits have declined from 91% to 87%. Our construction development bank level Tier 1 capital plus allowance declined from 124% to 104% and will continue to move lower and closer to our long term operating target for that ratio of 85% to 90%.

Speaker 2

On balance sheet liquidity to tangible assets has increased from 7.4% 12 months ago to 11% today. And we have grown our available sources of liquidity from $6,200,000,000 in the Q3 of 2022 to $6,800,000,000 today. As Chris said, we feel very well prepared for any economic downturn and our current view is that any downturn we experience will be milder than what we have prepared for. I'll now turn the call back over to Chris.

Speaker 1

All right. Thanks, Michael, for that color. And to summarize before going into questions, our balance sheet is situated in a position of strength. We're focused on improving profitability and returns. We're excited about the future.

Speaker 1

And from a financial Spector. We feel very prepared to execute on any opportunities that may come our way, so both financially and operationally. So that concludes our prepared remarks. Again, thank you for your interest. And operator, we'll open up the line for questions.

Operator

Citi. We will now begin the question and answer session. Are Chris.

Speaker 3

Citi.

Operator

Our first question comes from Stephen Scouten from Piper Sandler. Please go ahead.

Speaker 3

Hey, good morning, guys. I appreciate the time this morning. I wanted to get some more information on the security sale. I think last quarter you had said kind of bands you were looking at was 9 to 27 months on the earn back. It looks like this is a little higher than that.

Speaker 3

Kind of curious a couple of things. What sort of securities did you Reinvesting at that $6.43 yield and maybe what did you sell that kind of precipitated that longer earn back? Were these Yes. Was it a longer duration portion of

Speaker 1

your securities book? That would be helpful. Thanks.

Speaker 2

Yes. Stephen, good morning. Yes, it was a little bit longer, but a little over 3 year earn back. And so what we as we went through the process, we thought about Even if rates move down 300 basis points, these securities we sold, which are mostly mortgages and some CMOs, Would be with us in any rate environment. So they've extended out so far that it just made sense to kind of get rid of the dogs, As I'm calling them internally, reinvestment of some agency government agency stuff, FHLB type paper.

Speaker 2

And Company. And so that's where the yield came from, although we are seeing kind of current market securities all in that range. And so all well within Our guidelines and duration, not any extra credit risk there.

Speaker 3

Okay. That's helpful. And then maybe thinking about just that one C and I credit that you noted that kind of encapsulated a lot of the move in the credit metrics. Any additional information you can give us there kind of what sector that is? And if there's any Any kind of lingering issues along the same lines in any other similar sectors.

Speaker 1

Sure, Stephen. It's Chris. Good morning and Travis Edmonson, our Chief Banking Officer is in here with us as well. So let me just make a comment. It's To C and I credit, you're familiar with a bankrupt there was a bank As you guys I think know, we were not involved in that at all.

Speaker 1

We do have a client of Which that bankruptcy, they was a vendor to that client. And so that was the one C and I credit, roughly a $10,000,000 credit for us. And it is actually pretty well secured and has guarantors on it Just about all of our credits of that type do, but once it goes into bankruptcy, we're fairly conservative and this is not, but there's a Major vendor that is in bankruptcy. And so we're fairly conservative with how we handle those. And so we went ahead and just put it on non accrual And took some extra reserve on it, even though we are pretty optimistic on it.

Speaker 3

Got it. Okay. And I know I think Michael said no real changes in your ACL kind of mindset and underlying economic scenarios, but obviously you took the reserve up even in light of only 2 basis points of charge offs.

Speaker 4

So it feels like a lot most

Speaker 3

of that is really just Conservatism on your end and you never know what you don't know is coming down the pipe. Is that the right way to think about it? Or would we expect additional reserve

Speaker 2

Well, I think we're well positioned, Stephen. And I think this range, it didn't move up because of the credit we're talking about individually evaluated Loane, but I think you'll stay in this range. We feel comfortable with where we are and like you said, we haven't seen deterioration in the portfolio. And so right now that 150, 155 range Where we've been is likely where we'll stay.

Speaker 1

Yes, Stephen, I would just add. And Michael and I both alluded to this in comments. Both our capital levels and reserve, we're prepared for difficulties moving forward. We don't really actually expect things to get that difficult, but our preparation Allows for things to get more difficult than we anticipate they will.

