Good morning, and welcome to FB Financial Corporation's First 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 Mettee, Interim Chief Financial Officer; and Greg Bowers, Chief Credit Officer. 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. [Operator Instructions] 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 Securities and Exchange Commission, 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 non-Generally Accepted Accounting Principles financial measures as defined by Securities and Exchange Commission Regulation G. A presentation of the most directly comparable Generally Accepted Accounting Principles 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 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 Securities and Exchange Commission's website at www.sec.gov. I would now like to turn the conference over to Chris Holmes. Please go ahead.

All right. Thank you, Dimitra, and good morning, everybody. We're happy to be joining you. Sorry that we are a day later than intended. We did have a problem with our conference call vendor yesterday that -- where they lost their systems. And so we -- but we're glad that we were able to get rescheduled, and welcome to everybody, and thank you for joining us. We appreciate, as always, your interest in FB Financial. Were we speaking under other circumstances, my introduction would almost certainly be spent with guidance on our margin following the recent Fed rate cuts, a discussion of our seller mortgage performance, updates on our recently announced Franklin Synergy merger and our recently closed First National Bank of Scottsville acquisition or a discussion on some of our recent personnel changes. However, as I begin this call, I think it's important to remind everyone of our vision and values, and explain how our team has been embodying those over the past 2 months because more than anything, I think our associates, our corporate character and our responses to our customers and communities over the coming quarters were served to drive long-term shareholder value. This great challenge creates the opportunity of a lifetime for our bank to show its true colors and to distinguish ourselves from our competitors in the process. Our vision for FirstBank is to deliver trusted solutions for our customers, provide a great place to work for our associates, to invest in our communities and to provide a superior long-term return for our shareholders. We go about delivering that vision by upholding our values. One team. One bank. Doing the right thing, commitment to excellence, existing for our customers, treating people with respect and enjoying life along the way. March and April have been tumultuous…

Good morning. I'll give my high-level thoughts on the portfolio, and then I'll be available on the question-and-answer section as well. First, looking at the big picture, 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 will help our credit results over the long term and during this pandemic crisis. We believe in conservative underwriting standards with a focus toward cash equity or skin in the game and the personal guarantees. We've long focused on keeping hold levels lower rather than higher. We didn't predict the virus, but we knew that things happen and maintaining this discipline would be a good risk management tool. 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 and I think you'll see that in the numbers in today's presentation. We've never been big on buying in the shared national credits. It doesn't match our strategy of relationship lending. We want to bank the company, the owners and its employees. We don't do that as [ bankers meaning led by monies in our bank ]. Our SNC exposure is less than $75 million and consists of 3 credits, in which we maintain a historical relationship prior to participating in the syndicated credit. None of these SNCs are in our defined industries of concern. We just wanted to highlight our strategy here. As noted earlier by Chris, we have participated in…

Thank you, Greg. I know that we have covered a lot so far. So I'll give some brief color on margin and mortgage and then be happy to answer any questions after our prepared remarks. First, on the margins, our cost of interest-bearing deposits for the month of March was 1.14% compared to 1.25% for the quarter. The cost of our non-time interest-bearing deposits for the month of March was 79 basis points versus 93 basis points for the quarter. And the vast majority of our non-time interest-bearing accounts that we were able to reprice essentially have been repriced. We have seen these costs come in by about 30 basis points since those actions were taken in mid-March. On the time deposit side, our cost for the month of March was 1.91%. We have over $650 million coming due over the remaining 3 quarters of 2020, approximately $175 million in the second quarter, approximately $270 million in the third quarter, and approximately $215 million in the fourth quarter. Those are coming due with an average cost of 1.94%. With rates where they are now, we're hopeful to pick up significant costs on the deposits as they mature. On the asset side, our contractual loan yield for the month of March was 5.03%, and [ the spot ] contractual yield on our loan portfolio, excluding PPP loans, is approximately 4.9% right now. Interest-bearing cash is earning 25 to 35 basis points right now as opposed to the 1.51% that we reported for the quarter, and our investment portfolio is yielding around 2.6% as compared to the 2.81% that we reported for the quarter. On mortgage, no additional color on outlook, but I would like to highlight the hedging activity on our MSR. We were able to offset approximately $15 million in value reduction of our MSR asset during Q1 through our hedging strategy, which is designed to mitigate changes due to rate movement and expected prepayments. We do not hedge fair value to cash, which accounted for approximately $4.7 million of the MSR fair value change for the quarter. With that, I'll turn the call back over to Chris.

