FB Financial Corporation

Good morning and welcome to FB Financial Corporation's fourth 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 Matee, Chief Financial Officer, Greg Bowers, Chief Credit Officer, and Whib 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 one 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 call over to Robert Hohen, Director of Corporate Finance. Please go ahead.

Thank you, Kate. 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 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 FP 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.

All right. Thank you, Robert, and good morning. Thank you all for joining us this morning. We appreciate your interest, as always, in our company. And as we started thinking about the themes and preparing our comments for this quarter, it really struck me what a significant year 2020 was for our associates and our shareholders. Our team has actually had a really special year, and I want to give you a few facts. First, on our financials. Our adjusted net income for the year was $142 million. This represents adjusted EPS of $3.73 versus $2.83 per share last year for a 31.8% increase. This is an adjusted return on average assets of 1.68% and an adjusted return on tangible common equity of 19.1%. Those earnings also moved our tangible book value to $21.64 a share, growing over the prior year by nearly 17%. Yes, I said nearly 17%. Okay, remember that this growth came after we provided $108 million for loan losses and increased our allowance to 2.48% of loans, a figure that's among the highest of our peers. Our balance sheet is in excellent shape as we end 2020. In addition to the increase in our allowance, we grew from $6 billion in assets to $11 billion in assets during the year. But rather than this growth stressing our capital ratios, we maintained a tangible common equity to tangible assets ratio of 9.3%. And we increased our total risk-based capital from 12.2% to 15.2%, all this without an equity raise. Beyond the year's financial results, there were some other noteworthy accomplishments. Four years ago, our only relevant presence in an MSA was in Jackson, Tennessee, where we were third in market shares. Over the last four years, we've built top 10 market shares in Nashville, where we're sixth, by the way, with $4.8 billion in deposits, in Chattanooga, where we're fifth in market share, in Knoxville, where we're ninth, and in Bowling Green, where we're seventh. Those are markets that each have projected household income growth of over 8% over the next five years and projected population growth that's expected to be 4% and above. Finally, We continue to be a great place to work for our sessions. Of all the accomplishments of 2020, I personally might be the most proud of American Banker recognizing us as one of the top banks to work for for the first time this year. We've been recognized as a top workplace by the Tennessean, the largest newspaper here in Tennessee for the past five years, and it's nice to add national recognition as a superior workplace. Building on that culture, we've not had a single pandemic-related job elimination. And for those associates that were unable to perform their job due to branch closures, there was no reduction in pay. And I'd like to think there was never a concern on behalf of our associates that we would do things any other way. So with all that, I think we've had a monster 2020. And I want our team to take a minute to be proud of themselves for what they've accomplished. But after that minute, it's time for us to get back to work because we want to follow that monster year with a fantastic 2021 and 2022. We go into 2021 with a lot of excitement and optimism because we have a lot of levers that we can pull to build on last year's performance. First, the acquisitions get the headlines, but we're an organic growth company and we pride ourselves on outworking competitors and taking market share. With two acquisitions and COVID last year, we had plenty of distractions. Today, we're positioned very well for organic growth in Nashville, Knoxville, Chattanooga, Jackson, and Bowling Green, which are all very strong growth markets. We have excellent leadership in place, strong branch delivery networks, good market presence, and plenty of room to grow our market shares. In Memphis, we recently added a new market president and a team of relationship managers. In Florence and Huntsville, we have very little market share, so we can be very aggressive in getting after new business. Two other contributors, we expect the reliable, steady, slower growth, but higher margin contribution that we've come to rely on from our smaller community markets. And we'll be aggressive in recruiting and hiring additional relationship managers in every part of our footprint. With our culture, size, and momentum, there's not a better home for ambitious relationship managers. Across all our markets, we set aggressive targets internally, and in aggregate, we expect to deliver mid to high single-digit loan growth in 2021. We expect the first half of the year to be slower than the second half, but we also expect our markets to be among the best as economic activity increases during the year. Mortgage is another area of strength. Volumes and margins remain elevated, and our team will continue to capitalize on this favorable environment. We produced 23 million of adjusted pretax contribution last quarter in what's typically the slowest quarter for mortgage activity in the year. Our team has continued to perform well in January, so we expect the first