FB Financial Corp (FBK) 2016 Q4 法說會逐字稿

Good morning and welcome to FB Financial Corporation's fourth-quarter 2016 earnings conference call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by James Gordon, Chief Financial Officer, and Wib Evans, President of FB Ventures.

Please note FB Financial's earnings release and this morning's presentation are available on the Investor Relations page of the Company's website at www.FirstBank online.com. Today's call is being recorded and will be available for replay on FB Financial's website for the next 30 days. (Operator Instructions). With that, I would now like to turn the presentation over to Mr. Chris Black, FB Financial's Senior Vice President and Director of Strategic Finance.

During this presentation, FB Financial may make comments which constitute forward-looking statements. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results, performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many 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 S-1 registration statement filed with the SEC. 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. Our presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available on FB Financial's website at www.FirstBank online.com.

I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO.

Thank you, Chris, and good morning, everyone. Thank you for joining us on this morning's call to review our results for the fourth quarter and for 2016. We appreciate your interest in FB Financial. We're pleased to report record revenues, loans and deposits for the fourth quarter of 2016. We had a strong quarter where we hit or exceeded many of our key goals and, most importantly, we continued to deliver the service that our customers have come to expect.

On today's call, I'm going to review some highlights from our fourth quarter and then I'll turn the call over to James Gordon, our Chief Financial Officer, who will review our financial results in more detail. After James' comments, we'll open up the call to your questions.

This quarter, our total revenues were up 22.2% for the fourth quarter of last year to $60.4 million. This amount was below the record revenues we set last quarter due to strong performance from our mortgage business that benefited from -- benefited our noninterest income in the third quarter. James is going to provide more detail about our mortgage operations performance in his comments.

Our net interest margin rose to 3.99% in the fourth quarter compared to 3.85% for the same quarter last year. Our margin improvement benefited from growth in our customer-focused balance sheet. Loans held for investment grew 8.6% to a record of $1.85 billion for the fourth quarter of last year. Our loan growth picked up at year-end and on a linked-quarter basis was up 12.4% on an annualized basis over our September 30, 2016 loans.

Total deposits grew 9.4% to $2.67 billion for the fourth quarter of last year and were up 4.8% on an annualized basis from the third quarter of 2016. We had record mortgage loan closings $1.55 billion in the fourth quarter, up 126% from the fourth quarter of last year. This growth in closings followed our strong pipeline generated in the third quarter. As many of you know, we record revenue at the time of the interest rate lock. Our lock volume actually declined in the fourth quarter as we expected due to the typical seasonality and the impact of rising interest rates during the quarter.

We also continued improvement in our asset quality metrics. Our nonperforming assets to total assets improved to 58 basis points in the fourth quarter of 2016 and were down 10 basis points from the third quarter of 2016 and down from 86 basis points in the fourth quarter of last year. Tangible book value per share was $11.58, and tangible common equity to tangible assets was 8.65% at the end of the quarter. With that overview, I'm going to turn the call over to James to review our financial results in some more detail.

Thanks, Chris, and good morning, everyone. First, I would like to highlight our core results shown. Diluted core earnings per share were $0.43 on core net income of $10.5 million, which compares to pro forma core net income of $8.1 million in the same quarter last year. Our core return on average assets was 1.3% and our core return on average tangible common equity was 15.6%.

Now looking at slide 4, which shows our pro forma core net income up 30% since the fourth quarter of last year to $10.5 million. The bottom half of slide 4 shows the key drivers to our profitability. The first graph shows our loan-to-deposit ratio and the growth in our loans held for sale over the periods.

Second, our net interest margin has improved 14 basis points since the fourth quarter of last year. Noninterest income is up 30% from last year due to strong performance of our mortgage business. Next, our nonperforming assets to total assets is down 28 basis points from the fourth quarter of last year dropping in each of the last six quarters to 58 basis points at the end of the fourth quarter.

Next, on slide 5, in the graph on the top of that slide shows our historical yield in costs. As Chris stated previously, our net interest margin in the fourth quarter of 2016 was 3.99%, well within our long-term outlook of 3.85% to 4.05%. The key driver of our net interest margin has been our strong core deposit base with total costs of 29 basis points, which is flat year-over-year. Our noninterest-bearing deposits were 26.1% of total deposits and over half of our deposits are in transactional accounts.

Additionally, relationship loan pricing, combined with our customer-focused balance sheet have contributed to our overall improvement in net interest margin since the fourth quarter of last year. Finally, we have utilized our loans held-for-sale balances as an alternative to the investment portfolio providing us with higher overall yields.

The table at the bottom right of this slide shows the composition of our held-for-investment loan yield and reflects the impact of accretion on acquired loans and loan syndication fees representing 8 basis points on loan yields and 5 basis points on the fourth-quarter net interest margin. The fourth-quarter 25 basis point increase in -- by the Federal Reserve provided a modest benefit and we are projecting additional benefits as we move forward in 2017.

