FCB Financial's (FCB) CEO Kent Ellert on Q4 2015 Results - Earnings Call Transcript

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FCB Financial Holdings (NYSE:FCB) Q4 2015 Results Earnings Conference Call January 25, 2015 5:00 PM ET


Matt Paluch - IR

Kent Ellert - President & CEO

Paul Burner - CFO

Jen Simons - Deputy CFO

Mike Walker - General Banking Executive

Jim Baiter - Chief Credit Officer


Steven Alexopoulos - JPMorgan

Dave Rochester - Deutsche Bank

Stephen Scouten - Sandler O'Neill

David Eads - UBS

Ebrahim Poonawala - Merrill Lynch

Brady Gailey - KBW

Joe Fenech - Hovde Group


Good day, ladies and gentlemen and welcome to the FCB Financial Holdings, Inc. 2015 Fourth Quarter Earnings Conference Call.

My name is Laura and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Matt Paluch, Investor Relations. Please proceed.

Matt Paluch

Good afternoon, ladies and gentlemen and thank you for joining us today. Today, we have Kent Ellert, our President and CEO; Paul Burner, our CFO; Jim Baiter, our Chief Credit Officer; Mike Walker, our General Banking Executive; and Jen Simons, our Deputy CFO here with me to review our fourth quarter results.

Today’s call is being recorded and the slide deck we’ll refer to during the call can be found on the Investor Relations page of our website www.floridacommunitybank.com.

This call may contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, strategies, predictions, forecasts, objectives or assumptions of future events or performance, are not historical facts and maybe forward-looking. We caution that forward-looking statements may be affected by the risk factors, including those set forth in FCB Financial Holdings’ SEC filings and actual results and operations may differ materially. The company undertakes no obligation to publicly update any forward-looking statements. Please remember to refer to our forward-looking statements disclosure at the beginning of the presentation and the reconciliation of certain non-GAAP measures displayed in the appendices.

And now, I would like to turn the call over to our CEO, Kent Ellert.

Kent Ellert

Thank you, Matt. Good afternoon and happy new year everyone. First of all welcome, and thank you very much for joining our call to review our fourth quarter results.

It was another record quarter for our company this year, driven by consistent performance and execution, which led to robust organic loan and deposit growth, strong and stable credit quality and increasing operating efficiency.

The continued momentum across our core business is a reflection of our mission to build Florida's leading independent banking franchise. As of yearend we became the third largest independent bank in Florida and the largest pure play in the State with footings of 7.3 billion.

In spite of the recent disturbances in the public markets, our overall view of the Florida economy and our growth outlook remains consistent with prior quarters. That is very confident, but ever mindful of potential emerging risks.

Looking ahead, we plan to build on yet another strong quarter to drive double-digit revenue and earnings growth in 2016.

Before we discuss our outlook for 2016 in detail, let's review our fourth quarter results. The fourth quarter of '15 was most profitable quarter to date for our company, marking the 12th consecutive quarter of record core operating results.

For the quarter, we reported net income, core net income of $22.5 million or $0.52 per share on a fully diluted basis. On an annualized basis, core net income rose 28% sequentially and 79% year-over-year.

FCB's continued growth in core net income was a result of core revenue of $71.4 million, primarily driven by core net interest margin expansion to $63 million, up 25% year-over-year. As a result, revenue growth coupled with continued discipline expense management produced a core efficiency ratio of 45% and a core a ROA of 125 basis points.

When we think about our business, one of the most essential elements of our success is the quality of our human capital. To that end, we made strides in 2015 as we added bankers and underwriters to each of our wholesale banking groups.

For the most recent quarter we hired seven new commercial bankers covering Southwest Florida, Orlando, Tampa and Miami. The growth and stability of the origination platform has enabled us to establish a rhythm of safe and sustainable growth.

Additionally, we're pleased to have announced that Jennifer Simons will be taking over as CFO and Paul Burner will continue to serve FCB as Finance Director.

I really want to thank Paul for his leadership over the last several years as he has helped drive FCB's continued organizational growth and we're very happy that he is staying on Board with the company.

Over the last 18 months, Paul and Jennifer worked very closely together and they'll continue to do so to provide a seamless transition throughout 2016.

Now I would like to introduce and discuss Management's key operating priorities for 2016. These include disciplined organic loan growth, balanced deposit growth, diligent acquired asset management and continued operational efficiencies and finally we'll introduce our Florida market perspective segment where we can discuss permanent developments in the competitive landscape in the Florida economy.

First, we continue to generate consistent, sustainable, quality organic loan growth, resulting from $373 million of organic fundings and $544 million of commitments during the quarter. The production mix was well balanced led by record C&I production of $155 million, CRE production of $106 million and residential loan growth of $112 million.

In addition, our total new loan production during the quarter includes $146 million of purchase residential mortgage. Overall, total fundings of $519 million led to new loan growth of $452 million or 43% on an annualized basis.

As of quarter end, our utilization rate on the new loan portfolio remained consistent at 84% and unfunded commitments increased to $878 million. Moving forward, we anticipate commitment utilization will continue to offset a significant portion of paydowns and amortization.

