FB Financial Corp
NYSE:FBK
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FB Financial Corp
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Good morning and welcome to FB Financial Corporation's Third Quarter 2018 Earnings Conference Call. Hosting today's call 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 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. Today’s call is being recorded and will be available for replay on FB Financial’s website for the next 12 months. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation.
During this presentation, FB Financial may make comments which constitute forward-looking statements. All forward-looking statements are subject to risk and uncertainties and other facts that may cause actual results and performances 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 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 such 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 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.
All right. Thank you very much, Reilly and good morning. Thank you all for joining us on this call to review our results for the third quarter of 2018. We appreciate your interest in FB Financial.
On today’s call, I am going to review the highlights of the third quarter, and then I'll turn the call over to James Gordon, our Chief Financial Officer, who will provide additional analysis on our financial results followed by your questions.
Our team delivered outstanding growth and profitability this quarter. The relevant themes for the company; are one, loan growth deposit growth and margin; two, mortgage; three, credit; and four, capital. These themes are the same as most quarters but as always we’re going to give you some deeper insight into results and our outlook for the company.
On the first one of those items, we grew loan growth deposit growth and margin into one theme because you can't have an important conversation about one without considering all three. Our growth in loans of 14.3% and customer deposits of 17.9% over the last three months has been outstanding.
Our banking team has executed at a very high level all year with year-to-date annualized growth rate of 15.7% in loans and 16.4% in deposits. What makes the growth even more impressive is our 4.71% margin for the quarter or 4.46% excluding accretion in nonaccrual interest collections. Loan and deposit growth is easy without delivering profitability for growth what our margin requires balance and execution and again credit goes to our bank team.
Since approximately 60% of our total revenue for each of the past three quarters has come from net interest income, these are some of our most important metrics and the ones that continue to be our strongest.
Our loan growth rate for the quarter 14.3% is above our target range of 10% to 12% and we should exceed that range for the year. We continue to feel good about our pipeline and low momentum heading into the year and into next year.
Our customer deposit growth was also very strong for the quarter. We utilized higher time deposit rates and grew customer time deposits by $276 million fully understanding our deposit cost would increase for the quarter causing us some margin impact.
But with additional rate hikes likely in the coming quarters and the net interest margin that’s been above our internal target range for multiple quarters, we thought it was an opportune time to lock-in some long-term funding understanding that there is a near-term cost that would benefit over the next few quarters.
Customer deposits are necessary to fund growth under our banking philosophy and deposit growth will come at cost not only for First Bank but for all banks that have a growth profile similar to ours.
The last part of this theme is our net interest margin which continues to outperform most of our peers. As noted earlier, we consistently been at or above our target range of 4.25% to 4.5% that’s excluding accretion and nonaccrual interest collections. We’re near the top of that range at 4.46%.
Deposit costs have compressed the margin as we knew they eventually would and like we’ve talked about for several quarters. We anticipate the margin to remain in the upper end of our range in near-term.
Our mortgage results for the past three months were disappointing. For the quarter we produced $1.5 million of total mortgage pretax contribution in line with our revised guidance from the end of the third quarter.
Rising interest rates, lack of inventory in some markets and over capacity have led to lower volumes and compressed gain on sale margins. We do not expect those conditions to change over the next quarter and possibly longer, so we’re repositioning the mortgage business to conform with these realities. We don't want unprofitable pieces of our business or even less than stellar returns on our capital.
So the mortgage leadership is repositioning to deliver more consistent, reputable and unpredictable results. While this repositioning is important, I want to remind you that mortgage only represented 5% of our adjusted pretax income this quarter and 8% year-to-date.
Going back to the close of the Clayton transaction, it's not been higher than 15% in any quarter since that time. So while it’s meaningful to us and represents some upside in 2019, we want to keep it in perspective.
Moving on to credit, our credit metrics continue to reflect strong and stable credit quality. Our provision jumped to $1.8 million this quarter as a result of continued strong loan growth and is nearing a more normalize run rate.
