FB Financial Corporation

Good morning, and welcome to FB Financial Corporation's third 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 Webb 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 Finance's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in listen-only mode. The call will be open for questions after the presentation. With that, I would like to turn the call over to Robert Hone, Director of Corporate Finance.

Thank you. During this 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 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 others is contained in FE Financial's periodic and current reports filed with the SEC, including FE Financial's most recent Form 10-K. Except as required by law, FE Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release supplemental financial information 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. Good morning, everybody. Thank you for joining us today. We appreciate your interest in FB Financial. I'm excited to update you on what I think is one of the strongest and most impactful quarters that FB Financial has had since I've been with the company. During the quarter first, we converted our consumer and online mobile banking platform in July, which really improved our customer online banking experience and our mobile experience. The new systems improved our capabilities and we've gotten excellent feedback from our customers on the new app and how smoothly that conversion went. Lifted a team in Memphis in July and added some very strong, well-known commercial relationship managers in that market. We anticipate some significant production over the next couple of quarters as they bring some of their long-standing clients over to First Bank. And we expect that momentum to really continue and gain steam over the course of 21. Third, we closed our Franklin merger. on August 15 and then hustled to get through the systems conversion less than two months later on October 12. From a strategic perspective, we feel that this positions us well to be Nashville's premier community bank and further entrenches us as Tennessee's premier community bank. Fourth, we raised $100 million of 4.5% subordinated notes at the end of August. That further protects our balance sheet and provides us dry powder for future organic growth and accretive M&A. Finally, we posted a record-breaking adjusted EPS of $1.46 per share. record-breaking adjusted earnings of $59.5 million and a very strong adjusted pre-tax, pre-provision return on average assets of 3.13%. Thank you to the teams that put so many sleepless nights towards accomplishing those milestones. To see how our associates have come together to embody our one team, one bank philosophy over the past few months has made me very proud of the people and the culture that we have here at FBK. As you may remember from past calls, we reordered our priorities back in March to number one, the health and safety of our customers and associates, number two, liquidity, number three, capital, number four, profitability, and fifth, growth. These priorities remain in place to ensure the strength of our balance sheet to position us to aggressively pursue organic growth and increasing M&A when the time is right. On the first of those, health and safety, we have had minimal cases of COVID across our employee base and we continue to emphasize our safety protocols as most of our associates have returned to the office. We've continued to protect our team and provide a safe environment for our customers while moving our operations back to near normal. Little priority number two, we built our liquidity position to 14.7% of tangible assets and have access to an additional $6.1 billion in contingent liquidity available to us. We're very comfortable with the company's liquidity position and access to liquidity, so we expect our own balance sheet liquidity position to come down over the next few quarters as we unwind some 9-4 funding that came over in the merger. On priority number three, our tangible common equity to tangible assets has increased to over 9%, and that's even with a balance sheet that's seen $843 million in organic deposit growth over the course of this year and still has $310 million in PPP loans on the books. Our total risk-based capital ratio is 15.9%, which is about as high as we've ever had. We also took on a larger C&D portfolio with the Franklin merger and on a combined basis managed to get that well under 100% of the regulatory guidance threshold this quarter, which is a year earlier than we had originally anticipated and that we had originally committed. We feel very strongly that our balance sheet is positioned well both to weather any economic issues that may arise and to take advantage of any opportunities that may present themselves in the future. So while I'm talking about capital, I'll speak to our credit a bit as well. Year to date, we've increased our allowance for credit losses by $153 million. Over that same period, we've experienced only $2 million in net charge-offs. Our ACL to loans held for investment excluding PPP loans is up to 2.66%. Our ACL to non-performing loans is 421%. We feel very good, maybe a little too good, about the protection that we have in place for our loan portfolio. Priority number four, profitability. We need to keep working to bring our cost deposits down, given the decline that we've seen on earning assets. That's been a focus and will remain a focus until we regain our peer-leading margin. However, year-to-date, mortgage has put up $81 million in pre-tax contribution when we went into the year, expecting about $10 to $15 million in pre-tax contributions. As a result, our adjusted PTPP ROAA has been over 3% each of the past two quarters, so I'd say we've gotten a pretty effective hedge on our margin in times of declining rates. For priority number five, growth, we continued the measured approach that we