FB Financial Corp quarterly report, Q3 FY2017

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FB Financial Corporation — Q3 2017 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2017. Unaudited figures below are in U.S. dollars; amounts are in millions unless stated otherwise. FB Financial operates FirstBank, with banking operations in Tennessee, north Alabama and north Georgia, and a mortgage business serving broader markets.

Financial performance and position

  • Q3 earnings: Net interest income was $43.6 million, noninterest income $37.8 million, and net income $8.4 million. Pretax income was $13.0 million; diluted EPS was $0.27.
  • Nine-month earnings: Net interest income was $104.3 million, noninterest income $104.6 million, and net income $29.4 million. Pretax income was $46.0 million; diluted EPS was $1.08.
  • Margins and efficiency: Tax-equivalent net interest margin was 4.61% for Q3 and 4.50% for the nine months. GAAP efficiency ratio was 85.01% and 78.90%, respectively; adjusted tax-equivalent ratios were 64.43% and 68.84%.
  • Balance sheet at September 30: Assets were $4.58 billion; loans held for investment $3.11 billion; loans held for sale $466.4 million; deposits $3.72 billion; shareholders’ equity $572.5 million. Cash and cash equivalents were $97.2 million.
  • Funding and debt: Balance-sheet borrowings comprised $14.6 million of repurchase agreements, $52.8 million of short-term borrowings and $143.5 million of long-term debt. Total deposits included $104.3 million of brokered and internet time deposits. Noninterest-bearing deposits were 24.9% of deposits.
  • Cash flow, nine months: Operating activities provided $43.0 million; investing activities used $212.5 million; financing activities provided $130.4 million. Cash and cash equivalents declined $39.2 million from year-end 2016.
  • Capital and liquidity: FirstBank was reported well capitalized. Its common equity Tier 1 ratio was 10.72%, total risk-based capital ratio 11.31%, and Tier 1 leverage ratio 10.60%. Management stated liquidity was adequate and reported $300 million of FHLB credit availability and $165 million of correspondent-bank lines.

Material changes versus comparable periods

  • Q3 net interest income rose 57.9% year over year, primarily from loan growth and the Clayton Banks acquisition; tax-equivalent NIM increased from 4.05% to 4.61%. Deposit growth and higher rates also increased interest expense.
  • Q3 noninterest income declined 14.0%, mainly due to lower mortgage banking income. For the first nine months, noninterest income declined 7.8%, reflecting lower mortgage banking income and securities gains.
  • Noninterest expense rose to $69.2 million in Q3 and $164.8 million for the nine months, including Clayton Banks merger and conversion costs of $15.7 million and $17.0 million, respectively. A $10 million charitable-foundation accrual was included in those costs.
  • Q3 net income exceeded reported Q3 2016 net income of $1.2 million, but was below 2016 pro forma C-corporation net income of $10.0 million. The 2016 reported comparison included a $13.2 million deferred tax charge on conversion from S-corporation to C-corporation status. Nine-month net income was $29.4 million versus $31.6 million reported and $30.4 million on a 2016 pro forma C-corporation basis. Diluted EPS comparisons are likewise affected by the tax-status change and share issuance.
  • Assets and deposits increased substantially from December 2016, principally due to the July 31 acquisition of Clayton Bank and Trust and American City Bank. The transaction added approximately $1.06 billion of loans and $979.5 million of deposits; consideration was approximately $236.5 million, with preliminary goodwill of $92.0 million. The purchase-price allocation remained preliminary.
  • The allowance for loan losses was $23.5 million, or 0.75% of loans, versus $21.7 million and 1.18% at year-end 2016. The company recorded a $0.8 million Q3 provision reversal and a $1.9 million reversal for the nine months, citing recoveries and credit quality.

Outlook, risks and unusual items

  • No specific earnings or financial guidance is provided. Management expected approximately $5 million of additional merger and conversion costs through the rest of 2017; Clayton Banks’ core-system conversion was planned for Q4 2017. Approximately $4 million of project expenses were expected over the following 12–18 months.
  • Management described loan growth and favorable economic conditions in its markets, while emphasizing that results depend on integration, credit quality, mortgage activity, funding costs and interest rates. It cautioned that forward-looking statements are subject to risks and actual results may differ.
  • Construction and development loans were approximately 97% of Bank risk-based capital; management expected this to slightly exceed the 100% regulatory guideline before trending down. This concentration, along with commercial real estate exposure, warrants monitoring.
  • Nonperforming assets were $40.3 million, or 0.88% of assets, versus $19.1 million at year-end 2016. Nonperforming held-for-investment loans were $9.0 million, or 0.29% of loans; the $40.3 million total also included $13.6 million of GNMA loans subject to an optional repurchase program, which the Bank said it did not expect to exercise, and acquired real estate and other assets.
  • Mortgage servicing rights were moved to fair-value accounting effective January 1, 2017. The $63.0 million MSR asset is sensitive to prepayment speeds, discount rates and other estimates; the company reported a $3.2 million fair-value reduction for the nine months, partly offset by hedging gains.
  • Commitments to extend credit and letters of credit totaled $978.5 million. The filing says material losses are not anticipated, but these commitments create potential off-balance-sheet credit exposure.
  • A $945,000 other-than-temporary impairment was recorded on an equity security. Management reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective; management said a previously identified mortgage-accounting control weakness had been remediated.

Investor verification priorities

  • Assess Clayton Banks integration, realization of anticipated synergies, remaining conversion costs and whether the preliminary purchase-price allocation or goodwill changes.
  • Reconcile reported and pro forma 2016 earnings and EPS when comparing performance, and account for the 2017 private placement and acquisition-related share issuance.
  • Track loan growth and concentrations, especially construction and development exposure, acquired credit-impaired loans, nonperforming assets and allowance coverage.
  • Monitor deposit mix, brokered funding, deposit-cost trends, borrowings and liquidity availability as the enlarged balance sheet grows.
  • Review mortgage margins and volumes, MSR valuation assumptions and hedging effectiveness, as well as the $10 million charitable-foundation accrual and other merger-related expenses.