As a result of our earnings and result in capital generation, our capital level remains strong. Our Board of Directors has increased our quarterly dividend to $0.08 per share and also has authorized a common equity share repurchase program of $50 million which will remain in effect through October of 2019. We’re pleased to have this additional tool to efficiently and opportunistically return capital to our shareholders.
To summarize, we're proud of our team and the performance that they deliver. Our banking team is delivering exceptional growth and profitability and our mortgage team continues to fight through and adapt through a challenging environment. We believe we have a great foundation that we can build on with great markets, demanding market share in some markets, and growing market share in others.
We have a strong operational foundation, a hard to replicate delivery network throughout our geography and a workplace that's very attractive to talent. And taking together, we think these factors provide us maximum optionality enabling us to grow organically, be opportunistic on potential M&A and to evaluate and execute on more strategic M&A opportunities.
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 everyone.
First, I want to recap our operating results for the quarter as highlighted on Slide 3. Our diluted earnings per share was $0.68 on net income of $21.4 million delivering a solid return on average assets of 1.72% and a return on average tangible common equity of 17.4%.
Our year-over-year performance was driven by outstanding organic growth, the Clayton Bank’s acquisition and the benefits from the enacted tax reform offset by high provision for loan losses of $1.8 million due primarily to loan growth and normalized net charge off of six basis points this quarter compared to net reversal of 800,000 last year driven by net recoveries of 15 basis points.
Slide 4 illustrates the underlying fundamental trends of the company's profitability and demonstrates the consistent performance that we are targeting. Our adjusted return on average assets is 1.81% year-to-date demonstrating the strength and durability of core franchises earning power which enables consistent growth and profitability. This sustained level of profitability has been driven by strong loan growth, a strong margin supported by our low-cost customer deposit base, stable non-interest income, expense control and fundamental sound credit quality while being slightly offset by a challenging mortgage environment.
Slide 5 presents the fundamental elements of our net interest margin, in particular, our healthy loan yields, fees and low cost core deposit portfolio. As Chris mentioned our deposit cost increased as we focused on growing time deposits this quarter but our net interest margin remains strong at 4.71%. As you can see, our net interest margin again was benefited by about 25 basis points of accretion and nonaccrual interest collections.
Our core NIM of 4.46% settled into the upper end of our long-term guidance range of 4.25% to 4.5%. We expect to remain in that range in the coming quarters increases in deposit costs due to the current competitive environment our focus on customer deposit growth, and a rising short-term interest rate environment should be largely offset by increased yields and loans in our core NIM should remain largely flat to slightly down over the coming quarters.
We had a strong focus on growing customer time deposits this quarter in order to get in front of anticipated future Federal Reserve rate hikes as we increased our customer time deposit balances by 276 million from the second quarter. I also would like to point out our banking team's outstanding execution and the CD campaign this quarter those are major of our production during the quarter as we enhanced and deepened relationships in adding new customers in the process.
Additionally we made a decision to trade some of our short-term borrowings out by purchasing 54 million of broker CDs at the end of the quarter ultimately at a lower funding costs and borrowings they replaced at a rate that is locked in for the next three to six months. This should therefore get passed in its couple of anticipated rate hikes.
These actions led to a total cost to deposits increasing from 63 basis points in the second quarter to 80 basis points in the third quarter. However, our cumulative date since rate increases began in December 2015 is approximately 25%.
Also our loan sale for sell balance has able to combine selling in $300 million level over the next couple of quarters. We will likely invest additional excess liquidity in the investment portfolio which currently stands at 12% of total assets to mitigate the impact and earning assets in net interest income.
We remain confident and our balance sheet is well positioned for rising rate overall and our emphasis on customer deposits will continue to be a foundational element of profitability.