Speaker 3

Yes, that's great. Perfect. All right, guys. Thanks

Operator

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

Speaker 5

Thanks. Good morning, everyone.

Speaker 2

Good morning, Catherine.

Speaker 5

I just I wanted to ask about your outlook for balance sheet growth. You've been really conservative on your outlook for loan growth over the past couple of quarters and You saw loans pull back again this quarter. Just curious, how much how many more quarters Your gut would be that we'll see a decline in loan balances before we kind of hit that inflection and start to see growth again.

Speaker 1

Yes. So, Catherine, just a couple of comments. You're right. We have been conservative on the loan growth side. And we've said, right now for us and I talked about when I was talking about the liquidity, not over leveraging our deposit base.

Speaker 1

And so That's a real governor for us. And so we have been conservative on that side. We still see opportunities particularly in our construction portfolio and we're not growing our overall CRE portfolio. So when you put those dynamics in there, It's going to probably be muted for another quarter, maybe 2, but we do expect some growth in 2024. And so and again, that will come on C and I and we'll be in a Different position.

Speaker 1

Also, it also depends on economic circumstances and we'd like to see clear through Interest rate increases and we'd like to see clear through not seeing significant economic deterioration into some kind of thrown out recession. So Travis, do you have anything to add to that?

Speaker 6

First off, good morning, Catherine. Nice to talk to you. Nothing much to add to that. I think you're spot on. We still have a lot of opportunities In our markets, we're in a lot of growth markets, Birmingham, Huntsville, Memphis, Knoxville and the list goes on and on.

Speaker 6

It's more of a self imposed governor at and when we decide that the economies looks better for us, where we can see more clearly into the future, We will turn on some more growth initiatives internally.

Speaker 5

Are you seeing Chris. On the C and I side, it seems like you talked about construction and CRE that you're really not lending in right now. Can you just kind of talk generally about what the Landpapers and C and I Lending

Speaker 6

today. Yes, we're seeing a lot of opportunity. Of course, there's a lot of competition in that space Today, a lot of other institutions are derisking their balance sheet similar to what we're doing. But we're seeing a lot of opportunities. And we've actually grown committed balances in the C and I space by a little over $100,000,000 last quarter.

Speaker 6

So we continue to really engage in that space and we're seeing some

Speaker 5

Great. And then on the deposit side, your Chris. NIM guide was really helpful and seems like they're stabilizing, which is great. Can you just talk about just the incremental cost of deposits and just kind of what you're seeing within The behavior of your clients, maybe one where you're seeing the most stress in terms of higher deposit costs versus where things are really starting to ease, maybe in products or kind of deposit type.

Speaker 2

Hey, Catherine, it's Michael. Good morning. I'll start and Travis can jump in. I mentioned public funds, Most of our deposit outflows in the Q3 were down $230,000,000 but $300,000,000 outflows in public funds, so that all of it Centered around that. Those come back on, I mentioned 5% range.

Speaker 2

Those are mostly expected to be fed funds minus a little bit, so highly competitive, expecting full market rates there. Large Customers, commercial, corporate are expecting 5 plus percent on deposits that you get in large balances. The challenge we face and I know we've talked about this before as you look across our footprint, talk at the banks whether they're community banks or smaller or Some of the larger institutions, the community banks have CDs priced at 5.75 for 6 months, right? And so that's impacting our retail. And then you get the money market stuff that's still over 5%.

Speaker 2

What we've seen is because the velocity of rate increases have slowed The constant request for repricing has moderated and so that's been a benefit. And as long as there's stability, I think We continue to see that, but new deposits, new customers, they expect market rates.

Speaker 6

Correct. Just one quick thing to add. A lot of the people this time last year were chasing yield where they could get much higher yield, right? We're talking from 1% to 4%. It's been somewhat stabilized over the last few quarters where you might go from 5.25 to 5.75 and there's not as many people Chase and that incremental yield in the footprint.

Speaker 6

So that's helped us a little bit.

Speaker 5

That's great. All right. Thank you for all the color. Go ahead, Chris.

