FB Financial Corp (FBK) 2017 Q4 法說會逐字稿

Good morning, and welcome to the FB Financial Corporation's Fourth Quarter 2017 and Year-end Earnings Conference Call. Hosting the call from the 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 the question-and-answer session.

Please note, FB Financial 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. Today's call is being recorded and will be available for replay on FB Financial's website for the next 90 days. (Operator Instructions)

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 and performance or achievements of the 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 the FB Financial's 10-K filed by the SEC. FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of the new information, future events or otherwise.

In addition, these remarks may include certain non-GAAP financial measures, as defined by the SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and reconciliation of the non-GAAP measures to comparable GAAP measures is available on FB Financial's website at www.firstbankonline.com.

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

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Rebecca, and good morning, and thank you for joining us on this call to review our results for the fourth quarter of 2017 and for the full year of 2017. We appreciate your interest in FB Financial. On today's call, I'll review the highlights of the fourth quarter, and then I'll turn the call over to James Gordon, our Chief Financial Officer, who will provide additional comments on our financial results, and that will be followed by your questions.

We're very pleased with the results of this quarter, and I want to thank each of our FirstBank associates for their continued daily diligence, dedicated delivery of exceptional customer service, which drives our outstanding financial performance.

We're pleased with our core EPS of $0.60 for the first quarter -- for the fourth quarter and 39.4% -- a 39.4% increase over the fourth quarter of 2016. Our full year results demonstrate the earnings power of the FirstBank franchise, and highlight the sustained level of performance we've come to expect from ourselves with core EPS of $2.14, core return on average assets of 1.56%, and a return on average tangible common equity of 16.2%. This resulted in tangible book value per share of $14.56 at year end, which represents growth of $2.98. That's almost $3 per share since December 2016. This was our first full quarter following our combination with Clayton Bank (technical difficulty) and the benefits of the combination are apparent in our profitability measures.

For the quarter, we delivered a core ROAA of 1.59%, and a core efficiency ratio of 63.6%. Our Banking segment efficiency ratio was down to 55.6%, closing in on our near-term target of 55%. We converted the Clayton Banks core system to our core system at the beginning of December, and we believe that the first quarter of 2018 will represent a full quarter of cost savings.

Our Mortgage Banking team produced a 2017 pretax core contribution of $16.8 million, a 6.7% increase from 2016. The fourth quarter was unseasonably strong, benefiting from better-than-expected Consumer Direct volumes and strength in our retail and reverse channels. This resulted in an increase in pretax core direct contribution by 92.7% from the fourth quarter of last year. The efficiency ratio in the segment increased from the prior quarter to 83.8%, and we had a lower margin due to the mix of originations.

Similar to our outlook at this time last year, we expect mortgages 2018 direct contribution to be flat to slightly higher, and the volumes will continue to increase compared to 2017, driven by the continued expansion of our core [deposit count] and balanced growth in our other channels.

Annualized organic loan growth for the quarter was 6.7% and was 13.9% for the year. Our loan growth for the year was above our range of 10% to 12%, while brokered was below. This remains in line with our target of 10% to 12% per year with variances for the quarter, and we anticipate delivering similar growth for 2018.

Our customer deposit growth was 34% for the year, and our organic customer profit growth was 2% for the year and declined 3.9% on an annualized basis from the third quarter. Net deposit growth was lower than we

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Note, however, as we anticipated, our deposit growth was adversely impact by the liquidation of more than $100 million of deposits that were related to proceeds from our merger. We expect the remaining balance to continue to decline throughout 2018, which will likely create some noise in customer deposit growth from quarter-to-quarter. But importantly, when we think about the customer loans and deposits from the legacy Clayton Bank, we are experiencing very strong balance retention and optimistic that, that trend is going to continue going forward.

With that said, it's a competitive environment for deposits right now. We'll continue to place a heavy focus on our deposit growth in order to maintain the strategic advantages that our low-cost cost deposit base affords us.