Next, on slide 6, shows that our loans were up to $1.85 billion at the end of the year or 12.4% annualized from the third quarter of 2016 while average loans grew 14% linked quarter annualized. The graphs at the bottom of this page show the solid progress we made in growing and maintaining C&I loans to 40% of total loans, up from 39% last year. The chart at the top right of this page reflects our construction of CRE concentration levels of 81% and 185% of capital, respectively, well below the 100% and 300% regulatory guidelines leaving us additional room for growth as needed.

On slide 7, which highlights the key metrics for our deposit franchise, resulting from our strong strategic focus on growing deposits. Our total deposits are up 9.6% to $2.7 billion since the fourth quarter of last year. This growth is attributable to noninterest-bearing deposits that were up 11.2% to $697 million from the fourth quarter of last year. At the end of the year, noninterest-bearing deposits totaled 26.1% of total deposits. I would like to note that included in noninterest-bearing deposits at year-end were $45 million in mortgage servicing escrow deposits, down from $62 million at the end of the third quarter.

Now, turning to slide 8 for mortgage banking business results. Our mortgage banking revenues were $26.2 million in the fourth quarter of 2016. This was up 37% from the fourth quarter of last year, but was well below record third-quarter levels at $36.9 million. We had record mortgage closings of $1.55 billion in the fourth quarter, up roughly 14% from our third quarter as a result of the strong pipeline coming into the third quarter.

The majority of the variable expense for each mortgage loan is recorded at closing where the majority of our revenues associated with the origination of the rate lock on the loan. The loan lock pipeline declined from the third-quarter high of $851 million to $533 million at year-end 2016. This decline resulted in an approximately $15 million decline in revenues on a linked quarter basis. This change is also reflected in our net gain on mortgage loan sales during the quarter.

Mortgage banking revenue was down in the fourth quarter approximately 29%. This decline was due to a shift in demand -- I'm sorry -- a shift in channel mix along with compressed margins due to competitive pressures, post-election rate increases and overall seasonality. That same shift in channel mix also impacted expenses that were down roughly 20% in the fourth quarter.

Additionally, in the fourth quarter, we completed the previously announced sale of approximately $34 million of our mortgage servicing rights, leaving us with approximately $32 million remaining on the books at year-end. Our intentions are to work towards another bulk sale and mortgage servicing rights sometime late in the first quarter of 2017. Therefore, servicing revenues are likely to decline moving forward in 2017.

We expect challenging market conditions to continue in the first quarter of 2017 within mortgage with continued competitive pressures on our margins and lower lock volumes. Currently, we're seeing a slight uptick in daily locks, which is positive. We're keeping our operating model nimble and we'll continue to make adjustments through both revenue enhancements and expense reductions.

We expect a continued shift in our origination mix as our correspondent channel matures during 2017. We expect our consumer direct channel to continue its migration to a more purchased money focused with a shift in advertising partners in 2017. We also expect to reach full capacity on two retail offices we opened in the middle of 2016. Additionally, we anticipate increased production for recent new hires in some footprint markets, as well as increased business from new account executives we've added on the third-party originations side of our business.

Our outlook for mortgage volumes in 2017 established a slow start to the year, but to begin increasing in late Q1 and Q2 with continued improvement over the second half of 2017 to be more in line with 2016 on a full-year basis. Overall, we expect volumes to decline on a same-store basis, particularly consumer direct, and expect them to be offset by continued growth in the correspondent channel, leaving volumes to be flat to slightly down for full year 2017. This overall change in mix will reduce margins, but we expect to offset the lower revenues with revenue enhancements and cost control measures as needed resulting in stable overall mortgage revenues and profitability in 2017.

Next, looking at our operating efficiency on slide 9, which is one of our constant areas that we pay attention to in improving our overall operating leverage and resulting efficiency. Our efficiency ratio has been in the 65% range for our mortgage -- I'm sorry, for our banking segment. Our mortgage segment had showed solid progress, but was negatively impacted in the fourth quarter by lower revenues and higher expenses. We believe there are a number of factors that will benefit operating efficiency as we continue to grow the bank -- systems, operating leverage in existing metropolitan markets, centralization and current operational capacity.

Next, on slide 10, shows our strong asset quality that we've continued improving over the past year. Since the fourth quarter of 2015, our nonperforming assets are down 28 basis points to 58 basis points at the end of the year 2016. Classified loans are down $10 million, a decrease of over 20% to $39 million during the same time period. Our loan-loss reserve to total loans held for investment was 1.18% at December 31, 2016, and our net charge-offs to average loans remain at manageable levels.

