FB Financial Corp (FBK) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the FB Financial Corporation's Third Quarter 2017 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, who will be available during today's question-and-answer session.

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.firstbankonline.com. Today's conference 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 conference over to Mr. [Chris Black] of [CFO Banking].

Good morning. During this presentation, FB Financial may make comments which constitutes forward-looking statements. All forward-looking statements are subject to risks and uncertainties and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many 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 10-K 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. A presentation of the most directly-comparable GAAP financial measures and the reconciliation of non-GAAP measures to comparable GAAP measures is available on FB Financial's website at www.firstbankonline.com.

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

Thank you, [Chris]. Good morning, everyone, and thank you for joining us all on this call to review our results for the third quarter 2017. We appreciate your interest in FB Financial. On today's call, I will review highlights of the third quarter, and then I'll turn the call over to James Gordon, our Chief Financial Officer, who will provide some additional comments on our financial results followed by your questions.

We're very pleased to report our results for the third quarter of 2017. It's a quarter where most of our key points of execution came together and delivered outstanding performance. We have a strong team of passionate folks across FirstBank in our Banking segment, our Mortgage segment and our support areas that contribute while they continue to deliver for our customers and our shareholders. They're responsible for delivering our excellent results, and this quarter is a continuation of what they [presently] expect of themselves every day. So to our team, I'd say thank you and let's continue to get better every day.

And of course, bolstering the team this quarter are over 200 new associates that we're thrilled to welcome officially into our FirstBank family. Those are the associates that formally were with Clayton Bank and Trust and American City Bank. The integration has been going smoothly, and we have already begun to realize many of the benefits.

Now on the quarter. We reported record loans and deposits, strong growth rates, strong net interest margin, good mortgage results, stable credit quality and efficiency improvement. As to the specifics, we're happy with our annualized 16.7% loan growth this quarter, which excludes the loans acquired from the Clayton Banks. Our loan growth was above our historical range, and we delivered not only in terms of the growth, but also in the continued balance in terms of both product and geographic diversity.

Our deposits -- our customer deposit base is one of our greatest assets, and those grew at 4.8% on an annualized basis from the second quarter of 2017 when excluding the customer deposits assumed in the acquisition. With that said, the current deposit market dynamics are challenging and competitive. We continue to focus on the deposit side of the balance sheet, both in terms of balances and their costs, and it's one of our key competitive advantages.

Our net interest margin was 4.61% for the quarter, which benefited from accretion, nonaccrual interest and higher loan fees as well as the effects of the merger. We're focused on employing our relationship-based balance sheet to serve the needs of our customers while maintaining a strong net interest margin. James is going touch in -- on the NIM in more depth during his comments, but our revised outlook for our quarter NIM going forward is in the 4.2% to the 4.4% range before we consider accretion or any other benefits.

On the merger, 2 of the strategic benefits of the merger were driving operating leverage and increasing the Banking segment pretax contribution to our overall net income. During the third quarter, we show progress on both of these, reporting core Banking segment efficiency of 56.2%, closer to our stated goal of 55%, and moving the Banking segment's corporate tax contribution to 84%, nearly reaching our goal of greater than 85%. We will continue to focus on improving the overall efficiency of our mortgage operations, which were 79.9% for the quarter.

Our mortgage operations had a strong third quarter and benefited from seasonal growth and contributions across all 4 of our delivery channels: consumer direct, third-party origination, retail and correspondent. We continue to shift our mix to purchased money financings from refinancings in our consumer direct channel. Overall, we're on track to deliver modest year-over-year increase in our core pretax contribution from our total mortgage operations, which was our goal for the year.

For our asset quality metrics, we're impacted by the merger, although we're pleased with our continued solid asset quality. NPA as a percentage of assets increased this quarter, driven by the additional owned real estate from the merger as well as recording an option to repurchase certain GNMA loans originated in service by our mortgage operations.

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 want to recap our strong core operating results for the quarter as highlighted on Slide 3. Our diluted core earnings per share were $0.60 and our core net income of $18.5 million, up 22% from last quarter, delivering an outstanding return on average assets of 1.76% and a return on tangible common equity of 17%.