Some additional details for the quarter, around loan production, topline new loan interest income grew to $37.2 million, up 40% from the prior quarter as average outstandings increased by $364 million due to consistent production throughout the quarter.

The team generated $2.1 million of swap in secondary market fee income up 19% year-over-year. 92% of the commercial relationships were cross-sold and new loan production yields were 3.52% as compared to 3.3% in the prior quarter. As we move into 2016, we continue to tighten our management over origination activity to drive growth and profitability.

Over the course of time, we've moved from a loan-centric focus to a balanced loan and deposit focus with an emphasis on pricing. For the year, we expect new loan growth of $300 million to $400 million per quarter, over the course of the year while maintaining the mix evenly distributed between C&I, CRE and residential.

Overall new volume rates expect to range between $350 million to $380 million with structures consistent with 2015 production levels.

With respect to credit quality, all of our key metrics remain exceptionally healthy. Once again as of quarter end, the new loan portfolio continues to perform as agreed. There were no delinquencies, no charge-offs, no downgrades in the commercial and CRE portfolios.

The primary policy exceptions we track and monitor on a regular basis continue to decline on a quarterly look back.

Our second key priority is deposit growth. As discussed last quarter, we're working on aligning our resources to support deposit performance and growth in a manner consistent with our organic loan growth.

This quarter, we experienced our strongest quarter to date, with deposit growth of $609 million or 50% annualized. This marks our second consecutive quarter where deposits grew at or above the same rate as our new loan portfolio.

A few details around deposits for the quarter. Demand deposits grew by $223 million improving DDA to 23% of the total base. 88% of our branches contributed deposit growth during the quarter.

We opened 365 new commercial demand deposit accounts during the quarter, providing treasury management opportunities to 59 new customers.

Our HOA business grew by 5% to $161 million during the quarter adding over $8 million in demand deposits and 175 new accounts. Time deposits grew by $330 million driven by 18 month and two year CD growth and our cost of funds for the quarter was 60 basis points as we extended the duration of our time deposit portfolio.

To ensure our funding growth matches our organic loan growth, we're focused on the following. Organizing our banking teams around deposit-centric industries, aligning retail and wholesale teams to focus on cross-selling both personal and commercial banking needs of the clients we serve, integrating deposit opportunities into the credit approval process and structuring incentives to drive low cost core deposit growth.

As we move into 2016, we look to continue this momentum and balance the organic growth remains our top priority in the upcoming year.

Next our third priority is diligent, acquired asset portfolio management. We remain committed to earning the full value of our acquired assets while maintaining a stable revenue stream from the portfolio.

This quarter we generated $21.5 million of acquired asset revenue, taking into account interest income, gain on resolution and gain on OREO sales. This marks the seventh consecutive quarter of consistent acquired asset revenue over $20 million.

We continue to be confident in our ability to manage the portfolio at a level with 2015 revenue generation. As part of our overall acquired asset management strategy, we may periodically replace loss accretable yield from the portfolio with high quality residential mortgages, in order to sustain this revenue stream and allow our organic growth to continue to drive earnings growth.

In the fourth quarter we purchased $146 million of prime residential mortgage with an effective yield of 3.6% to replace approximately $65 million of acquired loan resolution and amortization activity.

Our fourth and final priority is the focus on operational efficiency centered on disciplined expense containment. Core non-interest expenses were $32.6 million for the quarter, an increase of $1.9 million from the prior quarter.

The increase from the prior quarter was primarily driven by increased incentives of $900,000. As a result of the stable expense base and our revenue growth, the core efficiency ratio declined every quarter this year and finished the year at 45%.

For the year, core non-interest expenses averaged $31.3 million.

From a go-forward perspective, we continue to anticipate the reduction of OREO workout expenses to generate future savings that we can reinvest in the business to fund revenue producing jobs and network expansion.

We expect non-interest expenses to be between $31 million and $33 million on a quarterly basis during 2016. This range reflects our strategy to be opportunistic regarding adding to our sales force.

Overall, we expect to deliver positive operating leverage with double-digit revenue growth and low single digit expense growth.

Lastly, I would like to provide a few comments on our Florida market perspective. Florida banking industry is extremely competitive with large national institutions and smaller independent banks having various degrees of influence of credit quality and pricing.

During the fourth quarter, in an effort to retain existing relationships, we saw incumbent banks willing to increase leverage, reduce or eliminate guarantees and drop pricing.

At the same time, competing banks are offering increasingly more aggressive structures to win the business, including longer term loans of 15 or 20 years, limiting our non-recourse transactions and increased advanced rates on accounts receivable and inventory.

Even given these market dynamics, FCB’s success remains rooted in our ability to provide the financial strength of a large institution with the agility of an entrepreneurial enterprise.

These clients do value FCB’s speed to market, access to Management, [local decisioning] and longstanding relationships. As you know, we’re very credit-oriented as a company with safety and soundness at the forefront of everything we do.

This is evidenced by the strong performance of our organic credit book and further evidenced by determined structure of the deals we’ve originated in the fourth quarter.