Moving on to Slide 6. As Chris mentioned previously, we've produced another quarter of robust loan growth above our long term 10% to 12% target range. We had a strong performance year-to-date, we believe that we will finish the year strong before selling back into that range in 2019. Our objective remained consistent, profitable in relationship-driven [indiscernible] not merely focusing on hitting our quarterly target.
Moving to our concentration levels over the top right corner, we previously announced mortgage servicing rights sale provided of about $20 million of regulatory capital benefit this quarter. We also experienced some migration from our construction portfolio due permanent financings, putting us back well below the 100% threshold.
While we may move closer to 100% from time-to-time depending on future, this allows mortgage servicing right as in construction findings, we continue to remain committed to be able to rely on with regulatory thresholds.
Moving to Slide 7. Our customer deposits were $4 billion, up 11.3% in the third quarter of last year, and that's 17.9% on an annualized basis from the second quarter of 2018. We had strong deposit growth this quarter particularly in customer comp deposit as we continue to manage and maintain balances within our portfolio.
We're working to mitigate funding related pricing risk in the current rising rate environment, locking in growth in the funding base at current rate is important to us and while we saw deposit growth move this quarter, we believe that we will pay off within next few quarters, while we estimate our deposited cost in the raw margin.
Now, turning to Slide 8. In the third quarter our total mortgage operations had a pre-tax contribution of $1.5 million in our retail footprint as included. This represents 5.2% of the Company's adjusted pre-tax income that's down from 18.2% in the third quarter of 2017.
Year-to-date our total mortgage contribution equates to approximately 7.9% for the Company's pre-tax income, which is down from 22% year-to-date in 2017. Our interest rate lock volume declined to $1.7 billion in the quarter compared to $2 billion last quarter and $2 billion there in the third quarter of last year. Competitive pricing pressures particularly in the correspondent channel, are weighing on both volumes and margin. Our margin was up this quarter due primarily due to change in mix from correspondent to our retail and consumer direct channels.
We expect our total mortgage pre-tax contribution between the retail footprint to be - still between $1 million to $3 million loss during the fourth quarter of this year in line with the updated guidance we provided at the end of September. We understand that allows an unacceptable results, and our team is focused on reducing expenses and streamlining of channels in order to achieve consistent profitability during current and future rate environments.
Our operating leverage this quarter remain in line with the prior quarter staying just above our near term goal of 50% for the banking segment. The quarter-over-quarter movement from 51.8% to 52.4% in our banking segment efficiency ratio can primarily be explained by the increase in salary attributable to our recently higher revenue from interest during the quarter and we have to get their books of business fully up to speed.
Our mortgage segment efficiency ratio increased quarter-over-quarter remains above acceptable levels due to lower volume environments we are rationalizing our operations, focusing on reducing efficiency ratios while producing profitability as we head into 2019. These cost cutting initiatives will continue during the fourth quarter positioning our team to capitalize on the seasonably busier second and third quarters of 2019.
Our effective tax rate of 23.9% for the third quarter was lower than the first quarter and second quarter as we had significant deductions related to our equity compensation volumes. As previously disclosed, we believe our full year 2018 effective tax rate will be in the 24.5% range.
As shown on Slide 10, our asset quality remains sound and provides a strong foundation for our Company. Non- performing assets to total assets decreased slightly for the quarter as we grew organically and continue to reserve at the non-credit environment.
Our loan portfolio remains in solid shape as evidenced by non-performing loans ratio of 30 basis points. As largely expected, our loan loss provision of $1.8 million for the quarter was driven by strong loan growth, renewals of previously acquired loans and normalized net charge-offs of six basis points to average loans as compared to net recoveries of 11 basis points to 15 basis points through the linked quarter and the third quarter of 2017 respectively.
On Slide 11, shows our capital levels remained strong enabling future growth for both organically and through strategic acquisitions. Our capital structure remains relatively simple giving us flexibility as needed to potentially add non-common equity sources.
Since the first quarter after our IPO, our tangible book value per share has increased by $4.69 or 14.6% to 16.25% during the quarter, driven by our strong financial results in the accretive Clayton Bank's acquisition.