Next, Slide 4 recaps the merger and our progress on the key targets and assumptions. This quarter, the merger was accretive to our core earnings and ultimately accretive to tangible book value per share that ended at 13. -- $13.79 versus our previous expectation of 2% dilution. Additionally, the additional capital raise left us with a strong 9.5% tangible common equity ratio to fuel future growth. We will continue to deliver on our cost savings and other synergies over the next few months and quarters.

Slide 5 shows that our year-to-date core return on average assets has risen to 1.62% for 2017 year-to-date as we continue to demonstrate strong and consistent growth in our profitability. This growth in profitability is driven by strong loan growth, driving our loan-to-deposit ratio to 96% at the end of the quarter, funded by a strong deposit base, strong noninterest income and strong fundamental credit quality.

Slide 6 presents the core fundamentals, being loan yields and low deposit costs, that drive our strong net interest margin. At 4.61% reported and 4.3%, excluding the accretion and nonaccrual interest this quarter, the NIM reflects the increased loan yields from the merger, partially offset by higher deposit costs, which remain controllable. We continue to be well positioned to benefit from rising rates as well.

Moving on to the next slide. And as Chris mentioned previously, we had great loan growth this quarter. Our year-over-year loan growth is -- has been 73.7% or 14.5% excluding the acquired loans. Noting our concentration levels on the top right corner, our construction and development concentration inched a bit closer to 100% this quarter. We may crest it at around 100% or slightly above at some point over the next few quarters, but we believe that would be a short-term occurrence and remain committed to staying within the regulatory guidance long term.

Next, on Slide 8, our customer deposits were $3.7 billion, up 37% since the third quarter of last year. Going forward, we will focus on growing customer deposits, which excludes broker, internet and time deposits primarily from the merger. A large portion of the cash paid to the seller in the merger transaction was deposited with FirstBank, which will likely move down in the coming quarters and will be managed appropriately for liquidity and funding purposes. This quarter, our legacy FirstBank deposit costs saw roughly 3 to 4 basis point movement up or well below the expected beta, but will continue to be pressured by competitive forces and likely increasing rates in the near term from the Federal Reserve.

Next on Slide 9. As Chris noted in his opening comments, we had an excellent quarter from our Mortgage Banking operations, as highlighted here on the slide, and Mortgage Banking income rose to $31.3 million in the third quarter of 2017, which was up 3.6% on a linked-quarter basis and was down 15.2% on a year-over-year basis. As a reminder, we would expect volumes and revenues to decline during the first -- fourth quarter of 2017 and into the first quarter of 2018 based on historically -- historical seasonality before beginning to build heading into the second and third quarters of 2018.

As previously disclosed this quarter or prior to this quarter, we began to hedge the MSR asset and had the total $63 million asset fully hedged by the end of the quarter. Going forward, we expect less volatility in the MSR fair value changes from interest rates and will not exclude the change in fair value from core earnings in future releases.

Next, on Slide 10, is our efficiency and operating leverage. As we have previously stated, improving operating leverage and efficiency has been a -- both a short and long-term objective of the team. The merger accelerated this process, driving our core efficiency much closer to our goal of 55% in the Banking segment. Also, the Mortgage segment was slightly less than 80%, and we will seek to drive it lower as we move forward.

One other comment on our effective tax rate, which was 35.5% for the third quarter based on reported results and was approximately 37.5% on the core earnings and was slightly higher than the expectation driven by the merger contribution and the lower levels of tax-exempt municipal income acquired. Our outlook for the tax rate before any potential tax cuts would be in the 37% to 38% range going forward.

Next, on Slide 11, our core asset quality remains a strength of our operations. Nonperforming assets to assets did increase for the quarter, but the majority of this increase can be attributed to the merger, which contributed foreclosed assets of approximately $4.5 million, excess land and facilities held for sale of $3.6 million and Ginnie Mae delinquent loans previously sold and current reserves totaling $13.6 million, which was new for the quarter. Based upon the accounting guidance, the Ginnie Mae loans are required to be recorded by the bank, even though the bank has no obligation, no intent to repurchase these loans, which are then [pretty suited] to growth in the correspondent channel over the last year.

