Good morning and welcome to FB Financial Corporation's third 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 call over to Robert Hoehn, Director of Corporate Finance.

Thank you. During this presentation, FB Financial may make comments which constitute forward-looking statements under the Federal Securities Laws. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in 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 everybody and thank you for joining us today. We appreciate your interest in FB Financial. And I am excited to update you on what I think one of the strongest and most impactful quarters that FB Financial has had since have been with the company. During the quarter, first, we converted our consumer online and mobile banking platform in July which really improved our customer online banking experience and out mobile experience. The new systems improved our capabilities and we have gotten excellent feedback from our customers over the new app and how smoothly that conversion went. Second, we lifted the team in Memphis in the July and added some very strong well-known commercial relationship managers in that market. We anticipate some significant production over the next couple of quarters as they bring some of their long-standing clients over to FirstBank. And we expect that momentum to really continue and gain steam over the course of 2021. Third, we closed our Franklin merger on August 15 and then hustled to get through the systems conversion less than two months later on October 12. From a strategic perspective, we feel that this positions us well to be Nashville's premier community bank and further entrenches us as Tennessee's premier community bank. Fourth, we raised $100 million of 4.5% subordinated notes at the end of August. That further protects our balance sheet and provides us dry powder for future organic growth and accretive M&A. And finally, we posted a record-breaking adjusted EPS of $1.46 per share, record breaking adjusted earnings of $59.5 million in a very strong adjusted pretax pre-provision return on average assets of 3.13%. Thank you to the teams that put so many sleepless nights towards accomplishing those milestones. To see how our associates had…

Thanks Chris. Good morning. We have spoken on previous calls about our asset quality and how it has continued to perform well, even in these unusual times. That continues to be our message for this quarter. From a credit metrics perspective, as you have seen in the release, we continue to report good numbers that speak for themselves, including trends associated with past dues, our watch list, classifieds and non-performers. But I will touch on a few important specific categories. On the deferral front, we have seen that move down from a high on a combined company basis of over 20% to roughly 6% at quarter-end. As we have noted before, at the onset of this, we were proactive in reaching out to our customers in providing relief which was a combination of our desire to help our customers as well as risk management. Behind these numbers lies a few things for consideration and review. Initially, those that truly need it relief, the hardest hit, got deferrals. But remember that many have requested a the deferral were in the category of, hey, we are doing fine, but with all of this uncertainty, I am going to seek a deferral out of conservatism in protecting against what might come next. So that was our report in the first quarter. Then as the second quarter came around, those that were in the latter category went back to their pre-COVID plan and deferrals began to drop. Now here we are with the third quarter report and I am glad to say, we continue to make progress in that regard. In summary, we are cautiously optimistic about the size of this portfolio continuing to reduce but remain pragmatic that without a vaccine or continued stimulus, uncertainty regarding the ultimate outcome will remain the watchword.…

Thank you Greg and good morning everyone. My prepared remarks today will focus on CECL and the financial impact of the Franklin merger, margin and mortgage. And then I will be available for the Q&A section as well. First, on CECL, there are two slides to focus on. Slide 20 lays out our economic forecast and resulting ACLs by each reporting category. And slide 21 shows the walk forward from June's ACL of $113 million to September's $184 million. I will touch first on our forecast assumptions. We used a blend of the baseline forecast as well as more positive forecast than Moody's put out in July. With that blend, we feel like we have pretty well captured our current expectations for our market. As the rest of the country continues to reopen, Moody's did put out additional forecast in August and September that were incrementally more positive than our July scenarios. But in that time between forecast, we did not see noticeable changes in the economic activity in our markets. So we ultimately stuck with our July blend for the quarter. Looking at ACL on our legacy portfolio, there were two primary drivers for the slight relief that we saw in the quarter. The first was declining balances and the second was the improving economic forecast that we used for Q3 as opposed to Q2. Together, these combined to produce approximately $7 million in ACL reversal this quarter. We had a little bit of heartburn about letting those reserves go but we still feel very adequately reserved and continue to stick with what our model tells us at this point with a few qualitative adjustments. On the Franklin related ACLs, there were a few components that I will touch on. The first that I will speak to is our…

All right. Thank you Michael and thank you Greg for the color. To close, we are very proud of what we have accomplished this quarter. The main challenges still lay ahead for us but we are excited to meet those, execute against those and capitalize on the opportunities. With that, I would like to open the line up for questions, operator.