put in place back in 2019 when we started pumping the brakes on terms and rates that we felt were nonsensical We used this year to prune some of our weaker credits while focusing on deepening relationships with some of our best customers. With local economies across our footprint picking up, our regional presidents are seeing significant pickups and new opportunities this quarter and expect some real momentum as we head into 2021. On the topic of growth, the company grew about $3.7 billion in assets overnight in mid-August. We've included a slide in this quarter's deck that lays out just what bringing these two banks creates for us in the National NSA and how some of our assumptions have shifted from announcement to today. We're thrilled to have the top market share in Williamson County and the second market share in Rutherford County while being the top 10 in Davidson County. We continue to think that achieving critical mass in a market creates some synergies that leads to additional opportunities. From people perspective, at announcement, we thought that we were combining with some of the top flight players with this merger in our market. That became a bit clear. A bit more clear, after seven months that we were working together towards the close. Now that we've been working on the same team every day for a couple of months, I can definitively say that the talent is even better than expected. The company has a group of high performing individuals that is used to winning. With every new hire, whether organic or through a merger, we let each associate know that that they're joining the First Bank team, and they work for one of the elite performing community banks in the country. Our message is that our performance stacks up well against your competition. You should always be proud of your company. We believe that this message has resonated well with all of our teammates, including our new teammates, and we're excited to go out and tell that story in the markets. We still have some work to do to get things fully integrated and humming on all cylinders, but we've been really pleased at how things have gone so far. I'll let Michael walk you through all the gives and takes of the purchase accounting later, but a couple of points I want to focus your attention on from a financial perspective. First, the transaction ended up being accretive to tangible book value per share. With the pandemic and its impact on the loan mark, as we were evaluating the terms back in March, April, and May, we thought we might see some dilution. But ultimately, the purchase accounting swung back the other way due to the zero rate environment and the interest rate mark on the loan portfolio. Each of our three whole bank transactions that we've done since going public have been neutral or accretive to tangible book value per share. We'll do our best to continue that streak as we move forward. The second item is that we ultimately decided to classify the non-core institutional portfolio as assets held for sale. The Legacy Franklin team has done a tremendous job of working that portfolio and moving loans from that portfolio out of the bank since announcement. and we are examining some bulk sale options. That portfolio had about 263 million in principal balances as of 9-30. The credit quality of that portfolio is actually doing quite well, and there are some strong sponsors behind some of the private equity back loads in the portfolio. So we're hopeful that we will ultimately be able to realize better execution than our mark, and we don't feel any pressure to take any bottom feeder type bids that we may see on that portfolio. All of that said, I sit here and look at what we've accomplished this year, and I look at how our balance sheet is positioned, and I look at the demographics of our footprint now that we have closed the merger, and I can't help but think that our team has created an incredible balance of franchise and shareholder value while the world's been shut down. We're laser focused on getting Franklin integrated, and we'll enter 2021 firing on all cylinders and points to take advantage of opportunities. I'm going to turn the call over to Greg Bowers to talk about our role portfolio. Thanks, Chris. Good morning. We've spoken on previous calls about our asset quality and how it has continued to perform well, even in these unusual times. That continues to be our message for this quarter. From a strict credit metrics perspective, as you've seen in the release, we continue to report good numbers that speak for themselves, including trends associated with past dues, our watch list, classifieds, and non-performers. But I'll touch on a few important specific categories. On the deferral front, we've seen that move down from a high on a combined company basis of over 20% to roughly 6% at quarter end. As we've noted before, at the onset of this, we were proactive in reaching out to our customers and providing relief, which was a combination of our desire to help our customers, as well as risk management. Behind these numbers lies a few things for consideration and review. Initially, those that truly needed relief, the hardest hit, got deferrals. But remember that many who requested a deferral were in the category of, hey, we're doing fine, but with all this uncertainty, I'm going to seek a deferral out of conservatism and protecting against what might come next. So that was our report in the first quarter. Then as the second quarter came around, Those that were in the latter category went back to their pre-COVID plan and deferrals began to drop. Now here we are with the third quarter report, and I'm glad to say we continue to make progress in that regard. In summary, we are cautiously optimistic about the size of this portfolio continuing to reduce, but remain pragmatic that without a vaccine or continued stimulus, uncertainty regarding the ultimate outcome will