Next, on slide 13, illustrates our very simple capital base with 85% of total capital represented by common equity. The chart on the left side breaks down our capital position further and shows our capital position versus each of the key measures, all well above the amounts required by regulatory agencies to be a well-capitalized institution at their highest rating.

With that overview, I want to turn the call back over to Chris for closing comments and then we'll open the call for your questions.

Thank you, James. We had a good quarter with record revenues, loans, deposits and mortgage closings. Our success is due to our excellent markets across Tennessee, Georgia and Alabama and our great client base. I also want to thank our outstanding FB Financial team and their contributions to serving our customers. That team is the driver of this success.

We're very positive about our Company and we're very positive about our markets and our ability to continue delivering solid performance and building shareholder value in the future. We look forward to updating you next quarter on our progress in early 2017. Operator, that completes my remarks for this morning's call. We'd now like to open the call up for questions.

(Operator Instructions). David Eads, UBS.

Hi, good morning. Thanks for taking the questions. I guess maybe starting on the banking side of things, it looked like a really good quarter for loan growth, and particularly on C&I. I'm just curious if you could give any thoughts about what you're seeing there and maybe if you're hearing any change in color from customers since the election and expectations for 2017.

Sure, David. We did have a good quarter for loan growth; it was fairly balanced in terms of across product types. C&I was good. Some of our C&I transactions tend to be bigger and bigger balances and so that helps in terms of the growth of that segment, but it continues to be fairly balanced across our portfolio, and we do see -- I guess we -- if you'll notice our 100% threshold on construction, we've got some room on that on our CRE threshold at 300%. We've got some room on that, so we're seeing some more opportunities in those buckets as well, but we're actually quite cautious on those at the current time, and so -- but we have seen some increase in demand. That actually has come from some key competitors that are either at or exceeding those thresholds.

And then color on post-election from customers, I'd say generally optimism is good, especially some of the small business folks that we deal with, I think their outlook is good. We haven't necessarily seen that translate into anything balance sheet-related at this point because it's too soon, but there is a general feeling of optimism across our markets, particularly, as you know, Nashville has been our strongest growth market; continues to be. Outlook continued to be good there. Perhaps I'd say slightly cool from the hyperactive it was if you go back 12 months ago, but actually I think if you compared it to most markets across the country, you'd say it's still very, very good, and then our other markets are all improving, whether that's Memphis and West Tennessee or the Knoxville East Tennessee area, as well as North Georgia and North Alabama.

That's great. Maybe following up on CRE, are you seeing changing in pricing from other banks pulling back from -- or being forced to pull back?

We have seen pricing that has improved a little bit on the CRE front. We've seen that the opportunity there is actually a little better with pricing for that very reason. Less supply of -- in terms of competitors equals better pricing.

Great. And maybe one on the mortgage side of things, thanks for all the color on the outlook for 2017. Just maybe wanted to make sure I understand some of the moving pieces on the efficiency side. Should we expect the efficiency ratio to come down in 1Q even with lower revenues? Basically given the color you guys gave about expenses coming on at close, so if you're more balanced between the lock pipeline and the closings in 1Q, that would generally be supportive for margins or should we expect the efficiency ratio to maybe tick higher just because volumes are -- your revenues are lower? Can you walk through that?

Yes, good question. Wib Evans, who oversees mortgage, will answer that.

Yes, good question, David, and yes, we do expect to see revenues probably overall in line for the year of 2017. We don't think that impact on the efficiency ratio is going to allow us to drop our efficiency ratio. So our target has been in that high 70 to 80 (technical difficulty) for 2017.

And one additional comment I would make on that, David, is remember part of the problem with the efficiency ratio in the fourth quarter, if you will, was the lag in closings, which drives the bigger part of your expense base as revenues came down quicker. You'll have somewhat the reverse of that heading into the fourth quarter where you wouldn't think closings would be as high coming into the quarter off of a lower pipeline with less commissions being paid on those with lower closings.

All right, great. Thanks for all the color.

He meant first quarter.

(multiple speakers)

Yes, I got that.

Peter Ruiz, Sandler O'Neill.

Morning, guys. I just wanted to maybe touch on the NIM a little bit. Can you just talk about the moving parts there? Looks like loan yields are looking better. Obviously, CRE is probably a driver of that, but are you seeing a better outlook for 2017 and maybe the core NIM being towards the higher end of your previous guidance near 4.05%?

So I'm going to come in on just the core part of our NIM, James, and then you can comment on accretion and the other moving pieces. So we've been able to maintain that core -- we give guidance of 3.85% to 4.05% and that's -- and so we continue to remain comfortable with that and we -- our hope is to hold that where it is throughout 2017. And our deposit cost has remained low; that's somewhat of a wildcard with rising rates. We do have a lot of noninterest-bearing balances. We do have a lot of long-time customer deposits and so we're hopeful that, as rates rise and we continue to keep those costs down, that we've been able to continue to get asset yields and continue to keep our growth rate. But I'll tell you, it's not easy quarter after quarter and I'm sure that every conference call you listen to says that. But we think we can hold that in 2017 in terms of the core piece of the margin. James, you might comment on the other pieces.

