FB Financial Corporation

Good morning and welcome to FB Financial Corporation's first quarter 2023 earnings conference call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer, Michael Matti, Chief Financial Officer, and Greg Bowders, Chief Credit Officer. They will also be available for questions and answers. 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. During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. Forward-looking statements are based on management's current expectations and assumptions and are subject to risks, uncertainties, and other factors 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 that may cause actual results to materially differ from expectations 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 non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release, supplemental financial information, and 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. Please go ahead.

All right. Thanks very much. Good morning, everybody. Thanks for joining us this morning. We appreciate your interest in FB Financial. And as we get started this morning, just a couple of things. First, I just want to say that our thoughts are with our colleagues at Old National, and just know that we want nothing but the best for you guys, and our thoughts and support are with you as you move forward in the face of difficult circumstances, but we, with you, look forward to triumph over tragedy. Second thing I would like to say is, I'm going to ask the questioning to go easy. Today is Michael's birthday as our CFO, and so happy birthday to Michael. With that, I'm going to get into the financial results for the quarter, and we reported EPS of 78 cents and adjusted EPS of 76 cents. We've grown our tangible book value per share, excluding the impact of AOCI, at a compound annual growth rate of 14.5% since our IPO. We also grew deposits by 12.2% annualized during the quarter, have on-balance sheet liquidity to tangible assets of 12.5%, have on-balance sheet liquidity to uninsured and uncollateralized deposits of 49%, and have $6.8 billion of available contingent funding sources, which is 2.1 times those uninsured collateralized deposits, and so 2.6 times total coverage when you combine the on-balance sheet and contingent funding sources. As of quarter end, we had tangible common equity to tangible assets of 8.7%. common equity Tier 1 capital of 11.3%, and total risk-based capital of 13.5%. If we were to include AOCI in those regulatory capital ratios, which, as you know, we certainly don't require to do, our common equity Tier 1 capital would be approximately 10%, and that's versus a well-capitalized 6.5%. and a total risk-based capital would be approximately 12.2%. Also, we have no securities that are classified as held to maturity, so we have no unrecognized losses on the investment portfolio buried on our balance sheet. We have no current liquidity needs that would result in the sale of any securities at a loss. If regulatory capital rule changed or if we were required to liquidate the entire securities portfolio for some unforeseen reason, we could do that without requiring any additional capital. The last quarter's call. I referenced our work in 2022 to restructure our mortgage division, slow loan growth in the second half of the year, and raise significant deposits in the fourth quarter, putting us in strong capital and liquidity positions and preparing the company for a range of economic scenarios. We certainly didn't expect two of the three largest bank failures in history to happen a couple of months later. But the turmoil experienced over the last five weeks has supported our cautious approach to managing our balance sheet and our continued investments in strong finance, risk, and operations personnel. The elevated risk environment of the day also validates the value of our community banking model that allows our customers to have strong personal relationships with the decision makers for their accounts. This customer philosophy and Fortress Balance Sheet approach, when executed with discipline, results in a known customer on the other side of every lending relationship It also gives us financial flexibility when the unexpected happens. As the Silicon Valley and signature events were unfolding, they caused the same anxiety at First Bank that I think all banks experience to some extent. We reflexively went into crisis management mode with frequent communications with the board and executive management, a closer review of data funding flows, and regular check-ins with our regional presidents regarding our larger customers. what we found after a week or two of this heightened activity was that the bank was fine. As I've often said before, our balance sheet is constructed with true customer relationships that make up every loan and every deposit. We know our customers and they know us. As a result, our deposits weren't spooked by the pundits on CNBC that were forecast in the demise of the regional and community banking system. for what seemed like 45 minutes out of every hour. Many of our customers came to us from money center or larger regional banks that the talking heads expected them to flee to. And they have little interest in going back to a customer service experience commensurate with being nothing more than an account number at some of those large banks. We certainly continue to keep a finger on the pulse of inflows and outflows of customer funds. but we feel good about our liquidity position. We also understand that this downturn and an industry-wide focus on liquidity could result in a credit crunch that's likely to result in losses. To this point, we've not found any disturbing trends in our portfolio. Our customers are cautious but generally feeling okay, and our asset quality numbers continue to reflect that. With net charge-offs for the quarter of two basis points, despite the benign results to date, we're even more conservative with our loan portfolio than typical, as reflected by our ACL to loans increasing by four basis points this quarter and only growing our loans by 3% annualized. We're not eager to aggressively grow the asset size balance sheet until we can understand which sectors are due for outsized losses. At this point, we share broader concerns about CRE office loans and have increased our monitoring of that portfolio as a result. I will let Greg discuss that portfolio more later in the call, but we generally feel okay with where we are currently. We've also been actively managing our overall CRE and C&D portfolio down since April of last year. While commitments made in 2021 and the first quarter of 2022 have continued to fund up since then, unfunded commitments in our construction portfolio are down by 16% year over year, or $260 million. And we expect outstanding balances to decrease over the coming quarter. And so given our desire to conservatively manage our portfolio liquidity position near term, we intend to focus on some internal improvements until the outlook changes. We're not pleased with the return metrics that we've delivered over the past few quarters. We're intent on having peer leading profitability. I've mentioned the First Bank Way initiative on the past call or two, and this environment provides us with a perfect window to continue to focus management's attention on the successful implementation of that plan. As a reminder, The first way is our effort around documenting and implementing best practices and procedures that will allow us to more effectively scale our local decision-making community banking model. We believe this project enhances the customer-associated experiences by enabling us to deliver our exceptional customer service more consistently and more efficiently, focus our resources towards that goal. This puts some standards in place that will create efficiencies of scale as our balance sheet grows. As far as M&A goes, downturns can result in some transformational transactions, and we could see that being the case in the industry over the coming quarters and into 2024. However, we don't necessarily see that being the case for us. Our goal is to be well-positioned to capitalize on the turmoil and displacement of customers and talent from competitors undergoing these transformational transactions. We also want to put ourselves in position to be the partner of choice as strong, smaller community banks decide they want to seek a partner. However, at present, we have plenty to focus on with our First Bank Way initiatives, and we don't want distractions that come with acquisition activity. To summarize all that, We're constantly checking the gauges but believe that we are positioned well for the near term from our discipline over the last three plus quarters. We're using this time of market anxiety to continue our internal improvements with the intention of returning to purely profitability and growth that we're accustomed to and doing that sooner versus later. I'm now going to turn things over to Greg to provide an update on credit before Michael gives detail on our financial performance for the first quarter.