Our net interest margin was 4.63% for the quarter. Excluding the benefits of accretion in nonaccrual collections, our core net interest margin was 4.35%. 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 to touch on the net interest margin in more depth in his comments, but we maintain our outlook for our core net interest margin going forward of 4.20% to 4.40%, not considering the accretion or other benefits.

We remain bullish on the underlying asset quality of the company, with net charge-offs of only 5 basis points for the quarter. Our nonperforming asset metrics were officially -- were optically affected, as we added $2.3 million of closed facilities to OREO from our merger, and increased our recording of an option to purchase -- or repurchase approximately 43 million of certain Ginnie Mae loans originated and serviced by our mortgage operations at the end of the year. We do not believe this signals any deterioration in our credit quality, as demonstrated by our nonperforming -- our HFI nonperforming loan ratio, up 32 basis points, which is relatively flat over the third quarter.

So overall, this was a strong quarter for us with a peer-leading net interest margin, solid earnings growth and loan growth, while keeping our expenses in check. We continue to execute on our strategy, believe the foundation remains in place for continued solid growth and profitability in our -- in the coming periods.

With that overview, I want to turn the call over to James to review our financial results in some more detail.

Thanks, Chris, and good morning to everyone. First, I want to recap our strong core operating results for the quarter, as highlighted on Slide 13. Our diluted core earnings per share were $0.60 on core net income of $18.7 million, delivering an outstanding return on average assets of 1.59% and a return on average tangible common equity of 17.4%. Unlike many of our peers, we recorded a tax benefit of $5.9 million related to the reevaluation of our recorded deferred tax liability as a result of the tax reform.

Slide 4 shows that our core return on average assets has risen to 1.56% for 2017, as we continued to demonstrate strong and consistent growth in profitability. This growth in profitability is driven by sound loan growth, a strong net interest margin, supported by our low-cost customer deposit base, stable non-interest income, strong fundamentals, credit quality, and improving efficiency.

Slide 5 presents the fundamentals of our strong net interest margin at 4.35%, excluding accretion and nonaccrual interest collections. Our base net interest margin reflects a full quarter of slightly increased loan yields from the merger, partially offset by slightly higher deposit cost at 50 basis points in the quarter. Loan yields on new production have shown limited improvement, given the relatively flat yield curve.

Going forward, we anticipate our deposit cost to continue to tick up due to the current competitive interest rate environment and overall cumulative rising rates, and we expect continued limited improvement in loan yields, but we remain confident that our balance sheet is well-positioned for rising rates overall, and that our core net interest margin will remain in the 4.20% to 4.40% previous guidance provided.

Moving on to the next slide. As Chris mentioned, we had sound loan growth this quarter and above average 2017 organic loan growth. Noting our concentration levels in the upper-right corner, our capital generated this quarter provided with some additional room on the regulatory guidelines with the -- with our construction and development loans to total risk-based capital at 96%, while our commercial real estate loans were at 228% of total risk-based capital. We are confident in remaining under these guidelines over the long term.

Our customer deposits were $3.6 billion, up 34% from the fourth quarter of last year and down slightly from the prior quarter. As Chris mentioned earlier, much of this decline can be attributed to the liquidation of over $100 million of temporary deposits related to our merger. Noninterest-bearing deposits declined from the third quarter, driven primarily by the typical seasonal declines in our mortgage escrow deposit balances of approximately $18 million, with additional outflows resulting from year-end customer activity. As expected, brokered and internet time deposits declined almost $19 million, as we expected them to continue to decline in coming quarters.

We saw a 4 basis point increase in the cost of total deposits this quarter when including a full 3 months of the Clayton Banks. Importantly, our third quarter results only included 2 months of the Clayton Banks' relatively higher cost of deposits. And thus, on an apples-to-apples basis, our deposit beta in the fourth quarter was minimal. As we continue to focus on growing customer deposits in this competitive environment, we expect our deposit cost picking up slightly, but remain confident that our steady low-cost funding base will remain a strength.