All right. Thank you, Michael. Now that we're through the quarter, let me touch briefly on our personnel announcements from Friday before I wrap up and open it up for questions. And you're aware at this point, James Gordon is following the path of many great Tennesseans, and he is heading down to Texas. James has been an integral part of our operations. He is a personal friend, and he's been a great teammate for these last 4 years. We're going to miss him and we wish him well. That said, James has helped us develop some great bench strength in finance accounting -- finance and accounting. We have faith in Michael and the rest of the team that we'll lean on as we conduct the search for James' replacement. I was also very happy to promote some of our market executives in that announcement. Travis Edmondson, our new Chief Banking Officer, has been a great young talent that we picked up in the transaction with Clayton, and I feel very confident in his leadership and his ability to handle that role. Nathan Hunter has 45 years of banking experience and is a great talent, and we look forward to his shepherding our East region going forward. Brent Ball, another great young talent from the Clayton transaction, will take over Knoxville from Nathan. Jim Mosby will take over as our Nashville region President. Jim has been a star member of our team for some time now, and we're excited to see him operate in this expanded role. Finally, to conclude, a lot happened this quarter. I'm extremely proud of our associates for the manner in which they've taken care of our customers so far. We are a community bank and we differentiate ourselves with customer service and quick local decision making. I think we've done very well with that so far and I have no doubt we'll continue to serve and support our customers and communities going forward. I'm proud of the way our associates have handled this adversity and our management team for getting everything up and running so quickly that they would hardly miss a beat operationally as the world has changed. From a liquidity, capital and credit perspective, I'm confident in the strength of our balance sheet. I believe that we are well positioned to weather this storm and come out on the other side, ready to take advantage of all the opportunities that this disruption is going to create. I'm confident that we're going to keep our position as an elite financial performer. And with that, operator, I'd like to turn it over -- open up the line for some questions.

[Operator Instructions] Our first question comes from the line of Stephen Scouten with Piper Sandler.

Thanks for all the detail in the presentation, it's very helpful. I'm curious, maybe first off, I didn't see any breakout of what the manufactured housing portfolio is currently? And curious if you could give us an update on that portfolio and kind of how you're thinking about that in this term loan?

Yes, sure. So we put a couple of general things in there on the MH portfolio. Remember, a couple of things about that portfolio: One, we look at it in 2 pretty distinct pieces: One we call manufactured housing retail; one we call manufactured housing communities. The communities portion is the bigger piece of the portfolio and that is actually, the -- that is what it says, it's manufactured housing neighborhoods or communities across our geography. We've got a -- roughly a southeastern footprint actually in that business. It is -- those loans resemble kind of more, I will say, like C&I stuff. And then the retail portfolio, which is the smaller -- and the retail portfolio is probably, I'd say, $180 million roughly. That is actually loans to folks that buy the units. And Greg, I'll let you talk about the performance characteristics.

Yes. Thanks, Chris. Yes, that's right. That manufactured housing piece of it is something we picked up with the Clayton acquisition. It's run by Kevin Kimzey, he does a great job. The portfolio has continued to perform well. To date, past dues are hanging in there as past dues are across the board. So it's always something that we're going to pay attention to. But right now, that has worked out well. The deferrals within that group are similar to the deferrals that you would see on the mortgage portfolio. And we referenced -- as it pertains to the energy piece, we said, they do have some exposure in the oil and gas-dependent area. And so we looked at that and that's just one of those categories that we'll be paying attention to along with about every other portfolio segment we have.

I will say, interestingly, we monitor it daily in terms of past dues and week over week, the past dues actually came -- were less in the latest week than they were in the previous week. And as we've been talking to folks, affordable housing is always in demand and perhaps, it's even a little more demand right now. So we're keeping in contact with the borrowers. We're -- so far, that portfolio is -- has performed well. Clayton, the folks that manage it, had it through the last downturn, and so they've got some experience with it. Most of us sitting around the table, at this very moment, didn't have that. And so we're in -- there's a lot of communication. But frankly, so far, it has been better-than-expected as things have turned out. So...

That's great. That's helpful. And then I'm curious, maybe on an update with the pending FSB acquisition. Obviously, the last 2 quarters, they've taken a loss as they've continued to try to dispose of some of this riskier credit book. And I know they've said in their release that there have been some slowdown in that -- their ability to dispose of those loans. So I'm wondering if you could remind us how that transaction will work as it pertains to that $400 million, plus the loans that they are still looking to dispose of. And what your exposure is potentially to that in the transaction structure.

