Forbright, Inc. Class A Common Stock 2026 Q3 Earnings Call

Thanks, Andrew. Before we begin, I will remind listeners that remarks on this call may contain forward-looking statements that are subject to risks and uncertainties. Please refer to the safe harbor statements found in today's earnings release and in our investor presentation for additional details. Management may also reference non-GAAP financial measures during the call. A reconciliation of non-GAAP measures can be found in our earnings release and investor presentation slides. Finally, I will identify the speakers on the call this morning. They are John Delaney, Chairman and Chief Executive Officer of Forbright Inc; Don Cole, President and Chief Operating Officer of Forbright Inc. and Chief Executive Officer of Forbright Bank; and Chris Lynch, our Chief Financial Officer. We are also joined in the room by Aaron Juda, our Chief Strategy Officer, who will participate in the Q&A. With that, I will turn it over to John.

Thanks, Ben. Good morning, everyone. I will start by saying I am somewhat superstitious by nature, so I am always a little reluctant to call a quarter terrific. But this time, the facts certainly merit that description to my mind. Our loan growth was very strong. NIM was stable despite meaningfully higher liquidity. Our credit performance was very good. We continue to build out what we view as a best-in-class digital deposit franchise, and we made good progress on the efficiency metrics that will continue to improve as we scale the business. At a high level, the quarter reinforced three key themes. First, our ability to drive good and disciplined loan growth from our six national lending businesses. Our loan book grew 24% year over year, up 9.5% this quarter alone.

Healthcare, which is our most mature strategy to some extent, drove most of our growth this quarter, but all of our specialty credit delivery verticals performed very well. We would expect different strategies to outperform from quarter to quarter. There is a little bit of lumpiness. But again, I think the key theme here is that all of the strategies are seeing good opportunities with attractive structures and appropriate spreads. The second big theme was around our digital deposit platform, which raised over $1 billion in the last quarter, which represents a 24% increase from the prior quarter. The platform continues to provide a highly scalable source of funding as we grow the business. I would describe our confidence as very high in terms of our ability to use this increasingly sophisticated platform to drive very precise deposit growth at optimal cost of funds and acquisition cost.

We spoke last quarter about our new promotion engine, which launched and was very successful, and we expect this strategy to continue to work well for us in the future. Our upcoming checking product is on track for a phased launch to begin in the first quarter next year, then expect most of the promotion to the public to take place in the second quarter. Finally, we view ourselves as very well-positioned to improve operating efficiency as the business grows. We certainly remain on path to achieve the efficiency targets we've laid out for folks. Overall, we believe the business we've designed and built will perform very well in the banking and financial services environment of today, and importantly, the one of tomorrow. In that regard, we're spending a lot of time thinking about how artificial intelligence will affect banking and trying to plan accordingly.

I co-wrote a piece in The Wall Street Journal a few weeks ago titled "AI Will Be a Boon for Savers." As I laid out in that article, our view is that the banking system is moving toward a world in which technology makes it easier for consumers to evaluate financial products, compare rates, and move their money to institutions that offer the best value. We view this trend as unambiguously good for consumers and therefore unstoppable. The speed of that transition, however, is very difficult to predict, but we believe a significant percentage of legacy branch deposit resemble a slow-melting iceberg. Put another way, the move to digital deposits has been slow and steady, and that's exactly what the early part of an S-curve looks like. That's how every major technology is adopted.

At some point, it accelerates, and when it does, it will happen faster than most people expect. Anyone who thinks today's pace is tomorrow's pace is missing the boat. We built our franchise for where deposits are going, not where they've been. We believe we're well-positioned to be the bank of the future, and that means having the technology, the operating model, and the deposit franchise that can compete as customer expectations change. We feel very good about where we are: gathering deposits nationally through a digital platform, paying a fair rate, and delivering a user-friendly experience through the platform we've built. Deploying that funding through specialized lending businesses where expertise travels nationally and where our teams can create value through speed, flexibility, and insight elevates the confidence in our model.

