Southern States Bancshares, Inc. (FBK) Earnings Call Transcript & Summary

Good morning, and welcome to the FB Financial Corporation's conference call regarding their proposed combination with Southern States Bancshares, Inc. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer; and Mr. Michael Mettee, Chief Financial Officer. Please note FB Financial's press release and the morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com. Today's call is being recorded and will be available for replay on FB Financial's website approximately 2 hours after the completion of the call. [Operator Instructions] During the presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities law. All forward-looking statements are subject to risks and uncertainties and other facts 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 forward-looking statements 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 is contained in FB Financial's periodic and current reports filed with the Securities and Exchange Commission, 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. Please refer to the accompanying disclaimers included in the presentation for more information. I would now like to turn the presentation over to Mr. Chris Holmes, FB Financial's President and CEO. Please go ahead, sir.

All right. Thank you very much. Good morning, everybody. Thank you for joining us on the call this morning. And as you've seen, we're proud to announce the combination of FB Financial Corporation and Southern States Bancshares. We appreciate your interest in both FB Financial and Southern states, and we're pleased to make this announcement on -- as we move forward here. So as you've heard us discuss before, we have a disciplined approach when we're evaluating a merger partner, and we consistently look at 3 things. First, we look for the right cultural fit. We believe that scalable business success requires a team of people with a common mission and shared values. At FirstBank, our values drive our motivation and our decisions, which ultimately produce our results. So getting culture right is table stakes for us. Second, we evaluate the map and the market opportunity. This includes geography, but also includes growth and expansion opportunities in those markets, macro and microeconomic conditions of those markets and the market leaders, both institutions and the individuals. Finally, we consider the financials. We look for solid operators that generate superior returns, balance sheet strength, disciplined credit culture and consistent risk management to ensure that the combination is accretive to our business and rewarding to our shareholders. For some time now, we've had the opportunity to get to know the Southern States Bank team, understand their culture, learn about their communities that they serve and watch their performance. We understand the many similarities between our 2 institutions. We couldn't be more excited to make this combination announcement today. Culturally, Southern States has a customer-centric focus with a deep commitment to the communities they serve. Many of those communities look and feel like the communities that FirstBank currently serves across our 5-state footprint. Southern States consistently produces strong growth and solid returns for the shareholders and maintains deep roots in their communities. Southern States also uses a relationship-banking approach. We believe that Southern States and FirstBank's customer focus, community style of banking and value systems are uniquely aligned. Geographically, the 2 banks' footprints complement each other well. The combination adds to the density in Birmingham and the Huntsville markets where we both operate, while also continuously expanding our footprints in the new markets in East Alabama and West Georgia. The expansion includes markets that benefit from their adjacency to Metropolitan Atlanta. These markets remind us of some of the markets that we serve today that are in other MSAs, including Nashville, that are suburban communities outside of larger metros. Financially, the transaction is compelling. I'll let Michael provide more details around the financial profile and modeling assumptions of the deal. But at a high level, we anticipate 12% EPS accretion, limited tangible book value dilution at less than 4% and a tangible book value earn-back period of less than 2 years. So in financial terms, the deal makes a lot of sense for both banks. To give you a sense of the process we've undertaken over the past few months, we've included a slide in our investor presentation with some depth on the diligence process. Our process was comprehensive with over -- with 12 focus areas covering all notable risk areas and functions of the bank. We leveraged in-house expertise of our team and engaged third-party advisers where necessary to aid in the process. We completed a comprehensive credit review, which includes a review of 60-plus percent of the outstanding loan balances, 85-plus percent of loan balances in a classified status. Through the loan review and the diligence process, we were able to confirm Southern States strong credit culture, as evidenced by the limited loss history in the loan portfolio. In total, our teams reviewed 500-plus diligence documents, and I'd like to thank both teams for their work throughout the diligence process and for all the efforts extended to help bring this combination together. I'd also like to thank the Southern States team, especially Mark Chambers, the CEO; and Lynn Joyce, the CFO. These 2 individuals have been invaluable throughout this process, and we look forward to pulling 2 good teams together to form 1 great team. Both Mark and Lynn, will remain with the company after closure, and we look forward to their leadership. Looking forward at our time line, we anticipate closing the deal in Q3 or early Q4 and will target a conversion shortly thereafter. On the regulatory front, of course, we've had conversations with our regulators about this transaction, and we're encouraged by the pace of approvals that we've seen in other recent deals in our asset size range. In the days to follow, we'll be submitting our regulatory applications and working through the approval process. Now before I follow on to Michael, I want to conclude by saying that over the past few years, our company has worked hard to prepare to be able to continue improving the company and how we operate while at the same time, integrating an acquisition. Our management teams remain laser-focused on constantly improving a strong operating foundation that enables us to pursue growth opportunities. We believe that continuing investments made in technology, talent and processes will allow us to unlock shareholder value through added scale, ultimately creating a better FirstBank. Now with that, I'd like to pass the call over to our CFO, Michael Mettee.

