Good evening and welcome to FB Financial Corporation’s Second 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; Greg Bowers, Chief Credit Officer; and Wib 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 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 conference call over to Robert Hoehn, Director of Corporate Finance.

Thank you, [Jamie]. During this presentation, FB Financial may make comments which constitute forward-looking statements under the Federal Security 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 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 and good morning. Thank you all for joining us this morning and we do appreciate your interest in FB Financial. On last quarter’s call I highlighted the company's priorities and how they have changed in the pace of these uncertain times. Those priorities were and still are: first, the health and safety of our associates and customers; second, liquidity; third, our capital; fourth, profitability; and then fifth, growth. I'll touch on each of these priorities in some more depth, but I want to start by saying how proud I am of our team for the level of execution that we achieved on those goals this quarter. Number of our associates listening to this call and I want to congratulate them on a job that's been remarkably well done. Our financial performance this quarter was outstanding, including record revenue and pre-tax pre-provision earnings. We produced an incredible 3.29% adjusted pre-tax pre-provision return on average assets for the quarter. Our profitability was largely driven by our mortgage team producing a record $33.6 million pre-tax contribution. After a $26 million provision that moved our allowance for credit losses to 2.51% of loans held investment that's excluding our PPP loans, we had an actual ROAA of 1.30%. The company's earnings power has allowed us to reinforce our balance sheet with fantastic liquidity, a conservative allowance for credit losses and an additional 23 million in tangible book value, all while operating in the middle of the pandemic. This demonstrates our business models complimentary bank and mortgage segments. We frequently described the company as a great community bank with a great mortgage division and this quarter exempts by that description. Diving deeper now under our priorities, our focus remains the health and safety of our associates and customers. I believe we've entered a…

Thanks Chris. I'll give a high level thoughts on the portfolio and then will be available on the question-and-answer section as well. For a refresher, we are at our core community bank that makes loans to support the economic activities of our markets. The strategy means dealing with and putting our faith in local people we trust, and know to be good operators. Our strategy has always been to focus on end market lending, while avoiding shared national credits, and purchasing participations for the sake of growing loan balance. Our portfolio reflects that bias. Since we last spoke, we have raised $315 million in PPP funding for customers that needed some help at the outset of this downturn, and you can see the industries where those PPP funds went on Page 11 of the presentation. We are also working through our deferral program. To echo Chris, our relationship managers in the field are having positive conversations with our borrowers, but it's still too early in this process for us to really know what will happen with many of those credits. Of the roughly 920 million in loans they received at first deferral, we still have around 550 million that have not come out of that first forbearance period. At this point 138 million have received approval for a second deferral. That number will increase as we continue to work through the remaining deferrals. Feedback from clients that received initial deferrals is across the board. With our open door policy, many of our clients accepted the first deferral base more upon uncertainty rather than actual business level. As such that group won't needing or requesting second deferrals. For those that are seeking second deferral, some plans still have limited revenues such as restaurants and hotels. Others don't have an urgent need…

Thank you, Greg. I know that we’ve covered a lot so far, so I'll give some brief color on CECL, margin, and mortgage and then be happy to answer any question after our prepared remarks. First, on CECL, we use a blend of the economic forecasts that Moody's put out in late June. With our markets generally open since early May, the pre-downturn strength of Tennessee as a whole and the pre-downturn strength of Nashville, which is one of the hottest job markets in the country pre-COVID, we did not feel that [waiting] 100% of baseline made sense for us at this point. The resulting economic input to that blend are laid out on Slide 19. The largest drivers of the increase this quarter were the CRE index and the unemployment rate, which you can see both deteriorated from last quarter forecast. These inputs and adjustments ultimately led to 2.51% allowance for credit loss, which we believe is hopefully higher than any losses that we'll see over the cycle, but we don't mind carrying that given the levels of uncertainty going forward. Moving on the margin, which as Chris mentioned, is facing some pressure due to both balance sheet mix, as well as lower yielding assets. On the balance sheet mix, we’ve been trying to nail down how much of the increase in deposits is related to PPP funding, and other government stimulus programs to determine how much liquidity we can expect to retain. However, depositor’s cash is fluid and comes from many sources, deposit balances of customers who received PPP funds from our origination are up 250 million from March to June. If you dig deeper and capped the increase by the amount of PPP funding that they received from us that only accounts for 138 million of deposit…

Alright. Thanks, Michael and thank you, Greg for that color. So, we know that challenges are coming as we manage through economic uncertainty. The Franklin merger and continued impact of the pandemic. That being said, we executed well on our stated priorities and had a very strong performance this quarter. We're coming off a quarter with exceptionally strong earnings, and moving forward with our reinforced balance sheet positions us for success. Our complimentary business segments of the strong community bank and the strong mortgage segment also positioned us for success in the current low interest rate environment. Our credit portfolio is behaving normally today and we're braced for any headwinds in the coming quarters. Moving forward, we positioned ourselves for a good combination with Franklin Synergy, and we're excited about the closing of the transaction. Pandemic notwithstanding, we’re ready and excited for the balance of 2020. With that, I'd like to open it up for questions.

