FB Financial Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are against December 31, 2017 unless otherwise noted. FB Financial is a Tennessee-based bank holding company operating FirstBank’s 56 branches across Tennessee, north Alabama and north Georgia, plus a national mortgage business. Amounts below are in millions of dollars unless stated otherwise.
Financial results and key metrics
- Profit: Net income was $19.8 million, up from $9.8 million in Q1 2017; diluted EPS was $0.63 versus $0.40. Return on average assets was 1.71% (1.25% prior year), and return on average equity was 13.4% (11.9%).
- Net interest: Net interest income was $48.4 million versus $30.3 million. Tax-equivalent net interest margin increased to 4.64% from 4.28%; yield on interest-earning assets was 5.25%, while the cost of interest-bearing liabilities rose to 0.85% from 0.51%.
- Noninterest income and expense: Noninterest income was $33.3 million, up 7.0%, including $26.5 million of mortgage banking income. Noninterest expense increased to $56.2 million from $46.4 million. The GAAP efficiency ratio improved to 68.7% from 75.7%; the adjusted tax-equivalent ratio was 65.5% versus 73.3%.
- Loans and credit: Loans held for investment totaled $3.245 billion, up $77.8 million, or 2.5%, from year-end. The allowance for loan losses was $24.4 million, 0.75% of loans. Nonperforming loans were 0.30% of loans; allowance coverage of nonperforming loans was 253.1%. Nonperforming assets were $27.8 million, down from $72.3 million at year-end, principally reflecting removal of previously rebooked GNMA loans.
- Cash flow: Operating cash flow was $47.8 million, compared with $147.9 million in Q1 2017; investing cash outflow was $139.5 million and financing cash inflow was $45.6 million. Cash and cash equivalents declined $46.1 million during the quarter to $73.7 million. Mortgage production and sale flows affect operating cash flow.
- Balance sheet and funding: Total assets were $4.725 billion, essentially flat with year-end. Deposits rose $101.8 million to $3.766 billion; noninterest-bearing deposits were 24.7% of deposits. Shareholders’ equity was $611.1 million. Period-end borrowings comprised $138.7 million short-term borrowings, $139.6 million long-term debt and $14.7 million repurchase agreements. The Bank and Company exceeded regulatory capital requirements; FirstBank’s CET1 ratio was 11.0% and total capital ratio was 11.6%.
Material changes and drivers
- Year-over-year growth reflects, in substantial part, the July 2017 acquisition of Clayton Bank and Trust and American City Bank; Q1 2018 includes their operations, whereas Q1 2017 does not. The acquired banks added approximately $1.06 billion in loans and $979.5 million in deposits at acquisition. Reported growth should not be read as wholly organic.
- Higher loan balances and yields drove the increase in net interest income. Average loans held for investment increased approximately $1.32 billion year over year, and the tax-equivalent loan yield rose to 5.92% from 5.44%.
- Funding costs increased: total deposit cost rose to 0.55% from 0.32%, and deposit interest expense increased to $5.1 million from $2.1 million. Management cited higher rates and acquisition-related deposit growth.
- Operating expenses rose with scale, personnel and integration costs. Merger and conversion expense was $1.2 million versus $0.5 million; the company said Q1 costs primarily related to converting the acquired banks to its core system.
- Mortgage segment pretax income declined to $1.1 million from $2.1 million, partly due to MSR valuation and hedging effects. Mortgage lock commitments increased 33.2% year over year to $2.129 billion, while management noted lower mortgage sales margins amid rising rates and a greater correspondent-channel mix.
Outlook, risks and unusual items
- The filing provides no specific earnings or margin guidance. Management said it believed current liquidity was adequate and described continued focus on core deposit growth, loan growth and controlling funding costs. It expected acquired brokered and internet time deposits to continue running off and seasonal public deposits to decline over the remainder of 2018.
- Interest-rate exposure is material: modeled net interest income was asset-sensitive, with a 100-basis-point increase estimated to raise year-one net interest income 1.1%, while a 100-basis-point decrease was estimated to reduce it 6.2%. A 400-basis-point increase was estimated to reduce economic value of equity 10.3%. These are model estimates based on assumptions, not forecasts.
- Credit risks include commercial real estate and construction exposure, collateral values and borrower repayment capacity. Construction and commercial real estate concentration ratios were below the stated regulatory monitoring thresholds. The allowance is based on management estimates and could differ from realized losses.
- At March 31, $45.9 million of delinquent GNMA loans previously sold were not rebooked because the company determined it lacked a more-than-trivial repurchase benefit. The $43.0 million rebooked balance and matching liability reported at year-end were derecognized; management said it will reassess the circumstances quarterly.
- Available-for-sale securities had $16.3 million of gross unrealized losses at quarter-end, primarily attributed by management to interest rates rather than credit quality; no other-than-temporary impairment was recorded. Accumulated other comprehensive loss increased, contributing to a $5.8 million quarterly comprehensive-income reduction relative to net income.
- The 2018 effective tax rate was 21.7%, compared with 35.7% in Q1 2017, reflecting the federal corporate tax rate reduction. The company adopted accounting guidance for equity securities, recording a $109,000 transition adjustment to retained earnings.
- Off-balance-sheet commitments included $959.3 million to extend credit and $22.2 million of letters of credit; the company said material losses were not anticipated. No material pending legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective.
- After quarter-end, the Company declared its first regular quarterly dividend of $0.06 per share, payable May 15, 2018 to shareholders of record April 30, 2018.
Important facts for investors to verify
- How much of earnings and balance-sheet growth is sustainable and organic versus acquisition-related, and whether Clayton integration costs and expected synergies develop as anticipated.
- Whether loan growth, criticized-credit trends, nonperforming assets and allowance adequacy remain consistent with management’s credit assessments.
- Whether deposit pricing and deposit mix keep pace with rising rates, including the run-off of brokered funding and the potential decline in seasonal public deposits.
- Mortgage profitability, correspondent-channel margins, MSR valuation assumptions and hedge effectiveness as rates and prepayment behavior change.
- Liquidity and funding flexibility, including collateral availability, commitments that may be drawn, and sensitivity to the modeled adverse rate scenarios.
- The effect of unrealized securities losses and future accounting changes, including the expected-credit-loss standard that management was still evaluating.