Next, on Slide 12, our capital levels remained strong, enabling future growth for -- both organically and for strategic acquisitions. Our capital structure remains simple, giving us additional flexibility, as needed, going forward. We are also now S-3 eligible following the 1 year anniversary of our IPO. And in the coming days, we intend to file a universal primary shelf registration statement and a secondary shelf registration statement, covering Mr. Ayers' shares and the shares issued in the Clayton acquisition. While neither we nor Mr. Ayers have any current intention to access the capital markets, we consider this to be good corporate housekeeping that will enable us to quickly and efficiently access the capital markets in the future, whether in connection with future acquisitions or otherwise.

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

Thanks, James. We had an outstanding third quarter, delivering on growth and profitability, and we made great strides in fully integrating our recent combination with the Clayton Banks. Our strong performance was diversified across our business and our markets, highlighting the strength of our franchise in Tennessee, Northern Georgia and Alabama and in our mortgage business.

We appreciate your interest in investment in FB Financial and look forward to updating you next quarter on our continued progress.

Operator, that completes our remarks for this morning's call, and we would now like to open the call up for any questions.

(Operator Instructions) It appears our first question comes from Tyler Stafford with Stephens Inc.

I wanted to start on the margins, just given there was a lot of moving pieces with the June hike and the Clayton impact. I guess first, on the deposit side, can you guys parse out for us the Clayton impact on the deposit pricing, I guess, pressure that you saw this quarter? And how much, other than legacy, at the franchise you're seeing in terms of pricing on the deposit side?

Yes, Tyler. I'm going to let James talk about some of the moving parts and pieces of it.

So Tyler, I think a couple, as I said in my comments, absent the merger, our cost would've probably risen in the 3 to fifth -- 4 basis point range on a legacy FirstBank basis. So the remaining increase was primarily driven by the higher cost and mix of deposits from the acquisition. They carry a little over $100 million historically and more wholesale deposits brokered that carry a higher rate and have less -- roughly less than our percentage basis in noninterest-bearing deposits than we have. So roughly [bakes] now, we would have 3 to 4 basis points, and then the remaining, about 8 basis points, would have been due to the mix and contribution of deposits from Clayton.

Okay. I never realized you touched on that in your prepared remarks. I missed that, sorry. What about the brokered deposits that they added? It's not a huge amount. But would you expect to run that off? Or would you keep a portion of that?

Yes. We would expect to not renew it once it matured. We won't -- we'll keep it until those mature, but our intention would be to turn those into customer deposits, once they mature.

And we actually -- between the merger date and at the end of the quarter, we allowed about $27 million of the brokered and Internet deposits to roll off as well as about $12 million of higher-rate public funds -- CDs, to mature and as Chris said, we would expect to replace it, hopefully with customer money or other funding sources as we move forward.

Got it, okay. And James, you may have touched on this in your prepared remarks and I missed it also. But did you talk about near-term margin expectations, with the full quarter impact from Clayton? And if not, can you?

Yes. We have updated our range to, say, 4.20% to 4.40%, and that's for the core range. That's not including accretion and that's not -- it's not including accretion. It's not including if we come across -- if we get -- are fortunate to get some nonaccrual interest. And so that's -- we're about 4.33% on that this quarter. And so we think that 4.20% to 4.40% is about where we'll be before those 2 items.

Okay. So the 4.20% to 4.40% is apples-to-apples with the 4.33 this quarter, not the 4.02% from this quarter. Is that -- am I hearing you correctly?

Yes, that's right.

Okay. And then just last one for me around Clayton cost savings. Did you guys -- or how much did you recognize this quarter? And what would be your timing for the realization of the remaining cost saves?

