FB Financial Corporation

Good morning and welcome to FB Financial Corporation second quarter 2021 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 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 FP 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 call over to Robert Hohen, Director of Corporate Finance. Please go ahead.

Thank you, Chad. 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 FBA Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FBA 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 due 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 gap financial measures and a reconciliation of the non-gap measures to comparable gap 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, and thank you for joining us. We always appreciate your interest in FB Financial. We had a great quarter as we delivered annualized loan growth of 13.9% when you exclude PPP, adjusted EPS of $0.88, adjusted return on average assets of 1.43%, adjusted return on tangible common equity of 15.8%, and grew our tangible book value per share to $20.43, or a 16.4% annualized pace. Back in April, when we had our last call, economic activity in our markets had started picking back up, and folks across our footprint were returning or had already returned to their normal schedules. We felt that the return We felt that this return to normal was coming through in our numbers last quarter as we had a loan growth of 1.8% annualized, most of which came in March. We also had a 19 basis point release in our adjusted allowance, deferrals declining to $152 million, and net charge-offs of five basis points. In this quarter, our markets have really been buzzing. People have almost universally returned to work, and our customers are transacting business again. This quarter's results reflect our footprint rebound. As loan growth, XPPP was a stellar $240 million. We saw a 26 basis point release in our adjusted allowance. Our deferrals are down to $74 million, and net charge-offs were only two basis points. Our loan growth this quarter is a sign of of the strength of our markets as well as the quality and capacity of our relationship managers. Our growth came from across the board. Middle Tennessee continues to show very strong economic activity. Our teams in Knoxville and North Alabama had some nice wins this quarter. We're also seeing strong performance out of Birmingham, which delivered $40 million of loan growth. We just recently received FDIC approval for a full branch location in Birmingham, so we look forward to continued momentum from that team. Our Memphis team has given us approximately $90 million in loan growth since we added several new relationship managers in that market last year and has a strong pipeline of relationships that they're converting to First Bank customers. Our relationship managers in the field are excited about the opportunities they have in front of them, and the pipeline remains strong. We feel good about our loan growth for 2021, and at this point, we're changing our guidance to high single-digit growth for 2021, and we could potentially reach double-digit growth, but we have some expected payoffs coming that was going to make 10% hard to achieve. On the liability side of the balance sheet, we brought down our cost of interest-bearing deposits by 12 basis points this quarter. I believe we still have some room for improvement on our cost of deposits. We'll continue to press our team to find pockets where it's appropriate for us to lower our rates. We also continue to tackle operational technology and customer experience initiatives that create scalability and position us for the future. We're committed to executing our customer-focused organic growth strategy in a way that creates the highest-performing bank in the Southeast. Following our Franklin combination, In our growth over the last few quarters from $7 billion in assets to $12 billion, we focused on integrating teams, associate retention and satisfaction, building out scalable credit and risk management platforms, and client retention and satisfaction. These initiatives ensure that we have the people and the infrastructure in place to execute on organic growth and acquisition opportunities in front of us without sacrificing our customer-focused, local authority-based community banking model that we believe will be a key differentiator for us over the coming years. We believe that if you're not currently executing at a high level, then you're wasting shareholder resources by adding scale to a less-than-optimal organization. We see this frequently in bank M&A, but we're determined that it won't happen to us. On M&A, the universe of traditional banks continues to shrink. Scarcity value is real given the relatively few quality banks that provide scale and geographies that are attractive to us. We keep a list of those banks and will be a factor if they choose to seek a merger partner. At the right time, we'll also pursue opportunistic M&A, which I define as banks that aren't necessarily on our radar at the moment, but that would be additive to our footprint or funding profile or at a complementary business line. Until then, we operate with great teams and great markets and can produce organic growth, as this quarter shows. On mortgage, our results were in line with guidance that we provided last quarter, but at $500,000 were less than we would like. As we look in the third quarter, our forecast has moved around significantly over the past 60 days. And with the market movement yesterday, we were re-forecasting again. Our best estimate right now is $2 million to $4 million in contribution for the third quarter. And I'm going to let Michael give additional color on the current mortgage backdrop in his section. So to summarize... We had a very strong quarter of loan growth that we believe reflects the strength of our markets, the quality of our team, and our focus on execution. We expect that growth to continue over the remainder of 2021. Mortgage space is a challenging environment but should provide an improved contribution. We continue to improve our funding costs, and we think that we have some more room there. And most importantly, we have the people, the systems, and the processes to capitalize on the strong growth prospect that we have in front of us. I'll now turn the call over to Greg to discuss credit. Thanks, Chris, and good morning, everyone. As you can see, we've scaled back our credit disclosures this quarter as our local economies continue to improve. We are keeping an eye on COVID case counts with the Delta variant picking up some steam across the country. But in the absence of further widespread outbreaks, and related shutdowns, we feel positive overall about how the portfolio has performed over the past 15 months. While we have not issued an all-clear memo yet, we are cautiously optimistic about how things have unfolded. On slide 11, you can see that our overall deferrals are down to less than 30 loans with roughly $74 million outstanding. Of those, as we've highlighted in the past, the bulk $49 million are actually on an interest-only payment schedule. with the remainder $25 million on a full principal and interest deferral. Hotels continue to