FB Financial Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 16, 2018. The company is a Tennessee bank holding company whose principal subsidiary, FirstBank, operates banking and mortgage businesses across Tennessee, North Alabama and North Georgia.
Business context and reporting period
FirstBank had 56 full-service branches and 9 other banking locations. Its strategy centers on relationship banking, organic growth in metropolitan and community markets, selective acquisitions, technology and mortgage banking. On July 31, 2017, FB Financial acquired Clayton Bank and Trust and American City Bank for approximately $236.5 million, adding about $1.06 billion in loans and $979.5 million in deposits. The acquisition materially affects year-over-year comparisons because results include the acquired banks only after closing.
Key financial metrics
Unless otherwise noted, amounts are in millions of dollars. Income and cash flow figures are for the year; balance-sheet figures are as of December 31.
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets | $4,727.7 | $3,276.9 |
| Loans held for investment | $3,166.9 | $1,848.8 |
| Total deposits | $3,664.4 | $2,671.6 |
| Total shareholders’ equity | $596.7 | $330.5 |
| Net interest income | $153.3 | $111.0 |
| Noninterest income | $141.6 | $144.7 |
| Noninterest expense | $222.3 | $194.8 |
| Income before taxes | $73.5 | $62.3 |
| Net income | $52.4 | $40.6 |
| Diluted earnings per share | $1.86 | $2.10 |
| Net interest margin, tax-equivalent | 4.46% | 4.10% |
| Efficiency ratio / adjusted efficiency ratio | 75.40% / 67.31% | 76.20% / 70.59% |
| Return on average assets / equity | 1.37% / 11.24% | 1.35% / 14.68% |
Net income rose 29.1%, while diluted EPS fell, reflecting a substantially larger weighted-average share count following equity issuances and the acquisition. Net interest income growth reflected higher loan balances, improved asset yields and acquisition-related accretion. Mortgage banking income was $116.9 million, slightly below 2016. Total 2017 noninterest expense included $19.0 million of merger and conversion costs, including a $10 million charitable contribution related to the Clayton Banks transaction.
Fourth-quarter 2017 net income was $23.0 million, or $0.75 basic and $0.74 diluted EPS, compared with $9.0 million and $0.38 basic and $0.37 diluted EPS in fourth-quarter 2016. Fourth-quarter 2017 net interest income was $49.0 million; the provision for loan losses was $1.0 million, following reversals in the first three quarters.
Cash and cash equivalents were $119.8 million. 2017 cash from operating activities was $37.6 million; investing activities used $267.2 million, including the acquisition; financing activities provided $213.0 million, including equity proceeds. Total borrowings were $333.3 million on the selected balance-sheet presentation; including $14.3 million of repurchase-agreement funding, reported borrowing-related obligations were $347.6 million. The loans-held-for-investment-to-deposit ratio was 86.42%, compared with 69.20% in 2016. The company reported that the Bank was well capitalized; year-end Bank CET1, Tier 1 risk-based and total risk-based capital ratios were 10.72%, 10.72% and 11.30%, respectively.
Material changes versus the prior comparable period
- Assets increased 44.3% and deposits 37.2%, driven substantially by the Clayton Banks acquisition; loans held for investment increased 71.3%, with management also reporting 13.9% organic loan growth.
- Net interest margin improved by 36 basis points to 4.46%; the cost of total deposits increased from 0.29% to 0.42% as rates and deposit balances rose.
- Reported nonperforming loans as a percentage of held-for-investment loans improved to 0.32% from 0.54%. Total nonperforming assets rose to $72.3 million from $19.1 million, mainly due to acquired assets and $43.0 million of rebooked GNMA loans subject to an optional repurchase right; the company said it did not expect to repurchase those loans.
- Merger and conversion expense increased to $19.0 million from $3.3 million. The acquisition also added $90.3 million of goodwill.
- Year-end shareholders’ equity increased following a $152.7 million private placement and $52.3 million of equity issued in the Clayton Banks acquisition. No common dividends were declared in 2017; management said it intended to retain future earnings.
Outlook, commentary, risks and unusual items
- Management anticipated gradual interest-rate increases during 2018 and expected industry mortgage origination volumes to decline. It identified the correspondent mortgage channel, metropolitan-market growth and core banking relationships as areas of focus. The filing provides no quantified earnings or revenue guidance.
- The Tax Cuts and Jobs Act reduced the corporate tax rate effective in 2018. FB Financial recorded a $5.9 million reduction in deferred tax liability in 2017, lowering tax expense; the company stated its accounting for the tax-law effects was complete.
- Mortgage servicing rights moved to fair-value accounting effective January 1, 2017. Subsequent fair-value changes were recorded in mortgage banking income; reported 2017 change in MSR fair value was a $3.4 million loss, while the financial-statement cash-flow reconciliation shows a $4.0 million change before hedge effects.
- Management reported the 2016 material weakness in mortgage-loan accounting and reconciliations as remediated at year-end 2017. Management assessed internal control over financial reporting as effective, but the auditor did not attest to that assessment; acquired Clayton Banks operations were excluded from management’s assessment.
- Principal risks include Tennessee and real-estate concentration, commercial real estate, construction and C&I credit exposure, rate and funding-cost changes, mortgage-market contraction and repurchase/servicing obligations, acquisition integration, competition, regulatory costs, cyber and third-party service-provider risks, and the controlling shareholder’s influence. About 73% of loans had real estate as a primary or secondary collateral component; approximately 77% of loans and 88% of deposits were tied to Tennessee.
- Unfunded loan commitments were $977.3 million and standby letters of credit were $22.9 million. Management said these arrangements are subject to normal credit policies and that material losses were not anticipated. The filing reported no material pending legal proceedings.
Most important facts for investors to verify
- Separate acquisition-driven balance-sheet and earnings growth from organic growth, and review the remaining integration costs and expected Clayton Banks contribution.
- Reconcile the reported 2017 asset-quality increase, especially the $43.0 million GNMA rebooking and acquired nonperforming assets, with management’s adjusted asset-quality discussion.
- Track deposit pricing, brokered and internet time deposits, borrowing levels and the effect of further rate increases on net interest margin and liquidity.
- Assess mortgage revenue and margins under the disclosed expectation of lower industry originations, including servicing-right valuation and mortgage repurchase exposure.
- Consider the effect of the $10 million charitable contribution and other merger costs, the Tax Act deferred-tax benefit, and the lower diluted EPS despite higher net income.
- Review capital and dividend capacity, acquisition-related goodwill, internal-control remediation, and the governance implications of the controlling shareholder.