Speaker 1

Yes. I want to make one. So As we look forward, as Michael said, the velocity of change is really slow. One of the key variables for us over the next 2 quarters, I'd say, is public funds, and that the flow in and out of public funds. Sometimes we see not sometimes all the time we see a flow out of in the second quarter That's a combination of the way the funds come into most of our public entities as well as Some folks making a market share play for reporting purposes and then they come back in the 3rd Q4 and those tend to be when they come back in there at higher, those are some of our highest priced and so We're going to manage through that in the 3rd Q4.

Speaker 5

So it's really a function of your public funds that are driving the modest but more margin pressure in the back half of the year

Operator

The next question comes from Brett Rabatin from Hovde Group. Please go ahead.

Speaker 7

Hey, guys. Good morning.

Speaker 2

Good morning, Brett.

Speaker 7

I wanted to start off, It's college football season and I know you guys fall quite a bit. And I know there's been taking some actions here in 3Q on offense and defense with the securities portfolio and the expenses. Wanted to see what else you might be considering doing to get Quotback in the playoffs in 'twenty four or if you feel like what you've done is kind of what you're able to do and if maybe

Speaker 1

Hey, Brett, this is Chris. You're right. It is college football season. We are fans and we do have The Monday morning ribbing of everybody that's on the losing end, so it's no fun on Monday morning here out here when you lose. And it's no fun day in and day out when you lose in banking relative to How we perform.

Speaker 1

And so, if you go back and look at our historical performance, it doesn't just go back actually 2 or 3 years. If you go back to when we start the call, we talk about where our compound annual growth rate of our Book value of the tangible book value of our stock is since we become a public company, we go back and we actually look Further back than that and we've always been a premier performer and we that's one of our key foundational tenants here. We're going to be an elite performer. We did over the last, I'll say 4 quarters or so, 4 or 5 quarters, said, hey, there are some things that we need to do To make sure that we have the scalability of the company and the foundations of the company where they need to be. So we spent some money, Which we knew would hurt our performance and we and Company.

Speaker 1

Have taken and we say we took our foot off the accelerator. We've done some things and but we feel hopefully you're beginning to hear When we talk about our confidence moving forward and we talk about some momentum moving forward,

Speaker 3

we are

Speaker 1

We'll be back in the playoffs and competing for the championship. And so that's game on from our standpoint. Just keeping with Your metaphor there, it's game on from our standpoint. You saw improvement last quarter that was Meaningful, you see improvement, some improvement this quarter that was meaningful. You see the steps that are already going to improve next quarter in 'twenty four.

Speaker 1

And so We have we continue to generate leverage. When we talk about strengthening our balance sheet, what we're doing is creating levers that we can pull as we go through 2024 to improve our profitability Our bar is higher than any of the investors out there. Our internal bar is higher than any of the investors. And so Again, we appreciate the metaphor and we are playoff caliber at this point and competing for the championship.

Speaker 7

That's good to hear. It sounds like you're expecting 24 to be a lot improved, so that's good to hear. I wanted to ask back on credit. You've got the slide in the deck about the office portfolio, but I'm actually curious, it's slightly smaller, but wanted to ask actually about hotels and just if we have any kind of consumer driven weakness in the next year or 18 months would seem like Hotels might actually be somewhat at risk. And so I was curious if you guys have done any work on RevPAR or occupancy Cushions for the hotel portfolio and maybe how you think about that book?

Speaker 1

Yes. So we do have a hotel book again. That one also is not outsized For us in terms of where it sits kind of on a comparative basis, I don't have those specific stats And we don't have our Chief Credit Officer with us today. But We have been watching hotel and we frankly haven't been doing much new there over the last couple of years For all the things that you just mentioned, we do have a few, but when we're pretty much restricted to really strong flags In nice in good areas. We've got some suburban stuff.

Speaker 1

We don't we do have a little bit of central business district hotel stuff, but and Travis, I'm thinking the ones I can think of, we've got a Hampton Inn in the Central Business District.

Speaker 6

Correct.

Speaker 1

And but it's that type of flag if We've got if we've got that, so.

Speaker 6

Yes. Good morning, Brett. This is Travis. One other thing I would add is, it wasn't too long ago It was the pandemic where hotels were on everybody's mind. And we did a thorough analysis during that time frame to make sure that our borrowers were able So we stand that pandemic.