be the largest component, but most of our operators are reporting improving trends, especially those more seasoned managers who benefit from newer properties and better flags. We actually had one of our smaller hotel loans that we had circled as a concern pay off this quarter, so that helps our outlook as well. Also on slide 11, You can see an update for the industries that we had viewed as most at risk at the onset of the pandemic. We continue to monitor these industries but feel fairly comfortable with the current operating environment for each of them at this point. No one specific segment stands out in our list, but as noted in our first quarter call, we did have a pickup in the healthcare segment's classified loans last quarter with a couple of assisted living properties having challenges due to a COVID outbreak. We continue to monitor those closely and saw improvements in performance during the quarter. I will close with slide 12, which displays our overall credit metrics. Across the board, our numbers improved this quarter, and we feel pretty comfortable with the health of our loan portfolios. Classified loans, non-performing loans, and NPAs each moved down 11 basis points quarter over quarter. And lastly, charge-offs were minimal this quarter at two basis points. As highlighted in Chris's comments, I too am pleased to see the pickup in our loan book as our teams continue to compete aggressively across the markets. Our associates are identifying good opportunities, and our people continue to be diligent in balancing growth and asset quality to achieve long-term profitability, which is the core of our company's historic success. I'll now turn the call over to Mike. Thank you, Greg, and good morning, everyone. Speaking first to mortgage and illustrated on slide six, mortgage performed as we expected for the quarter, achieving a contribution of approximately $550,000. We continue to see margin compression and reduced volumes due to excess capacity in the industry, refinance fatigue, and a shortage of housing in our markets. We expect the housing shortage to be a continued headwind and margin compression will be a concern until we see capacity exit the mortgage industry. However, margins have stabilized over the last couple of weeks. Additional guidance from Chris's comments is somewhat challenging given the recency of changes in the rate environment and the removal of the adverse market fee by FHFA on refinancing, both of which could lead to more refinance activity, but it's too early to tell. Moving on to net interest margin, we saw our headline number remain essentially flat at 3.18% in the second quarter compared to 3.19% in the first quarter. We were able to bring down our cost of total deposits by 10 basis points this quarter. We continue to focus on lowering our funding costs, and we see room for continued improvement. Our CD repricing is slowing as we've made it through the majority of the higher cost deposits from our 2018 campaign, but we do have approximately $330 million repricing in the third quarter at a weighted average cost of around 85 basis points. Our contractual yield on loans, excluding PPP, dropped by 11 basis points to 4.37% in the second quarter from 4.48% in the first quarter as pricing competition remains fierce. Yield on new originations during the quarter came in at 3.8% to 3.9% range, and that pricing has continued through the first few weeks of the third quarter. So we would expect to continue to see contractual yields compress until we see rates begin to rise. When rates do rise, we have approximately $2 billion in variable rate loans that should reprice immediately. We traditionally have kept our fixed rate loans shorter dated as we know that longer term fixed rate paper at low rates can become a credit risk in addition to an interest rate risk. As a result, our balance sheet remains fairly asset sensitive. Despite our strong loan growth for the quarter, we continue to have a tremendous amount of excess liquidity. We've begun deploying a portion of that liquidity into our securities portfolio opportunistically after the benchmark 10-year U.S. Treasury yield increased by approximately 83 basis points in the first quarter. After $265 million of security purchases, runoff from paydowns, and market value changes, our securities portfolio increased by $179 million in the second quarter. The average yield on purchase securities during the quarter is an estimated 1.46%. We continue to be conservative with duration risks with new security purchases as we add to the portfolio. In the absence of rate increases, we would expect the margin to stay in the same relative band that we've been in for the past couple quarters, with positive changes in the balance sheet mix being relatively offset by continually declining earnings asset yields. Our cost of funds should also continue to have small declines. We'll focus on continuing to grow net interest income in the near term through earnings asset growth, both loans and securities, and maintain the longer-term upside of our asset-sensitive balance sheet. Moving to CECL and our allowance, we saw a release of $13.8 million this quarter as economic forecasts continued to improve. As we have mentioned previously, the improving economic forecast from the first and second quarter has caused us to begin to increase our qualitative factors in order to maintain what we feel is a prudent level of reserve. Going forward, we will continue to weigh the improving forecast versus Q factors that are necessary to pinpoint any risks that still exist that are not reasonably picked up in a model. We would currently expect further releases over the next few quarters, assuming outlets continue to improve. As an update on our non-core commercial help for sale portfolio, we saw our exposure decline by an additional 50 million during the quarter. With these paydowns and improving economic conditions, we saw a gain of 1.4 million on our portfolio as compared to an $853,000 loss in the first quarter. a $1.4 million gain in the fourth quarter of 2020, and a $1.9 million gain in the third quarter of 2020. We continue to market the portfolio while maintaining our hurdle price, and we feel that the portfolio is appropriately and adequately marked for the remaining risk. Until a buyer hits our bid, we expect continued paydowns and small gains or losses as the portfolio is marked to market each quarter. Speaking to our expenses, our bank expenses were higher than we had anticipated as we implemented systems and took advantage of hiring opportunities, each of which support our growth. We don't expect our bank expenses to exceed the current quarter's level over the remaining two quarters of the year, and we expect next year's expense growth to be in the low to mid single-digit range. With that, I'll turn the call back over to Chris to close. Thanks, Greg and Michael, for the color. Certainly, we believe that we delivered strong financial performance this quarter. We're pleased with the team's results, particularly our loan growth. That concludes our prepared remarks. Thank you, everybody, for your interest in FB Financial. And, operator, at this point, we'd like to open the line for questions.