FB Financial Corporation — Q3 2016 Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2016; nine-month comparisons are against the period ended September 30, 2015. FB Financial is a Tennessee bank holding company operating FirstBank and two reportable segments, Banking and Mortgage. Amounts below are in millions unless otherwise noted. The quarter included the company’s September 2016 IPO and conversion from S corporation to C corporation status.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $27.6 | $24.1 | $81.9 | $68.6 |
| Noninterest income | $44.0 | $27.0 | $113.4 | $68.3 |
| Provision for loan losses | $0.1 | $(1.2) reversal | $(0.7) reversal | $(0.9) reversal |
| Noninterest expense | $55.5 | $35.6 | $147.5 | $96.6 |
| Income before taxes | $16.0 | $16.8 | $48.5 | $41.2 |
| Reported net income | $1.2 | $15.9 | $31.6 | $38.7 |
| Pro forma net income, assuming C-corporation taxation | $10.0 | $11.6 | $30.4 | $27.0 |
| Pro forma diluted EPS | $0.55 | $0.67 | $1.73 | $1.57 |
Reported Q3 net income includes $13.2 million of deferred tax expense from the change to C-corporation status; it is not a recurring operating expense. The filing’s pro forma figures exclude this conversion-related charge and apply estimated C-corporation tax rates.
- Margins and efficiency: Tax-equivalent net interest margin was 4.05% in Q3 versus 3.95%, and 4.15% for nine months versus 4.00%. The tax-equivalent efficiency ratio was 69.96% and 69.70%, respectively, improving from 72.11% and 71.58%.
- Balance sheet at September 30: Assets were $3.19 billion, up from $2.90 billion at year-end 2015. Loans were $1.79 billion, deposits $2.64 billion, cash and cash equivalents $117.3 million, and shareholders’ equity $329.1 million.
- Funding and debt: Total deposits rose from $2.44 billion at year-end. Noninterest-bearing deposits were $726.2 million, or 27.5% of deposits. Repurchase agreements, short-term borrowings and long-term debt totaled approximately $154.4 million, versus $179.7 million at year-end; the IPO proceeds repaid $10.1 million of shareholder-held subordinated notes.
- Credit: Allowance for loan losses was $23.3 million, 1.30% of loans, compared with $24.5 million and 1.50% at year-end. Nonperforming loans were $11.0 million (0.61% of loans); nonperforming assets were $21.6 million (0.68% of assets), down from $24.9 million (0.86%) at year-end. The allowance covered nonperforming loans by 212.42%.
- Cash flow: Nine-month operating cash flow was negative $225.7 million, compared with negative $153.8 million. Investing cash flow was positive $22.8 million and financing cash flow positive $222.5 million; ending cash and cash equivalents were $117.3 million. Mortgage-loan production and sale activity materially affects operating cash flow.
- Capital: Company total capital ratio was 13.32% and CET1 was 11.16%; FirstBank’s corresponding ratios were 11.91% and 10.96%. The filing states the Bank met requirements and was well capitalized.
Changes versus comparable periods
- Q3 net interest income increased 14.4%; nine-month net interest income increased 19.5%, reflecting loan growth, the Northwest Georgia Bank acquisition and purchased-loan discount accretion.
- Mortgage banking income rose to $36.9 million in Q3 from $19.8 million and to $91.6 million for nine months from $51.1 million. Mortgage originations were $1.36 billion in Q3 and $3.12 billion for nine months.
- Expense growth offset much of the revenue growth: noninterest expense increased 56% in Q3 and 53% for nine months. Drivers included staffing and mortgage-volume costs, IPO-related equity compensation, mortgage servicing rights (MSR) impairment and amortization, growth investments, and merger/conversion expenses.
- Q3 reported EPS fell to $0.07 from $0.93, chiefly due to the tax-status conversion charge; pro forma EPS was $0.55 versus $0.67. Nine-month reported EPS was $1.80 versus $2.25, while pro forma EPS increased to $1.73 from $1.57.
- Loans grew 5.4% and deposits 8.3% from year-end 2015. The securities portfolio declined to $553.4 million from $649.4 million, partly as securities cash flows funded loan growth.
Outlook, commentary, risks and unusual items
- Management forecast Q4 2016 mortgage banking revenue of $25–$30 million and a pretax contribution from mortgage operations of approximately $2.6–$3.2 million. It cautioned that rates, seasonality, lower origination margins and channel mix could change results; mortgage lock commitments had declined to about $825 million by October 31, with a further year-end decline expected.
- The company signed letters of intent to sell serviced mortgage balances after quarter-end. The filing describes approximately $2.4 billion and an additional approximately $1.3 billion in one discussion, but approximately $2.37 billion and an additional approximately $1.2 billion elsewhere. Both transactions were expected to close before year-end. Management did not expect a material gain or loss but expected approximately $2.6 million of transaction expenses. It planned to retain some MSRs and consider future sales.
- MSR carrying value was $46.3 million; nine-month impairment was $8.1 million, and Q3 impairment was $2.4 million. Management cited higher rates and changes in origination mix as affecting mortgage activity and margins. MSR fair value depends on estimates including prepayment speeds and discount rates.
- Management identified interest-rate sensitivity as a key risk. Its model showed net interest income increasing in rising-rate scenarios but declining in a 100-basis-point rate decrease; assumptions and actual balance-sheet responses may differ. Mortgage pipeline commitments and forward-sale derivatives are used to manage exposure.
- Commitments to extend credit and letters of credit totaled $708.5 million. Management said material credit losses on these arrangements were not anticipated, but they represent potential off-balance-sheet exposure. Mortgage loan-sale representations and warranties are supported by a $3.3 million repurchase reserve.
- Additional considerations include public-company and regulatory compliance costs, stock-based compensation (with $17.1 million of unrecognized cost), and the expected adoption of the credit-loss accounting standard after December 15, 2019. Management reported effective disclosure controls; it also noted recent banking and mortgage system conversions. No material legal liability was anticipated from pending ordinary-course matters, and the filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile reported and pro forma earnings, especially the $13.2 million tax-conversion charge and ongoing C-corporation tax burden.
- Track mortgage production, Q4 guidance, origination margins, MSR sales and the inconsistent sale-balance estimates in the filing.
- Assess whether MSR impairment, servicing economics and interest-rate assumptions affect future mortgage profitability.
- Monitor credit trends, including nonperforming assets, risk-rated loans, allowance adequacy and commercial real estate concentrations.
- Review liquidity and funding needs alongside negative operating cash flow, deposit growth, short-term borrowings and substantial lending commitments.
- Evaluate ongoing compensation, public-company, technology and regulatory costs against revenue growth and the reported efficiency ratio.