[Operator Instructions]. And the first question comes from Catherine Mealor with KBW.

Hi. Good morning.

Good morning Catherine.

Thanks for all of the color. I just had a couple of these are kind of needy questions and maybe a little bit more picture. But my first question is just on first the outlook for core bank expenses. If we strip out mortgage, it looks like your core bank expenses were just under $50 million. And so I know we have a partial quarter of Franklin and then you have the cost savings coming in. Is there any kind of visibility you can give to what that number looks like as we move into fourth quarter and then kind of your growth rate for next year?

Yes. And Catherine, good morning. Glad you are with us. And I don't know exactly the dollars, but let me make a couple of comments. Our core bank expenses were pretty close to flat, our legacy core bank expenses were pretty close to flat quarter-over-quarter. Our cost saves are coming in as expected, perhaps slightly earlier in terms of, I think it moves both ways, so our cost saves are coming in originally as expected, maybe slightly better because we are getting some of them earlier. And as we look out, we could actually beat that number sometime in 2021. There a couple of things that have moved in there. We have got some from the branch closures. We plan to do some subleasing. That's less, some of these markets is less attractive than it was when we made at announcement. So we are allowing that that could drag on a little more than we expected. But even with all that, we think we will meet or exceed that. We very confident that we meet the cost saves and likely exceed those. And so those two elements. Mortgage will continue to remain elevated in the fourth quarter from an expense standpoint. That's a purely variable expense related to volume. If you will notice, our efficiency on that business continues to get better and better again because it's a variable expense and our revenue has gone up so much. And so that's kind of the moving pieces as we look at fourth quarter. Any other clarification? Okay.

That's helpful. And then other fees, well, they were up a little bit more than expected this quarter. Is there anything kind of one-time in that line? Or is that a good run rate?

Nothing in other fees. Our loan fees were consistent, not particularly. Our swap fees were --

About $1 million.

Yes. So they were fairly consistent. And no, we can review the detail and if there is something there, we can certainly put that in our deck.

Okay. And then one last one, if I may. Just the increase in classified assets. Was this mostly just due to the Franklin deal closing? Or was there any kind of migration into classified from a legacy perspective?

Hi Catherine, this is Greg Bowers. Good morning.

Hi. Good morning.

I think you will see some of that from the merger, but as I referenced, we did have one larger account that's about $25 million from legacy FirstBank that moved into substandard in the quarter.

That's the one we have referenced today and you referenced in your comments actually.

Right.

It was referenced in the comments. It was actually referenced in the deck as well.

Yes.

Got it. Okay. I apologize. I missed that. And what type of credit is that?

It's referenced. Yes, it's a diversified foodservice, is what I call it.

You put that in your deck before. Got it. Okay.

That's right.

Got it. All right. Great. Thank you so much. I will hop out of the queue.

All right, thank you Catherine.

Thank you. And the next question comes from Jennifer Demba with Truist Securities.

Thank you. Good morning.

Good morning Jennifer.

Can you remind us what kind of interest fee hit you would expect next year per quarter, should you stay over $10 billion in assets in the fourth quarter?

Yes. It' about $5 million, between $5 million and $6 million is what it would -- that's what that -- I will refrain. That's what that price control would cost us.

Okay. And can you also update us on the CFO search?

Yes. The update is, it is going well and we would expect to conclude that before the end of the year. And we been pleased with how that's going and interest in candidates.

Okay. One more question. You mentioned a couple of times, this environment might give you some opportunities in terms of acquisitions. Tell us about what you are interested in at this point? And what kind of timing we would be looking at? How long before you would be comfortable doing another deal?