Some color would include, we competed against and won business from six of the top largest market share banks in Florida. Over 95% of our production carry personal guarantees. Over 98% of our production was within FCB’s debt service coverage and loan-to-value policy limits.

There were no originations with policy exceptions for length of term with the average tenure for fixed rate loans of six years. And finally there are no delinquencies or downgrades within the originated commercial and CRE portfolios.

After another strong quarter capping off 2015, we continue to be on track with our plan and our financial and strategic goals as we move into the New Year.

Our constant focus on the principles of quality, quantity and sustainability of our organic growth is rooted on our human capital and operational discipline. This focus gives us continued confidence in delivering on our stated growth and our operating objectives during 2016.

With the brief overview, I would like to turn it over to Paul, Paul?

Paul Burner

Thank you, Kent. We had a very strong quarter that I would like to discuss in further detail. Then I'll pass it to Jen to share our outlook for 2016.

First we had a few notable core adjustments between GAAP and core net income in the fourth. Core net income explains the release of a $9.1 million deferred tax asset valuation reserve related to the great Florida acquisition, $0.5 million of cease-use expense related to the repositioning of our bridge network and tax adjustments relating to the fiscal year totaling $1.4 million.

Slide Two of the presentation provides core financial highlights over the last five quarters. Core net income of $22.5 million was 28% higher on an annualized basis than the $21 million reported in Q3 and 79% higher than the $12.6 million reported in the fourth quarter of last year.

The primary driver of our core net income increase was the growth in net interest income to $63 million. Net interest income growth was driven by new loan interest income of $37.2 million, up $3.4 million or 40% annualized from the prior quarter.

The overall acquired asset portfolio generated $21.5 million of income for the quarter, marking the seventh successive quarter of total acquired asset portfolio income between $20 million and $23 million.

Core non-interest expense was $32.6 million for the quarter up $1.9 million from last quarter due to increased incentive accruals and yearend professional services fees.

The operating leverage associated with revenue growth and cost containment led to record core net income of $22.5 million or $0.52 per share on a fully diluted basis and a core ROA of 125 basis points.

On Slide Three, new loan portfolio growth exceeded $450 million for the quarter driven by total fundings of $519 million consisting of $373 million or organic loan growth and $146 million of purchased residential mortgages.

New loans have increased by $1.5 billion of 49% over the last 12 months with new loans representing 89% of our total loan portfolio at quarter end. We experienced in excess of $100 million in net new loan growth across each of the C&I, CRE and residential segments and our portfolio remains balanced three basis points as of quarter end.

The provision for loan losses of $2.3 million recorded for the fourth quarter of 2015, includes a $2.3 million provision for new loans and net recoupment valuation allowance of 1,200 for the acquired loan portfolio due to better than expected performance.

The provision for new loans served increase the related allowance to $23.7 million or 0.52% of the $4.6 million in new loans outstanding. Once again there were no new loan portfolio charge-offs during the quarter from an overall balance sheet perspective with the reduction of the acquired asset portfolio and the continued strong performance of the new loans, overall non-performing assets continue to decline and represent 0.79% of total assets.

You can see on Slide 5 that the robust demand deposit and overall deposit growth during the quarter stemming from both retail and commercial growth. We continue to focus on commercial deposit generation as the primary driver of low cost deposits in ancillary fee revenue.

As of quarter end, commercial deposits were $2.2 billion, or 41% of total deposits. Deposits grew by $609 million, or 50% annualized linked quarter to $5.4 billion on the strength of demand deposit and time deposit growth.

Over the last 12 months, demand deposits have grown by over $500 million, increasing demand deposits from 18% to 23% of total deposits. As of quarter end, our loan to deposit ratio was 96%.

Moving forward over time, we expect deposit growth to parallel loan portfolio growth and expect to maintain our loan-to-deposit ratio between 100% and 105%.

As Slide Six portrays we continue to realize improved operating leverage through new loan revenue growth and disciplined expense management. The core efficiency ratio improved to 45% in the quarter, down from 46.3% linked quarter and 57.9% in Q4 of last year.

The core efficiency ratio improvement was primarily driven by net interest income expansion, up $5.2 million, or 36% annualized from the prior quarter.

The primary drivers of this enhanced performance are consistent new loan growth and the continued outperformance of collection and resolution activity from the acquired loan portfolio.

From an expense perspective, core non-interest expense was $32.6 million for the quarter, up $1.9 million from last quarter due to increased incentive accruals and yearend professional service fees. For the year, core non-interest expenses averaged $31.3 million.

Slides Seven and Eight provide detail on the drivers of our net interest margin. The adjusted net interest margin, which removes the excess accretable yield over and above the contractual acquired loan rates, declined six basis points from last quarter to 3.06% while reported net interest margin increased seven basis points to 3.69%.

The adjusted net interest margin fell due to an increase in average cash on hand during the quarter as average interest-bearing liabilities grew by $418 million during the quarter.

The increase in GAAP margin from the third quarter of 2015 was due primarily to a $1.9 million or 10% increase in interest income on acquired loans; its average balance of $63 million was more than offset by better than expected cash flow performance.

The overall new loan yield increased to 3.38% with average balances for new loans up $364 million during the quarter. The excess accretable yield over contractual interest rates totaled $11.7 million during the quarter.