Thank you, Chris. Good morning to everybody, and thank you to everybody who's joined us today. I'd like to echo Chris' thank you and comments to the Southern States team and our internal teams who've been working diligently behind the scenes to bring us to this point. I'm excited to share with you some of the details surrounding this combination. The transaction itself is an all-stock bill with an exchange ratio of 0.8 shares of FB Financial common stock for each share of Southern States common stock, which values the total deal consideration just north of $380 million. In the financial model, we estimate cost saves of approximately 25%, which we anticipate phasing over 2025 and 2026 and 100% thereafter. And we're anticipating pretax transaction costs of around $38 million. On the loan portfolio, we've estimated the total loan mark at 3.2% or $71 million, $36 million is related to credit, which equates to 1.53% of gross loans and a split 50-50 between non-PCD and PCD. This results in a day 2 CECL double count of approximately $18 million. The remaining mark of $35 million is interest rate related and is modeled to accrete straight line over 4 years. At closing, we'll mark all of Southern States' held-to-maturity securities to fair value through purchase accounting and reclass them into available for sale. Over time, we'll optimize the entire portfolio and liquidate some of the securities portfolio to redeploy into higher earning assets, pay down their limited wholesale funding that exist or reinvest in other bonds. Lastly, our assumptions include a core deposit intangible of about 2% of non-time deposits and an estimated write-down on their sub-debt of $10 million. All in, on a pro forma basis, we anticipate strong return from this transaction. As Chris mentioned, our model showed 12% earnings per share accretion and a tangible book value earn-back of less than 2 years, all while maintaining minimal dilution at a sub-4% level. We believe these to be conservative earnings estimates and have a high level of confidence in our ability to meet these modeled expectations. As a combined entity, we'll see meaningful improvements in our return and efficiency ratios as we have denoted in our investor presentation. Our 2026 pro forma returns show a return on average assets of 1.41%, a return on average tangible common equity of 14.5% and an efficiency ratio of 50%. These metrics are above our peer group median and an improvement to our stand-alone metrics, resulting in progress towards our expectations of peer-leading financial results. Concerning capital, this transaction is effectively the combination of 2 banks that are both in strong capital positions. On a pro forma basis, the combined common equity Tier 1 ratio is 12.1% and the total capital ratio was 14.8%. Our tangible common equity to tangible assets models out to 9.9% at close. These ratios boast results well above regulatory thresholds and place the combined entity in a sound financial position. Having such a strong capital position at close enables us to continue to be bullish around capital deployment and look at options to deleverage our capital base to improve shareholder value. Overall, we are very pleased with the financial profile of this deal as it builds scale, expands our geography, improves returns and adds franchise value, all of which benefits our company and its shareholders. We look forward to capitalizing on this opportunity as well as opportunities in front of us as we continue to grow our franchise across the Southeast. With that, I'll now turn the call back over to Chris.

All right. Thank you, Michael. And in closing, I would just like to extend a word to both teams and especially the Southern States team. We do look forward to combining our companies into a bigger and better company than either of us could be on our own. We're excited to see what we can accomplish together. Thank you again to all the participants for your interest in FB Financial and Southern States and our announcement today. And operator, at this time, we'd like to open the line for questions.

[Operator Instructions] And the first question will come from Catherine Mealor with KBW.

