Business context and reporting period
FB Financial Corporation’s Form 10-K covers the fiscal year ended December 31, 2018; it is an annual report, not a standalone fourth-quarter filing. The Nashville-based bank holding company operates FirstBank, serving Tennessee, North Alabama and North Georgia, with banking and mortgage segments. At year-end, it reported $5.14 billion in assets, $3.67 billion in loans held for investment and $4.17 billion in deposits.
Financial and operating highlights
Unless noted otherwise, dollar amounts are in millions. Annual comparisons are 2018 versus 2017.
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $204.1 | $153.3 |
| Provision for loan losses | $5.4 | $(1.0) reversal |
| Noninterest income | $130.6 | $141.6 |
| Noninterest expense | $223.5 | $222.3 |
| Income before taxes | $105.9 | $73.5 |
| Net income | $80.2 | $52.4 |
| Diluted earnings per share | $2.55 | $1.86 |
| Net interest margin, tax-equivalent | 4.66% | 4.46% |
| Efficiency ratio | 66.8% | 75.4% |
- Net income rose 53.1%; management attributed the improvement mainly to loan growth, the full-year contribution from the 2017 Clayton Banks acquisition and higher interest rates. The 2017 comparison includes substantial Clayton merger and conversion costs.
- Mortgage banking income was $100.7 million, down from $116.9 million. Mortgage segment pretax income fell to $1.2 million from $13.1 million as origination volume and sales margins declined and mortgage servicing rights (MSR) fair-value and hedge changes weighed on results.
- Operating cash flow was $212.2 million, compared with $37.6 million in 2017. Investing activities used $586.5 million, including $491.8 million of net loan growth; financing activities provided $379.9 million. Cash and cash equivalents ended at $125.4 million.
- Loans held for investment grew 15.8% to $3.67 billion; deposits rose 13.8% to $4.17 billion. Noninterest-bearing deposits were $949.1 million. Total deposit cost increased to 0.76% from 0.42%, reflecting higher rates and time-deposit growth.
- Year-end borrowings were $227.8 million, down from $347.6 million. Shareholders’ equity was $671.9 million; the company’s CET1 and total risk-based capital ratios were 11.7% and 13.0%, respectively. FirstBank was reported well-capitalized.
- Credit indicators were mixed: nonperforming loans rose to 0.46% of loans from 0.32%, while nonperforming assets fell to $31.4 million from $72.3 million. The prior-year figure included $43.0 million of rebooked GNMA loans subsequently derecognized. The allowance was $28.9 million, or 0.79% of loans, versus $24.0 million, or 0.76%.
Material changes, outlook and risks
- The company agreed to acquire 14 Atlantic Capital branches, assuming approximately $602 million of deposits and buying approximately $381 million of loans at 99.32% of book value, plus a deposit premium. The filing anticipated completion in the second quarter of 2019 and said regulatory approvals had been received. Management expected the transaction to reduce capital ratios upon closing.
- Management expected interest rates to increase modestly or remain flat during 2019. It cautioned that a flatter yield curve could pressure net interest income and that rising rates and competition were likely to continue weighing on mortgage volume, pricing and profitability.
- CECL was scheduled to take effect in 2020. The company expected a one-time increase to its credit-loss allowance but said the impact could not yet be reasonably quantified. Lease accounting adoption in 2019 was estimated to increase the balance sheet by 0.4%–0.8% of assets.
- Key risks include geographic concentration (approximately 77% of loans and 87% of deposits were tied to Tennessee), real-estate exposure (about 71% of loans had real estate as a primary or secondary collateral component), commercial and construction credit risk, competition for deposits and rising funding costs. Five customers held $412.0 million of deposits; public deposits totaled $448.2 million and may fluctuate.
- Other notable items: the company sold $39.4 million of MSRs during 2018 and completed a further MSR sale in the first quarter of 2019, reducing MSRs by $29.4 million. It declared $0.20 per share in 2018 dividends and authorized a $50 million repurchase program, with no shares repurchased by year-end. No material pending legal proceedings were reported. Management assessed internal control over financial reporting as effective; the auditor issued an unqualified opinion on the 2018 financial statements.
Important facts for investors to verify
- Whether loan-credit deterioration continues and whether the allowance remains adequate, particularly across commercial real estate, construction and commercial and industrial lending.
- Deposit retention, large-depositor and public-funds fluctuations, and the effect of deposit repricing on margins and funding costs.
- The Atlantic Capital branches’ actual closing date, acquired balances, integration costs, customer retention and capital impact.
- Mortgage profitability and MSR valuation, including the realized effect of the 2019 MSR sale and continuing mortgage-market pressures.
- The eventual CECL adoption adjustment and related regulatory-capital treatment.