FB Financial Corp
NYSE:FBK
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FB Financial Corp
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Good morning, and welcome to the FB Financial Corporation’s Fourth Quarter 2017 Earnings and Year-End Earnings Conference Call. Hosting the 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, supplement and 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] 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 performance or achievement 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 discussion 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 regulations G. A presentation of the most directly comparable GAAP financial measures and reconfiguration 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 FBs Financial’s President and CEO. Please go ahead sir.
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 would 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% increase over fourth quarter of 2016.
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 or 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 almost $3 per share since December 2016. This was our first full quarter following our common entity with FirstBank 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 our new term target of 55%. We convert 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 pre-tax core contribution of $16.8 million and 6.7% increase from 2016. The fourth quarter was unseasonably, benefiting from better than expected consumer direct volumes and strength in our retail and reverse channels. This resulted in an increase in pre-tax 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 have lower margin due to the mix of the originations.
Similar to our outlook at this time last year, we expect mortgages 2018 direct contribution to be flat to slightly higher and the volume will continue to increase compared to 2017, driven by the continued expansion of our core deposit count and balanced growth in 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 growth was below. This remains in line with our target of 10% to 12% per year with variances of quarter, and we anticipate delivery of similar growth for 2018.
Our customer deposit growth was 34% for the year and our organic customer deposit growth 32% for the year and the decline 3.9% on an annualized basis from the third quarter. Net deposit growth lower than we -- however as we anticipated, our deposit growth was adversely impact by liquidation of more than a $100 million of deposits that were related to proceeds from our merger.
We expect the remaining balance continued to decline throughout 2018, which were likely creates 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 starts to continue going forward.
With that said, it’s a competitive environment for deposit right now. We’ll continue to place a heavy focus on our deposit growth in order to maintain the strategic advantages that are low-cost, cost to 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 base balance sheet to serve the needs of our customer while the maintaining the 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 420 to 440, not considering the accretion or other benefits.
We remain bullish on the underlying asset quality of the Company with net charge-offs of only five basis points for the quarter. Our non-performing asset metrics were officially -- were optically affected, as we added $2.3 million of closed facilities of OREO from merger our and increased our recording of an option to a repurchase approximately 43 million of certain Ginnie Mae loans originated in service by mortgage operations at the end of the year.
We do not believe this signals any deterioration in our credit quality, as demonstrated by our non-performing, our HFI loan ratio of 32 basis points which is relevantly flat over the third quarter. So overall, this was a strong quarter for us with the peer leading net interest margin, solid earnings of growth and loan growth while keeping our expenses in check. We continue to execute on our strategy and we believe the foundation remains in place for continued solid growth and profitability in the coming periods.
With that overview, I will turn the call over to James to review our financial results in some more detail.
Thank you, Chris, and good morning to 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 core net interest 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%. And like many of our peers, we recorded a tax benefit of $5.9 million related to the revaluation of our recorded deferred tax liability as a result of tax reform.
Slide 4 shows that our core return on average assets has risen to 1.56% for 2017, as we continue to demonstrate strong and consistent growth and profitability. This growth and 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 represents the fundamentals of our strong net interest margin. A 4.35% excluding accretion and nonaccrual interest collection, our base in net interest margin reflects 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 take 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 our core net interest margin will remain in the 420 to 440 previous guidance provided.
Moving onto the next slide, as Chris mentioned, we have 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 the remaining bunch of these guidelines over the long-term.
Our customer deposits were 3.6 billion or 34% from the fourth quarter of last year and down slightly from the current quarter. As Chris mentioned earlier, much of the decline can be attributed to the liquidation of over 100 million temporary deposits related to our merger.
Non-interest 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 by 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 three months of the Clayton Banks.
Importantly, our third quarter results only included two months of the Clayton Banks relatively higher cost of deposits and thus on an apples-to-apple the deposit data 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 constrained.
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 assets in the majority of the 76.1 million MSR balance fully hedged this quarter. We expect less volatility in MSR values from interest rates and we’ll no longer exclude the change in the fair value from our core earnings in the first quarter in 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 corresponding 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 is 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 liability to the corporate factory 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 non-taxable income benefits from equity compensation in overall profitability. However, this will vary from quarter-to-quarter based on the levels of pre-tax income and the equity compensation benefits.
Our core asset quality remains in check. It is the strength moving forward. While NPAs to assets increased for this quarter nearly the entirety of the increase can be attributed to what I'd describe as non-core, non-performers with minimal risk driven by five additional close branches and facilities which accounted for $2.3 million of the increase in the recorded $29.5 million more of Ginnie Mae rebook loans, increasing the amount that Ginnie Mae delinquent loans previously sold and currently service in our performing assets to $43 million or approximately 91 basis points of our 153 basis points and the NTAs 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 in order to attempt to repurchase these norms. These balances have increased due to growth in the corresponding channel and capacity driven by the summer's hurricane.