We are maintaining an asset sensitive balance sheet that will respond to a 100 basis point and 200 basis point yield curve increase with a projected increase in net interest income of 5% and 8.6% respectively.

Net interest income will benefit with interest rates continue to increase with a majority of C&I and CRE loans tied to LIBOR.

Page Nine reflects our strong capital position that is well in excess of regulatory requirements with TCE and total risk-based ratios of 10.9% and 13.6% respectively. Tangible book value per common share is $19.31 as of December 31, 2015.

During the quarter, pursuant to the share repurchase authorization, the company repurchased 211,159 shares at a cost of $7.6 million. For the quarter, our fully diluted share count is 43.6 million, including the effect of 2.7 million dilutive shares for the quarter.

Now I would like to turn the presentation over to Jen Simons to share detail regarding our outlook for 2016.

Jen Simons

Thank you, Paul. When we approach our annual budgeting process as a company, we assume a flat current rate environment and this historical performance is the best predictor of future outcomes.

Turning to the loan growth, we expect net new loan growth of $300 million to $400 million per quarter over the course of the year and mix evenly distributed between C&I, CRE and residential. Overall new volume rates expect to range between 3.5% and 3.8% with structure consistent with 2015 production levels.

These levels reflect the consistent production of our seasoned commercial and residential banking teams that originated $1.5 billion in funding for last year as well as normalized quarterly amortization of 2% of the new loan portfolio.

We expect acquired loan portfolio payoff and amortization of 4% to 6% per quarter with portfolio yields between 8% and 9%. Additional attrition may occur to the extent there are targeted portfolio resolution activities during the year.

The aggregate investment portfolio is expected to be between $1.5 billion and $1.7 billion at a total yield between 3.4% and 3.6%. We expect the duration of the portfolio to remain consistent with current levels at 3 to 3.5 years and total investments to represent approximately 15% to 20% as total assets by year end.

From a funding perspective, we anticipate deposit growth of $250 million to $315 million per quarter. Our focus is on core deposit growth and we expect growth to be consistent with the current composition of deposits.

From a cost of funding perspective, we expect cost of deposits between 55 and 70 basis points in the current rate environment as we increase the duration on the time deposit portfolio.

As a result, we expect adjusted NIM between 3% and 3.15% in the current interest rate environment as the increase in new loan yield is offset by the attrition of higher coupon acquired loans and the cost of funding of longer term borrowings and deposits.

We anticipate non-interest expense to remain between the $31 million and $33 million range on a quarterly basis. This range reflects sales force growth and maintains our efficiency ratio below 50%. For the year, our effective tax rate is projected to be 36%.

In summary, we expect 2016 to build on the momentum of 2015 generating increased production at higher yields with a goal of continuing to improve our operating leverage.

And now, I would like to turn the presentation back over to Kent for concluding remarks.

Kent Ellert

Thank you, Jen and Paul. As you can hear from the report, we’re extremely pleased with our fourth quarter results and very excited about the momentum heading into 2016. Thank you for your time and now let’s open up the line for questions.

Question-and-Answer Session


Thank you. [Operator Instructions] And our first question will come from Steven Alexopoulos of JPMorgan.

Steven Alexopoulos

Hey everyone.

Kent Ellert

Good evening, how are you?

Steven Alexopoulos

Good. Kent I wanted to start out, I was surprised to hear that you guys purchased the $146 million of resi mortgage loans in the quarter. Not sure if I heard you incorrectly, but I thought you had indicated you didn’t plan on purchasing mortgage as you were going to hold your own production. Did I heard you wrong or did your plan change?

Kent Ellert

No, you heard us correctly and our plan did change slightly. We did have pass-through business that we fell for fee income and it was our best quarter to date in doing so.

The decision to acquire the mortgage portfolio in Q4 was in a direct response to we were redefining success around the acquired loan portfolio. As you know, there is complex geography in looking at the revenue associated with the acquired book.

It’s not just interest income. Its gain on resolution and gain on sale of OREO and one of the things we've said to ourselves is as we go through the process of accelerating the resolution of those portfolios to unlock the mark associated with those pools of loans, we recognize that we will be also accelerating the decline in accretion.

And so to offset that accelerated decline in accretion we may, it won’t be a significant portion of our business, though we may from time to time go to the marketplace and buy assets that we're comfortable with.

Now the reason it’s a mortgage portfolio, one we think we're good at underwriting the portfolio. Two, we have the scale and capacity to put it through the platform. Three, we service it right alongside our organic portfolio and four, it’s a diversification strategy when you pick up assets from a more distant geography than Florida.

So with all that being said, it is a departure from the purchases we made a year or so ago when it was really an asset accumulation play for us at that point in time. Now it’s really very isolated and very targeted to the acquired loan activity, does that help?

Steven Alexopoulos

That helps, but, so let me say this, if we look at the new guidance on loans of $300 million to $400 million per quarter, how much of that should we expect to be purchases?

Kent Ellert

Zero, that’s totally outside of it.

Steven Alexopoulos

Okay. I got it.