Speaker 6

And what we found was we have very strong borrowers in this asset class that did everything that they said they were going to do. We continue to monitor that portfolio. We're not seeing any struggles to date on RevPAR. We are mindful as the consumer spending goes down in 24 that's Something we need to definitely keep our eye on, but no alarms at this time.

Speaker 1

Yes. And Michael, would you remind me, we have done in the last Say, you're 18 months, 1, again, I guess I can say it's a Hilton and it's with just fantastic parameters around it. That has we had extremely high expectations for it and it's crashed through them. And so it's Again, that's the only one we've done here very recently.

Speaker 7

Okay. If I could sneak in one last one just around M and A. And Chris, it sounds like you're more interested in expansion if it makes sense strategically. And so I think Citi. Everyone in the environment realizes that's kind of the tough thing is that the marks on the balance sheet.

Speaker 7

Can you guys talk about Or maybe Chris, just how you think about dilution to tangible book or what kind of parameters would be acceptable to you Relative to an opportunity.

Speaker 2

Yes, Brett.

Speaker 1

Certainly, there's a lot there's conversations that seem to be picking up and seem to be a lot of that going on. I think folks are thinking I think 24 is going to force a lot of that. And I know it is forcing a lot of that. And I think folks are having to think strategically. And the landscape continues to change and I think you have to think more and more strategically as we think about it.

Speaker 1

And I made this comment, we only think about it strategically. So we don't we're not thinking about just asset Siz, unless it makes really good strategic sense for us, we don't engage in a deep way. And so and then when we think about it, it's going to be strategic And usually those aren't going to be, I'll call them tangible book value type deals because they're going to be valuable properties. And so we've always thought about it as a 3 year earn back It's kind of the where we draw the line. I will tell you one of the most Frustrating things that I deal with is because we say this on the we say that on this call And therefore, investment bankers hear that and so they just automatically go out and calculate what a 3 year tangible book value is and then they go out and tell everybody here what they here's what they can afford to pay for you and generate conversations around that.

Speaker 1

And then The line I use often is because that's what we can afford to pay doesn't mean that's what you're worth. And so we have that conversation sometimes and again I draw the analogy of selling your house. If Elon Musk is interested in your house, He can afford to pay a lot, but that doesn't necessarily mean your house is worth more than the comps around your house. And so we get into that and so that's a when we think about it, we think about that as kind of a parameter, but we're thinking about hey, what does this mean to us. And it could, in some cases, I suppose it could take us over that.

Speaker 1

It never has. But we think about it quite strategically and then our parameters is really, we want obviously we want to see EPS accretion and we want that to be Again, on a reasonable sized institution, you'd like for that to get up in the double digit EPS accretion. And then on a smaller institution, it might not reach that because it just doesn't have the impact. But then we really focus on what happens to our tangible capital level. And one other point there that Part of what you're alluding to is that that's a harder computation than it used to be because of AOCI and what that does, it can create more tangible book value dilution, but that also tends to come back much More quickly in the way that that comes back to you on your earnings and GAAP accounting.

Operator

The next question comes from Alex Lau from JPMorgan. Please go ahead.

Speaker 8

Hi, good morning, everyone.

Speaker 2

Hey, Al. Good morning.

Speaker 8

What are the key areas of the bank where you're seeing the expense reduction coming from? Can you give some color as to How much of this retirement or cuts are coming from front office, back office? And also, what are the types of projects or investments that you're putting on the back burner for now. Thanks.

Speaker 2

Hey, Alex, Michael. Good morning. Yes, I mean, it's broad based across the company, front and back offices. Early retirement was probably more Management driven activity, but again it's front and back office, some leadership and Company. Yes, positions as you look across, obviously, We've had slower loan growth, so we've seen some reduction in relationship managers, but not very much.

Speaker 2

And some of that's just Product of the environment. I've mentioned the branches, that's a piece of it. And then just some other back office stuff. But I think if you think about projects, Yes, Chris mentioned the investments we've made. I mean, we're still positioning ourselves for becoming a larger, more scalable institution.