Tyler, this is James. So the total cost saves were about 4.3 estimated at -- to 20%. We're roughly about 40 -- we realized about 40% of that, and we'll have the majority, at least set in motion, to begin realizing at the first of the year following our conversion closing of approximately 6 branches and other things by the end of the year as well as the -- just in the contractual non-expansion of the business and interchange revenue, which will be about $300,000 to $400,000 increase per quarter going forward following the conversion. Converting systems and putting them on to our interchange contract will have a benefit on that as well. Then some of that will be offset by some of the reinvestments we've talked about in branches and technologies as well, but all of that should be roughly baked into heading into 2018.

Okay. So there should be a $300,000 to $400,000 interchange revenue increase once the conversion takes place, and then that'll start, I guess, beginning of the year.

Yes. We would have a little bit at the end of the year, but it'll only be for a month or so. And so we should be able to start realizing that at the beginning of 2018.

And then 2Q, just on the cost-saving side, 2Q '18 would be a -- it'd be your expectation that'd be a pretty clean quarter in terms of run rate?

That's right. [Relatively], we should have everything out by the start of 2Q.

Our next question comes from Catherine Mealor with KBW.

So first, I want to start on the efficiency ratio. You came down a lot in the Bank segment to 56% this quarter, and we -- clearly, your comments previously had some additional cost savings to put -- flow through. Can you think about what efficiency ratio you're targeting from here as we think about both the higher margin and the cost savings continuing to come in? Are you now in the mid-50s range as a target?

Yes. So I'm going to talk about the 2 segments versus overall. So if you go back the last quarter, we were 60.2%, I think; 60.4% maybe last quarter. And so that Banking segment has been consistently trailing down, and we -- which we said it would and it has. And we knew when we come out quite (inaudible), it would help quite a bit -- so we had 2 months of this month, so that guide down to 56%, just lower 56%. And so our 55%, we will achieve that. We've said -- what we said was first goal was let's get it under 60%. And as soon as we get it under 60%, next goal would be to get it under 55%. So we think we'll achieve that sooner rather than later. And then we will continue to drive it from there. We haven't named any other target other than to get it under 55%, but we're going to continue to drive it down, it will continue to be a focus. We're still actually improving some operating processes and some reporting from the core conversion that we did in 2016, and then we'll continue to -- we'll get the stated cost savings out first quarter '18. But as we continue to get refined operations from our combination with Clayton, that will help as well. So '18 should be a year where we really are holding our operating model. I feel like we've got a [perfectly measurement] and accountabilities to consistently improve that.

Okay. And then one more question on the margin. So if we look at the contractual interest rate on your kind of core loans that went from 4.63% to 5.08%, can you just walk us through that increase? I'm assuming a lot of that is just from Clayton Bank coming over at a higher yielding -- at higher-yielding loans. How much of that came from the June hike? And then just help us directionally think of where that can move to? Are there factors that could bring that lower with dynamics in Clayton? Or is that a level that you think can continue to grow, assuming we're in a higher rate environment?

Catherine, this is James. I think the majority of that movement came from mix. So we probably had 7 or 8 basis points pickup because of the rate movement, as we've seen over the last couple of quarters, from that [in stone] kind of the legacy FirstBank side. So most of that was driven by the higher-yielding portfolio brought over from the merger. It will have some upward movement with one more month of them being included in the margin going forward. I don't think we'll see a whole lot more movement up in the near term from the rate environment. It seems the competitive pressures are pushing our loan pricing in some areas and not in others. We still see a lot of longer-term, fixed-rate commercial product in 5, 7 and even 10 years in the 3.5% to 4% range that could pressure that. So I think all of balanced at -- 5.08% will be roughly the run rate going forward. And obviously, that strips out a lot of the noise from nonaccrual interest indiscernible]. So it should settle in a little bit higher than that, but not a lot higher.

Got it. And then as we think about -- over time, as we model your margin, I mean, that rate, you're clearly not growing loans, incremental loans at a rate higher than 5% right now, I presume. So over time, I would assume that, that starts to kind of compress and normalize. As your loan portfolio grows, it becomes, I guess, less weighted towards those Clayton higher-yielding asset classes. Is that a fair assumption?

Yes. I think that's a fair assumption, and I think you got it correct.