quarter to be another strong one for mortgage. And then after that, we'll be back into the purchase season. that between continued low rates and the current housing start trends, we expect to be strong. As you all know, mortgage volumes are very, very difficult to forecast, and frankly, we've failed every time we've tried to do it. But we expect the first quarter to be similar to Q4 with a 70% to 100% of the previous quarter's contribution. And we expect continued strength in the second and third quarters, barring a significant change in the environment. On net interest margin, we continue to carry significant levels of liquidity, which weighs on the margin, but gives us some levers over the next couple of quarters to improve our funding costs. This past quarter, we did a good job of further purifying our balance sheet and reduced non-core funding by $462 million. between FHLB advances and wholesale type deposits. We have another $80 million or so to go in the first two quarters of the year. On the asset side, it's difficult to find higher yielding assets. Everybody knows. So we're still likely going to lose some yield on our contractual rate on loans, XPPP, as long as this rate environment continues. But we think that we still have some good progress that we can make on our deposit costs to offset that. On non-interest expense, we realized our cost savings on the Franklin merger earlier than expected. We may realize an additional $1 to $2 million in annual run rate cost savings in the second half of 2021, but we don't expect additional dramatic improvements in the first half of the year. With this larger balance sheet and our larger platform and conversion activities behind us though, we feel like we're in a good spot to focus on some operational improvements that should help reduce expense through productivity gains and avoiding future expenditures. I would expect low to mid single digit growth to our core bank expenses fourth quarter run rate in 2021. On credit, we feel as good about our portfolio as ever. The deferrals and PPP loans serve their purpose of putting our customers back on their feet, and we use this opportunity to improve the overall quality of our loan book. We did have one credit that we've been giving you updates on over the last few quarters that we decided to charge down in the fourth quarter. This accounted for 55 of our 58 basis points in net charge-offs, and we think we've nipped this one in the bud, and we got it behind us. I'm going to let Greg give you some more color, but I feel pretty good about where we stand, and I think 2021's metrics will bear that out. To recap all that, we achieved density and relevance in some exceptional markets, and we have local leadership teams in place that know how to capitalize on the resources that we provided for them. We've turned ourselves into an excellent option for talent that's looking to make a move. Our capital liquidity positions are better suited than ever to take advantage of good business opportunities. We have a very strong non-interest income engine that should continue to deliver outstanding results. We've already achieved our targeted cost savings on FSB, and we think that we have some expense control opportunities in front of us. The margin is compressed, but we think we're well positioned to continue driving down funding costs while deploying lower yielding liquidity into core loan growth. And credit shouldn't be a headwind for us in 2021. With a great 2020, and by the way, did I mention that we did grow tangible book value by almost 17% despite $108 million provision during the year? I want to make sure we got that one in there. We're poised for a fantastic future. And with that, I'm going to turn things over to our Chief Credit Officer, Mr. Bowers, for some detail on credit. All right. Thank you, Chris. I share your sense of optimism for 2021 and confidence in our overall asset quality. The integration of our portfolios has moved along well and I appreciate all of the hard work that our teams in the markets have done in this regard. It's no easy feat. We ask of them to coordinate the move of their customers on the new systems while ensuring great customer service at the same time. It's been remarkable. We say that asset quality remains positive overall and with one exception, We believe you will see that in our credit metrics today. That exception is a problem credit that, as Chris noted, we have called out with you for the past three quarters. Like most deals that get into trouble, information comes in over time and you assess it accordingly. Circumstances change, information gets updated, and things either get better or worse. And in this case, it just continued to decline. And just like any other deal in our portfolio, when problems surface, we address them swiftly and decisively and then take the appropriate steps. In this case, it was determined that appropriate steps included a charge down related to that loan. As a result, our net charge-offs for the fourth quarter were 58 basis points, or $10.4 million. Of this, $10.4 million, $9.9 million, or 55 of the 58 basis points in charge-offs were tied to that one credit. The balance was placed on non-accrual, which accounted for 17 basis points of our 88 basis points in non-performing loans. to loans held for investment this quarter. With that, we believe this loan is appropriately marked and rated, and our focus will continue to be on its resolution. With that one exception, the asset quality of the portfolio remains good, and as Michael will detail for us, significantly reserved. When I speak