Our underlying asset quality in terms of Class 5 loans remain in great shape despite the increase in the NTA ratio discussed above, as evidenced by our non-performing loan held for investor ratio of 32 basis points this quarter. Our capital level remains strong enabling future growth both organically and through strategic acquisitions. Our capital structure remains simple given us the flexibility as needed to have 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. Again, we also continue to execute our M&A strategy by fully integrating recent merger and continuing to evaluate additional opportunities. Our strong performance was diversified across our businesses and our markets highlighting the straight and our franchise and tendency 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 now like to open the call up to questions
Thank you, James. Ladies and gentlemen, the question-and-answer session will be conducted electronically. [Operator Instructions] And your first question will come from Nick Grant with KBW Investment.
So may be 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 two key drivers, Clayton, for one 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 one month.
Then sort of kind of talking about taxes really quick. How are you thinking about potential expense to offset another investment you might be making kind of following the benefit of lower taxes? And what percentage makes it to the bottom line?
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 would like to make some investments in employee that we continue to make and some of that will also fall to the bottom-line, obviously probably 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 are under consideration for us as we apply that -- apply the tax cut.
And then may be one last one from me. Kind following the full integration of Clayton, how do you guys feel about your pipeline for M&A now? And how conversations changed at all since the announcement of tax reform?
Yes, so I will take the second one first. Actually, they have changed a little since the announcement of tax reform. So they have slightly but particularly may be in our case, if we were thinking about something, it may have changed the expectations of a seller there and understandably. So I think it has changed a little bit especially may be for some of the smaller privately held banks that been a target for us. Those, we'll need really to start to calculate those dollars and they become real. It’s a lot different.
And so I think it can change our 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 just where we are in M&A, we are in a constant state of evaluation, which can be a little frustrating times, but we have a lot friends out there, so we carry on a lot of dialogue, as the way we have two or three important things we remain very discipline and what we look for, okay.
We’re going look for good financial metrics for us the deposit list. We’re going to look for banks that a lot like us in terms of the community banks that tend to be -- have a lot of customer loan and deposits versus a lot wholesale business. So we look for companies like us. We look for established franchises versus those they're only been around for five or seven year which in the wall post and around.
And then, we don't have any deposit side of the balance sheet. Geographically, as we are having conversions and it’s really markets being like us and that are around us. We actively have conversations in Alabaman, 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 and the western parts of North and South California even in Southern continue and of course in an old Tennessee.
And maybe even a couple of markets in Kentucky which are going to continues for us. So, just seeing and you do and you with Eastern Canada assuming circle of 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’ve been a lot of I’ll call price seek. I’ll draw the analogy of when some folks really put the house up for sales. They're not really putting it up for sale. They just want to see if somebody 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 converse -- a true good conversation. And then last thing. there is also -- we have a lot confidence coming off of the Clayton transaction that’s fully integrated no. We have great partners on board with us and that integration in conversion both acquire well and so we are active out there and 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 comments you made earlier about just very strong retention out of the quite deposits. As you look out to this next year, can you just talk about the remix expectation within some of the Clayton's higher cost deposits into more lower cost and more type deposits? And just kind of the expectations you have for that remix?
Sure, as we think about that as couple of things and as you know, this was mentioned -- we’re constantly triangulating between loan growth, deposit growth and margin. And if you look at where we're today, our margins at the high end of our range, our loan growth has actually been at the high end of the range for the quarter. It was a little below, but we -- you’ve heard us say. We look at that long-term quarter checkpoint. And so long-term, we’re actually on grow in loans, as longer term during 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 pay-offs was an expected pay-off in the manufactured housing part of our business where they took it to public market. So, it was expected and those things happen and we’re happy for customers that they had that level of success. But other than that, we pretty much held everything that as we think about moving forward, Tyler, as you’ve heard us say, we’re not big on the wholesale funding for our 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 to roll out the bank. We'll replace them. But then with the 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 improvement in the cost of those funds in the short-term. But over the longer term, as those are more stable. They are 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 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 FirstBank has more funding options than additional avenues to pursue. We don’t always have to turn to the higher calls to deposit base, so we can take the pressure off of that. That would be shifting a little bit more to say, Federal Home Loan Bank advances temporarily, as we reposition their overall balance sheet within our 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 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 the lower cost in the short-term.