Okay, great. And then lastly, just on mortgage. Any -- can you help us? At fourth quarter, we understand it will be seasonally lower. But can you kind of help us think about how you're thinking about mortgage volumes and margins as we move into next year?

Yes. So I'll start by saying good execution on mortgage by our team in what we had planned to do this year. And we had planned for volumes to be down in some of our delivery channels, picked up by the correspondent channel; that's been executed well. We've seen a little lower margin on the -- in the mortgage business this year. And a lot of it next year -- of course, seasonally, we're going to be down fourth quarter. Seasonally we'll be down in the first quarter. But in terms of growth expectations, a lot of that is going to be tied to what happens with rates and what happens -- just what happens with rates. Wib is on the call, Wib Evans. And Wib, I'm going to let you comment further on just what we're thinking about our -- next year for mortgage, what we're thinking.

Thanks, Chris. And so Catherine, what I would tell you is that we continue to develop our correspondent channel. And so we'll see that line of business up a little more than others. For the most part, we expect 2018 to be relatively flat to slightly up on most of our channels. We'll focus on the retail side. We'll be focused on our footprint business, and so we'll probably see a little bit of growth in that. But for the most part, we'll be slightly up to relatively flat.

Really, similar to this year, Catherine.

(Operator Instructions) It appears our next question comes from David Eads with UBS.

Obviously, you guys talked about the really good organic loan growth this quarter. You also mentioned, if you look at loans, plus loans held for sale, loan-to-deposit ratio is now at 96%. Can you just talk about how high you're comfortable with that going and sort of where you think the trajectory for organic growth versus -- on the loan side and deposit side goes from here?

Sure, good question. And we've been thinking about that a lot recently. So we have historically guided towards 10% to 12%, and we've been over that 12% for most of the year, for all -- pretty much all the year, and that held true this quarter. As we think about that loan growth going forward, that 15% roughly where we are is not something you're going to see the next couple of quarters. We're going to be back in that range and probably even the lower end of that range, if we had to guess, from a few things. One is exactly what you mentioned, loans to deposits are now [quite] higher. Keep in mind that 96% does include our held-for-sale portfolio. So if you exclude that held-for-sale portfolio out, it'd be 84%. So we're not concerned about that. We -- because of the held-for-sale portfolio, we could take it higher if we desire to take it higher. But this is getting to a range where we feel pretty comfortable and we feel like our profitability is good. There are 2 or 3 other factors, I think, that are going to impact it over the next couple of quarters. One is just the continued integration of Clayton and American City. So that -- as you do that, typically you'll experience some payoffs in there, and so we will likely experience some. It's just the reality of what happens whenever you're merging, combining 2 companies together. Second one is just the credit environment. The credit environment has been really good. We're fortunate to be in really good markets. But the fact of the matter is things are a little racy out there in some places. And while we may be driving a Ferrari that we can drive down the highway at 120, we think going the speed limit is very prudent right now. And so we are choosing to maybe go a little slower than some others because we think that 10% to 12% is a responsible rate, given kind of what we see in the credit environment. So that's going to come from some higher standards there on the credit side. We also mentioned the regulatory guidelines. We're going to stay within our 100% on construction. We're getting closer to that. We got plenty of room on the CRE guideline, but we're getting closer on that 100% risk-based capital on construction. And so that's another place where we are cautious and aren't doing as much as we have been. And then you got the natural seasonality that hits in the fourth quarter. We're thinking it'll slow down on the loan side. And in the first quarter, things are -- often sometimes we'll start the year a little slower. So we think the 10% to 12% is going to be a much better range for the -- at least for the next couple of quarters and maybe even beyond that. On the -- I'll also just say this. On the deposit side, deposits are a strength for us. The market right now has gotten quite competitive, and we're faring well. So -- but we want to continue to fare well, but we think that pricing is going to get even more competitive. It's been a while since we've emphasized deposits over loans. If you go back just 2 quarters ago, we were 70% on our loan-to-deposit ratio. If you just considered our held-for-investment portfolio, we were at 70%. So it's been a while since we got to emphasize deposits over loans. And so that's -- as we began to stretch some muscles that we haven't had to stretch much lately, we -- that'll take a little time. So with all of those things, we think that the margin -- we feel pretty good about the margins -- they're actually quite good -- about the margin in our business. But we also want to be realistic on the growth side of our business. And we think we're going to continue to grow at really good rates, but probably not 15% on the loan side. And then we'll be ramping up on the deposit side.