Speaker 2

So We've invested a lot in risk management, a lot in data, a lot in audit functions. And so those continue. We're just in a really sustainable, scalable place at this point operationally. And so we're looking to capitalize on that. But yes, it's just making sure that we're well positioned for next year and the years after.

Speaker 2

Hey, Alex.

Speaker 1

If I could just add just a couple of comments. Some of the expense reduction comes from remember this, so remember we over since we did our IPO in late 2016, Steen. We have quadrupled in size. We have made 4 acquisitions, the last one being 40% our size. And so and then we and then that We went through a pandemic right after that.

Speaker 1

And so when you do all that, you put a lot together. And so The expense reductions, which we have been very thoughtful about, notice we haven't built up and We tried to build a lot of anticipation around this because we've been very thoughtful about that now over a number of months And it's something that comes and frankly has been the execution has been over time as well. And so they come across the board Both geographically as well as operationally in terms of how those and then I want to mention just a couple of investments that we won't put on the back burner. You said ones that Frankly, I can't think of ones that we're looking around the table, but we can't think of ones that we have, but we have made substantial investments, particularly in data, The data side of the business and making sure that we have actionable data to manage The business and I talked in my comments about when we were talking about liquidity and we talked about I said some of the models have been tweaked and some have been overhauled. That's what we so we've done a lot of overhauling of models, again making sure we have the right and actionable data.

Speaker 1

The risk management side of our business, we've made really substantial investments over Last 2 plus years and just third line defense investments have been Substantial as the company gets larger and as you plan to scale the company from here, those foundations are what we've spent. The other one of the other ones, Michael, I'm not sure if you mentioned was professional services. One of the big Reductions as we've spent a lot in professional services. You can see that actually again, if you look at that expense line or supplement, you'll see the decrease there. And that was intentional spend from some of the best international consultants out there On things that we want to make sure we got right.

Speaker 1

And so when it comes to back burner, frankly, I can't think of what We hadn't done a lot of branch expansion, would be one thing. That's about the only thing I can think of.

Speaker 8

Thanks so much for that color. And I had a question on security sale. Can you update us on the parameters that you look for in terms of an acceptable earn back period. And then separately, as bond yields were rising in the quarter, When in the quarter did you sell these securities and what is the appetite for more sales at the current yield curve? Thank you.

Speaker 2

Yes. It really kind of the parameters haven't changed that much. We want to be around a couple of years. We did kind of move a little bit off that, just because as I mentioned earlier, The securities we sold were so low yielding that it really didn't matter the rate environment. The duration was the duration And so we saw some opportunity, but I think as we look forward, it's going to be in that couple of year range on earn back.

Speaker 9

We sold it's kind

Speaker 2

of probably middle September and it was before the 10 year and everything shot up Dan, and so we really paused reinvesting. We put about $90,000,000 to work In mid September and we paused that last couple of weeks. Now subsequently the 10 years come back down 25 basis points, 30 basis points. So we're comfortable in this range, but it's about finding the right investments. Our portfolio has gotten smaller.

Speaker 2

It's about 10.8% of total assets. Yes, that's fine. It depends on what other options are. And so We're not growing the book to 20%. We're not shrinking to 5% and it will stay in this range.

Speaker 8

Thank you. And then just to follow-up on the public funds. If you look at last year's Q4, that grew in the $400,000,000 range. Is that a fair amount to assume for this year or is there something different going on in the Q4?

Speaker 2

Yes, that's fair. We expect $400,000,000 to $500,000,000 or so. And yes, we're managing that with Profitability and liquidity and competitive environment. So it's a daily grind, I'll say. But yes, that's yes, we kind of forecast out that's what we'd expect and we're kind of managing through all the moving pieces there.

Speaker 1

Yes. I'd say you're right on our assumption. Yes, Alex, I mean it's going to be right in that range. Well, That's what we anticipate it will be.

Speaker 8

Great. Thank you for taking my questions.

Speaker 1

All right. Thanks, sir. Good to talk to you guys.

Operator

Simpson. The next question comes from Kevin Simmons from D. A. Davidson. Please go ahead.

Speaker 9

Hey, guys. Good morning.

Speaker 4

Good morning.

Speaker 6

Thank you.