remain the watchword. This is especially true within the hotel segment, which accounts for the largest single concentration within the deferral portfolio. Moving to slide 12, this provides an overview of the new combined portfolio as of quarter end, moving total loans up by roughly $2.7 billion with a merger with Franklin Synergy Bank. We are excited about the impact that this makes on our company. Chris has hit on this today and in previous presentations, but I think it is worthy to highlight some of the changes as we put these two portfolios together. First, let's clarify how we presented the portfolio so we're all on the same page. My comments will be about the loans held for investments, not the non-core institutional portfolio. I'm talking about the plain old relationship-based local market loan and deposit book, not the loans held for sale. With the merger, you will see that we remain a balanced and well-diversified company. An area that has trended up is within the percentage of the portfolio which is real estate based. No question about it, Franklin Synergy held a higher concentration than First Bank has historically, but it took advantage of the market, built upon relationships and expertise, and is extremely successful in this area. That real estate portfolio is primarily broken out into a commercial real estate piece and a residential real estate piece. The residential segment is your standard home building portfolio, lending to builders who are building single family homes in our market for sale. And if you're going to be in the home building business, we don't believe there are any better counties to be in than Williamson, Rutherford, and Davidson in Tennessee. The area's statistics continue to demonstrate strong growth and tight inventory levels. The legacy Franklin Synergies portfolio reflects that market. The focus was on dealing with the right people, the right subdivisions, assessing inventories and concentrations, and monitoring the construction process. You will also see that our ratio of construction and development as a percent of risk-based capital, as Chris already alluded to, is already below the 100% regulatory threshold, now stands at 90%, which is frankly quicker than we had expected. On the commercial real estate side, we see similarities within the two portfolios as well. Again, a focus on dealing with people that we know, borrowers with skin in the game, a local market focus, and owners willing to stand behind their deals. Generally, similar underwriting parameters with a bent toward a little higher dollar size in certain instances. We've already begun the steps of merging the two companies' credit processes and organizations. We'll spend a lot of time going forward melding the two cultures and continuing to assimilate the portfolios. Moving to the next slide, number 13. As we have done in the past, we began breaking out the portfolio along the lines of industries of concern. This first slide provides an overview with the next slides providing a little more granularity. Slide 14 references the retail portfolio. which is continuing to be something that we're all watching, but I would say that in general we continue to see good results. This has a significant C&I owner-occupied piece that has fared well, as has the CRE side. This is one of the segments that has moved up with the merger, and while in general we would say that the portfolios are similar, typically smaller retail strip centers, we have picked up an atypically larger loan in the $34 million range secured by a regional mall. That property, however, has not sought a deferral, is meeting its obligations, and actually generating positive cash flow. Occupancy is high, and its performance owes to leverage with low value in the mid 50% range. On slide 15, the hotel slide, this highlights one of my previous comments, that hotels represent the largest component of our deferrals. This portfolio consists of over 100 notes ranging from a few hundred thousand dollars to our largest single exposure, just under 26 million. We remain cautiously optimistic about the portfolio. I wish that we could report across the board step-ups in occupancy and performance, but at this point, it continues to be a mixed bag of results. We do remain positive about our original underwriting and the willingness of the borrowers to support their properties. As an example of that, without going into too much detail, we have entered into an agreement with one of our largest customers, which calls for them to bring all of the deferred interest current, establish a reserve account for the upcoming year, and in conjunction with this, we agreed to extend the maturity for roughly a year. Rather than requiring principal and interest, we did agree to an interest-only structure. On an overall basis, we believe this corroborates our position. that we're dealing with good properties and investors who have both the willingness and the wherewithal to stand behind these loans. Lastly, on this slide, I'd note that our portfolio is primarily limited-service and full-service properties, which, as you know, are models that can support the location at an overall lower occupancy rate compared to that of, say, a luxury property. Healthcare is our next slide, number 16. which accounts for 4.7% of the portfolio. Overall, not much to report here, generally good results. Anecdotally, we're hearing from the field that physician practices are steady after reopening, while assisted living and skilled nursing operators are having to continue to deal with the COVID protocols, which is impacting occupancies. Our restaurant exposure is reflected on slide number 17, accounting for just under 2% in total. As we've talked about before, we have a pretty diverse portfolio here. Concentrations moved up slightly with the merger, as did our largest single exposure, now at approximately $11 million to a good local operator