Kent Ellert

And so if you look at what we did -- so just to underline that point, we did $367 million in Q4 of new funding on commitments of over $500 million. That is outside separate and apart from those mortgage purchases. You put the mortgage purchases here and then that new loan growth goes up to $451 million.

And so it is not -- the pure intent Steve is to not disrupt anything we're doing in the organic business, but what we also want to do is migrate throughout 2016.

We want to migrate through that acquired loan book to pull that mark out and as we pull that mark out, there will be moments where the accretion rate will drop a little more steeply and we want to replace it so that the revenue base remains stable.

That $20 million a quarter that we've done for seven quarters, I think for a company our size is rather unusual for banks who have acquired assets that are our size and I believe, our team believes that this method will allow us to keep that stable throughout '16 into '17.

Steven Alexopoulos

Okay. That’s helpful. And then just staying with loans for a minute, so that you had really solid growth in construction land and development, can you give some color on the types of properties you're lending on?

Kent Ellert

Absolutely, I'll turn it over to Jim Baiter or Chief Credit Officer and Mike Walker, our General Bank Executive to walk you through some deals. What I would tell you is that we are less enthusiastic about construction than we are with properties that have existing cash flows that might have -- represent our opportunity to be repositioned.

Also with that being said, when you look at the OCC guidance around construction portfolios, there are always earmarking that to be thresholds of under 100% capital under 300% of capital. We're under both of those thresholds.

So where we view that as a judicious layer within our portfolio, but Jim and Mike if you want to jump in and talk a little bit about what we've been doing in that arena would be good.

Jim Baiter

Thanks Kent. With regards to the new loans that we've been working on specifically in the construction side on CRE, we're very judicious as Kent said in terms of new construction. We're doing some in-fill multi-family.

We're really not doing very much condo. We're doing retail and we're also looking at some office space. We're typically looking at proven sponsors, repeat customers of ours and people that we know in the market.

When you look at C&I, we're looking for proven operators and people that we've done business with in the past with no specific concentration on industries. If you look at the portfolio, in general on the construction side not one segment within this commercial real estate exceeds 20% and also on the industries that we deal with on C&I there's no common.

Mike Walker

Yes, I think we are a little more cautious today than we probably were a couple of quarters ago. We were more conscious than most then. I think in addition to a handful of multi-family, I think we only have one act of condo project and their free sales exceed out debt level within infinite of whatever you say Jim, I think we’ve done a couple of public centers, which are retail or publics being the big grocery store chain here.

Jim Baiter

Correct, it's more and in terms of that proven cash flow. A lot of what we’ve done is refinance existing properties, but on a construction side, we take a very deliberate approach to each one of those transaction.

Kent Ellert

Mike, I don't know if can color on any other deals.

Mike Walker

I was just -- same thing about the investor and kind of single tenant or retail big box investment grade.

Kent Ellert

It was interesting to your question, when I saw the news on the treasury looking for more information on LLC buyers of residential properties over $1 million in Miami and in New York.

I immediately thought what that’s going to do with our book and we really only had two clients in that space and one client said well, my products tops out at [$750]. So, they don’t have the issue and they haven’t seen any impact in sales.

Another client is in the million-plus space and said that it's about 15% of their product. And so they have a wait and see. They're not sure how it's going to impact their business, but as a bank, we're fortunately isolated away from that issue.

Steven Alexopoulos

Okay. That’s really helpful. Kent, maybe just one more, just given the global market and essentially commodities meltdown, are you guys starting to see less far money coming into Miami at this point for commercial real estate? Thanks.

Kent Ellert

I think if you were to generalize about Southeast Florida, Brickell, Downtown Miami, the design district in the beach, I think the level of activity has changed to -- that feels more like a digestion period. I would say there is an era of caution and you see some people, some locals taking profits out of these large land assemblages.

And then when you look at the data that’s published and produced, the number of sales are definitely slowing, rents are definitely easing back, land transactions are not at the volumes they've been at over the last several years, all of which doesn’t -- we don’t see anything that looks like a crises. It really is at a level that’s probably more sustainable for longer period of time.

But once again I want to underline FCB does not have substantial exposure in any one of those markets and in some of those markets we have no exposure.

Steven Alexopoulos

Great. Thanks for taking all my questions.

Kent Ellert

Nice talking to you.


Our next question comes from Dave Rochester of Deutsche Bank.

Dave Rochester

Hey, good evening, guys.

Kent Ellert

Hi Dave.

Dave Rochester

On the deposit guide, you had some great deposit growth this quarter. I would imagine some of your new incentive structures help drive that. Are you possibly viewing this $250 million to $350 million growth guide as maybe a little conservative?

Kent Ellert

We flip coins to see who will answer the deposit question because it’s a tricky one. But I'll take a stab at it and let Mike comment on it. It used to be that frankly I was very concerned about our ability to generate deposit growth to keep up with the organic loan business and the team has responded well under Mike’s leadership, the alignment matters, the incentives matter and he can walk you through that.

But at the end of the day, where I sort of sit on it is we can grow the deposits, but it’s a function of cost. And when we give guidance that cost of funds could be 65 to 70 bps and we’re going to put a lot of CD product in the marketplace all that maybe very sound judgment and be very good for structuring the balance sheet, but I would rather do it at 40 basis points.