As Chris noted in his opening comments, we had an excellent quarter from our Banking -- Mortgage Banking operations, as highlighted on Slide 8. Our Mortgage Banking income was $30.3 million in the fourth quarter of 2017, which was down only 3.4% on a linked-quarter basis and was up 15.7% on a year-over-year basis. As a reminder, we would expect volumes and revenue to decline during the first quarter of 2018 before beginning to build heading into the second and third quarters of 2018.

As previously disclosed, we are hedging our mortgage servicing rights asset, and had the majority of the $76.1 million MSR balance fully hedged this quarter. We expect less volatility in MSR values from interest rates, and will no longer exclude the change in the fair value from our core earnings in the beginning of the first quarter of 2018.

Our operating leverage this quarter continued to improve, moving closer to our goal of 55% in the Banking segment. Our Mortgage segment had a higher efficiency ratio this quarter due to the higher velocity of sales in the correspondent channel and continued pressure on secondary margins in the markets. We expect the efficiency ratio to improve as we move into the second and third quarters of 2018, and see the additional volumes in the other channels pick up.

Tax rate of 16.3% or 37.9%, excluding the tax benefit for the fourth quarter, was significantly lower based on merger charges and the reduction of our deferred tax liabilities due to the corporate tax rate reductions. As previously disclosed, we anticipate our effective tax rate being in the 24.5% to 25.5% range going forward, based on projected levels of nontaxable income, benefits from equity compensation and overall profitability. However, this will vary from quarter-to-quarter based on the levels of pretax income and the equity compensation benefits.

Our core asset quality remains in check, and is a strength moving forward. While NPAs to assets increased for this quarter, nearly the entirety of the increase can be attributed to what I would describe as noncore nonperformers with minimal risk, driven by 5 additional closed branches and facilities, which accounted for $2.3 million of the increase in the recorded $29.5 million more of Ginnie Mae rebooked loans, increasing the amount of Ginnie Mae delinquent loans previously sold and currently serviced in our nonperforming assets to $43 million or approximately 91 basis points of our 152 basis points of NPAs to total assets. As a reminder, these Ginnie Mae loans are required to be recorded by the bank even though the bank has no obligation nor intent to repurchase these loans. These balances have increased due to growth in the correspondent channel and to past dues, driven by this summer's hurricanes.

Our underlying asset quality in terms of classified loans remain in great shape despite the increase in the NPA ratio discussed above, as evidenced by our nonperforming loan held-for-investment ratio of 32 basis points this quarter.

Our capital levels remain strong, enabling future growth, both organically and through strategic acquisitions. Our capital structure remains simple, giving us the flexibility as needed to add non-common equity sources, if needed. As noted earlier, since the end of 2016, our tangible book value per share has increased by $2.98 or 25.7% to $14.56 at the end of the quarter, driven by our strong performance. The tax rate reduction will further enhance capital generation going forward.

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

Thank you, James. We had an outstanding fourth quarter, delivering growth and profitability, and we also continued to execute our M&A strategy by fully integrating our recent merger and continuing to evaluate additional opportunities. Our strong performance was diversified across our businesses and our markets, highlighting the strength of our franchise in Tennessee, Georgia and Alabama. We appreciate your interest and investment in FB Financial, and look forward to updating you next quarter on our expectations of continued growth and performance.

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

(Operator Instructions) And your first question will come from Nick Grant with KBW Investment.

So maybe following up on the -- kind of your margin commentary real quick. So how much of the uptick in contractual rates was driven by Clayton versus kind of your core bank?

So I think there were 2 key drivers, Clayton, for 1 more month, and then the change in the federal funds rate right at the end. The majority of that was attributable to the Clayton Banks, probably 7 or 8 basis points; and then the other 2 or 3 were driven by the change in the fed funds rate at the end of the quarter for 1 month. So...

Okay. And then, so kind of talking about taxes really quick. How are you thinking about potential expense offsets and other investments you might be making kind of following the benefit of lower taxes? And what percentage makes it to the bottom line?