about the portfolio's quality, one measure of this is in our deferred portfolio. Deferrals are down to about $200 million, or 2.9% of the portfolio. That's a long way from the roughly $1.6 billion we had at one point. Note that when we say deferred, we are including all of the loans that remain on some form of modified payment schedule. We take comfort in noting that of that approximately $200 million, roughly 65% is making interest payments with about 35% of that portfolio on a full deferral. That is, we have allowed them to forego interest and principal. Hotels remain the hardest hit area within deferrals. No surprise there, making up 44% of the full deferrals, 41% of the interest only deferrals. We remain cautiously optimistic about the ultimate resolution for the remainder of that portfolio, and are very pleased to see that it has come down so far. The next area that we believe continues to reflect positively regarding our overall portfolio is in what we have called our industries of concern, and as you know, We've broken these out each quarter since the beginning of the pandemic. I think you'll share our sense of overall improvement here, too, as you review these slides. Specifically, we'll move to the hotels on slide 15, excuse me, and try to provide a little more color on that segment. Again, overall, we still feel confident in the underwriting of that book as a whole, but occupancy rates continue to be impacted by the pandemic. We continue to work with those customers that we believe are strong operators, and our customers continue to work with us in instances where we have asked for additional capital. We continue to be comforted by the quality of our properties, management teams, and investors, and we sleep well at night knowing that we have avoided projects in Nashville's core downtown tourist area, larger luxury properties, and conference center properties. I look at these figures specifically that the bulk of the deferrals are paying interest as a positive. Another segment that continues to struggle is restaurants, which we have on slide 16. That's due to the reduced capacity restrictions, especially in our metropolitan markets, and overall trends across the geographies. On the whole though, our group generally continues to be okay, but I'm not recommending that we give them an all clear flag. These shutdowns and reduced capacity limits are a challenge, and long-term prospects for the industry remain cloudy. We'll share with the group that this doesn't mean we haven't had very specific issues. For example, we have one customer with a full service operation that recently closed. However, the guarantors that were part of our underwriting are stepping up and performing on the debt. As we've also noted on the positive side, the quick service segment of the business has fared well. While overall we're cautious about restaurants, we would entertain opportunities for seasoned and well-capitalized operators in this segment if it made sense. Lastly, roughly 25% of our other leisure portfolio, slide 17, remains on deferral, so we have included that disclosure again this quarter. Rather than a systemic issue in that portfolio, It's a handful of loans that comprise roughly 90% of the deferred balances. Those are customers whose industries have remained impacted by the pandemic, but we feel good about our guarantors and collateral in each situation and think that the businesses should bounce back well once the vaccine is widely distributed. Our other industries of concern, for example, retail, healthcare, and transportation, continue to perform and have minimal remaining deferrals. You can see that we have reduced our disclosure on these industries this quarter and that's because simply in general, they've returned to normal and there's nothing significant to highlight. As always, if that changes, we'll reincorporate that into the deck for you. From an overall economic viewpoint with the exception of hospitality and entertainment, our footprint has continued to perform economically better than any of us would have guessed back in April. Moving on now to the institutional portfolio, our help for sale portfolio, it has been reduced down to roughly $215 million, down from $241 million at Q3. You will recall that announcement roughly a year ago now, that portfolio stood at approximately $430 million. We maintain our position of exiting this portfolio as soon as we can. We're willing to sell on a one-off or a bulk basis. But as we've said before, we're not willing to give away a performing portfolio. We'll continue to work on this from the sales side. And in the meantime, we'll just continue to do what we do with any loan and manage them on a one-on-one basis. So for the institutional portfolio, that help for sale portfolio, we see positive trends with it continuing to reduce, standing now at half where it was at announcement. It is appropriately marked. and our expectation is that it will reduce further from paydowns, one-off loan sales, or selling it in bulk. Regarding our outlook for 2021, we continue to be cautiously optimistic about trends throughout our market. The additional government stimulus should continue to be a welcome assist until the vaccine is successfully distributed and our markets move back to normal. The residential housing market in Nashville, and really across our entire footprint, is still performing very well and is aided. by continued influx of corporate relocations as our new neighbors arrive from California, New York, Chicago, and on to enjoy our lifestyle and business environment here in Tennessee.