Thanks, Chris. I'll start out by reminding everyone of what I said on this call about three years ago today. We are at our core a community bank that makes loans to support the economic activities of our communities. In our conversations in the past, we've highlighted our local operating model, focused on relationships with our customers. This strategy at its heart means dealing with local people we trust and know to be good operators. Our portfolio reflects that bias. We believe that has helped our credit results in the past and will continue to do so in the future. We believe in conservative underwriting standards with a focus toward cash equity or skin in the game and personal guarantees. We've long focused on keeping hold levels lower rather than higher. We're trying our best every day to underwrite for the long term through the cycle. not counting on the greater fool theory. Our strategy has always been about in-market lending. We've never been big on buying into shared national credits. It just doesn't match our strategy of relationship lending. We want to bank the company, the owners, and its employees. That was all true then, and it remains true today. We still feel good about our lending philosophy and underwriting process. Moving to the slides. On slide 9, you can see it outlines our overall portfolio, which we believe continues to be a good mix of industry segments and product types. You've seen our credit metrics, which continue to reflect good results from past dues to NPAs. We get the question in times like this about whether we have changed our underwriting criteria. For example, have you raised debt service requirements or loan-to-value maximums? Our answer is not really. That's more what you hear from big banks that run a line of business model where they give their customers whiplash turning the spigot on one quarter and off the next. We simply work with our markets and explain our thoughts. We have a cautious outlook and we aren't looking to grow the book and ask that they change the focus of their teams to deposits, not loans, all the while trying to reserve our dry powder for our long-term relationship customers that are the reason for our success. Now that's easier said than done, so what you see in the numbers is the result of that thoughtful process. Our commitments are way down over the past couple of quarters, as Chris pointed out, but as you would expect, balances have continued to increase as deals previously committed fund up. Our analysis is that we will see that begin to come down over the next few quarters as properties rotate out. Switching gears. For this quarter's presentation, we have included a page on our office exposure, given our focus on that property tag and the concerns that we've heard from the analysts and investor community. Those of you that have been in Nashville lately know just how many buildings are under construction here in the CBD. Like the old saying goes, so many cranes that they're going to call up the state bird before long. This activity is great for the city and the region's economy as we benefit from the large inflow of companies and associated jobs. But let's make something clear. We are not financing those projects. Frankly, we didn't even participate in the construction of the new building that we are moving into this year, not because it wasn't a good deal or not a good developer. It has both, especially a great tenant, right? But it was just not our type of deal given its size, not our risk appetite. You can review this slide for yourself, but let me highlight a couple of things about our portfolio. Office non-owner-occupied CRE accounts for only 4% roughly of our total loans outstanding. These are spread across our footprint with the largest concentration being in the Nashville region. Most of it in completed projects with only four still under construction accounting for less than 15 million units. As part of our normal portfolio management, I asked our teams to put together a list of office loans with commitments greater than $2 million, which, if you think about it, isn't a very big office, right? It is interesting to see the granularity highlighted by this. The list showed a total of 48 loans with outstanding balances ranging from a loan of $1.7 million, the largest has a balance of $26 million, and the next largest is $20 million. The $20 million, frankly, is actually a loan secured by four different buildings. The next five are in the $12 to $16 million range, and everything else is less than $10 million. I mention this just to highlight that this reflects my earlier comments about the type of lending that we do. Most of these are just smaller projects owned by local real estate professionals. The average loan-to-value on this set is 62%, demonstrating our goal of having our borrowers have a significant amount of skin in the game. with sponsors who guarantee the loan. We looked at the interest rate on the entire portfolio and found 58% is fixed, 42% floating. Looked also at maturity risk, found that only 7% mature through 2024. Interest rate increases have impacted everyone, of course, but so far, no problems. You'll never hear us say that our portfolio is perfect. There's no such thing. I've been doing this for about as long as Mattia's been alive, but we're proud of how it has fared so far and will continue to manage it to the best of our abilities. I'll also touch briefly on our commercial loans held for sale. We have only two relationships left, balances less than $10 million. We feel adequately marked on that, so any additional gains or losses until sale or maturity there should be relatively inconsequential. We appreciate the work Scott McGuire, our head of special assets, has done to work this down over the past few years. I'll now turn that over to Michael Matisse.