As mentioned previously, we received approximately $20 million of regulatory relief as we sold a portion of our mortgage servicing rights. We will continue to monitor the assets and we'll seek to optimize its impact on our capital from time-to-time selling portions of the MSRs as appropriate.
We are pleased to be able to return a portion of our shareholder's equity in the form of a continued quarterly dividend of $0.08 per share, which represents the payout ratio of approximately 12% and 33% increase in last quarter.
As Chris discussed, previously our Board also authorized a $50 million share repurchase program that we will seek to achieve our key objectives of minimizing tangible book value dilution while maximizing EPS accretion. Buyback opportunities will be evaluated against deployment of capital for M&A opportunities as we manage our capital in the coming periods.
With that overview, I'm going to turn the call back over to Chris for closing comments and then we'll open the call to your questions.
Thank you, James.
Overall, we did deliver strong performance and we're proud of our team. We appreciate your interest and investment in FB Financial.
Operator, that completes our prepared remarks this morning and we would like to open this call for questions please.
[Operator Instructions] And we'll take our first question from Catherine Mealor with KBW. Please go ahead.
We discussed first on deposits, James, you mentioned that there is a CD campaign this past quarter and then you also talked about some of the brokerage CDs that you added on. Could you give us the incremental cost of each of those CDs that you added on this quarter?
The CD campaign, so we had an 11 months CD at 2.55%, then a 25 month CD at 3%. So the average was kind of in the middle of that, say in the 2.70% range for the bulk of that piece of the portfolio.
The broker came in at about 2.40%, which now is below the Fed fund rate after the rate hike was right at the end of the quarter. We kind of took reverse advantage of the LIBOR disconnect from the funds rate on the borrowing side which slightly impacted the loan yields during the quarter.
One other comment there. On the brokerage side, obviously we had good growth in our customer deposits. I mean, we haven't traditionally funded our customer growth through brokered funds and that's not the case this time. We had full year growth, it was strictly a move by - that our financial team brought to the table so that we get chance to lower our cost year by utilizing brokers and best to be swapping out broker for federal home loan bank and so that's what we did.
So, it's different than what you some time - when you usually see brokerage you used to buy banks our size.
And so on the customer CD side, do you look at the weight of that CD as more of a catch up or maybe opposite of being kind of aggressive to try to get ahead of higher rates and would you expect this high of a beta as we move forward or do you feel like the beta that we saw this quarter is just more indicative of the reality of deposit cost in your market?
I think it was a little bit of all of that Catherine. I think part of it is accumulative. We had hoped that the good side for - since rate started moving up and had a pretty low beta on that since some of it was that cumulative catch-up and then but we also allowed to go higher to position for the future.
Our cumulative beta is again in that 25% range and we’re proud of that. We think it will be less than this quarter going forward but it will still be higher than we’re really run out in the last three or four quarters leading into this quarter but it was all down strategically.
We were able to get some customer's back to it well for higher rates elsewhere nearly deepen this customer relationships and we chose to do that versus say going out and doing ourselves borrowing at probably in line costs with those maturity levels and it was overall a strategic plan to position us for the future.
Yes, it’s always a balancing act Catherine as you know and so there is a balance between the growth and we're fortunate we have to get the growth and be in position to get the growth and particularly on the deposit side that comes with the cost these days. And so we acknowledge that and I think James described it well.
And to your point even with the higher beta, you’re still at the top end of your range. Do you think it's an important point? And then one of the questions just moving to mortgage - I'm sorry go ahead.
No, that’s exactly you’re exactly right that’s part of the balance.
And then one other thing on mortgage just what - what would be an acceptable mortgage specialty ratio as you think about next year as you write that business?
Yes, that’s where we think about is about 80% and frankly we'd like to be better than that especially in good times about 80% that's kind of threshold for us.
Okay, that’s great.
We just added some of the higher period of production like Chris said it would be over the year and not in any particular quarter to be able to kind of get to that 80 or better efficiency ratio.