Ladies and gentlemen, at this time we'll begin the question and answer session. [Operator Instructions] Our first question today comes from Stephen Scouten from Piper Sandler. Please go ahead with your question.

Hey, guys. Good morning.

Good morning, Scouten.

Good morning.

So I wanted to get one point of clarification if I could, on the loans that are in deferral currently, I think if I heard you right from that, you know, 918 million, it sounded like 550 million were still in deferral, and then I think you said $138 million were – requested a second deferral. So ballpark, does that mean about $250 million have already fallen out of that $918 million in total initial deferrals? Is that close to correct there?

Yes, that's right. It's in the [240-ish, 250] something like that. Yes.

Okay. Great, great. And so, I know you said a lot of your customers felt like they were doing this on a proactive basis and probably wouldn't need a second deferral, but what's your feeling with the $250 million that came off? Maybe do you have any indications on what type of industry if there’s any concentrations there that glean any – give us any color as to how the overall market is performing there?

Yes, let’s say it's across the board. There’s no industry concentration, some of it’s actually consumer. And so, you got a consumer piece of that and then not a lot of industry concentration. It'd be representative of the community bank that we are. Greg made reference to that, you know, we're a community bank and we’re kind of a reflection of that community. I would say, it’s not exactly your question, but I think it may help a little bit. If you notice, 10% of the – if you notice, there was a bigger percentage of dollars than number of loans, and so, you do see some, where, you know, hotel, probably a good example, where they're probably going to request a second deferral, but they're going to have a higher balance. And so, you're going to see some smaller ones particularly that just don't ask for a second deferral and keep going. So we see some with more balance that ask, but it – we have seen no concentration. We know we do have – I wouldn't say this too, as we look at larger balances, we know we do have some that are still out there that we're already talking to about a second deferral. Again, hotels would be a good example where we may have a $25 million or $30 million credit, really comfortable with the collateral, really comfortable with the owner and really comfortable with the investors. Then, as Greg – again, as Greg said, it's just a matter of time, so.

You know, and one thing also, Chris, we had seen some customers go from a deferral that's complete deferral, [P&I] payments to just interest only now as well, so as they managed through this.

Yes, good point.

Okay, that’s very helpful. And it seems like you guys are pretty well ahead of the game from a reserve standpoint, at least to me here and should be in the top kind of decile, quartile maybe of your peers relative to reserves to loans. So can you talk a little bit more about that? I know you’ve laid out the CECL math in that one slide, but talk about the quantitative versus qualitative factors there? And then maybe also with that one larger credit, I think it was a $25 million relationship you mentioned, if that has specific reserves? And if so, if you have that number of specific reserves related to that credit?

Yes. So, I will take the first part of that, and then, I'm going to let Michael comment on CECL, Greg, comment on the credit. And I would say this, Stephen, and look, CECL is still – while we've been talking about it for a long time, you know, its – we’re two quarters in and I think we're all still learning some things about it. And one of the things that we've – we have probably and this is my impression, and Michael may slap me on the hand here, but I do – you know and you may remember this, I did start my career in public accounting with Ernst & Young, so I do actually have an understanding on appreciation for the theory behind some of these things. And so – and we started pretty closely and had made as many – my perception is we haven't made as much in terms of qualitative adjustments at many of our peers because we look at the numbers, and we look at what comes out on ours, and we stick pretty close to what it says, even though – I would tell you we don't think we need all that, frankly. I mean, we – if – but you know, bankers are often the last to know, and so, we don't actually think we need all that, but that's what the number say, and so, we stick pretty close to the numbers because it's new and I think there are a lot of folks out, a lot of banks, and I'm not being critical here, that are making a lot of qualitative adjustments, and probably more than we are and I think that probably sticks us in the higher tier. So that's just some [might now], but Michael, feel free to correct me if I’m wrong.