Congrats. I wanted to -- everything is laid out clearly in the slide deck. I just wanted to hear what you're thinking about forward growth for both companies. Southern States has had really strong high double-digit growth rates for the past couple of years. I think FBK, you've slowed a little bit, but we're getting ready, I think, to ramp up for kind of better growth over the next couple of years for you. So just kind of curious how you're thinking about growth rate on this balance sheet that you're bringing over what that could look like pro forma.

Yes. Catherine, thanks for joining. So yes, we modeled out just actually based off the consensus estimates with the group here on the phone, obviously, through communication from both bank management teams. Yes, going forward, we expect to be right in this kind of, what I'll call, the FirstBank traditional range of that 8% to 10% growth is where we would continue to grow the company.

Yes. So we did use consensus in the model, but particularly our internal goals are higher than that. And so we've said 8% to 10%. We've also said high single digit, low double digit. And so I think that's a good estimation.

Okay. And we've got 8% to 10% in our numbers, which is in consensus. So it feels like those are matching up accurately. Okay. Great. And I mean that's for Southern States. And then separately on just the pro forma margin, how are you thinking about that as that comes together? And any kind of changes that this might do to your asset sensitivity?

So they kind of -- this is really good because we together kind of fit like a glove. We both have half our -- we're 50-50 floating and fixed, very similar balance sheet, slightly improved asset sensitivity for both companies. So we're more neutral. And they've done a real good job on loan pricing and margin. We've been able to hold ours in that mid to low 3.50% range. They've been in the 3.65% range. So I think you kind of meet a little bit closer to us, right, when you're doing a kind of a interpolated number. But I think our range still would hold from what we've been talking about for the year.

Okay. Great. And any -- my last question is I noticed in the slide deck, you said closing as of third quarter or fourth quarter. And given that these deals that we've seen are just getting approved and closed a lot quicker than expected, is that fourth quarter just being super conservative? Or is there anything -- any reason that you think it could take that long to close?

Yes. So I'm getting some ribbing from the room here, Catherine. Look, we...

I know you're conservative, Chris.

Yes. So look, we hope to close as quickly as possible. Some of our advisers and folks that help us are, I'm sure, listening to the call, and they know the goal. So -- but some of those things are out of our control, as you know. You don't know what things happen there from third parties. So we would anticipate really more of a third quarter. And we -- depending on what happened, maybe it could slip into the fourth quarter, but we would anticipate a third quarter. And there have been some recent really quick approvals from a regulatory perspective, and we've challenged our third parties to set a new record -- our outside helpers to set a new record. So that would be our goal. But I think realistically, probably third quarter is the best spot to target.

Next question will come from Stephen Scouten with Piper Sandler.

Congrats on the deal. It's great to see it. I think it's going to be good for the market, too, to see such a well-priced deal. So thank you for that. I'm curious, a lot of times when people think about deals, we think about cost saves and what can be stripped out. But as a way I feel like I'm hearing you guys talk about and you think about the business this more helps you to invest in the growth of the company moving forward. It gives you needed scale to make further investments. Can you talk about some of that stuff that this might allow you to do over the next couple of years with the increased scale and still the strong capital and how you think about that the leveraging of that capital over time?

Sure. Stephen, thank you for the comments and a couple of things. And we worked some of these into the comments, but they tend to be the ones -- the comments that get overlooked. And we have spent some time and some investment on trying to make sure that we can continue to improve the company because we think you got to get it to be a better and better operator every day. And when you start to add a big project like bringing 2 companies together like this, it really can deviate your focus from improving your operation, sometimes can completely move your focus away from that to just trying to combine the companies. And so we're really focused on being able to walk and chew gum at the same time. So along with what you're saying, we're going to continue to invest, we'll continue to get better from a customer value proposition that's important to our team right now, so that we can continue to improve our organic growth profile because we're in strong organic growth markets, and we think that's critical. We also anticipate some possibly material disruption in our market as we go through the next 2, 3, 4 years. And so again, you got to be able to capitalize on that. So those are really important to us, and that's part of what's in this. And so when we said 25% cost saves, you also heard us say both Mark and Lynn, are staying with the company. There's not a lot of overlap. And so that's a fairly conservative cost save number. And we're just not going to get much more aggressive because of the exactly -- we got -- we have to continue to invest because we think we've got exciting opportunities from here. And so that's how we're viewing it. It's really through a long-term lens of how we make sure we're going from a good operator to a great operator and at the same time, expanding our opportunities geographically. This obviously extends our geography. We want to look to continue to extend the geography.