And we'll take our next question from Tyler Stafford with Stephens Incorporated. Please go ahead.
So just a follow-up on Catherine's last question thinking about the mortgage business rather in a pretax income as you guys can talk about that waste. So, the mortgage business is expect to generate I guess at a pretax loss in the fourth quarter. So that exiting run rate I guess does put a big question mark on what 2019 pretax mortgage income could be. So any expectations or thoughts for next year as pretax mortgage just as you think about, you know the cost status or initiatives, expense initiatives that you are able to realize?
Yes Tyler just a couple of comments there, one as you know the mortgage business is hard forecast because so rate dependent and a lot of that is reading the market. And so it’s a difficult business to forecast and so we don’t want to get too specific on forecast. But if you look at what's out there in forecasting mortgage for next year, the volumes have forecasted to be similar to this year and slightly down or slightly down so similar to maybe slightly down.
When we think about our business, we’re repositioning some things there and we would expect it to be a similar year for us in terms of volumes kind of moving with the market if you will. And then but keep in mind we do have some repositioning going on and so like I said hopefully that there will be some upside in that business for us as we look out to 2019 but that's really about. But we’ve done some - we did a couple of forecast during 2018 we had to revise those. And so like I said we want to stay away from current debt to getting too much into the forecasting business there.
Understood. Maybe - I’m sorry go ahead Chris.
No, did that help.
Yes, I understood. So on the consolidated mortgage expenses for the quarter it looks like they were flat quarter-over-quarter despite pressured volumes. Is that right and why wouldn’t there have been expense relief given the variable compensation tied to the volumes?
Some of the revenue was caused by higher - one by lower mortgage servicing revenues and slightly higher fair market value change on the servicing rates. So revenues on a same-store basis were slightly up for the quarter. So, and most of the adjustments that we’re doing on the expense side will be baked in largely by the end of the year.
Do you happen to have what just total deposit cost were at the very end of the quarter so just thinking about and exiting deposit costs?
Yes, so they have moved up about 9 or 10 basis points but I will say we've seen a pretty good movement since quarter end after the rate hike in our loan and in our contractual loan yields. We have about little over 700 million of LIBOR based loans which is about 20% of the portfolio and about 900 million of prime based loans.
So we’ve seen good movements on that front as well. So call it in the upper 80s or around 90 basis points and the movement of cost which is kind of the cumulative of the campaign in the broker CDs going into that.
And we’ll take our next question from Peter Reese with Sandler O'Neil. Please go ahead.
Most of my questions have been answered but just maybe wanted to get some color on the buyback here obviously the stocks has been under a lot of pressure. So I just wanted to maybe get your thoughts on how aggressive you could be with the buyback, is it something you actually planned actively to use here or just what you’re thinking in terms of your stock price?
Yes, it’s a tool and we wanted to get the authorization because we don’t know what’s going to happen in the market, we don’t know what’s going to happen with stocks and especially bank stocks. So it's a tool and whether we got very aggressive or not is really dependent on the price. We’re conscious of dilution, because we love EPS accretion but we’re also conscious of book value dilution those are two things we would balance. And so if the prices continue to drop certainly we probably would deploy.
The other thing that we’re balancing is acquisition opportunities. We continue to evaluate those. We continue to we want to make sure we're in a position to pull the trigger on something whether it's opportunistic or strategic. And so, from months to those opportunities, we would be issuing stock and so it doesn’t have that big of an impact on our tangible common equity or tangible asset ratio. And so we think even with the acquisition opportunities out there, we think it's viable tool for us to have.
And also we would have the opportunity - we have a little bit of creep in outstanding shares from equity plans that has a minimum at these levels would likely make sense that wouldn't be a significant component as if that would be a phase level that we could definitely see executing on and the rest of it would be dependent.