As part of our digital-first focus this quarter, we announced the sale of our legacy Washington, D.C. area branches and associated deposits to an institution called Trustar Bank. That transition is moving ahead nicely. We anticipate regulatory approval, or Trustar anticipates regulatory approval in the fourth quarter, and closing will happen in the first quarter of 2027 based on the timing of lining up the two core service providers for that transition. Both teams have done a great job of planning a smooth transition for the customers. Before concluding, I want to reiterate the four key metrics that made this, in my judgment, a very strong quarter. We had very strong loan growth. We expect that to continue, perhaps not at the level we saw this quarter, but we certainly expect strong loan growth in the fourth quarter into the first quarter.

Credit was very strong, which is in many ways the most important metric for our business. We had disciplined deposit pricing and very strong deposit growth. We achieved solid execution on our expense management initiatives, which is now part of the culture of Forbright. As we continue this work, we expect the machine we have built to become increasingly more productive and valuable. With that, I will turn the call over to Don.

Thanks, John. First, I will spend a few minutes on earnings and operating metrics for the quarter. As John said, outstanding loan growth and credit quality really drove our strong performance this quarter. Our net income was $20.6 million, or $0.41 per share on a fully diluted basis. This represents an increase of $16.5 million, or over 400% from the second quarter. Our net interest income of $72 million grew about 14% compared to $63 million last quarter. Our pre-provision net revenue was up almost 60% from the prior period as well. Finally, our NIM was essentially flat despite our expectation of some contraction in Q3, which we touched on during our last quarterly call. That expectation was based on growing liquidity levels from our deposit promotion, as John described. Those increased liquidity levels support the upcoming branch sale.

However, if you include those held-for-sale deposits in the calculation of the loan-to-deposit ratio, that went down, which put downward pressure on our overall NIM. However, we were able to maintain the steady NIM based on two key factors. First, as John indicated, we held our Growth Savings rate steady even as the Fed raised rates in September. Second, our non-accruals were down again in Q3, which resulted in higher GAAP loan yields. Some of that impact is from the recapture of previously unrecognized interest from loans returning to accrual status. These results reflect our continuing conviction that we can continue to grow our loan portfolio while being able to precisely fund that growth with our digital deposit platform, which will continue to result in improved economies of scale and better overall returns on equity. Turning next to credit. We experienced just $1.2 million of net charge-offs this quarter, down from $2.7 million in the second quarter.

The core net charge-off rate on our six national lending strategies was only three basis points, down from eight bps last quarter. We expect these numbers to move around quarter to quarter, but our expertise in our specialized lending businesses and a disciplined culture position us to consistently manage credit effectively. Moving to non-interest income. We saw strong growth from our FHA/HUD business, as we previewed on last quarter's call. On solar servicing, it is worth noting that we continue to see artificially elevated expenses and revenues as these expenses are reimbursed by our clients. You will note in the investor presentation, we detail exactly how much those pass-throughs are so analysts and investors can factor them into calculations around our efficiency. On expenses, our core expenses were well-managed during the quarter.

Our efficiency ratio improved to 69.6%, down about eight percentage points or 10% from the second quarter. Our operating model is designed to scale without proportional increases in headcount. As we grow loans and deposits, we expect the fixed cost base to be absorbed across a larger and more productive franchise. As John said, we remain on track to achieve our efficiency targets in 2027 and believe we are on a solid path to achieving our longer-term efficiency objectives. Finally, I'll say a word about Fed positioning given yesterday's decision to keep rates unchanged. As we have discussed before, we believe we are well-positioned regardless of future rate movements. About 90% of our loans and 85% of our deposits are floating rate. We manage our investment portfolio to balance interest rate risk. We've built our business that way intentionally.

We view our success tied to execution on our growth strategy, not tied to arbitraging Fed interest rate decisions. In September, for example, we did not change the base rate on our Growth Savings product after that Fed hike because our strong funding levels and market positioning. There will be times when we'll need to add deposits to maintain our liquidity and growth, and we expect to move deposit rates if there are future Fed hikes. But with our promotion engine, we are structured to remain competitive and have flexibility to manage our rates pragmatically. Overall, the quarter's results demonstrate a strong and steadily growing business. We believe we're continuing to execute against our core objectives, grow our specialty lending strategies, maintain strong credit, fund our business responsibly through our digital deposit platform, and achieve our expense efficiency and return objectives.