Yes. We haven't put anything out yet officially on that, Nick. But I'd say our thoughts are probably like most you've seen in terms of some investments in -- back in some different parts of the -- excuse me, parts of the company. We'd like to make some investments in employees that we continue to make, and some of that will also fall to the bottom line. Obviously, probably a majority of that will fall to the bottom line, and as we continue to evaluate how to best benefit the shareholders with that. So we haven't put out anything officially, but all of those things are things that were -- are under consideration for us as we apply that, apply the tax cut.

Okay, great. And then, maybe one last one for me. Kind of following the full integration of Clayton, how do you guys feel about kind of your pipeline for M&A now? And have conversations changed at all since the announcement of tax reform?

Yes. So I'll take the second one first. (inaudible) actually have changed a little since the announcement of tax reform. So they have slightly, but particularly -- maybe if you -- in our case, if we were thinking about something, it may have changed the expectations of a SAR there, and understandably. So I think it has changed a little bit, especially maybe for some of the smaller privately held banks that could be a target for us. Those, we'll need to start to calculate those dollars and they become real. It's a lot different. And so I think it can change some expectations there. In bigger banks, probably they've already thought through that, and I don't think it would have as much of an impact.

And so I'm just -- where we are in M&A, we're in a constant state of evaluation, which can be a little frustrating at times. But we have a lot of friends out there, so we carry on a lot of dialogue. I'll remind you have 2 or 3 important things there. One, we remain very disciplined in what we look for, okay? We're going to look for good financial metrics for us. This is going to be at the top of the list. We're going to look for banks that are a lot like us in terms of being community banks that tend to be -- have a lot of customer loans and deposits versus a lot of wholesale business. So we look for companies like us. We look for established franchises versus those that have only been around for 5 or 7 years. We tend to want those that have been around. And then we look heavily at the deposit side of the balance sheet.

But geographically, as we are having conversations, it's really markets like us and that are around us. We actively have conversations in Alabama, I'd say, all the way down to Birmingham. And in Birmingham, we have them in Georgia all the way down to Atlanta, and including Atlanta. We have conversations over in, say, the Eastern -- the Western parts of North and South Carolina, even in Southern Virginia; and of course, in our own footprint of Tennessee, and maybe even a couple markets in Kentucky, which, again, is contiguous for us. So Kentucky and Tennessee, and you drew -- and you went east and kind of drew a semicircle North and South, that would be where the places we're actively talking to other folks.

And then, the last couple of things I'll add there, one is, we find a lot of, and I'll call it, price seekers. I'll draw the analogy of when some folks get ready to put their house up for sale. They're not really putting it up for sale. They just want to see if they can find somebody who will pay more than it's worth. Well, we see a lot of that in the banking market. And so we have come to where we really try to seek out those that are truly looking for some options and interested in having a true, good conversation.

And the last thing there is I'll say, we are -- have a lot of confidence coming off of the Clayton transaction. That's fully integrated now. We have great partners on board with us, and that integration and conversion both went quite well. And so we're active out there in having conversations.

(Operator Instructions) Next, we'll hear from Tyler Stafford with Stephens.

I wanted to start on the margin and maybe, Chris, going back to the comments you made earlier about just very strong retention out of the Clayton deposits. As you look out to this next year, can you just talk about the remix expectations within some of Clayton's higher-cost deposits into more lower costing, more core-type deposits and just kind of the expectations you have for that remix?

Sure. As we think about that, there's a couple of things, and as you guys know, it's worth a mention, we're constantly triangulating between loan growth, deposit growth and margin. And if you look at where we are today, our margins are at the high end of our range. Our loan growth has actually been at the high end of our range. In the quarter, it was a little below. But we -- you've heard us say, we look at that long term quarter [to] checkpoint. And so long term, we're actually going to grow in loans, longer term being the year, above -- and it's actually slightly below on deposits in terms of what we consider to be more of a long-term growth rate.