So what we have to do is find the balance between growing enormous amounts and growing very low cost core. And I don’t think we solved for that completely yet. And so what I would say is that I feel very confident that we’re going to be able to fund the business, the organic business of the company which the loan side will be $300 million to $400 million should be.

If things don’t change dramatically in the marketplace we can get that done. What we have to get done is really a stronger performance on the DDA side for non-interest bearing and a stronger performance on the treasury side.

We’re selling lots of treasury for free. I’m not quite sure how successful that will make us over the long haul, but we’re starting to see volumes now we've got to start getting paid for it. So I feel good about it, but I think we have work to do on the cost. So Mike if there is any color you want to add that would be good.

Mike Walker

I would just add Kent as you mentioned the funding side of the business is obviously a bigger challenge than the loan side of the business and as we realigned, we got teammates that are 100% focused on deposit gathering.

We’ve gotten very specific interactivities around calling on companies in the market that are deposit centric and we’ve also spent a great deal of time working with retail and commercial joint calling activities focused not only on the commercial deposits, but also going after cross-selling the personal deposits of the owners and employees that work for those companies in which we bank on the commercial side.

And lastly but not least, we also have put a stronger waiting on the deposit side of our business from an incentive perspective in order for teammates to paid out, they got to have good solid deposit performance and their loan production has to have equal waiting or close to equal waiting with deposit customers and it’s not just the loan has to be fully cross sold.

Dave Rochester

Got it, that’s a lot great color. Appreciate that. And I guess the main driver of extending the duration on the borrowing from CDs just to preserve or increased the asset sensitivity.

Kent Ellert

That’s right.

Dave Rochester

And then in terms of the positive price that you’ve seen, any pressure at all from the recent rate hike amongst your competitors?

Kent Ellert

No, not yeah we haven’t seen it.

Dave Rochester

Great. And then on the loan growth, I think you may have just answered this question earlier Kent, but it doesn’t sound like the recent retroact of the regulators and commercial real estate concentrations are going to have much of an impact on you guys, is that fair? You mentioned you're still building the threshold.

Kent Ellert

You of course never want to take anything for granted, but the way we manage those risk appetites we stay well below those lines that they have out there that create attention.

The other thing that for this quarter, which I think Mike and his team should feel great about Jim as well as the C&I production level, I don’t know if it was an all time high for us. I think it was in terms of new fundings on C&I of just of $150 million and that’s better than twice what we did the same quarter last year. So, in my mind everything is better when we got the C&I engine going.

Dave Rochester

Yeah. Great, and then one last on the expense range and the uptick there, can you just talk about what’s your appetite is for hiring today and what that pipeline looks like for bringing in more reps?

Kent Ellert

Yeah, so happy to the -- I think the relative success of FCB over the last three or four quarters financially has done a lot for people who thought about us as a potential place to practice their craft to really making them feel confident that its potentially a good decision and so that really speaks to the seven hires that we did in the fourth quarter.

The other thing I will tell you and everybody on this call is very active in recruiting for our company is that there are a couple of other institutions that are suffering from -- they are in the back side of an incentive cycle that they can’t keep paying out the way they've been paying out.

And so their banking teams are frustrated. There are banks -- a couple of banks that are having whether self-imposed or regulatorily imposed a little bit change in their credit culture. And those things are driving inbound traffic to us for people who are interested.

And so we’re going to be opportunistic. We’ve got staffing now in all the markets we serve at a level that I think gets the job done, but there are a handful of people out there that we think strategically can make us a better, stronger, faster sales organization.

And if they are at a point in their careers where they want to join us, we’re going to make room for them. So that’s really how we’re going to approach it. If we didn’t hire another person, we would be fine this year.

But I would envision us maybe in the first half of this year hiring another six bankers across the wholesale segments and then maybe five to 10 MLOs in the mortgage space. We are different than banking the 100-plus we do a quarter in organic residential mortgage business, we think is very important validation for the retail network.

I want to keep growing that business. It performs very well for us and the cross sell has been strong against those numbers. So we'll add more, but those folks are commission based. So they're more affordable obviously to bring them on.

Dave Rochester

Great. And is there any of that uptick in that guidance range account for any spending on preparing for the $10 billion asset threshold?

Kent Ellert

There is a little bit in the back half of this year. The OCC comes in for us and does a -- it's called a focused review. It’s not really a formal exam, but they’re off cycle mid-year when they come in. That will be in late March and early April.

Part of that exercise is we're going to roadmap with them a project plan to get that underway. And so I think sometime during this summer we will kick that off.

Dave Rochester

Okay. Great, thanks a lot guys.

Kent Ellert

Thank you.


And the next question comes from Stephen Scouten of Sandler O'Neill.

Stephen Scouten

Hi, good evening guys. How are you doing?

Kent Ellert

Hey Stephen, good to have you with us.

Stephen Scouten

Thanks. Question for you on the loan growth, obviously you took up the forward guidance on the loan growth a little bit and I’m curious just seeing the mix this quarter, which is more kind of fixed rate then adjustable relative to previous quarter.