Yes, I'll tell you a couple of things. On the rate side, on the asset side, particularly on the loan portfolio, we'll get some natural lift on the roughly 40% that's variable. We will see more pressure to begin to do fixed, but one of the things we've done over the last quarter or so is enhanced our interest rate swap capabilities with customers that should help protect that going forward and that should give us some lift on originations, as well as the interest rate side to take advantage of the interest rates.

On the deposit side, we believe as long as rates move slowly, but even steadily upward, we can manage that and keep our deposit costs within balance; that will give us some natural expansion over time. How long you can continue to do that in an absolute rate, straight-up rate environment, but as long as it's slow, it's fine in looking at the margins. So overall, on balance, I think where it's at has some upward pressure from the core taking out accretion and loan fees and the other noise, but the core NIM has some ability to move closer to the middle to the upper part of our 3.85% to 4.05% range.

Okay, and in terms of accretion, you think maybe closer to fourth-quarter levels or somewhere in between third quarter and fourth quarter?

They should be very nominal going forward at this point unless there are major payoffs, which we're not expecting. I think it will be more normal what I would call amortization of it going forward and very close to the fourth quarter. The majority of that was just normal amortization, so --.

Okay. Makes sense. And if I could just get one last one, maybe just if you could talk around the decision for the provision release this quarter. I know credit costs have been really low for you guys, but just wanted some clarity on the decision and the thinking around that.

Yes, sure. The big driver there was we had a classified -- we had a loan that had a fairly meaningful specific reserve against it that we had allocated; that loan paid off and so it released some specific reserve there was the biggest driver of that. James, you'll comment further, any further --?

Yes, that was the primary thing. And just one additional comment on (technical difficulty). Debt charge-offs ticked up just a little bit in the quarter. All of that, or primarily all of that, was attributable to one loan that we had around. I'd call it a historical nonperforming loan that had been around for several years; we had it specifically reserved and it finally came to fruition and we charged it off. So the charge-offs had really no impact on the provisioning for the quarter, so it allowed -- what Chris talked about on that one loan came through, there was really nothing to offset it, so we pulled the reserve down as the model dictated.

Okay. Thanks, guys.

(Operator Instructions). Ben Lurio, JPMorgan.

Hey, good morning, everyone. Yes, I guess just a follow-up on that -- the provision and reserve. I guess we've seen the reserve ratio decline pretty meaningfully over the past year. Longer term, I guess do you guys have a target range in mind that you'd like to see that go to or I guess how should we think about that longer term? Thanks.

So we're getting pretty close to where our target would be. We've said roughly in that 110, 120 kind of range, and so we're in that. That gets -- as you know, we run a model that's got all kinds of assumptions and inputs in it that really dictate ultimately what we provision -- what we provide, and so that's what we target and so probably not going to be a lot of additional reverse provisions as we look into 2017. Actually, probably won't be in reverse provision; probably be a provision actually in 2017 and so that's something that we've -- as we're thinking about next year, that's something that we're thinking about.

Okay, great. Thanks. Then I guess just going back to loan growth, I know you touched on it earlier a little bit, but where does the pipeline sit heading into the year? Are you still aiming for that 10% to 12% loan growth per year?

Yes, pipelines are good. They are really as we expect and they are as they have been as we look across markets and so we would continue to shoot for that 10% to 12% is what we are targeting. I think it will be similar to 2016 where we were actually slightly -- actually for 2016, we were slightly below that at just -- right at 9%, so we're aiming 10% to 12%, but that 10% is probably -- plus or minus is a good benchmark for us as we look into 2017.

Okay, thanks, and if I could just ask one more follow-up. I mean just based on your commentary surrounding CRE, it seems like there is some opportunity there, but are you thinking growth will be more like fourth quarter where it's more driven by C&I or is it just depending -- depends quarter to quarter?

Yes, I think it's going to be really mixed across our productline. We want to continue to grow C&I. We are getting some good CRE opportunities. Frankly, some of those tend to be big projects and we -- you have to be really careful on the credit quality on the CRE projects and so you'll see it grow, but you're not going to see it -- you're not going to see a big shift in our mix of products to CRE, but you will see it -- the balance continue to grow, but you're not going to see the mix shift very dramatically.

Okay, great. Thanks.

And with no further questions in the queue, I'd like to turn the conference back over to Chris Holmes for any additional or closing remarks.

Thank you very much. We appreciate all of you joining us for the call. We really appreciate your interest in FB Financial and partnering with us and we look forward to a good 2017. So everybody have a great day. Thank you.

Thanks, everyone.

Again, that does conclude today's presentation. We thank you for your participation.