Great. That's very helpful. Maybe can you just elaborate a little bit on the credit comments you just made? I mean -- things are getting a little bit racy. I mean, is that mostly in theory in multifamily? Or is there any -- is it more broad? Or we -- kind of where exactly are you seeing some kind of more frothy condition?

No, there's nothing specific that spurs that comment, and so don't read any more into it than I mean. It's just when you -- the expansion, this has been one of the longest expansions in history. We've seen a lot of real estate and continue to see a lot of real estate loans being made, whether that's multifamily or just office or whether it's hospitality or anything else. And so what we will see is, particularly on the terms, we see pricing getting really thin. We see maturities getting longer. We see a little bit of things that you typically will see. We'll see relaxation of personal guarantees, for instance, which is -- can be a hot button for us. And so we're seeing more and more of just all of those things that cause us to back off of some opportunities that we could -- frankly, we could get, but we just back off just because of those -- typically, those terms.

All right. And just quickly, on -- the other consumer loans now, it's about 7% of the total loan book after the deal. Where should -- where do you think that's going to go? Is it going to -- kind of trend a little bit lower just as you're doing more originations elsewhere? Are you looking to grow that book? What should we think about that portfolio?

Yes. So we like the segment, but it's frankly not easy to grow. We -- the growth you see in it this quarter comes from our MH retail portfolio, which we like. It's -- we have a good team in MH. I will say this on the MH team that's come over with the Clayton combination. We pretty much are -- Jim Clayton and Kevin Kimzey run that business. They know it really well. They've got a great team, and we've been pretty much hands off. And they continue to do what they've done. We have been out with them to visit communities and, frankly, are more impressed than when we struck the deal. And so we will, in this, continue to do what they're doing. That's grown a little bit, the MH retail piece of that consumer, and we like that. And so we want to continue to grow it, but slowly, and Kevin and his team will do that. And then the other pieces, frankly, are a little tougher because they're traditional retail, and we've been growing more commercial side than the retail side. And so that -- has that segment -- frankly, hasn't been a big growth segment for us. We would like more. We like it, but we haven't been growing that much in home equity segment and then just consumer loans that ranges from everything from boats to RVs to cars. We haven't grown it that much. However, we like it, and we'll continue to grow it.

All right. Then just last one. You guys made a couple of comments about the capital position and kind of giving opportunities for M&A. So I just wonder if you could comment on what -- how you guys are approaching M&A now the Clayton deal has been closed.

Yes, sure. So the M&A market is one where we continue to see a fair number of opportunities. And we'll -- I guess, first, I'll say on the closing of the Clayton, there is -- it is closed. That's all great. The conversion is very important. So that's really an area of focus over the next several weeks here. The next 6 to 8 weeks, we will -- we're intensely focused on that. We do continue to have dialogues with other companies that have approached us through one channel or another, and so we are active there. We're having dialogues there and are actively looking at opportunities. In terms of what those look like, if you go back to the criteria that we've always said, we're just doing what we said we would do there. We're looking at things mostly in footprint -- or actually in footprint, that could expand our footprint some if we get them, but that would be because we've got something in footprint, but could also have some things outside of our geography. We're looking at banks that have solid deposit franchises. We're looking at things that are accretive to both earnings and capital, and that's -- those are really the things we look for, which would -- operating leverage is important to us. We want to generate operating leverage with -- as we consider acquisitions.

(Operator Instructions) It appears we have no other questions in the queue at this time. I would now like to turn the conference back over to our speakers for any additional or closing remarks.

Well, thank you, everyone, for joining us on the call. Thank you to all of you that had the questions. We appreciate your interest in FB Financial, and we look forward to updating you on our status again next quarter. That's it.

That does conclude today's conference. Thank you for your participation.