Speaker 9

I just want to so I know we've had a few questions on this, but I just want Make sure I'm thinking about this correctly. So we're going to have a positive in terms of being higher cost and coming in and we still continue to see a deposit mix shift, right? Butt. However, the velocity or the pace of deposit rate increases is abating, it seems like you're saying. So If we look, I appreciate that margin range, but apart from the effect of and his team.

Speaker 9

Margin is going to trough here in the next quarter or 2 and then position maybe in the first half of 'twenty four Star expand. I know that's a big preamble. I'm just trying to make sure I'm catching all the variables. Thanks. I appreciate the

Speaker 2

preamble because those are all the things we talk about.

Speaker 1

I think you got it. I think you nailed it. And with one thing I would say there was something You said that the public funds should outweigh the Securities, Trade and it will certainly those 2 will work against each other. Michael, will it totally outweigh it? Yes, because it's a kind of a rate volume

Speaker 2

challenge, right, as the volume of the public funds we expect to come on 4x, 5x the securities trade.

Speaker 1

Yes. That's true. And so the but the rest of that, Kevin, What's going on and you called it a preamble, but it's those and other factors which are all Filter into the model to help us forecast where it's headed and that's why we use a range And we've described it as kind of range bound over the next couple of quarters. But again, I think you said and then after that we'd expect it to begin to increase and that would That would be the case, getting into 2024.

Speaker 2

I will say the mix shift, yes, if you think about from non interest bearing, interest bearing has moderated as well. We've been in this 22% range for a couple of quarters now. So the velocity of deposit or the velocity of rate increases has slowed. We've seen that Moderator as well. Yes, I always point back to kind of pre pandemic.

Speaker 2

As we talked about the combination with Franklin, we expected that number to be around 20%. So I would say this range feels about right for migration from NIB to interest bearing. We do see some move between products, Interest checking the money market more so, little bit in CDs, but we're trying to keep those fairly short. Yes, but competition there is, as I mentioned earlier, some community banks and then treasuries, but not to as much outflow anymore to treasuries.

Speaker 9

Got it. Thanks. And one follow-up I wanted to ask about M and A. Chris, in the past, you've kind of described it as you guys have certain targets in mind over a long term time horizon and it's a matter of when Cummings. And so is that a matter of you guys are getting a sense some of these attractive properties are getting ready are having starting to have conversations or and or that just given the environment and the position you're in, You're kind of expanding that spectrum of potential opportunities.

Speaker 1

It's the former. It's not that we're really we still have the same and Company. So that means that there's going to be a limited Number of institutions that have the parameters that we're looking for. So that list really hasn't changed. It's just that with when we look out into 24 and we talk to Everybody in the industry and conclude for ourselves what we think is going to happen.

Speaker 1

We just think Some of those are likely to decide, hey, it's time to seek Seek out my options. And so it's really the latter. It's not that we're expanding and going, okay, We're not expanding our parameters either from a geographic perspective or from what we're looking for.

Speaker 9

Okay. Got it. Thank you. And one last thing, you mentioned a couple of times that you B. Riley, these deliberate moves to strengthen the balance sheet for difficult times, but you feel now that Citi.

Speaker 9

Things won't likely get that difficult. Is that been more of an ongoing thought or is that something based on recent observations that you're feeling like, All right. We're glad we prepared, but it's probably not going to be as bad as what we might have thought a couple of quarters ago.

Speaker 1

Yes. And I'm going to alter that just a little bit to say we're prepared for things to Yet difficult. We don't think they'll get as difficult as we're prepared for. And so because we're prepared if things get If we find ourselves stuck back in 2,008, 2009 that kind of environment, We think we're knock on wood, we think we'd be prepared for that at this point. Going back to what Happened in March of this year.

Speaker 1

Again, we feel like we're well prepared for whatever comes at us. And our point is, we don't think those things are going to happen. We actually do think things are slow, get slower from here. Okay. So we do think that things will get slower.

Speaker 1

We don't think we're saying if it gets really slow Really difficult. We're prepared for that, okay. But we don't really anticipate it getting As bad as we're prepared for. So that doesn't mean we'll think it's going to get slower. Okay.

Speaker 1

Got it. Understood. Okay.

Speaker 9

Thanks for that clarification. Thank you, guys.

Speaker 1

Thanks, Kevin.

