FB Financial Corporation

Good morning and welcome to FBE Financial Corporation's first quarter 2021 earnings conference call. This call today from FBE Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Muti, Chief Financial Officer, Greg Bowers, Chief Credit Officer, and Webb Evans, President of FBE Ventures, who will be available during the question and answer sessions. Please note, FB Financial's earning 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. And with that, I would like to turn the call over to Robert Hone, Director of Corporate Finance. Please go ahead.

Thank you, Ian. During this presentation, FB 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 SB 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, FD Financial's president and CEO.

Thank you, Robert. Good morning, everybody. Thank you for joining us this morning. We appreciate your interest in FD Financial. We had another successful quarter as we delivered adjusted EPS of $1.00 12 per share, adjusted ROAA of $1.89% and adjusted return on tangible common equity of 20.9%. And we grew our tangible book value per share to $22.51 or 14.6% annualized. With each day that passes, our markets get a little closer to normal, and that's reflected in a few of our numbers this quarter. We had $31 million in loan growth, excluding PPP, for 1.8% annualized. Through February, balances were actually down $89 million, but then we had a very strong mark with $120 million in growth. As our markets bounce back, customer demand for loans continues to build, We still feel good about our mid to high single-digit annual loan growth target that we set for ourselves. We released $13.9 million from our allowance for credit losses this quarter as continually improving economic forecasts dictate that we bring down our reserves. Following this reserve release, our allowance to loans excluding PPP is 2.29% down from 2.48% last quarter. Assuming no further COVID waves or hiccups in the recovery, we would expect those releases to continue in the near term if economic outlooks continue to improve. Our full deferrals of principal and interest are down to $21 million, and we have $131 million of loans on interest-only payment schedules. Of the $131 million on interest-only schedules, $76 million are hotel loans. We continue to feel optimistic about the ultimate resolution of our loan deferrals. Our net charge-offs were five basis points this quarter. We're still cautious, and we still have significant reserves in case we do experience any credit events, but we don't have any knowledge of anything specific that causes us any concern. With each passing quarter, we grow more optimistic that we'll get through the pain of COVID without any serious credit losses. Beyond numbers, our associates have returned to the office. This is crucial for the internal projects that are our current focus. While our remote world has been effective for most tasks and for a limited time period, face-to-face interaction is crucial for the goals that we have for ourselves this year. Each time we speak to investors individually, we harp on being better operators than our competitors. Most of the goals and initiatives from our strategic plan are geared towards ensuring that we run a better bank for our customers than our competitors do. Most services in banking are commoditized, so our value proposition for our customers is to be faster with less friction while providing better advice than our competitors, whether that's a bank, a credit union, or a fintech company. From an infrastructure standpoint, that means ensuring that a customer can attain any product with us they could with any of our competitor, with any other competitor. And second, that means enabling the customer to do business as conveniently as they can with any competitor, be it online, on their telephones, or through a branch location. From a personnel standpoint, we do that by setting up regions, investing, our regional presidents with the power to operate their regions as independent community banks. Each of our regions is divided into markets. Each market has a president and individual relationship managers report up to those market presidents. Very few banks our size and larger have chosen to stick with the community banking model. From a risk and uniformity standpoint, it's simpler to go with a centralized line of business model. The unintended operational consequences of a centralized model are the reasons that smaller community banks have historically been able to pick off talent and customers from larger banks. Relationship managers tend to get dissatisfied with their work environments, and customers grow frustrated by the lack of responsiveness that's birthed out of broken centralized processes. Since I've been with First Bank, our goal and desire has been to keep our community banking strategy and model regardless of size. We've been able to maintain that well enough, but now that we have $12 billion in assets and have very strong organic growth prospects across our firm footprint, we're taking the time and working hard to review and challenge the customer experience, support functions, risk management functions, and other processes that allow us to maintain our community bank model and will be scalable up to $20, $30, $40 billion, and even more. With an explanation about our regional model, we're excited to announce a newly formed Central Alabama region with the hiring of our first four banking division associates in Birmingham, two of which are very experienced senior bankers. We have long had a more strong mortgage presence in Birmingham with our retail channels leadership being based in Vestavia Hills. Our foothold in mortgage in Birmingham made it a logical market expansion for us and we couldn't be happier to welcome these associates to the First Bank team. We have a loan production office in place currently and we're working through the branch application process with the goal of having a full