Yes, I got it, Stephen, thank you. So just a general -- a couple of general comments, as you said, the financial -- the world has changed, obviously, since we announced the transaction with Franklin Synergy and of course, that's not anticipated. That being said, they're really -- if you think about their transaction -- and there are a lot of moving parts and pieces. You got your -- obviously, your [ credit rep marks ], you got your interest rate marks, you got liquidity marks, you've got -- and on not only the loan portfolio, but on the investment portfolio and on fixed assets. And I'd tell you, as we evaluate it and we looked at changes, remember, we also locked in an exchange ratio. And so basically, the tangible book value piece of that is -- it looks at least -- and again, all these numbers were moving. So -- but that looks to be still about a neutral transaction for us. Not sure exactly the impact on the EPS accretion. If the marks go up, some of that would probably come down a little bit. But generally, that all looks still pretty good. The 400 -- there is a $430 million portfolio that's kind of, I'll call it a legacy SNC leverage lending portfolio that we announced when we did the transaction that, that would be something that we wouldn't be doing going forward. It was actually something that they had announced that they wouldn't be doing going forward as well. They have worked -- have been working that down. It's a little easier just because of a size standpoint for us to work it down than it is to them because it is performing, and it does have earnings associated with it. That's down to -- it moved down to about $400 million with some draws moved back up to around $408 million or so. As we look at it going forward, it -- I said, the world has changed. It could change our plans with it. It doesn't change our long-term plans, it could change our immediate plans. We're not going to sell good loans at big discounts -- good performing loans at big discounts because we said we're going to sell them. And so we're going to be prudent as we go forward, maximize profitability and minimize risk. And so when we -- frankly, when we initially announced the transaction, it looked like it was going to not be difficult at all to get rid of the vast majority of the portfolio at close to par. And I'm not saying that's not still possible, but it's -- but it is certainly changed, and that's caused us to look at that strategy a little differently. Greg, comment -- other comments on it?

I think, yet -- as well, we stay in contact with their management. They're continuing to do a great job, serving their community and managing the bank in these times, maybe I'll reference their participation in the PPP program as well. They did also indicate satisfactory overall asset quality, but have seen some challenges in that institutional portfolio like you talked about.

Make sense. So it's a great summary here you [ provided ], you might take on more of that $408 million remaining at close than you would have expected. But that being said, you might -- will probably will also increase the market that does occur. Is that fair summary?

Yes. Yes, that's fair.

Okay. Great. And then one last thing. You guys gave some great detail on the PPP program. I haven't seen from others in terms of your expected fees on a net basis. And I'm wondering if you could give some color into what's driving that kind of 65% net of these direct costs and originations. Is that kind of accrual accounting? Or is that true incremental costs that are related to the PPP program over time and other things? Just give us some idea of what we can expect relative to the gross fees.

Yes, sure. Yes, the short answer is we've got some technology partners there that we're paying -- that are going to get a little piece is the short answer. I'm going to give a slightly expanded answer to say when we went into this, I mentioned, we're not at a historical SBA lender. And so when it comes out -- as many banks aren't, and so as it comes out, a lot of us were scrambling on the front end to figure out a solution. So we tapped a lot of sources. Ultimately, Jack Henry is a vendor of ours that we've done a lot, we've continued to do a lot with. They helped us with the solution that went through -- that helped us with both the application process, but also at the submission process. So 2 different vendors that are helping us there: one with application, one with a submission into SBA. And I got to say this, so we took some time on the front end. If you'll notice, I said, we didn't start accepting applications until, I think, it was the Saturday before the program went live on a Friday. And so we got us a little bit of a late start. If you can remember that time, there was a lot of anxiety, folks want to jump in. And -- but we didn't have the process as reliable. As a matter of fact, we went to a plan B on Saturday because we had a problem with one -- with a different solution. And so -- but we did get the process working very well. And I'll say this, in round 2, which started Monday, we processed -- we've got an approval for 900 in -- this was through yesterday. So in the 2 days, we got an approval for 985 applications and $50 million worth of loans in the 2 days. And so we worked out the process. It now works very well, and it's going very well. And one other thing because I think it's interesting, in the first round, the average loan was 175 -- ours anyway, it was about $175,000 average balance on the loans. This round, so far, it's $51,000 in average balance. So smaller customers are getting served in the second round. And I think they were a little later to get their applications in, and so I think that -- and I think that will probably be -- you'll see that nationally in terms -- which is a good thing. That's a lot of smaller folks that didn't get applications in as quickly or with as much that were as easy to quality check or getting in on this net round so.

Our next question comes from the line of Tyler Stafford with Stephens.