Yes. That's perfect. That's really helpful. And specifically around that, how do you think about the Atlanta MSA. I feel like it's never really been a market that's been high on your list, and I know you said this is maybe a little bit more tertiary like some of your outlying Nashville market exposure. But how do you think about that entry and the potential for expansion in growth in and around Atlanta?

Yes. Good question, Stephen. In the way you described it is -- does describe how we look at it. We don't have a an obsessive goal of getting to Atlanta. But we think as you continue to expand in the Carolinas and in Georgia, Alabama, Tennessee, Atlanta is a big -- it's the largest metro in the Southeast, that in Miami are in a different league in terms of population. And so you're going to come across that the way that we've approached it -- we'll approach Atlanta is the same way that we approached Nashville. We originally went into Nashville and now we're #6 in market share with $4.5 billion, $5 billion there. We will go into markets like Cartersville and like Carrollton. We'll continue to do that with opportunities that -- we have opportunities like this to combine with others around there, that would be exactly how we would approach it. And then someday, we may be in the center of Atlanta, but that's not today. That's how we would approach it is continue to benefit from some of those smaller communities in the collar counties, just like we're doing with this one. And those -- by the way, those communities have really good growth profiles that come from the large Fortune 500 companies that are headquartered in Atlanta, those communities have a lot of -- get a lot of growth benefit from that, both from retail consumers, but also from the smaller companies that are the Level 2, Level 3 companies that support all of those much larger Fortune 500 companies. And so that's been our approach and will continue to be our approach to Atlanta. So don't look to see us with an announcement sometime in the immediate future that has a giant Atlanta headline, but we're not afraid of it. We're just -- we approach it in the way that has worked for us in the past.

Yes. No, that makes sense. And then just last thing for me. I don't know if I missed it in the slide deck, but I know some states has a bit more CRE as a percentage of the loan book than you guys do. Where does this take your pro forma CRE to risk-based capital? And is there any need to work any of that exposure down over time? Is it pretty well contained?

Stephen, it's Michael. Yes, we have it in here, but there's not a need to work it down. We'll continue to manage just as we have. We're about 240% of -- on our concentration ratio for CRE and about 65% for construction development. And that's on Page, I think, 11 of the deck.

Page 11 of the deck.

So yes. They do obviously -- are a little heavier commercial real estate. It's kind of split owner occupied, nonowner occupied, and they do a good job managing that. And so the combined company we'll be able to move forward and continue to operate in the way we've been operating.

Congrats again.

Yes. Thanks, Steve. Those are 2 important ratios that we monitor closely. And so again, about 240% on the CRE ratio on the -- for the combined company and about 65% on the C&D ratio. So both very manageable and in a zone that we're comfortable with, and we'll probably maintain ratios close to that.

Next question will come from Russell Gunther with Stephens.

Maybe a bigger picture question to start just in terms of the background and how you -- how the deal came together, how long you guys have been getting to know each other and whether or not this was a negotiated transaction?

Yes. So we -- gosh, we met the team I'd say 3 years ago or something like that. So it's been a while, maybe 3. Yes, I'd say, 3-plus years ago, I don't remember exactly the date, but it's been a while. And then we've watched them and -- of course, we pay attention to every earnings release, and we've watched them closely over that time period. We have also -- and then we really begin to get to know the management team, I don't know, maybe a year ago or something like that and have had conversations since then. We began to have more serious conversations late last year sometime and then here we are. So I'd say during the fourth quarter, first quarter, those got to be a little more intentional, a little more serious. And then we talked about the possibility of making this happen, begin to put some -- we really didn't actually talk about it even from a financial standpoint. It was really more about again culture and how the company is fit. And then when we put some numbers behind it, we thought, wow, this actually looks really good financially, too. And then we -- again, throughout the quarter is when really most of the work took place again late last year and early this year.