service branch later in the year. Two other financial reports to make before turning the call over to Greg and Michael. The first is on mortgage. Our mortgage team delivered $16.3 million in direct contribution this quarter, which was 71% of our fourth quarter 2020 contribution. So within our previous guidance of 70 to 100% of the fourth quarter's adjusted contribution. We generally don't give much guidance, especially with mortgage. But we did last quarter because we were confident that we had good insight into the quarter and that the first quarter would be solid for our mortgage group, both in the retail channel and the consumer direct channel. And it turns out we were right. As we look into the second quarter and the remainder of the year, our retail mortgage channel continues to look strong. But with the increase in interest rates, we've seen a decline in refinance volumes, which has an outsized impact on our consumer direct delivery channel. As a result, the retail channel should have a solid second quarter, but that will be largely or entirely offset by the impact of declining volumes and margins in consumer direct. The smaller pipeline will cause a negative market-to-market adjustment on the pipeline that we will absorb in the second quarter. With these headwinds, we are expecting a significant, if any, contribution from our mortgage operations in the second quarter. Once we digest the consumer direct volume decrease, we expect more normal operations in the second half of the year where we would expect mortgage to be in the 10% range of total contribution for any given quarter, depending on seasonality, of course. The second point is on our non-core commercial help for sale portfolio. We had offers that were close to acceptable for us, but we ultimately decided we weren't comfortable with the discount that we were being asked to take on the portfolio that we think remains reasonably strong. As long as we continue to hold the portfolio, we're likely to see some small movements in the valuation as we mark that to market each quarter. The third quarter was a $1.9 million gain. The fourth quarter was a $1.4 million gain. The first quarter was an $853,000 loss. We continue to feel appropriately marked on the overall portfolio and believe that we will ultimately dispose of the portfolio in line to ahead of the discount that we have on the loans term. So, to summarize, we had a strong financial performance this quarter. Our regional leadership feels good about their growth prospects for the remainder of the year. And we added a new central Alabama region and key relationship managers in the quarter. We face a mortgage headwind in Q2, but feel good about the second half of the year. And we're focused on customer experience and the operational enhancements that allow us to deliver our community banking style no matter our size. Now, Greg's going to give you some additional call around credit. Thanks, Chris. Good morning. Overall, the portfolio continues to perform satisfactorily, and I'm reminded that it was almost exactly a year ago that we gave our first update in the pandemic world. It would be an understatement to say that we've seen a number of changes within our portfolio. Unfortunately, due to good general underwriting by our teams, strong relationships, and the strength of our own balance sheet, we've successfully managed through what appears to be the worst part of the storm. Those of you that followed us for the past year will recall that in reaction to the pandemic, we assisted our customers by allowing for some form of payment deferral on approximately 20% of our portfolio. And today, that has been reduced to around 2%, as previously noted and shown on slide 11. Of that 2% number, the minority, or only 21 million, are remaining on a full deferral of P&I, while the other 131 million in deferral are on an interest payment schedule. Those remaining interest-only deferrals are largely in the hospitality sector, as we pointed out previously. All that to say, we're glad to see how that has progressed. While we're on deferrals, it's a good time to highlight some of the major portfolio categories that we've been tracking, or our industries of concern, as it's pointed out in the deck. A year ago, we outlined six primary industry sectors that based upon what we knew at the time could potentially be more heavily impacted by the pandemic. Retail, hotel, healthcare, restaurants, other leisure and transportation. As we look back, we are pleased with the overall results in these sectors, especially in the light of the unknowns at the beginning of all this. Slide 12 highlights the overall picture of those industry segments, and you can see that credit quality has held up. Of these, we will call out two segments to highlight this quarter. In the hotel portfolio, with detail broken out on slide 13, our larger operators are reporting improved occupancies and I believe are optimistic about the future as markets continue to open, the number of vaccinations increase, and travel picks back up. They account for the majority of our exposure. On the smaller, less well-capitalized end of the market, We have seen a few operators not fare as well, and those account for some of the movement in the classified totals. I'm talking only about a few smaller loans. We're hopeful their results improve, but if not, we could see further migration with a couple of these. But again, overall, I'm very pleased with how the hotel portfolio has come through this so far. Second one I'd point out is in the healthcare portfolio, which is detailed on slide 14. We saw a decline initially last year from the closures of the doctor's offices, but again that picked back up with the reopening of the markets. The exception of this has been in a few of our assisted living homes, which were hit with outbreaks at the beginning of this year, and their occupancies or census counts have been impacted. This has not been indicative of our portfolio