FB Financial Corporation

Good morning, everyone, and welcome to FB Financial Corporation's second quarter 2020 earnings conference call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mati, Interim Chief Financial Officer, Greg Bowers, Chief Credit Officer, and Wib Evans, President of FB Ventures, who will be available during the question and answer session. 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. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation. With that, I would like to turn the comments call over to Robert Helen, Director of Corporate Finance.

Thank you, Jamie. During this presentation, FBA Financial may make comments which constitute forward-looking statements under the Federal Securities Laws. 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 factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's Earnings Relief supplemental financial information in this morning's presentation, which are available on the investor relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov. I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO.

Thank you, Robert, and good morning. Thank you all for joining us this morning, and we do appreciate your interest in FB Financial. On last quarter's call, I highlighted the company's priorities and how they had changed in the face of these uncertain times. Those priorities were, and still are, first, the health and safety of our associates and customers. Third, our capital. Fourth, profitability. And then fifth, growth. I'll touch on each of these priorities in some more depth, but I want to start by saying how proud I am of our team for the level of execution that we achieved on those goals this quarter. A number of our associates listened to this call, and I want to congratulate them on a job that's been remarkably well done. Our financial performance this quarter was outstanding, including record revenue and pre-tax pre-provision earnings. We produced an incredible 3.29% adjusted pre-tax pre-provision return on average assets for the quarter. Our profitability was largely driven by our mortgage team producing a record $33.6 million pre-tax contribution. After a $26 million provision that moved our allowance for credit losses to 2.51% of loans held investments, that's excluding our PPP loans, we had an actual ROAA of 1.30%. The company's earnings power has allowed us to reinforce our balance sheet with fantastic a conservative allowance for credit losses, and an additional $23 million in tangible book value, all while operating in the middle of a pandemic. This demonstrates our business model's complementary bank and mortgage segments. We frequently describe the company as a great community bank with a great mortgage division, and this quarter exemplifies that description. Diving deeper now into our priorities, our focus remains the health and safety of our associates and customers. I believe we've entered a new normal for the foreseeable future. Approximately 700 of our associates continue to work remotely, and we have continued to see strong productivity under this environment. While our drive-thrus and our branches never closed, in March and April, we had suspended lobby access for all of our branches in line with guidance from our state and local governments. As stay-at-home orders began expiring in late April and early May, we moved to reopen our lobbies. We reopened our first branch lobbies on May the 7th with sneeze guards, hand sanitizer, masks, and social distancing markers in place. By the end of June, almost all of our branch lobbies reopened. As case counts have risen and many of our customers have shown a preference in recent weeks for drive-throughs, we have moved to make lobby access appointment only in some select branches. We continue to monitor case counts and will continue to take necessary safety precautions. As discussed on our last call, We've been very proactive in reaching out to our customers, and we provided first deferrals to everyone that requested one. This outreach resulted in $918 million in loans being granted a first deferral. Roughly 60% of our initially deferred loans are still in their first deferral period, which makes it a little difficult to get clarity on how those credits ultimately will turn out. Of those loans that have hit the end of their first deferral, roughly $138 million or about 38% of the balances that have requested, roughly 38% of the balances have requested and received a second deferral. The 38% of balances that have received second deferrals make up about 10% of the notes that have come out of deferrals. We've been in constant communication with our customers as our relationship managers check in and gather information. Anecdotally, we're hearing positive news from the field on our population of deferred loans. We provided a new slide in the investor deck that gives some feedback that we're receiving from our regional presidents. is that after a crop in April and May, many of our markets have been bouncing back reasonably well. A caution, we continue to monitor market activity in our customer base as the case counts have begun to rise in some parts of our footprint. Moving on to liquidity, we're thrilled with our $581 million of customer deposit growth. It's a little difficult to tell at this point how much of that will be sticky. The fact of the matter is that we're a trusted partner to our clients, but we don't grow $581 million in deposits in one quarter without some help from broader market conditions. We're going to do our best to hold on to as much of those deposits as we can, but it's difficult to predict at this point how much of that will stay with us past a couple of quarters. We believe we're well positioned. to take on Franklin Synergy's balance sheet, which has historically been more reliant on non-core funding. In our communications with Franklin over the past six months, we've identified approximately $415 million in FHLB, brokered, and other non-core deposit relationships with a cost of around 1.65% that we could exit by year-end. We'll balance that elimination and not core funding with our current priority of unbalanced sheet liquidity, but we believe that we have the opportunity to pay off some wholesale funding more quickly than we had anticipated. On our third priority, capital preservation, we increased our total risk-based capital ratio to 13.2% this quarter, up from 12.5% in the first quarter through strong provisioning and profitability. We believe that we have plenty of capital to manage through the downturn. We also maintain maximum flexibility as we currently have only common equity and trust preferred in our regulatory capital stack, and we have an investment grade rating from Kroll should we choose to access the debt capital markets for some additional capital cushion. We believe that our strong profitability and existing capital levels continue to support our dividend. Moving on to credit, so far we've not seen significant signs of deterioration in our portfolio. Given the economic environment, we expect some uptick in substandard loans over the coming quarters, and ultimately we expect some increase in our net charge-off to follow. We still feel very good about our underwriting standards in our portfolio. We continue to closely monitor our asset quality. Our message to our relationship managers has been that this is not the time to settle the problem. If you have a loan that needs some attention, then we want to know about any potential issues sooner versus later. And I'm sure we'll face some challenges over the next six to eight quarters, but we won't suffer from a lack of focus. Now on profitability, as I mentioned earlier, our pre-tax pre-provision earnings were $57.8 million, or 3.29%. as a percentage of average assets, which is a record quarter for us. As expected, the margin is facing some headwinds of the lower interest rate environment. Our headline net interest margin number would normally not be one that's acceptable to us. However, this has been partially the result of our on-balance sheet positioning. We've pruned some credits. and had prudent loan growth over the past couple of quarters while at the same time building our liquidity. We'll continue to keep an eye on how this recent influx of deposits behaves and how quickly PPP loans are forgiven. In the absence of record synergy, which will have, say, a 10 to 15 basis point impact on our core margin, the second and third quarters should be a draw for us. I expect our market to begin to bounce back in the second half. However, the same rate environment that's created the headwinds for our banking segment allowed our mortgage area to deliver $33.6 million in direct contribution. This was a Herculean effort from our team as they capitalized on strong volumes and above average margins while benefiting from the record low but steady interest rate environment from March through the end of the second quarter. We expect our mortgage team to capitalize on this environment for as long as it continues. I have a few other updates before turning things over to Greg and Michael. We've consistently been updating our technology over the past couple of years and consumer online and mobile banking was the last remaining significant platform that was due for enhancements. When we converted Farmers National Bank last quarter, we placed their customers onto our new system and we've had great feedback from those user experiences and from those capabilities. Later this week, we're converting the rest of our customer base onto that same platform and we're excited to provide an improved experience for our customers. On the Franklin Synergy merger, we anticipate closing in August and conversion before the end of the year. Dialogue between those two management teams has been consistent and positive since the announcement. We're hearing that their core credit portfolio continues to perform as expected. They continue to make progress on moving out of that non-core portfolio as well. We are eager to be able to officially join forces with those associates and begin taking advantage of the combined strengths of the team. With that, I'm going to let Greg go into a bit more detail on the credit portfolio.