Speaker 10

Simpson. Just want to Follow-up on the capital discussion. We've talked about potential for additional securities transactions and M and A conversation is heating up. So can we assume that as far as any kind of share repurchase program that in the near term that that's going to be Less likely or how would you characterize the appetite of the buybacks?

Speaker 1

I'd say less likely And that's really related again to just not being able to predict the future. And We don't want to I think if somebody goes out, if anybody, if we went out and did start buying back now and credit got really Difficult for the whole world. We wouldn't look too smart if we had to raise capital after that. And so we want to make sure that, so We're going to be conservative there on how we use this capital until We think that the industry is feel brighter from a credit perspective And again, interest rates, we feel like interest rates are have hit their peak.

Speaker 7

Okay.

Speaker 10

That's helpful, Chris. And then I guess also circling back on the deposit discussion, I think you gave us lots of good details around the public funds and that's kind of where the focus is now. What about on the customer time deposits? I think there's a $1,400,000,000 balance. That average Cost in the Q3 still feels quite a bit below most of your peers.

Speaker 10

Can you just kind of walk through the repricing dynamics there Smith sharing more near term and then what are the current rates that you're seeing for your customers?

Speaker 2

Yes, Matt, good morning. This is Michael. If you remember, we did a fairly decent sized deposit campaign last year and we had Some CDs, some CD specials that it was September, October last year, it was kind of 13, 18 month, 24 month papers. The weighted average term on that was about 18 months. And Yes, the cost was at the time market.

Speaker 2

We haven't moved off those rates a whole lot. And we're still seeing renewals and historic kind of renewal rates. And so I kind of mentioned this earlier, we've certainly raised some CD rates, but it's and shorter in terms. So we if customers come in and want a shorter term CD at slightly higher rate, you actually See, it looks like the yield curve is a little bit inverted. And so if you stay in those terms that you were in last year, you're getting a very similar rate.

Speaker 2

And of course, our model is customer focused and so that Phil can take care of customers as they need to in competitive situations and we stick by that, so that we're doing right by the customer, right by the company. And so there's some flexibility there.

Speaker 10

And then Michael, just to follow-up on that. As you look at some of the renewal timelines, is there is it spread evenly the next few quarters or is it any quarter or 2 where you see more volumes set to reprice?

Speaker 2

It's spread pretty evenly 4th and 1st. There's a little bit of a lump in the Q2 of next year. Yes. And so it's but it's already higher priced stuff than what's renewing in the 4th and first quarter.

Speaker 10

Okay. That's helpful. And then I guess thinking on the deposit pricing pressure theme, your footprint is a good kind of mix of more metro markets and also some rural communities. Just any general commentary for us as we think about deposit repricing pressure and some of your general markets where the pressure is greater today and where maybe not as great as it once was.

Speaker 6

Hey, Matt. Good morning. This is Travis. It's really interesting. Initially, we saw the most pressure from the smaller communities, the kind of the rural markets.

Speaker 6

We're now seeing Some larger regional banks putting out some specials in the fives. So it's really across the board, either urban or Rural that we're seeing deposit pressures and they're all generally in that 5.25% to 5.75% range on the specials.

Operator

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

Speaker 2

Hi, good morning.

Speaker 1

Good morning,

Speaker 9

Eddie. So most of my questions have been asked and answered here. Just one thing on office here. Just curious if you could give any color as to when the rents in that portfolio start to come up for renewal and any color around that dynamic there?

Speaker 1

Steve, I'm sorry, our Chief Credit Officer is not here. I will say just generally on renewal, Michael went through kind of where we were on our fixed rate portfolio, not office specific. And so when we did look at office, I'm not thinking about rent renewals, I was thinking about The loan renewals. And so I'd have to get a little more detailed information to get back to you. Is that Travis, is that fair?

Speaker 10

That's fair. Okay,

Speaker 9

Okay. That's pretty much my last question. So appreciate all the color here today.

Speaker 1

All right. All right, Steve. Thanks for being with us.

Operator

The next question comes from Freddie Strickland from Janney Montgomery Scott. Please go ahead.

Speaker 4

Hey, good morning, gentlemen.

Speaker 1

Good morning,

Speaker 2

Betty. How are you?