and strong financial footings. But as with all markets, the limited service operators are actually finding the going easier than the full service, who continue to be challenged with constraints on seating capacity. So far so good on this portfolio as well, but one that we will continue to monitor closely. As noted in our prior quarter's presentations, not included within this segment's numbers, we did have a larger diversified food business operator whose performance was declining with a rating that had been moved to criticize in Q2. You will recall that we indicated that without an improvement, it would likely continue to decline. This roughly $25 million exposure has done just that and accounts for the majority of the pickup in our substandard assets for this quarter. Slide 18 highlights our other leisure portfolio, which represents a mix of industries accounting for just under 2% of the total. As we discussed before, some segments here have seen a benefit over the past few quarters as outdoor activities over the past few quarters, such as outdoor activities, while indoor venues have continued to struggle. Overall, we're continuing to see satisfactory performance within this segment, but we'll keep it under review as you would expect. Slide 19 breaks out transportation and warehousing, also under 2% of the total. Overall, continued good results within this segment, which has seen some industries actually improve within the current economic environment, such as trucking and warehousing. We do list some air travel and support business, but rest assured that does not include direct debt to any commercial airlines. In summary, asset quality remains good. Deferrals continue to come down, and we're excited about the merger and working with our new teammates and customers. It wouldn't be an update from a credit perspective, however, if we didn't remind us all that any enthusiasm we have at this point must continue to be tempered with the uncertainties related to the pandemic. With that, I'll turn it over to Michael. Thank you, Greg, and good morning, everyone. My prepared remarks today will focus on CECL and the financial impact of the Franklin merger, margin, and mortgage, and then I'll be available for the Q&A section as well. First, on CECL, there are two slides to focus on. Slide 20 lays out our economic forecast and resulting ACLs by each reporting category, and slide 21 shows the walk forward from June's ACL of $113 million to September's $184 million. I'll touch first on our forecast assumptions. We used a blend of the baseline forecast as well as more positive forecasts that Moody's put out in July. With that blend, we feel like we have pretty well captured our current expectations for our markets. As the rest of the country continued to reopen, Moody's did put out additional forecasts in August and September that were incrementally more positive than our July scenarios. But in that time between forecasts, we did not see noticeable changes in the economic activity in our markets. so we ultimately stuck with our July blend for the quarter. Looking at the ACL on our legacy portfolio, there were two primary drivers to the slight release that we saw in the quarter. The first was declining balances, and the second was the improving economic forecast that we used for Q3 as opposed to Q2. Together, these combined to produce approximately $7 million in ACL reversal this quarter. We had a little bit of heartburn about letting those reserves go, but we still feel very adequately reserved and continue to mostly stick with what our model tells us, at this point with a few qualitative adjustments. On the Franklin-related ACLs, there were a few components that I'll touch on. The first that I'll speak to is our non-purchase credit deteriorated allowance. As of September 30th, there were $1.7 billion in loans in that bucket and our CECL model told us they needed a 3.06% in ACLs. That resulted in provision expense of $52.8 million for the quarter. Given the unique nature of that provision, providing for the entire reserve on the portfolio in one quarter, we backed that out of our adjusted earnings. The second piece to this Franklin-related ACL was the purchase credit deteriorated ACL. As of September 30th, there was about $700 million in loans in that bucket, and our CECL model and qualitative factors led us to an ACL of 3.62%, or $24.8 million on that portfolio. That PCD ACL does not count towards Tier 2 capital, and was established at close, impacting goodwill rather than being expensed on day one. All told, we wound up with $184 million in ACL, or 2.66% of loans held for investment, excluding PPP. Segueing from our ACL to our provision expense, there were four main pieces to our expenses quarter. We have talked about two, which are legacy portfolio reserves relief and the FSB-related day one expense. The other two are related to provision for unfunded commitments. With the outlook for the economy continuing to improve from quarter to quarter, we had a relief on unfunded commitments of .9 million. On the FSB side, our assumptions on the economic environment led to a provision for unfunded commitments on day one of 10.4 million. Similar to our non-PCD provision, due to the unique nature of building this entire reserve on the portfolio in one quarter, we've also backed this out of our adjusted earnings. You can see the details of these four components on our provision expense on slide 21. Moving from CECL into an update on our purchase accounting, I'd first like to talk to the loan mark, and I think it's helpful to point you to the bottom of slide 8 as I'm talking through this. At announcement, we had assumed $110 million of total pre-tax impact of tangible common equity related to the loan mark, be that initial provisioning, day one PCD APL, or fair value marks. At close, we wound up with $101 million of impact. Eighty-eight million of that was