Got it. Okay. Thanks, Chris. And then it sounds like you're anticipating a shorter time to close. Just bigger picture question here. Would you guys be willing to announce another transaction while Southern States is still pending? And maybe based on the level of M&A discussions today, is that something that could be a likely event in 2025? Or are you more likely to wait until deal close and integration to think about next steps?

Yes. I guess the way we think about it is, Russell, that we think about. At the end of the day, our job as managing the company is to make sure we have a great customer value proposition. We're taking care of customers and then to make sure that we are taking care of the capital that investors trust with. And so the conversations that we have on how we apply that capital and how we get a great return on the capital will take place every day, okay? We're obsessed with how we get that. That's how the team gets judged and rewarded. And so that's -- and so we're having those conversations and those include M&A. And so while we haven't actually announced an M&A transaction since 2020, I can assure you not a week has gone by since then where we've had some conversations internally and externally about that. And so we'll continue to do that. When things come about -- when things actually come to pass, it's generally because the factors just happen to line up. And so we don't have a lot of control over some pieces of that. And so we'll continue to have conversations and be reactive, if something that we found just to be -- that was really strategic to us came up, we'd have to have conversations with regulators and our team, our Board and figure out if we would undertake any -- how quickly we'd undertake something else. But we don't ever take the opportunity to improve our company, improve our value proposition and improve our return on capital. We don't ever take that off the table. So it's a matter of kind of just when the factors line up, and we'll continue to look for that.

Understood. Okay. I appreciate your thoughts on the topic, Chris. And then, guys, just last one for me, maybe a follow-up, please, on the pro forma NIM and how you guys are thinking about that. I think the comment was sort of within the most recently communicated range. So maybe just remind us what that is and how this accretive deal kind of fits into that range, what the puts and takes are.

Yes, Russell. So that range was kind of for FBK was 3.52-ish to, I think, 3.58-ish. Obviously, bringing in their balance sheet, a couple of billion -- $3 billion in assets, 3.65-ish margin puts us at the upper end after close. There are opportunities through the investment portfolio and wholesale funding. Of course, we continue to optimize our balance sheet as well. So feel really good about their diligence and how they price loans. Deposits are always a focus for every company. So focus for the combined entity and core operating accounts, which helps with margin, but more importantly, helps grow relationships. And that's really what we're here to do with margin moves based off competitive environment. But the focus on core relationships, operating accounts and really growing both sides of the balance sheet. But the deposit side of that is critical for the combined entity. So we think the balance sheet fits nicely, and we think we can optimize it on both sides after close.

The next question will come from Brett Rabatin with the Hovde Group.

Congrats. I wanted to ask, when I look at potential opportunities, I wanted to hear what you guys thought might be the biggest near-term things with the combined franchise. I noticed that the cost of interest-bearing funds is about 50 basis points higher for SSBK and a big piece of that is the CD book. Would that be the biggest near-term opportunity for improving pro forma profitability? Or are there other things that you guys see that would be easy or low-hanging fruit, so to speak?

Brett, I hope you did okay in the storms last night. It's pretty crazy night in Nashville, I think. So I think Lynn and team have done a really good job. They keep their -- you mentioned interest-bearing and the CD portfolio short duration, about $400 million of it is less than 12 months. So that is opportunity to reprice. Wholesale, they've kept short as well. It's not a huge number, but the combined entity and the liquidity profile helps reprice those lower as well. So that is an opportunity. Loan pricing diligence, they do a good job on loan pricing. You mentioned their deposit costs are 50 basis points higher than ours, but their loan yields are also 50, 60 basis points higher, too. So net margin does a really good job. And then investment portfolio, $225 million-ish, we'll be able to work with that really day 1 as well to drive meaningful margin expansion.

Okay. And then I don't really think of you guys as being big specialized lenders, but are there lines of business in lending or otherwise, maybe mortgage banking or something that you guys think with best practices, you can bulk up the combined company in?