Yes. We do remain clear that as I have seen the banks like everybody does, sitting around the table that I am sitting at, that we thrilled with our position. But we are also really focused right now internally in making sure that our engine is hitting on all cylinders. Every acquisition that we have done has been really, it's been a financially successful, as we highlighted. We don't talk about this as much as expected and really strategically successful. And we see things about the price of merger and the folks and what we get in terms of critical mass. And I would go back to prior to that same thing with the branch acquisition from Atlantic Capital. And then you go back prior to that and I would say the same thing about that the transaction we did with Clayton. All those really strategic in operating leverage. And so we are sitting here now and we really want to make sure our organic growth engine is still best, we think, in our markets and among our peers. And so that is absolutely job one, is making sure we get some things right. And that's going to take us a little more time. I suspect we will get hit opportunities, frankly, before we are ready for them. We wouldn't be disappointed if we didn't get an opportunity for three to six months. But I suspect we will and we will have to make the same strategic decisions we always do and we would have to be more than really strategic to us again. We wouldn't do one just because somebody could miss an opportunity. It's got to be one that's strategic for us. And so that's a lot of wind to say we are happy right now to continue to improve all of our operating metrics organically. And as we move into 2021, we will see what opportunities come our way is really kind of where we sit. I would say we are really happy though with our balance sheet and the strength of our balance sheet. And so financially, I think we sit in a great position.

Thanks so much.

Okay. Thanks Jen.

Thank you. And the next question comes from Stephen Scouten with Piper Sandler.

Hi. Good morning everyone.

Good morning Stephen.

One quick clarifier on the Durbin impact. That solves to $6 million. Was that just the back half 2021 number? Or is that an annualized number?

That's an annual number. So we go in base, assuming that we don't get under $10 billion, I would say, it would be real long shot, but because of some things we are doing to pay off some wholesale funding and it's not completely out of the question, but it's a long shot.

Great. And then on the foodservices credit there, that $25 million our exposure, I guess one question around the reserves. Any specific reserve there? I can't remember if you noted that last quarter. And then if you could touch on the percentage of the reserve for C&I loans? It looks like about 56 basis points versus much higher in the other categories. So I am wondering, what's different for you guys around that portfolio? And what gives you confidence at that lower percentage on that segment?

Yes. Good morning. This is Greg. I would just direct us to the CECL numbers that we have got in here as far as the ACL specific on the reserves just in general on those. That's how we measure that.

Yes. And look for second half.

Hi Stephen. It's Mike. C&I percentage, we did see some improvement there quarter-over-quarter. I think the stimulus played into the performance in that. And kind of the loss expectations, we will see how that looks going forward. But that segment has certainly been [indiscernible]

Okay. So most small business, maybe with PPP loans affiliated with this?

They will try, yes. On that first part. So nothing specific other than what our CECL calculation would cause us to a little bit of an increase because of the rating and that kind of thing. But nothing specific other than that.

Okay. Great. And then you guys have noted the possibility to use the liquidity to have some higher cost funding and some of the non-core items from FSB. Beyond that, it looks like you still have a lot of excess liquidity. So I am wondering, how you think about additional initiatives there? Whether it would be reducing securities book or anything else that might move the needle a little bit more there on the food side?

Yes. There is a little of a dilemma there because we do pride ourselves on having a really strong funding side of our balance sheet that really helps our profitability. I think it really helps our stability and helps our margin and helps a lot of things. But today, there is some elevation in the deposit numbers that's not real because of the liquidity several bankers available to everybody because of PPP and the relief that folks have gotten. And so that's all going on at the same time where as we put these two balances together, we are looking at some wholesale funding. So we are pretty rapidly trying to pay that down. And then we are thinking about the investment portfolio possibly it could grow but of course your yields aren't great. And so you may have picked up a little bit from the tone. And this was pre-pandemic. But we had, in our markets, we have begun to see some things from both a credit perspective on the loan side, both a credit perspective and a pricing perspective, it wasn't tracking to it. And so we absolutely are 100% open for business, even growing the business, but probably at a slower pace than we have. I would expect to see us be more aggressive. Again, we have got the Franklin transaction behind us. We have a team of A-players there and I would expect us to see those folks be more aggressive as we move out into 2021. And so that's another strategy.

