FB Financial Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. FB Financial operates FirstBank across Tennessee, North Alabama and North Georgia, and a national mortgage business. Comparisons with 2017 are affected by the July 2017 Clayton Banks acquisition: 2018 includes the acquired operations for the full periods, while 2017 includes them only after the acquisition closed.
Financial performance and condition
- Q3 earnings: Net income was $21.4 million, or $0.68 diluted EPS, versus $8.4 million, or $0.27, in Q3 2017. Nine-month net income was $63.2 million, or $2.01 diluted EPS, versus $29.4 million, or $1.08.
- Revenue and margins: Q3 net interest income increased 21% to $52.8 million; tax-equivalent net interest margin was 4.71%, up from 4.61%. Nine-month net interest income rose 46% to $152.7 million and tax-equivalent margin was 4.72%, versus 4.50%. Loan growth and higher loan yields supported results, partly offset by higher funding costs.
- Noninterest income: Q3 fell to $34.4 million from $37.8 million; nine-month income was $103.4 million versus $104.6 million. Mortgage banking income declined to $26.6 million in Q3 and $81.7 million for nine months, reflecting higher rates, lower Q3 lock volume and narrower mortgage margins.
- Expenses and efficiency: Q3 noninterest expense was $57.2 million versus $69.2 million, primarily because 2017 included $15.7 million of merger and conversion costs. Nine-month expense increased to $169.7 million from $164.8 million, as growth-related and personnel costs partly offset lower merger costs. The adjusted efficiency ratio was 63.7% for both Q3 and nine months; GAAP ratios were 65.7% and 66.3%, respectively.
- Balance sheet: At September 30, total assets were $5.06 billion, loans held for investment $3.54 billion, deposits $4.13 billion and shareholders’ equity $648.7 million. Since year-end 2017, loans grew 11.7%, deposits 12.7% and assets 7.0%. Loans-to-deposits were 85.7%.
- Liquidity, debt and capital: Cash and cash equivalents were $181.6 million. Borrowings were $211.0 million, down from $347.6 million at year-end. The company and bank reported regulatory capital above minimum requirements; company CET1 was 11.5% and FirstBank CET1 was 11.7%.
- Cash flows, nine months: Operating cash flow was $140.7 million versus $43.8 million; investing cash use was $402.2 million versus $212.5 million; financing cash flow was $323.3 million versus $129.5 million. Cash increased $61.9 million to $181.6 million.
- Credit quality: Nonperforming assets were $25.9 million, or 0.51% of assets, down from $72.3 million at year-end, which included $43.0 million of rebooked GNMA loans subsequently derecognized. Nonperforming loans were 0.30% of loans; the allowance was $27.6 million, or 0.78% of loans. Nine-month provision was $3.2 million, compared with a $1.9 million reversal in 2017.
Material changes, outlook and risks
- Management attributed stronger banking results to loan growth, higher interest rates and the Clayton Banks acquisition. Deposit costs increased: Q3 cost of total deposits was 0.80%, compared with 0.46% a year earlier. A deposit campaign and $53.9 million of brokered deposits were used in Q3 to replace higher-cost FHLB funding; management noted the brokered deposits would raise time-deposit expense in Q4 2018 and Q1 2019.
- Management expected rising rates and a slower housing market to continue weighing on mortgage lock volume through the remainder of 2018. Q3 mortgage-segment pretax income was $0.4 million versus $3.9 million; nine-month income was $3.5 million versus $9.8 million. The nine-month results included a $6.2 million charge from changes in MSR and related hedge fair values.
- Interest-rate sensitivity modeling showed estimated net interest income increases of 11.9% in year one and 14.2% in year two under an immediate 400-basis-point rise; under a 200-basis-point decline, modeled decreases were 14.5% and 18.3%. These are scenario estimates, not forecasts, and rely on assumptions.
- Deposit concentration is a material liquidity risk: six commercial and individual clients held $446.2 million in aggregate, while public deposits totaled $425.1 million. Management cautioned that withdrawals could require higher-rate deposits or other funding.
- Off-balance-sheet commitments to extend credit were $1.039 billion, with $19.3 million of letters of credit. Mortgage repurchase and indemnification activity totaled $5.0 million for nine months, with a $3.7 million reserve. The filing reports no material pending legal proceedings.
- Management planned approximately $5.8 million of branch improvements and expansion over the next 12 months and indicated plans to add 12–15 revenue producers in the second half of 2018. No formal earnings guidance was provided. Subsequent to quarter-end, the board declared a $0.08 per-share dividend and authorized up to $50 million of share repurchases through October 22, 2019, or until the authorization is exhausted.
Important facts for investors to verify
- How much of earnings growth reflects sustainable organic growth versus the acquisition-related comparison, and how loan growth affects underwriting and future credit-loss provisions.
- Whether deposit costs and concentrated or rate-sensitive funding pressure net interest margin, liquidity and profitability.
- Mortgage origination volumes, sales margins, MSR valuation and hedging results, including the effect of further rate changes.
- The level and composition of GNMA delinquent loans not rebooked, loan repurchase exposure, and the adequacy of credit reserves.
- The assumptions behind management’s interest-rate sensitivity scenarios and the capital, liquidity and earnings effects of the announced repurchase plan and dividend.