Yes, I think that's well said. I can't slap your hand since we're socially distanced, but – so and Stephen, from an overall CECL model perspective, Chris, was right. We did take the model output, but we adjusted our assumptions last quarter. We're a 100% baseline and quite frankly, the economic forecast buried pretty loudly this quarter and from a [indiscernible] perspective, deteriorated significantly depending on which [indiscernible] you are looking at. So, you know, our forecasting committee looked at that and we saw some green shoots in the economy. [Indiscernible] payroll number, improve retail spending, you know, during the quarter was – set our all time record [earning up] 17% on one print. And so, you know, that had us change kind of our forecasted assumptions a bit to a more positive outlook than a baseline or a consensus. That being said, as you can tell on the slide, the numbers were still worse; GDP was worse; unemployment for 2020 and 2021 was higher. And as we mentioned, commercial real estate, which is a major driver in our model because of our construction and non-owner occupied exposure was worse [indiscernible]. That all stood out a higher number, and then, qualitatively, we looked at that; we looked at a Tennessee-only run and said, hey, you know, we feel like we're in a better spot and we did make some adjustments down, but to Chris' point, it was not, you know, material. I think we had some – some [more room] there. We also got some really good feedback from our markets that said, you know, things are looking pretty decent, but, you know, we don't know. Greg mentioned government stimulus, a second way of other factors that kind of go into that, and so, we're cautious, but we feel it's appropriate at this time. And like I said, you know, we don't plan on actually realizing 115 million in losses.

Yes, [indiscernible] I’m sorry. Greg, do you want to comment there?

Yes, just – Stephen on the – I think you had two other specific questions. That $25 million referenced on the slide, that is on our watch list at this point, and as far as the $5 million [property] you're asking about reserves, that – those reserves [indiscernible] too specific about – are in that 30% range.

Okay, so no – with that watch list credit, no reserves against that yet today?

Just our standard law.

Yes, just what that gets out of the standard formula for all of the watch list.

Okay, perfect. That's all very helpful. Maybe if I could squeeze in one last one, I'm curious if you could comment on the Nashville residential real estate market, obviously, based on your mortgage results, which obviously is not Nashville only, but it seems like the environment is good, but with FSB’s concentration there and construction, I'm just curious how that's holding up?

Yes, sure. I will – Greg and I will both comment on that. Yes, so residential real estate has been, for me anyway, surprisingly strong nationally given again the fact we have a pandemic, but an even stronger – stronger locally than nationally if you take Nashville. Inventories are low, builders are [indiscernible] and we see that reflected in our portfolio. So it's quite strong. Sales activity is strong. And so, it continues to go, especially at certain price points. And I'd say the mid-level price points, it's really, really strong. Greg?

Yes, I agree it and I echo those surprising comments. They have continued to do well and I think the interest rates help on that. You know one thing you might be interested in, for our [1-4 Family] construction, our group that is focused in the Middle Tennessee area, led by [indiscernible] who does a great job with this group, has approximately $225 million plus or minus in commitments with around, you know, $120 million plus or minus in outstandings. You've got that and that's spread out. Davidson, Williamson, Rutherford, Sumner County. Davidson's 27%, Williamson's 33%, Rutherford 17%, and all of those markets are just doing great. When you look at that portfolio, specs are around 23%, pre-sold is 40% of the total. So, it's just done very well today.

That's great, guys. Thanks so much for the color and congrats on a phenomenal quarter.

Thanks, Stephen.

And our next question comes from Catherine Mealor from KBW. Please go ahead with your question.

Thanks. Good morning.

Good morning, Catherine.

Good morning.

Just a couple of, many follow-ups, just, I want to confirm a couple of things. So you mentioned in your slide deck that you expect for the PPP loan to have $5.5 million of fee income. So are you bringing these revenues through spread income or through fees?

They are got through spread income.

Okay, perfect, perfect. So, I just wanted to confirm that. And then, on – if we look at your reserve build slide, we see a pretty big jump in your construction. ACL, the loan category goes from 3.8% to 6.4%. Is the jump there really a – more of a factor of the CRE price index declining, as you mentioned before? Or is there anything specifically in that portfolio that you're more worried about today?

Catherine, it’s Michael. It's not credit specific. It's more of the price index and CRE outlook.

Yes, it's not specific at all. It's actually, yes, totally driven by the outlook.

That's right.

Okay, great. And then, one NIM clarification, you mentioned that you expect Franklin to be 10 basis points to 15 basis points impact on the core NIM. Is that exclude – you also talked about, you know, the FHLB brokered and non-core funding coming off by year-end, is that inclusive or exclusive of what you can do with the funding once the deal is closed?