Speaker 4

I'm good. I'm good. I wanted to To start off, I saw borrowings and brokered CDs declined during the quarter, which I'm sure helped on the funding cost side. If those just mature and you didn't renew them and could we see more of that rolling off in the future quarters just given you've got loans to deposits sort of around 87%?

Speaker 2

Yes, that's right, Betty. Some of them rolled off and we have some more coming due in November. If you remember last quarter, we increased some of that, just because it was cheaper than retail deposits, Frankly, so Chris mentioned this and is that we keep our powder dry on sources of liquidity, So that we can leverage it when we want to, need to. And so sometimes when we see brokered market is cheaper for FHLB funding is cheaper. We'll do that.

Speaker 2

And so that lever is out there, but we do have I believe it's $100,000,000 rolling off in November. Whether we renew it or not, yes TBD certainly don't need it to your point. We freed up a lot of liquidity from and his team have a

Speaker 4

great team.

Speaker 2

And then, we have a great team there to further create sources of liquidity.

Speaker 4

Understood. That's helpful. And switching gears a little bit here, as we look at these expense reductions coupled with some of the securities portfolio restructuring and some of the other trends we talked about in the margin and everything else going on. Do you think efficiency at the core bank ex mortgage can get into the mid-50s range by the end of 2024 from the I think I peg it around 60% today.

Speaker 1

Yes, is the answer. We do. We think on the core just Core Bank. Yes, we think we can get below the mid-50s even.

Speaker 4

Got it. And one last question for me. It sounds like we should expect to see the unfunded loan commitments in the C and D space continue to come down. As a consequence, do you think we'll see the unfunded commitment reserve continue to decline as well?

Speaker 2

Yes, that's right. If you look at the ACL side, you'll see we actually increased our reserve on the construction bucket, But we released from the unfunded strictly due to volume and so you'll see that continue to decrease and then we'll probably land in that 80%, 85% range to Tier 1 plus AECLs and it would normalize from there.

Operator

Simpson. The next question is a follow-up from Stephen Scouten from Piper Sandler. Please go ahead.

Speaker 3

Hey guys, thanks for letting me hop back in. I'm not Sure, if you have this number, but I just wanted to follow-up as you referenced you at C and I Credit had some exposure to the SNC loan in

Speaker 2

the industry that went bad.

Speaker 3

But Do you guys have numbers on your total SNC exposure? And if so, like kind of how much of that you lead of the SNC exposure that you may have?

Speaker 6

Yes. Good morning. Again, Steven, it's Travis. We have roughly $175,000,000 in SNCs. We lead approximately 80 of that is for round numbers.

Speaker 1

And so and Importantly there, we don't do any SNCs without some Helling. We don't do SNCs for growth. We only enter a SNC because we've got some client that or some relation Schuh that gets us into the SNCC. And so and I'll give you a couple of examples, 2 specific examples without using names. 1, significant client here in our footprint.

Speaker 1

We have a we know the owners of we know the owners of the company. We know the officers of the company and they said we really want you in our credit and so we got We're in the credit because it's a major name that everybody would know in our geography. 2nd one, A company that we banked from the startup of the company until they became a publicly traded company. We still have The bulk of their deposits, including their operating account, but their line of credit now is over $1,000,000,000 We don't lead it. We still we participate we have part of the SNC.

Speaker 1

Those would be two examples. And so we it's only those kinds of That we get into. We don't just put SNCs on for it. We generally are SNC adverse is the way I would put it. When we do it, it's because we have some compelling reason that says we need to do this.

Speaker 2

Yes.

Speaker 3

Well, I think that's the right mindset. Thanks for the color there. That's helpful to know

Operator

Risien. I would like to turn the conference back over to Chris Holmes for any closing remarks.

Speaker 1

Okay. Thanks everybody. We really appreciate again your interest in the company. We appreciate everybody's questions and answers today. And if we have Things that need clarification, we're glad to get on the phone with anybody that we need to.

Speaker 1

So don't hesitate to reach out. All right. Everybody have a great rest of your day and you analysts have a great rest of your earnings season. Smith. The

Operator

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

Powered by Quartr
Earnings Conference Call
FB Financial Q3 2023
00:00 / 00:00