Perfect. Super helpful. Maybe one last thing, maybe very high level. I think some one said maybe you guys weren't necessarily seeing the economic reopening that was almost indicated by the improvement in August and Moody's numbers. But the flipside of that, as I would think you are still seeing pretty strong population inflows. I think all of us are hearing about zero tax state, population growing in states with zero percent tax rates and migration from the Northeast and so forth. So I am wondering, just anecdotally, if you can tell us what you are seeing in your markets and if you are seeing any significant influence on that phenomenon?

Yes. We really are. Stephen, good question. And we get asked that very often, especially from the investors in the Northeast, that particularly in New York and other places. But we are seeing our job growth has just continued to be really strong in our markets, particularly Nashville would be the leader there. We are seeing technology companies make investments and move significant numbers of folks here. Amazon has a big presence. And so we are really seeing those numbers begin to pick up again. GM just announced really big, $2 billion investment in their assembly facility in Spring Hill, which is a Nashville suburb. All three of the states assembly plants now are assembling electric vehicles. So folks are making big investments here. And so it's actually quite good. And then I will give you a couple from just the residential side continues to almost to defy logic. It has been so remarkable. And then just pure anecdotally from somebody who lives here, the number of folks, if they are migrating that you just hear, buying homes up and when they are moving either from the West Coast from Chicago or from the New York area, New York, New Jersey, Connecticut, they are buying big homes here. And so we are seeing that. I mean it's just a constant dinner party topic. So we are seeing a lot of it.

Got it. That's super helpful Chris. Thanks so much guys. I appreciate it and congrats on a really good quarter.

Thank you. We appreciate it, Steve.

Thank you. And the next question comes from Kevin Fitzsimmons with D.A. Davidson.

Hi. Good morning guys.

Good morning Kevin.

Chris, given you spend a lot of time on the reserve and appreciate all the detail and given the strength of the ratio at this point and given that the calculations led to some releases in this quarter, I mean is it fair to say that barring no big changes in economic metrics or expectations that the bulk of the reserve build is behind you and you guys could potentially be growing organically? And not necessarily adding to the preserve over the next few quarters?

Yes. I think it's fair. We said consistent, I think it's a pretty good characterization and we said fairly consistently that we have not varied too greatly from pretty straight numbers and we own from our secret calculations. And so we haven't had undue influence of qualitative factors. And I understand different banks doing it differently. That's been our approach. And that's led us to allowance number that's the highest among our peers, I think. If not the highest, it's certainly among the highest. And so, yes, I think it's fair to say that even as we look at it, we go, wow, surely we can't need all that as we look at in the cycle. Now, we quickly follow that up with, hey, it could get worse than we expect. But you know, it could be election turmoil, it could be all kinds of things that cause us to take a conservative approach. But I think you characterized it, we wouldn't, unless something really changed in the economic outlook, we wouldn't see it going up from here, unless there was something that really changed.

Okay. Great. That's very helpful. And on the institutional loan book from FSB, the decision to put that into held for sale, was that -- I know originally that was the plan to look to sell that portfolio in short order and then it was decided to step back and take some time. So was there a decision process on whether to keep that in the held for investment portfolio? Or did the decision to go to held for sale imply that you saw more of a short term opportunity to be able to sell those?

Yes. Good question. And I would start by telling you, it's been a conversation as late as yesterday afternoon and that's when it went held for sale. And so you characterized it again, you characterized it exactly right. Initially, we just looked like we are going to sell that. Then as we went through, we looked at it at as you know, back in March, in April, we were thinking, boy, will we be able to sell that. And then as we then moved into here lately, we have taken the approach of, it's nice to have options with it. And therefore we are letting some folks look at it. But as I said before, they are going to need to come strong because it's a performing portfolio in today's world that's got a yield on it that's north of 5%. And those aren't easy to find. And so, we are going to fire sale it. But if somebody comes strong, then we may let it go. And so it's a constant topic.

