FB Financial Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. FB Financial is a Nashville-based bank holding company operating FirstBank across Tennessee, North Alabama and North Georgia, alongside a national mortgage business. Unless stated otherwise, amounts below are in millions of dollars. The 2017 comparison predates the July 31, 2017 Clayton Banks acquisition for much of the comparison period, which materially affects year-over-year comparability.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net interest income | $51.5 | $30.4 | $99.9 | $60.7 |
| Noninterest income | $35.8 | $35.7 | $69.0 | $66.7 |
| Net interest income plus noninterest income | $87.3 | $66.1 | $169.0 | $127.4 |
| Noninterest expense | $56.4 | $49.1 | $112.5 | $95.6 |
| Provision for loan losses | $1.1 | $(0.9) | $1.4 | $(1.1) |
| Net income | $22.1 | $11.2 | $41.8 | $21.0 |
| Diluted EPS | $0.70 | $0.43 | $1.33 | $0.82 |
| Tax-equivalent net interest margin | 4.81% | 4.19% | 4.73% | 4.24% |
| Efficiency ratio | 64.6% | 74.4% | 66.6% | 75.0% |
Q2 net income nearly doubled year over year; H1 net income also approximately doubled. Management attributed higher net interest income mainly to loan growth, higher loan yields and the Clayton Banks acquisition. Higher deposit and borrowing costs partially offset the increase. Mortgage banking income was lower in Q2, while overall noninterest income was nearly flat. Expense growth reflected the larger business, personnel and operating costs, and acquisition-related intangibles and costs. The effective tax rate declined to 26.1% in Q2 and 24.1% in H1, versus 36.9% and 36.4% in 2017, following federal tax reform.
Financial position, cash flow and capital
- At June 30, 2018, total assets were $4.92 billion, up from $4.73 billion at year-end 2017. Loans held for investment were $3.42 billion, up $248.7 million; deposits were $3.91 billion, up $245.5 million.
- Cash and cash equivalents were $104.4 million. Total borrowings, including repurchase agreements, short-term borrowings and long-term debt, were approximately $342.9 million; long-term debt alone was $139.4 million. The loan-to-deposit ratio was 87.4%.
- For H1, operating cash flow was $78.8 million, investing cash flow was negative $331.2 million and financing cash flow was positive $237.0 million. Cash and cash equivalents decreased $15.3 million from year-end.
- Shareholders’ equity was $631.0 million. Company common equity Tier 1, Tier 1 and total capital ratios were 10.6%, 11.3% and 11.9%, respectively; FirstBank was reported as well capitalized.
- Book value per share was $20.56 and tangible book value per share was $15.66. A quarterly dividend of $0.06 per share was declared; the next $0.06 dividend was declared after quarter-end.
Material changes, outlook and risks
- The Clayton Banks acquisition, completed in July 2017, added scale and markets; management cited acquired balances and organic metropolitan-market growth as major drivers of loan, deposit and earnings growth. H1 loan balances grew 7.9% from year-end.
- Mortgage conditions were pressured by rising rates, slower market activity and margin compression. Management expected the slowdown in mortgage lock volume to persist through the remainder of 2018; it also said anticipated further federal funds rate increases could raise funding costs and compress net interest margin.
- The company signed a letter of intent to sell servicing rights on approximately $3.22 billion of serviced loans, with closing expected in Q3 2018. It expected no significant gain or loss and said the transaction should make regulatory capital available to support Banking growth.
- After quarter-end, the Federal Home Loan Bank increased the company’s overnight line capacity from $300 million to $800 million. Availability remains subject to collateral requirements.
- Deposit concentration is a stated risk: six commercial and individual clients held $484.3 million in aggregate, and public deposits totaled $408.7 million, including three public entities with $152.8 million in total. Loss or reduction of large balances could require higher-cost replacement funding. Mortgage escrow deposits of $88.4 million were expected to decline after the pending servicing-rights sale.
- FirstBank’s construction lending concentration was 105.1% of risk-based capital, above the cited 100% supervisory guideline; commercial real estate concentration was 238.5%, below the cited 300% guideline. Nonperforming loans were 0.26% of loans, and the allowance was 299.0% of nonperforming loans. Management noted $0.7 million of subsequent deterioration in acquired credit-impaired loans.
- At June 30, $52.2 million of previously sold delinquent GNMA loans were not rebooked after the company concluded the repurchase option provided no more-than-trivial benefit. The filing says it will reassess this quarterly.
- A secondary offering of 3.68 million shares in Q2 was a sale by the former majority shareholder, not a primary capital raise by the company. His ownership fell to approximately 44%, ending the company’s controlled-company status. The company incurred about $0.7 million of related expenses.
- Management reported effective disclosure controls and no material pending legal proceedings. Forward-looking results remain subject to interest-rate, credit, liquidity, mortgage-market, acquisition and other risks; the filing provides no formal earnings guidance.
Important facts for investors to verify
- Whether deposit growth and the funding mix remain stable as seasonal public balances, brokered deposits and acquisition-related balances change, and whether large depositor concentrations decline.
- Whether higher deposit costs and further rate changes erode the reported margin improvement.
- Whether the planned mortgage servicing-rights sale closes as expected, and its realized capital, liquidity and servicing implications.
- Whether construction concentration, loan growth and acquired-credit marks lead to higher provisions or deterioration in asset quality.
- How much reported earnings growth is attributable to acquisition-driven scale, loan yields and accretion versus sustainable organic growth; compare results with appropriate pro forma acquisition data.