I wanted to start on one of Stephen's earlier questions just around the MH portfolio. So the $180 million of retail, how much is the community piece of it? And then you said the deferrals, there are similar to what you've seen in mortgage, but I don't think you guys disclosed what the actual deferrals are on mortgage. So could you quantify that a little bit for us?

Yes. Yes. Thanks. And Stephen (sic) [ Tyler ] this is Greg. The -- that MH community portfolio is around $220 million, $230 million. The -- when I was talking about deferrals, that's the actual number that is around 6.7%, which ties back to a reference that I had regarding the [ MBA ] at -- regarding just single-family in general and that it would be similar to that was my point.

Okay. Got it. That's helpful. On the hotel portfolio, can you give us a sense of pre-COVID impacts? How that portfolio was -- not performing, but how -- what that portfolio's kind of loan-to-value and debt service coverage was maybe at 12/31/19. I heard you mentioned, I guess, Chris, that you typically get 35% cash into those deals. But what -- just on a weighted average basis, what would be those LTVs and debt coverage on that book at year-end?

This is Greg. So debt service coverage on things like that, we've got in excess of 1.25, 1.30, is what you would see. What we were emphasizing was on the construction projects. You see 35% or more cash equity going into the projects. All of these were doing well. The exception to that is one that you've seen on our list for a long time, and frankly, it's been there probably since 2010.

Since both of us joined the bank.

Right. So it's a long time, and it's one property, it's on nonaccrual. It's approximately $5 million, not excited about that one. It's on nonaccrual. Otherwise, this portfolio has performed very well, very strong. And so it's -- we've got it in here because just like everybody else, so this is an industry that we're going to have to watch. You drop from occupancy, high occupancy to an average occupancy across the country right now in the 20s. Property needs more than 20% to work.

Sure. Okay. What's the specific reserve on that $5 million nonaccrual hotel portfolio?

Gosh, I'm not sure of the $5 million nonaccrual. It's on that one. That is probably -- yes. It's a little over $1 million.

We have -- we got some additional collateral on that.

Yes. I think it's in that [ 7.50 ] range.

And so -- and it's a -- like I said, it's been -- we've had no nonaccrual, it's our largest nonaccrual, and it's been there kind of on and off. It's always been on nonaccrual. It's been in terms of operation. It's -- sometimes it gets better, sometimes it gets worse, but it's just one of those that we do have pretty good collateral support for it because we've got the real estate. We have actually even some additional collateral beyond the specific facility. And so -- but it's one that was -- it has been in there a long time. So it's not affected by -- probably affected by COVID-19, but it was -- we didn't like it before then.

Understood. Okay. Just thinking about the reserve for a moment, I appreciate completely that the final marks on FSB aren't obviously complete. But if we can kind of maybe put aside the macro kind of Moody's related changes for a moment, is there any preliminary range you can help us think about for a combined ACL ratio at close for the 2 companies?

Yes. Really not, Tyler. And Michael, I'll let you comment. Well, I mean we've thought about it and really not at this point. CECL was new enough, and we're still making sure that we understand for ourselves. And so we really don't have that -- we're at a point where we can talk about it at this point. So I wish we did, but it's really not -- and again, with all the moving parts, not only in the economy, but you also got the moving parts with CECL. And so we'd tell you if we could, we just don't have it yet.

Fair enough. That's totally fine.

Michael, do you have anything to add?

Yes. I mean I would echo those comments, and I would expect it's probably likely higher than ours.

Yes, probably is a little higher than that.

[Operator Instructions] Our next question comes from the line of Stuart Lotz with KBW.

I guess most of my questions have been answered. I appreciate all the color on the credit book. Maybe turning to expenses and a question for Michael. I think the run rate this quarter came in a couple of million higher than we were looking at. Kind of how are you guys thinking about a 2Q run rate with a full quarter of Scottsville in there as well as your kind of target expense cuts? Just trying to get a better picture of what we can expect before layering on FSB?

Yes. Good morning, Stuart. And so the quarter had a couple of things in there around merger expense. And then obviously, you mentioned FSB, then Chris mentioned in his comments, we expect to see some cost right there. We had some payouts from higher payroll in the first quarter. So we expect to return to normal a bit in Q2. So March was a little bit elevated, but we think that, as Chris mentioned, we will be monitoring expenses very closely as we go through the next couple of quarters and prepare for FSB and...