As Chris said, other opportunities because that will become our little bit of the measuring stick for other opportunities is use of capital and growth and acquisition versus buybacks and which one will yield the best returns overall
And with your comments on M&A actually, obviously evaluations are changing a little bit but is there still something that you guys think is an opportunity for you out there and maybe have conversations changed at all and maybe have seller expectations changed?
Yes, it is an opportunity for us. We're still - we think it is still an opportunity but yes I think you hit some relevant points, while evaluations have changed especially at public companies. There are often times - it takes some time depending on what kind of potential partner you're talking to especially for private companies it may take some time for them to adjust their thinking. And so that may be a little more difficult because when valuations move down the way they have over the last two or three weeks, obviously it takes everybody's valuation down and so that's something that we still don't know. But I would suspect it may take a little bit of time for those to adjust.
We still on a relevant basis, think we may get market opportunities and we want be compared to those. And we'll continue to be looking.
[Operator Instructions] And we'll take our next question from Alex Lau with JPMorgan. Please go ahead.
Going back to deposits, in the quarter we saw growth in time in the moving markets while noninterest bearing was flat in the quarter. And also with checking accounts trending lower from the start of the year from 50% to now 44%. To what extent are you seeing some of the lower cost or non interest bearing deposits migrate over to these attractive higher rates?
Yes, Alex, we do see some of that. We track that as best we are able to track that, and we do see some of that, it hasn't been a major move but also we've expected some of that. It's not something that gets a lot of discussion, I think there's some discussion in the industry about whether that's going to be the case.
I do think it is going to be the case because most of - you've seen records non-interest bearing balances out there and I think some of those - I think there's been a fewer for the industry that some of that would move, and I do think some of it will. And it has with us, but it's actually been not significant.
But you do see some of those balances and we saw it when we had the campaign, we saw some of that but again all manageable and most of that is frankly governed by our relationships. If you have a good relationships where you expect some of that and you would - and it would not be a very good customer service if you didn't have some of that. So I'd say, that explains most of what you see there.
And part of the non-interest bearing decreases when we sold the MSRs we lost some of the escrow which is on the non interest bearing category. I think it's now $10 million point-to-point but it's actually probably down more than some of the seasonal growth offset that. So, that was expected when we announced the settlement. MSRs that we would lose the corresponding as escrow balances from that.
And on the CD campaigns, are you seeing any kind of shift from consumer preferences from short term to longer term. I know both are pretty attractive rates, but any color on that?
We can't offer a little bit of a mix. I think it depends on what your position in life or your outlook or different things are. I don't think there's a consistent view of shorter loan. I think some like the loans as longer view so they don't have to worry about it, and some like the shorter view that they have the opportunity to do whatever the market is doing.
And so I think it's mixed based on what their individual outlook or cash needs maybe at any particular time. So I would think really no consistent view on that, I'll call it overall basis.
My last question is on - back in the second quarter you called out potential hiring like a dozen revenue producers in the back half of the year, can you give an update on how you're tracking with that and are there any more hires in the pipeline?
Yes. I'll give you an update and so first we didn't talk about this because the numbers are not that significant. We did see a little bit of that come through on the expense line. Again, fully expected and right on what we thought. We've had those folks come along, we're actually also seeing some production if look around the - particularly the metropolitan part of our footprint. We've seen most of those markets have really good production. Again, that's coming through the growth numbers.
We continue to have various conversations and continue, it’s a little like our loan and deposit pipelines. We had some various conversations going on out there with additional parties and whether they come to pass or not just is part of the competitive world that we live in. And so all of the ones that we've talked about have come to pass, there have been maybe - I'll say a handful of others and then there are a couple of potential bigger ones out there.
But again it's - I consider that to be a normal part of our growth just like adding loans and deposits.
And it appears that there are no further questions at this time.
Okay. Well, thank you very much for joining us on the call. Thank you for your questions. We appreciate your interest in FBK and we appreciate your investment in FBK. Everybody have a great day. Thanks.
And this concludes today's call. Thank you for your participation. You may now disconnect.