Okay. That’s very helpful. Thanks, Chris and James. But just a follow-up on that James, the 4.20 to 4.40 core margin expectations maintained. Can you just remind to 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 two this year?
Well, I think the rate hikes, so it doesn’t necessarily assume the 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 24 you’ll have some most of their all from the funding side either the deposits or wholesale borrowings, and it kind of said that we will be different to the rising rate environment as we position the balance sheet. In the short-term, it goes in the upper side and then come back down to the middle to the lower side. But we feel comfortable that the 420 to 440 in overtime will work in and whatever interest rate environment that’s out there.
Overall 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 following the out. Can you just help us what kind of a general run rate perspective on the expenses? How much cost savings are left fallout from here?
So basically by the end of the quarter -- by the end of the fourth quarter, we have primarily all of the cost savings. There is a little bit more, but a very immaterial amount heading into the first quarter. So, the first quarter should be kind of core run-rate of. So we closed particularly seven branches and added one branch where we consolidated back into six in that branches were closed on December 1st.
We did the system conversions so -- but then we added one more quarter of Clayton Banks to the mix. So, we’ll see a little bit more relief fourth quarter or the first quarter and kind of core banking segment. Mortgage was a little bit of contributors on the expenses side, as we noted earlier in the call. So, there is some benefit to be picked up from fourth quarter to first quarter in the core bank and we should see the full run-rate in the first quarter.
And then just last one for me. Just given the change you mentioned earlier that you make regarding the fair value of the servicing portfolio in the first quarter. Can you just clarify the 2017 pre-tax earnings contribution for mortgage from which are expecting to see slightly -- add slightly higher contribution in 2018. I just want to make sure I’m thinking about their right, starting point for 2018 per equity?
Right, so, the 16, this can be different number again just to make sure give you the right number 16 just under 17 in play. $16.8 million is what we did on a core basis and so we would expect that really the amount movement in the fair value in the MSR will be relatively nominal relate to answer now there was a market share and valuations to liquidity as MSRs are other than damage other interest rate to their back set. So, apples-to-apples, it’s the expense is $16.8 million.
[Operator Instructions] From Raymond James we’ll hear from Daniel Cardenas.
Just a couple of 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 out the 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 those markets, Memphis, they have, second half of the year been strong.
And then the others, we've got some out of West Tennessee, not huge numbers, and we had a little bit out of Knoxville as well, Knoxville, team there is continuing to produce just like they had before and before the merger. And so that’s a strong area for us. I mentioned we did have a pay down in manufactured housing at the end of the year.
We would have another pay down at the end of the year just in our core C&I business where one customer on 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 those customers that have that capability.
The loans we’re worried about are ones that don't pay off. So it’s I would say relatively balanced stand. There’s no big standout there. Nashville for the last three, four years has been -- last five years has been the leader and continues to be the leader but everyone 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 a very steady on the pipeline front. I will say what I said on these calls for the last probably three to four quarters, a 10% to 12% feels pretty good and strong, and actually that goes back years, now, probably three to four years where we’ve looked at our 10% to 12% kind of growth rate.
Frankly, it gets to -- the 10% 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 standard or something. So we would 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 go back overtime, that’s what it is. And our pipelines today are very, very similar to our pipelines for first quarter last year. We did actually have strong pipelines at first quarter of last year and we actually have pretty strong pipelines first quarter this year.
And then may be just some color on competitive pressures, if you’re seeing any pick up even on the deposit or the loan side in any of your major markets?
We have seen -- I don't have any -- I made some statements about that last quarter, I would say they are 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 that is I don’t quite of consider this competitive pressure. We do see some things on the credit side that we’re just not willing to do, but we always we see that maybe we see a little more of that -- because if I wouldn’t have done those particular customer or deals anyway. But we do see some things that happen on the credit side that we -- that just don’t fit our profile, and may be seeing a few more of them that don’t fit in our profile.
On the deposit side, we see a little more rate pressure than we have seen particularly where we’re seeing that is customers that keep a lot of money on deposit. And that there is some more pro-activity in reaching out to some folks that may have money on deposit with us somewhat reaching out to them and saying, "hey, I'll give you a higher rates, if you move in that over." We have seen that as where we really seeing the competition with deposit side. And we see more apps than we have seen both in radio, newspaper. We see a quite a few more apps in the marketplace.
[Operator Instructions] I am seeing no other questions at this time. I would like to turn the conference back over to Chris Holmes for any additional or concluding remark.
Okay. Thank you very much, Rebecca, and thank you all for joining us on the call. I just reiterate that we are 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. And we thank you for your support.
Ladies and gentlemen that does conclude today’s presentation. We do thank everyone for your participation. And you may now disconnect.