Is there any change there that you’re anticipating within the forward growth like are you going to have to offer more fixed rate loans to drive that level of growth or what can you speak to there?

Kent Ellert

I think first of all, the balance there is about 50-50 fixed to floating on the production side and the tenure of the originations were six years -- was the -- of the fixed rate loans.

To the extent that we’re doing five year mini firms, we’re probably comfortable putting some of that on the balance sheet and not doing swaps. Swaps again remember there is a suitability aspect to where they sell some on a swap or not and then there are other instances where we might be able to get better pricing in our mind comparing our floating rate to the yield curve for selling swaps.

And if we can put our own balance sheet and get paid a premium to do so, we might take that on. That’s really what happened was a design that way for the quarter.

I don’t see that as being a requirement of the marketplace in 2016 to get our job done because we can always go back and swap this stuff out, but we may opportunistically put some more bet on our books. Mike do you have color for what you're seeing from your customers?

Mike Walker

No, I would agree with you and why you're saying, we’ve taken the opportunities, but we can do an on balance sheet fixed rate at a premium we’ve taken the opportunity to do so and then using the swaps as an opportunity to lock in arms for a long term fixed rate over a five or 10 year period depending on what they've asked for and therefore not putting our balance sheet at risk. So it's really a client by client, deal by deal basis.

Stephen Scouten

Okay. That makes sense and looking at the duration of the deposits you spoke to, I know you mentioned longer duration CDs. Are you looking at any longer duration FHLB borrowings as well right now?

And as it pertains to the resi mortgage perks is moving forward to replacing the acquired book, how are you thinking about funding that and your kind of incremental cost of funding versus the assets yields there?

Jen Simons

Well, we are very focused on growing core deposits as well as the duration of our CD portfolio, but yes, we will supplement with slot borrowings to the extent that we need to.

Stephen Scouten

Okay. And as it pertains to that, I think it was 3.6% effective yield on resi mortgage purchase. How do you think about the kind of matched funding perspective there kind of what your maybe net spread is there?

Paul Burner

I would say the net spread will probably be about 2.5% with the blend of funding.

Kent Ellert

Yes between 2% and 2.5%.

Paul Burner

From an incremental basis, I think Stephen we probably would not isolate it and if we do it in the future because the amounts won’t be sufficient to cause us to build a program for it, but really it’s more about the global funding plan for the balance sheet and taking it into the context of remaining asset sensitive.

Stephen Scouten

Okay. Makes sense and maybe one last one for me just in terms of the remaining accretion, I think you had said maybe it was looking like around $90 million previously with the $11.7 million this quarter. Did you have any other movement from the non-accretable to accretable that would make that bucket larger over time or where are we sitting there?

Kent Ellert

From a discount perspective, the discount is right about $80 million as of quarter end. Now the non-accretable to accretable will be different, but depending on the various slides of performance characteristics of those underlying assets.

So there has been transfers from non-accretable to accretable, but from a discount perspective on balance sheet that number remains at $80 million.

Stephen Scouten

Great. Thanks so much guys. Congrats on the great quarter.

Kent Ellert

Thank you, sir.


And next we have a question from David Eads of UBS.

David Eads

Hi good afternoon.

Kent Ellert

Hey David.

David Eads

Couple last ones, so any color on the non-interest income side of things about any opportunity you are particularly excited about excluding all the noise related to the acquired portfolio as you’re looking to 2016?

Kent Ellert

The biggest growth area this year will be the pass-through from the sale of conventional mortgage originations. That should -- line item should double as we go through the year between now and the fourth quarter and so that’s the most robust.

When we look at deposit fee generation, it’s a disappointment at this point and it's growing slower than the growth rate of our new depository households and that’s primary function of us giving too much away.

We would like to turn on the fees. We just haven’t gotten enough self confidence to do that yet. Hopefully that will happen in later quarters this year.

David Eads

All right and then any thoughts about the buyback. It looks like it is little bit less than half the authorization in 4Q, any thoughts given all the volatility in the market about using the rest of it -- of the current authorization and potential increase of the authorization?

Paul Burner

Well this is another question in which we're not entirely sure how to sound smart in answering it, but it certainly feels like the market has caused the bank to be a tremendous value and we do have a pretty significant open availability under the buyback.

And when we come out of the blackout period we're obviously going to look at the market and the Executive Management will make a decision. We clearly think we’re undervalued in today’s setting.

David Eads

All right. Great. Thanks.


And the next question comes from Ebrahim Poonawala of Merrill Lynch.

Ebrahim Poonawala

Good afternoon, guys.

Kent Ellert

Hey, how are you?

Ebrahim Poonawala

Good and just had one last remaining question tied to capital deployment, obviously it seems like you will be verbally going back to the market as far as buybacks are concerned because that means that you're not quite looking at M&A as a way to deploy capital given a very strong organic growth outlook and the pullback in the stock where you would rather buyback stock or is M&A still on in terms of if something comes through?

Kent Ellert

We have to look at each of those strategies independently and then in concordance with each other and we very much like to do something on the M&A front. The pricing has just gotten in our view for the smaller banks at a level that we couldn’t rationalize.