Yes, that's exclusive of that. We've been expecting about a 10 basis points to 15 basis points impact on our margin and we’re – as we're working through here, we're looking at things that we can do to lessen that impact and this excess liquidity helps.

Okay, great. And then, I know I'm doing four questions. But my first two, I’m going to argue were little one. And so, I’m going to ask one more and then I’ll be done.

We don't know [indiscernible]. I guess we would have to call [indiscernible] at some point, but Catherine [indiscernible].

[Indiscernible]. But – so my last one is just on Franklin, if you could just provide an update on how you're thinking about the loan mark and your ability to exit some of their non-core loans as with the original plan with that deal? Thanks so much.

Yes. So, loan market, if we think about, we’re sort of – we thought about it in two segments, you know, core portfolio, which – is and core portfolio is performing as expected. It’s very similar to our portfolio, perhaps a little more real estate ways, but in terms of underwriting, it's similar to our portfolio. And so, we’d say it’s behaving not unlike ours and not unlike what you expect in this market. So, you know, the – some unknowns there, but we're – we'd say it wouldn't be much different than the outlook for our own portfolio and the outlook has changed because the world is different, but not materially there. On the institutional portfolio, you know, which was – when we announced the transaction back in January, that's about $430 million, you know, that portfolio has been a little more volatile as we continue to monitor the valuations on that, and it will – it probably had dipped more earlier. We've seen some of that – some of the values on some of that come back. And so, it's – I’d say, I don't know what the mark was, the mark would be bigger right today than what it was in January, but it's also a smaller portfolio. And so, as we have sort of written the waves up and down on that over the last three, four months, it's probably substantially higher than where it was in terms of – in terms of valuation less or more. And I’d say we're optimistic, as I mentioned, they continue to work that portfolio. And so, there were a couple loans in there that they had identified that were taking some right now and they've already done that and – but most of what they're getting out of today, they're getting out of at par. And so, we continue to be optimistic and I can't give you too much more color on that because we're not sure where it will be when the transaction closes. Greg?

I'll tell you one thing, we could add, I don't have a specifics, but in my conversations with them, you know, they – as you mentioned, they have a significant real estate portfolio and they've shared in the robust Middle Tennessee results and sales activity with their builders. I think on the PPP – excuse me, on the deferral program, they've had similar numbers as to ours as far as how that has worked through. So, I echo your comments.

Yes, they're – they continue to really work that down and they had that strategy in place to work that down, just we will work it down more quickly together than they would have been able to work down on their own. Their Chief Credit Officer Eddie Maynard and Dave McDaniel are doing a really good job of just working – continuing to work that. So, it'll be even less when we close the transaction than it is today because they constantly get things that work in there.

Great, it’s really helpful. Thank you so much.

Thanks, Catherine.

Our next question comes from Brock Vandervliet from UBS. Please go ahead with your question.

Hey, good morning guys.

Good morning.

You gave some color in your opening remarks and I can see the slide on the mortgage results. Just trying to get my head around, you know, what would happen this quarter with the gain on sale, and you know, as important, you know, what you're thinking kind of going forward whether the seasonality, you know, and kind of what we should look for in terms of the profitability of the mortgage area in the future?

Yes, and Michael has a very deep knowledge in the mortgage part of our business, I’m going to let him comment on that, Brock. I will just reiterate, you know, great quarter; strong – as you said strong gain on sale, strong margins, strong production, and so we kind of hit on all cylinders. You want to specifically answer those, Mike?

Yes. Good morning, Brock. I think part of the variability, you know, and one reason we added to the fair value basis, it’s kind of demonstrated. Now, if you remember, at the end of the first quarter, we were a little uncertain as to what – you know what the world looked like, so we had a reserve. We adjusted some pull-through assumptions. And so that created some variability between the two quarters. But overall, you know, that [38-ish] number in our fair value mark is more indicative of where we've been executing. Some margins are materially higher than where they were in the first quarter, and quite frankly, historically, you know, so we expect them to remain elevated. Yes, at the same level, likely not – capacity comes in, we'll certainly see margins lower, but we expect a strong third quarter, you know, is it going to be the second quarter? I'm not going to say it. Our team can execute, but it's not likely September, it’s a slow – short business month, and it's just not likely and [indiscernible] do you have anything to add there?