And so as we think about the Clayton integration, which again, has gone well, very pleased, particularly with the people, some really great folks and customers. We pretty much held all the customers. We did have one of those payoffs, was an expected payoff in the Manufactured Housing part of our business, where they took it to the public market. So it was expected, and those things happen, and we're happy for the customer that they've had that level of success, but other than that, we've pretty much held everything.

But as we think about moving forward, Tyler, as you've heard us say, we're not big on the wholesale funding for core -- for funding our core business. And so we're going to remix that, so you'll see us continue to have the brokered funds roll out of the bank. If there's -- if there are just even public funds that are not really core, we don't have a lot of those either. And so as those come up, we tend to let those roll out of the bank. We'll replace them. But then with rising rates, it could -- we could not see any net improvement in the cost of those funds. And so we're really not anticipating a lot of net improvement in the cost of those funds in the short term. But over the longer term, those are more stable. They're lower cost over the longer term, and they provide relationships that give you other income benefits. And so we'll continue to replace those, even though we probably won't get a short-term cost benefit. But we think we're getting long-term shareholder value benefit from doing it that way.

And I would also add to that, Chris, is that taking the pressure off of that, where FirstBank has more funding options and additional avenues to pursue we can -- we don't always have to turn to the higher cost deposit base, so we can take the pressure off of that. That'd be shifting a little bit more to, say, Federal Home Loan Bank advances temporarily as we reposition their overall balance sheet within our own balance sheet. So it may not yield significant -- given the rising rate environment, may not yield significant lower cost, particularly in this environment where time deposits, and I would say, higher balance, higher cost, money markets are kind of now the avenue of choice by many of our competitors and the desires of our customers, so that may not lead to that lower cost in the short term.

Okay. That's very helpful. But just to follow up on that, James, the 4.20% to 4.40% core margin expectations maintained, can you just remind me, does that assume any future rate increases? And if not, what would you expect the impact to be if we do get an incremental rate hike or 2 this year?

Well, I think the rate hikes, so it doesn't necessarily assume a rate hike. But even if it did, we would assume that we would pick up some, and be in the loan yields with roughly 50% of our portfolio variable rate at this point. However, we think, going forward, you'll pass some or most of that off on the funding side either through deposits or wholesale borrowings. So it kind of says that we'll be indifferent to the rising rate environments as we position the balance sheet. Short term, it may go to the upper side and then come back down into the middle to the lower side. But we feel comfortable that the 4.20% to 4.40% over time will work in whatever interest rate environment that's out there.

Okay, got it. Over on expenses, they did come in a little bit heavier than I was expecting this quarter. You mentioned the December systems conversion. As we look towards the first quarter, with those cost savings falling out, can you just help us with kind of a general run rate perspective on the expenses? How much cost savings are left to fall out from here?

So basically, by the end of the quarter -- by the end of the fourth quarter, we had primarily all the cost savings. There's a little bit more, but a very immaterial amount heading into the first quarter. So the first quarter should be our kind of core run rate. So we closed basically 7 branches, and added 1 branch where we consolidated back into -- so 6 net branches were closed on December 1. We did the system conversion. So -- but then we added the one more quarter of Clayton Banks to the mix. So we'll see a little bit more relief fourth quarter over first quarter in kind of the core Banking segment.

Mortgage was a bit of contributor on the expenses side, as we noted earlier in the call. So there's some benefit to be picked up from fourth to the first quarter in the core bank, and we should see the full run rate in the first quarter.

Okay. And then, just last one for me. Just given the change you mentioned earlier that you'll make regarding the fair value of the servicing portfolio in the first quarter, can you just clarify that the 2017 pretax earnings contribution for mortgage from which you're expecting to slightly -- add slightly higher contribution in '18. I just want to make sure I'm thinking about the right starting point for '17 correctly.

Right. So the 16 -- let me get that number again just to make sure I give you the right number, 16 point -- just under 17 -- 16.8 million is what we did on a core basis. And so we would expect that really the amount of movement in the fair value of the MSRs will be relatively nominal related to interest rates now. If there was a market shift in valuations due to liquidity of MSRs or other dynamics other than interest rates, it could impact that. So apples-to-apples, it's that $16.8 million.