related to ACL, which compared to 41 million estimated in announcement. To put that into relevant terms, FBK's initial adoption of CECL brought our legacy standalone ACL up from 31 million to 54 million. The economic forecast from that point on brought our ACL from 54 million to what would have been 106 million standalone this quarter, or roughly double what would have been expected on a standalone basis back in January. So that move from $41 million to $88 million has pretty well followed suit. The second piece of that $101 million is the mark on the non-strategic portfolio. At announcement, we'd assumed an 8% mark on that $430 million portfolio. At September 30th, we had a $22 million mark on the remaining $263 million, or 8.4%. In the past few months, we've seen a large portion of that portfolio either refinance at par or get sold to other banks close to par. We feel comfortable that the 8% level captures a liquidity mark there, and while we will be opportunistic if we get the right price on the portfolio, we feel no pressure to sell given the credit quality of the remaining loans. So between the ATL and the fair value mark on the non-core portfolio, we wound up with $112 million in credit marks versus $75 million assumed at the announcement, which feels pretty good to us. The last piece of the $101 million loan market are the fair value rate, liquidity, and credit marks. That number came into the $11 million premium versus the $35 million mark that we had assumed at announcement, so a $46 million swing. Obviously, the rate environment was a huge driver there. Checking in on other purchase accounting assumptions from announcement versus what we realized. Between the two banks, we've expensed around $30 million in merger charges to date versus $50 million that we'd expected at announcement. Despite it being a fourth quarter event, we realized most of the conversion-related expenses in the third quarter. We have five to 10 million left that we'd expect to see in the fourth quarter related to lingering contract terminations and conversion costs. We ended up adding nine net branches from the acquisition. Franklin had leased all of their locations except for their former headquarters location, which has become our operations hub. Our current plan is to find sub-tenants for these closed locations, so with the current real estate environment, it may take a little bit longer than originally anticipated to realize our full run rate of cost savings. That said, we feel very strongly that we'll hit our 30% cost of investment in early 2021. On Durban, we're clearly over $10 billion in assets today. There is a potential path to getting under $10 billion at 1231, but we are weighing the cost benefit of executing on that strategy. At this point, we are more likely than not to be over $10 billion at 1231 and would realize the loss in interchange revenue created in the second half of 2021, which is how we modeled the transaction and announcement. Finally, we calculate about 50 bits of tangible book value accretion as of today versus our neutral announcement. As Chris noted, each of our past three whole bank deals have been either accretive or neutral to tangible book value, and it feels pretty good to protect that value for our shareholders. Moving on to the margin, PPP and liquidity continues to weigh on the stated number. The third quarter is fairly messy given PPP, liquidity, and having Franklin on the books for only half the quarter. Contractual loan yields decreased 21 basis points to 4.36% from 4.5% in Q2. PPP loans had about 18 biffs of impact on the contractual yield this quarter. And for recent color, spot contractual rate on the portfolio was around 4.45% at 9.30. Excluding PPP loans, the contractual rate on the held for investment portfolio was around 4.6%. On the liability side, total deposit costs decreased nine basis points to 0.56% from 0.65% in Q2. The flat cost of deposits was 0.59% as of September 30th. There are 257 million in time deposits maturing in the fourth quarter with a weighted average cost of 1.77%. The sheet rates for those deposits would have them repriced approximately 40 basis points. For comparison, during the third quarter, we had a little under $290 million in CDs matured with a 1.84% average cost. This had a sheet rate of just under 40 bps, and we renewed about 65% of those at an average cost of just under 50 basis points. We have also identified $471 million in legacy Franklin deposit relationships at a contractual rate of 1.25% that we would consider not quite core customer relationships that we think will be leading the balance sheet this quarter. Moving to mortgage, the team produced another record quarter, so we'd like to congratulate their work in that regard, and our mortgage production continues to provide us with strong counterbalance to the NIM pressure that the bank is facing in this low rate environment. Similarly, to last quarter, the group continues to benefit from strong origination volumes and capacity constraints in the industry, producing atypical margins on loans in our pipeline and ultimately on our gain on sale margins as seen on slide 25. As we highlighted during our second quarter earnings call, the market-to-market value demonstrated in Q2 flowed to gain on sale in Q3, plus some execution pickup as expected. Our expectation is gain on sale will continue to be at elevated levels in Q4 due to our current market-to-market values, but we will have likely seen the peak for margins on new production. With that, I will turn the call back over to Chris. All right. Thank you, Michael, and thank you, Greg, for the color. To close, we're very proud of what we've accomplished this quarter. There are many challenges that still lay ahead for us, but we're excited to meet those and execute against those and capitalize on the opportunities. With that, I'd like to open the line up for questions, operator.