No. One of the things that is great about the combination of our 2 entities is we're very, very similar in a lot of ways. We're good bankers, traditional banking lines, no real specialty things on their side. Mortgage, they have a couple of mortgage people we're excited to welcome to the team. But we see that as opportunity throughout their -- the market expansion, the footprint. And so hopefully, we can expand upon that. So there is opportunity in that. They have a smaller team, and we're excited to welcome them.

Yes. And I would just say this, Brett, both companies are really good, what I call community bankers, have good community banking with consumer small business portfolios that are granular, deep in our communities. And frankly, that's what we like. And so there's not a lot of specialty lines, actually no specialty lines. We do have a manufactured housing line on our side, the FirstBank side. But what we actually like is, hey, it's pretty much core business. FirstBank also has pretty good expertise in mortgage, and that's one of the things we've heard from their team is, hey, we're excited to get more expertise in the mortgage area. And so we're happy to provide that and expand that when the time is right.

The next question will come from Christopher Marinac with Janney Montgomery Scott.

Chris and Michael, you talked about Atlanta earlier. So I just want to ask, I guess, a similar question, which is, as you think of the next 3 to 5 years, can you envision Tennessee getting diversified to where Alabama, Georgia and even North Carolina become kind of equal parts of the footprint? Do you think of it that way? And is that part of kind of what sort of, I guess, your big picture rationale would be from both organic and external expansion?

All right. So short answer is we do see it similar to what you said. We are Southeastern in our focus. I think we're headquartered in Nashville, we have bigger ambitions just for Nashville. And so I've mentioned earlier, we're #6 in market share. And every single market, every single we divide up the world today and our internal reporting is 7 metros and every single one of them needs to climb the market share tables next year. And so whether that's inside Tennessee or outside Tennessee -- and so we look at it more market, I guess, instead of state. And so we do have ambitions to continue to add to that. And some of those are outside of Tennessee. We just went into Asheville and opened up de novo in Asheville. We have the ability and the capital after this transaction, our CET1 still is going to be in excess of 10%. Our TCE to -- I'm sorry, 12% on CET1. I was thinking TCE to TA where we're almost 10%. We're like 9.9% on TCE to TA. So we still have a very strong capital base and the opportunity there. And so -- and this, again, applies back to one of the earlier questions. So we're thinking about how we continue to drive that return. And so we're thinking about markets. We're in most of the Tennessee markets. So organic growth is important there, but we're thinking about how we get into new ones and juice the organic growth even more. So to summarize that, I'd say we are thinking Southeastern, which does mean it will be -- you'll continue to see the Tennessee market and grow, but you'll see others grow more, so you'll continue to see just like this transaction, you'll continue to see us add probably a larger market share in some places outside of Tennessee.

Okay. Great. And just a quick follow-up is you mentioned disruption earlier in the call. Do you think that disruption is happening as we speak? Or is that more prospective that you anticipate change around your markets?

It's funny. That's a good question, probably actually an insightful question. I would say it's happening as we speak. And the reason that I say that is all of us who are really focused on the business are watching how this industry is evolving. And some have a great foundation to move forward. Others, I'd say, have a -- there may be more questions about exactly what that looks like moving forward, and that can cause folks to begin to ask questions. And so we're seeing a few more recruiting opportunities than we've seen in a long, long time. And that's not just -- that didn't just happen this week. That's been happening over a series of months now. And I don't mean people that are being shopped by headhunters. I mean folks that don't move -- that hadn't changed jobs in 15 years and are not necessarily on the market, but are open to conversations in ways that they haven't -- we found them not to be open in times past. I think that's a combination of, one, I think we sit in an attractive size range where we're small enough to really get a lot of things done and have a lot of ability to service customers in a positive way and put people in a position to really service their customer. So we're small enough, I think, for that to happen. We are also large enough where we can do relatively large handle -- relatively large customers on both the deposit and the loan side. And so I think as people begin to think about where things are headed, and we've had a long-established reputation for having a long-term plan, I think all those things are beginning to benefit us. And I do think, yes, the disruption is actually already underway.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Chris Holmes, for any closing remarks. Please go ahead, sir.

Okay. Thanks again to everybody for joining us. We really appreciate it, especially thank you to all of our teammates at Southern States Bank and FirstBank. We look forward to spending time with all of you in the coming days. All right. Everybody, have a great day.

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