Maybe the current market conditions will create an opportunity. We do have pretty frequent dialogue and conversations. There are some interesting opportunities out there and I would say that that’s an operational priority for the team on this call and so we definitely are not walking away from it but we don’t have anything specific to talk about.

Ebrahim Poonawala

Understood and if I -- sorry if I missed it earlier, just in terms of the hires that have come you brought on recently, where are most of these lenders coming from? Is it other smaller community banks, the larger regionals or the big banks?

Kent Ellert

Yeah, there actually the big banks we're hiring folks that we have worked with previously at large organizations throughout Florida.

Ebrahim Poonawala

Understood. Thanks for taking my questions.


Our next question is from Brady Gailey of KBW.

Brady Gailey

Hey, good afternoon guys.

Kent Ellert

Hey Brady, how are you?

Brady Gailey

Good, so the $300 million to $400 million of quarterly loan growth just to make sure I understand that correctly, is that net loan growth or is that the production number that you’re guiding to there?

Kent Ellert

That’s the net loan growth. If we tend to just talk about the growth from fundings on new business and the commitments hopefully, we get on the backside I think on funding commitments are now about $850 million.

Brady Gailey

Okay. All right and then lastly for me the -- I think the snick book was like $483 million last quarter, did that change much in 4Q?

Kent Ellert

Down about $15 million or $20 million for the quarter.

Brady Gailey

Okay. All right great. Thanks guys.

Kent Ellert

You bet. Good talking to you.


And our next question is from Joe Fenech of Hovde Group.

Joe Fenech

Hey, guys most of my questions are answered but just two quick ones here I guess Kent, few other high quality banks operating in Florida have talked about increased aggressiveness on terms and structure you have, but it doesn’t seem to be impacting the outlook for loan growth for any of your guys.

So is it the things just continue to get better and the pie is growing. So there are more opportunities because otherwise it just seems to be a disconnect with bank supposedly pulling back because of aggressive underwriting but loan growth not slowing as a result.

Kent Ellert

I think that it were $7.5 billion or so right now and it feels really good that the team organically has built this business to the size and scale, but even having said that, I think that we still are not a major market participant and we don’t bump into ourselves.

There is a lot of opportunity against the large nationals that are very good at what they do when they’re paying attention and when they’re not paying attention they're susceptible to losing opportunity. That's still going on out there and that’s what happens in the C&I space.

On the real estate front the better capitalized, more experienced developers, they tend to have it stable. They tend to have a handful of projects going and a handful of banks that they work with and they don't put all their eggs in one basket and we just -- the technical expertise and the team here has just earned the privilege to be in those stables and so we're going to get our fair share.

So I would tell you we haven't changed our approach operationally other than the following. We're more disciplined today than we've ever been. We're more focused today than we've ever been. We're in the marketplace more today than we've ever been, which means we're just getting better at what we do.

I will tell you we track our key policy exceptions as a percent of the originated portfolio to make sure that we're not stretching and every bank's policies are different for these areas, but in the big ones that we track, we were a year ago at 15.2% of the originations had one of those types of exceptions that was mitigated for good cause.

In the most recent quarter, it was 13%. It's just steadily coming because we're commanding a better share of the business and a straighter dialogue with the client today because the bank is more relevant than it's ever been.

So those are two big bright points on my part. The team is doing better in the field. Jim is bringing greater discipline to the credit process. Mike's now raising the floors on all the pricing levels to try to drive better profitability in '16.

Having said all those great things about FCB right now, I will tell you that there are other banks out there that are behaving more aggressively today than they have in the past and they're doing things that we cannot do because we won't let ourselves do it and that would be a lot of non-recourse debt that would be highly leveraged transactions that would be significant loan to value and cash flow coverage violations without the right mitigated support.

And here's the back on that color because I am passionate about it, but when you see property in Southeast Florida and we know and Jim knows I am talking about that we passed on financing when they were -- it was a deal four years ago at $30 million and now that's gone through three trades and it's now something worth a $150 million and the land use hasn’t changed.

We're scratching our heads saying somebody is going to get left holding that and so it's the subtlety when Jim underwrites and says I am going to look at this not loan to value, but I am going to look at this loan to cost in 2010 or 2011 versus a loan to value in 2014 and that's just local decisioning and that's what's keeping us safe thus far and while we're very proud of what Jim and his team done around the credit book.

Joe Fenech

Okay. That's helpful color and then just one last one for me building on that last question on syndicated book, I know you guys have said in the past, you don't have direct energy exposure in there, but anything though that you might consider to be ancillary exposure that's related somehow to energy there in terms of geography where it sits where it's located etcetera that's at all concerning to you that you're monitoring more closely?

Kent Ellert

When you look at the syndicated book, it's remained relatively flat in terms of dollar as well as names. About 65% of its Florida and there is really no energy exposure whatsoever.

Joe Fenech

Great. Thanks.

Kent Ellert

Thank you.


This concludes our question-and-answer session. The conference has concluded. Thank you for attending today's presentation. You may now disconnect.

Kent Ellert

Thank you.

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