overall, but is project specific. At just over $20 million, a couple of these credits account for the rest of the increase in our classified numbers. Our teams are confident that with the increase in vaccinations, these properties will be able to build the occupancy numbers back up, but this could be an extended timeframe that we will be monitoring closely. Slide 15 breaks out the restaurant group as we have done in the past, but results here are good overall and in line with our last report. I'll close with slide 16, which displays our overall credit metrics. On the whole, we feel comfortable with the health of our loan portfolio. Charge-offs were minimal this quarter at five basis points. Non-performing ratios held relatively steady this quarter. Our classified loans saw a bit of a jump, but that increase is primarily related to the credits that I just discussed, primarily the assisted living. Lastly, we remain comforted by having an allowance toward the upper end of our peers at 2.29%, excluding PPP. With that, I'll turn it over to Michael. Thank you, Greg. Speaking first to mortgage and expanding on some of what Chris spoke to earlier, the team produced another strong quarter in Q1, producing $16.3 million, a seasonal decline from Q4 of 2020, but was within the expected range. As mentioned last quarter, we saw a seasonal dip in margins, which have continued to compress, as illustrated on slide six, with the rise in interest rates. As we have seen in the past, when interest rates rise quickly, the effects on margins and volume impact the consumer direct lenders harder than the traditional retail channels. This is due to the consumer direct channel being more heavily refinance-focused than our traditional retail channel, and historically, the consumer direct line of business has been between 55% to 65% of our overall volume. We do believe one of the positive outcomes from the pandemic as it relates to mortgage has been the shift in consumer behavior and preference to utilize and leverage technology for their mortgage needs. This shift will provide our consumer-direct business with continued growth prospects, especially as the team works to gain additional market share in the purchase space. We have seen successful strides in April to move in that direction, but as in any business model, shift takes time to fully implement, and we will continue to take advantage of the refinance business as long as it exists. We do expect a solid purchase season, but the mortgage industry as a whole is facing its share of headwinds, including excess industry capacity and national and local housing shortages. Moving on to net interest margin, we saw a decline in the headline number as our liquidity has continued to build. Adjusted for normalized liquidity levels, the margin held relatively flat, around 3.41%, compared to 3.44% last quarter, and that detail is on slide five in the impact of excess liquidity loss. We're still focused on bringing deposit costs down, and we're able to do that this quarter. As cost of total deposits came down five basis points, while contractual yield on loans, excluding PPP loans, also came down five basis points. This trend is poised to continue as we have over 300 million of CDs repricing again this quarter in the 1.25% range. We also continue to see progress on reducing our money market and interest-bearing checking rates as we've been picking up a basis point or so per week on the cost of those deposits recently. Liquidity is likely to continue to weigh on the margin, and we would obviously like to redeploy that cash into core lending relationships, but with the competitive environment and with liquidity continuing to flood into the system, we have ramped up our securities purchases. We've previously held off on investing too much in the securities portfolio given low rates and duration rest that were evident in our investment opportunities. However, with the recent uptick in rates, we've added 112 million to our portfolio in April at about 150 basis point yield, which is a nice short-term pickup compared to the 12 basis points that we're earning on our cash. We will look to move our portfolio to approximately 12 to 13% of total assets. Moving on to CECL and our allowance, we saw a release of $13.9 million this quarter as economic forecasts continue to improve. As we had mentioned previously, we have been fairly model driven with limited qualitative factors to this point. However, the initial release based on our chosen meeting forecast this quarter was larger than we thought was prudent given that the economic recovery is in its early stages and we're still facing headwinds. With that, we increased our qualitative factors this quarter in order to account for some of the uncertainty. Going forward, we will continue to weigh the improving forecasts for skew factors that we believe are prudent to manage the allowance. However, we would currently expect further releases over the next few quarters, assuming outlets continue to improve. I'll close my section by speaking to our expenses. The banking segment non-interest expense was a bit higher this quarter at $55.7 million, which excluding $4.5 million in FHLB prepayment filings compares to $52.9 million in the fourth quarter. This was related to some seasonal and one-time expenses and not a run rate to base future estimates on. Between the seasonal expenses related to the annual incentive compensation payout and a few other one-time items, we're about $1.7 million higher this quarter than what we feel like our run rate is. We continue to expect low to mid single-digit percentage growth rate for 2021 and our annualized run rate from the fourth quarter, which would have been about $212 million. I'll now turn things back over to Chris to close. Okay. Thank you, Greg, and thank you, Michael, for that color. Thank you, everyone, again, for your interest in our company. And, operator, we would like to open the line for questions at this point.