(Operator Instructions) From Raymond James, we'll hear from Daniel Cardenas.

Just a couple quick questions here. On the loan growth that we saw this quarter, maybe geographically, if you could give us a little bit of color as to where that growth was being generated from. And then, as you look at your pipelines going into 2018, a little bit of color as well as to how those look compared to, say, a quarter ago.

Sure. First, geographically, on the loan growth, it's actually reasonably balanced. And if you took our footprint, you would see that it's -- it pretty much reflects that. So Nashville would be the leader there in terms of what we've produced. If there's one market that's probably produced above our market share in that market it's Memphis. They have, second half of the year, have been strong. And then the others, we've got some out of West Tennessee, not huge numbers, and then we had a little bit out of Knoxville as well. Knoxville, again, the team there is continuing to produce just like they did before and before the merger, and so that's a strong area for us.

I mentioned we did have a paydown in manufactured housing at the end of the year. We had another paydown at the end of the year just in our core C&I business, where one customer on the last day of the year said, hey -- actually, next to last day of the year, moved $10 million from their checking account to pay down their line. And so you have those things happen, and frankly, you're happy that you have customers that have that capability. The loans we worry about are the ones that don't pay off. So it's -- I'd say it's relatively balanced there. There's no big standout there. Nashville, for the last 3 or 4 years, has been -- last 5 years, has been the leader, and it continues to be the leader, but every one is a contributor. And there was not any particular place of -- nothing that we're worried about there.

On the pipelines, I would say our business is very steady on the pipeline front. I'll say what I've said on these calls for the last probably 3 or 4 quarters. Our 10% to 12% feels pretty good and strong. And actually, that goes back years now, probably 3 or 4 years where we looked at a 10% or 12% kind of growth rate. Frankly, if it gets to 15%, I think probably the investment community looks at that as being a great thing. We look at that as being more we might need to check because maybe we need to alter our credit standards or something. So we like to keep it right in that range, and actually, in any given quarter, it could be more, it could be less. But if you look back over time, that's what it is. And our pipelines today are very, very similar to our pipelines for first quarter of last year. We did actually have strong pipelines at first quarter of last year, and we actually have pretty strong pipelines first quarter of this year.

Okay, great. And then, maybe just some color on competitive pressures, if you're seeing any pickup either on the deposit or the loan side in any of your major markets.

Yes. We have seen -- I don't have any -- I made some statements about that last quarter, and I'd say they're very similar. We do see on the loan side, I'll address loans and deposits separately. But on the loans side, we do continue to see certainly competitive pressure. And I don't know that it's that much different than it has been over the last several quarters. We do see, and as I said, I don't quite consider this competitive pressure. We do see some things on the credit side that we're just not willing to do, but we always see that. Maybe we see a little more of that. I don't think that necessarily is hurting us because we probably wouldn't have done those particular customers or deals anyway. But we do see some things that happen on the credit side that just don't fit our profile, and maybe seeing a few more of those that don't fit our profile.

On the deposit side, we see a little more rate pressures than we have seen. Particularly, where we're seeing that is customers that keep a lot of money on deposit. And that there's some more pro-activity in reaching out to some folks that may have money on deposit with us and somebody is reaching out to them and saying, "hey, I'll give you a higher rate if you'll move that over." We have seen -- that is where we've really seen the competition on the deposit side, and we see more ads than we have seen both in radio, newspaper. We see quite a few more ads in the marketplace.

Great. Thanks, guys. Good quarter.

(Operator Instructions) And seeing no other questions at this time, I would like to turn the conference back over to Chris Holmes for any additional or concluding remarks.

Okay. Thank you very much, Rebecca, and thank you, all, for joining us on the call. I'll just reiterate that we're pleased with our performance in the quarter, pleased with our performance for the year. Look forward to a great 2018. We thank everybody for your interest in FB Financial. We thank you for your support. That's it.

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation, and you may now disconnect.