I’ll say [indiscernible] and we have a clean commentary, but I'll say the seasonality factor does come in, Brock, you mentioned that it will come in September, which is usually a lower month for us. And so in the quarter, you know, we had three really great months, all stacked together, and September is a lower month, and so, that'll be one impact of seasonality. And in the fourth quarter, of course, seasonality will really come into play with…

Yes, there's several things that play obviously a factor in and capacity is certainly one of them. Industries, you know, add capacity right now and I guess when you start talking about these elevated margins, as Michael said, you know, we've had an opportunity across the industry to elevate the margins. Is that sustainable? Likely not, but we don't see it changing much in Q3, but as we get into that seasonality part of Q4, which would be traditional, we expect to see some of that come down.

Okay. And I can tell from the disclosure, your channels, you know, retail, correspondent, wholesale really haven't changed. Is there anything you're doing differently with respect to the products? Is this all vanilla conforming? Or are you doing any non-QM?

Yes, Brock, so we're in the consumer direct in retail space. We exited correspondent, wholesale reverse early in the middle of last year. So – but we're 100% QM product. We don't operate in kind of that non-QM space reducing some [indiscernible], but primarily conforming we aim to sell every loan we originate in the mortgage division, it’s prime product.

Got it. Okay, thanks for the color.

Thanks, Brock.

[Operator Instructions] And our next question comes from Ammar Samma from Raymond James. Please go ahead with your question.

Hey, good morning.

Good morning, Ammar.

I think the – kind of big topics have been hit, but just circling back to expenses, you've got the FNB Financial franchise, you know, coming on, and then, the cost savings coming out next quarter. You’ve got Franklin coming on as well. So, how should we think about kind of the core bank expense run rate, you know, maybe in the next couple of quarters? And then, when all the cost savings are out?

Yes, so the core bank run rate has been – actually has been flat for the year and we really like to keep it in that flattish kind of way for the rest of the year. We do have – we've completed the FMB Scottsville transaction, which is – and converted it, so we'll have a little bit come out there, we'll also have a little bit of just natural increase, so I think of that as more flattish. And then, of course, when Franklin comes on, we'll have that increase in expenses, but as I think about just the legacy core bank, it should be flat.

Okay, I appreciate that. And then, on margin, you know, you gave the commentary on the 10 basis points to 15 basis points from Franklin, are you able to strip out your kind of core ex-PPP margin right now, and then how we should think about that core moving forward?

Yes, I mean, ex-PPP, it’s probably [5 bips to 7 bips] higher and really, you know, carrying excess liquidity is another, you know, 10 or so, 10 to 15. So, as we deploy some of that liquidity and kind of work through that, you'll see some stabilizing in NIM.

Okay, and then last one from me, bigger picture, has the pandemic provided any opportunities to maybe re-think the business model. You know, that could be from a branch perspective, account prospective internal processes, etcetera? Thanks.

Yeah, I think the pandemic causes you to rethink everything. And so, we, you know, we – our branches. We've got some, if you look at bank branches today, I mean, you see, I think you could park in front of some meaningful percentage of bank branches and watch and if you serve, if you just put them under surveillance, Monday through Friday for the eight hours that they were open, you'd probably be amazed at the lack of traffic for some reasonable percentage of bank branches in the country today, which tells you that you don't need necessarily the transaction capability of those branches. And so we already were thinking – had been thinking that way, I think this makes it even. That being said, we have some very, very busy branches that have been around for decades and decades and decades and get heavy lobby transaction, heavy lobby in transaction traffic. So, we got both ends of that spectrum and everywhere in between. It does cause – we have seen transaction activity drop, at least live across the counter transaction activity drop and not return at this point. And I think that probably doesn't ever return at the same level that it that it did. Because we've seen [indiscernible] use remote channels even more than they were before. So yes, it causes you to rethink your branches. It causes you to rethink your non-branch facilities as well, because we've got 700 people working remote. And you know, expenses are completely in check, maybe even going down a little bit and so, you know, it causes you to think about what kind of other office space you need going forward, and how you react to that. And so, it also causes you to, you know, everybody's already thinking about the investment technology, the technologies that employ and how they make sure that their customers are able to completely transact business in an efficient way. So it does cause you to rethink all of that. It's not that we weren't thinking of that because we were, but it gives you some new perspective and it and it makes – and it maybe moves your plans into a faster – it probably speeds your adaptation of some things that you've been thinking of. So …

I appreciate that. That's it from me. Thanks, guys.

All right. Thanks Ammar.

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Chris Holmes for any closing remarks.

All right. Well, thank you again, everybody, for joining us today. We really appreciate your support. We're grateful for a great quarter, and we look forward to the next one. Everybody have a great day. Thanks.

Ladies and gentlemen, with that we’ll conclude today's conference with you. Thank you for attending. You may now disconnect your lines.