Okay. Great. And one last one. Understandably there is a number of moving parts in terms of what you all are doing on the balance sheet and things moving off, things moving on. So taking may be a step back, looking from a bigger picture, can you give some top level expectations on what could see the core net interest margin doing? What you cold see the reported net interest margin doing? And let's say, on a ex-PPP forgiveness basis over the next two to three quarters? Thanks.

Yes. Kevin, yes, we appreciate the question. But really, we are just not prepared to do that right now because of exactly what you mentioned. There has been a lot of moving parts and pieces. And so we try to put out some of the parts and pieces but we wouldn't want to go beyond that at this point. As we move into the quarter and we do some investor meetings and we put out a deck, we may update the deck and put out some additional information later. But at this point, we don't want to any further on what we expect on the margin next quarter.

Okay. Totally understand. All right. Thanks guys.

All right.

Thank you. [Operator Instructions]. And our next question comes from Alex Lau with JPMorgan.

Hi. Good morning.

Good morning Alex.

So following two consecutive quarters of record mortgage contribution, when you think about driving pre-provision net revenue growth in 2021, what are the main levers you are thinking of offsetting some potential mortgage headwinds? And can you drive positive growth in the upcoming year?

Yes. So if you think about where we are from a pretax pre-provision revenue number and you look at the fact that we have had a pretax pre-provision ROA of well north of 3%. And by the way, most of our peers are hoping to get north of 2% and falling short. And so, we are looking at it as though we have sort of a perfect storm of events that has created mortgage results that are not going to be repeated. And we would be more shocked than anybody, in fact, matter of fact, last quarter, I think we had said something like we wouldn't expect the same performance in the next quarter. But it was even better. And so nobody is more shocked about that than we are. So as we look at 2021, we are really focused on that core earnings of the bank. And so, our core quarter earnings of the mortgage, we have got a huge refinance help in this year. Let's say that rates go it projected, we would expect another quite strong year. Our previous, Wib, I think our previous record contribution for mortgage was $17 million on an annual basis and we did of $38 million this quarter, okay.

That's right.

And so, no. we never say never. And we set high goals and we have been pretty good at achieving them. But I would hate to set the expectation that we duplicate this mortgage year next year. Matter of fact, I would we won't set that expectation. We are going to be focused on how we grow the margin. We will be focused on how we continue the momentum in mortgage, understanding the volumes are going to be less and the margins are going to be less, is the way we see it. But you know, we still expect to have peer-leading and industry-leading profitability in terms of our return on capital, in terms of our growth numbers and in terms of well, really those two measures in terms of our growth, in terms of our capital and in terms of our EPS growth.

Thanks for that. And then just could you speak about the building momentum into 2021 from your regional presidents? How comfortable are you returning towards that prior long term loan growth target of 10% to 12%? Or has that target changed with the Franklin merger? Thank you.

That long term target hasn't changed, especially with the Franklin merger because they have, again, strong, they are in the strongest markets with the strongest bankers. And so we certainly wouldn't want to put reins on those guys because they do a great job. And so we wouldn't see the Franklin merger impacting it. And we would see long term that continuing to be good strong goal for us. I would say, the first half of 2021, right now actually we see some real momentum heading into 2021. But I would also say that there is some economic uncertainty headed into the first half. And so that bears on our thinking a little bit works as we are thinking about 2021. But I actually, again, taking our markets and where we are, we see momentum heading into it, we see excitement among our people heading into it, coming off what's been a challenging year. And so we think that's a good long-term target. Not sure what it will be in exactly the loan growth goal yet for 2021. But we do see a lot of momentum.

Thanks for taking my questions.

Yes. Alex, the one thing I would mention there is, we do have a new team in Memphis. And so they are growing off a lower base. But they are really doing a great job of bringing some things on there in that market. So we have got some events like that too that should help whenever we look at the overall growth for the company.

Got it. Thank you.

All right.

Thank you. And that does conclude the question-and-answer session. So I would like to turn the floor to Chris Holmes for any closing comments.

Thank you very much everybody for being on the call. Thanks for the questions. And we appreciate you joining us. Again, we are wrapping up a great quarter and we are looking forward to the fourth. So everybody have a great day. Thanks.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.