So -- and I'd just -- so Stuart, on the expense side, and roughly about a 2.5% growth, if you look at an apples-on-apples comparison. Over the last even couple of years, expenses haven't been -- I mean, it's expenses -- if you're in banking, expense control better be a core competency, and so -- and it is here. That being said, we've got a lot of investments over the last couple of years. We -- and so it's not a cool competency that maybe that's been emphasized as much as some other things. And so as we move forward, in the environment that we're in, expense control becomes more in focus. And so as we think about -- we're in a lot of conversation about which investments to make, which investments to delay. And we actually have -- and I use these words with a little bit of caution. We've said to our folks, let's put in a hiring freeze. And so we're not -- we are hiring some replacements, but we're not looking to grow the staff right now from a people standpoint. And so we've done -- we do some things like that. And as we look at the rest of the balance of the year, then expenses become an important part of, I think, the balance of the year expense control becomes. And when I say hiring freeze, we will make some exceptions to that. That's the reason I say it lightly as we will make some exceptions to that for various reasons. But in general, we're kind of not doing a lot. One other consideration there that we got to make sure we're thinking about is the $10 billion hurdle. And in the combination of Franklin Synergy, $10 billion gets right in the crosshairs. We may be over it. And so there is a little bit of expense that comes with that. And so -- and so we've got that in view as well. And so that means it's hard to do a lot of cut, but also, like I said, we're evaluating investments, things like that.

Chris, I appreciate all the color on that. Sorry, last one for me. If we turn to the revenue side, obviously, we're going to have some margin compression coming forward, obviously given the rate shock we got in March from Fed cuts. And your guidance for the $5.7 million net of origination [ costs ] coming through from PPP. In terms of geography, could we expect that in spread income? And do you expect to realize most of that in 2Q and 3Q? Or how can we kind of think about that flowing through?

Yes. We -- it will go into spread income is exactly where it will go. And how we recognize that, I'd say is cautiously. Okay? That's how we recognize that because there is a couple of things. You've got -- as this program has been rolled out, it's been short on rules. That's not a complaint because this program -- the way that the government, the agency, the treasury, SBA, everybody has been able -- the banking -- the banking system have been able to roll this out. It's been fantastic, actually. Even though, it's had its bumps and bruises along the way, if you think about the -- if you back away and think about the macro picture, what's being accomplished, it's actually remarkable. And that being said, as we roll it out, there are a lot of things we don't know. And so we're going to be cautious probably by going back to the reserve side before we just take all that into income, we're going to be careful. Make sure we get paid back by the SBA. In some cases, you may get paid back by a customer, in other cases, you may have to get paid back. And so the way to take it is through spread, and it would come in over the life of the loans. So theoretically, that's probably the next 2 quarters, but we're going to be cautious in reserving before we really take any of that in with of course following proper accounting principles, but we're going to be cautious by reserving before we take any of that in. Michael, you tell me if -- I'm jumping in the middle of a --

No, I agree with that. I think you also have to take it out of the $5.7 million indirect expenses associated with the PPP program, and Chris touched on the work effort from our associates. And so as those come to maturity and the loans pay off, then -- or [ for a given ] this case may be, we'll recognize some indirect expenses associated.

Well, and you're supposed to defer both, the fee and the direct expenses. And so -- and there are some direct expenses associated with it. So we would -- you defer both of those. But again, in this case, it's a shorter-term deferral. It's a 2-year life of the loan, but you expect most of them to be forgiven in a much shorter time period than that. And so I'd summarize that, Stuart, by saying, we're not going to be taking a lot of that in the income immediately.

Got it. And that $5.7 million is pretax, obviously?

Yes, that's correct. That's correct.

And given round 2's up and running, do you anticipate providing further guidance if that funding runs out, just given your participation and so forth. Or is -- I think for now we'll probably use that $5.7 million, but it sounds like you guys have been active in round 2. So just trying to think about how we'll put that into -- over the next few quarters.

Yes, we will -- yes, thanks, Stuart. We'll give some update there, some updated guidance as we continue through the program. But yes, we have been very active in round 2. And so we'll -- so -- and we'll continue to update. And I said last night, we had done 985 loans. I'm sure it's over 1,000 now compared to roughly 1,500 in round one. And so that's only the first 2 days of round 2. And so I think we'll continue to see that. And those loans actually had smaller balances, which also means, by the way, a higher fee so. And we'll try to keep that sum up -- provide some updates on that.

Mr. Holmes, there appear to be no further questions. I'll turn the call back over to you.

All right, very good. Thank you. We appreciate it. Again, we're sorry for the delay. Some things are beyond your control, and so we apologize that we got delayed, but we appreciate everybody joining today. And we appreciate your interest in FB Financial, and we will look forward to -- to moving forward with another exciting quarter. Thanks, everybody.

Thank you. That does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines.