FB Financial Corporation — 2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016. FB Financial is a Tennessee bank holding company operating primarily through FirstBank, with banking and mortgage segments across Tennessee, North Alabama and North Georgia. The company completed its IPO in September 2016; its common stock began trading on the NYSE as FBK that month.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Net interest income | $111.0 million | $93.9 million |
| Noninterest income | $144.7 million | $92.4 million |
| Income before taxes | $62.3 million | $50.8 million |
| Net income | $40.6 million | $47.9 million |
| Net interest margin, tax-equivalent | 4.10% | 3.97% |
| Efficiency ratio | 76.20% | 74.36% |
| Adjusted efficiency ratio, tax-equivalent | 70.59% | 73.10% |
| Total assets at year-end | $3.28 billion | $2.90 billion |
| Loans held for investment | $1.85 billion | $1.70 billion |
| Total deposits | $2.67 billion | $2.44 billion |
| Total shareholders’ equity | $330.5 million | $236.7 million |
Pre-tax income rose 22.6%, while reported net income fell 15.2%, principally because the company became a taxable C corporation at the IPO and recorded a $13.2 million deferred tax charge. On a pro forma C-corporation basis, net income was $39.4 million in 2016 versus $33.0 million in 2015. Reported basic and diluted EPS were $2.12 and $2.10, respectively, versus $2.79 in 2015.
Mortgage banking income increased to $117.8 million from $70.2 million; total mortgage originations were $4.67 billion. Salary and benefit costs rose to $114.0 million from $84.2 million, reflecting growth, mortgage production and IPO-related equity awards. Mortgage servicing rights also incurred $4.7 million of impairment and a $4.4 million loss on sale.
Credit quality improved: nonperforming assets declined to $19.1 million from $24.9 million; nonperforming loans were 0.54% of loans versus 0.68%. The allowance for loan losses was $21.7 million, or 1.18% of loans, and coverage of nonperforming loans was 216.22%. The company recorded a $1.5 million reversal of loan-loss provision in 2016.
Cash and cash equivalents were $136.3 million at year-end. Operating cash flow was negative $245.2 million, largely reflecting the high volume of mortgage loans originated and sold; investing cash flow was negative $32.7 million and financing cash flow was positive $316.5 million. Cash increased $38.6 million. Financing liabilities included $150.0 million of short-term borrowings, $21.6 million of repurchase agreements and $44.9 million of long-term debt. Company and Bank capital ratios exceeded minimum requirements; FirstBank’s total risk-based capital ratio was 11.72% and leverage ratio was 8.95%.
Material changes versus the prior comparable period
- Net interest income increased 18.2%, driven by loan growth, lower funding costs and $3.5 million of accretion on acquired Northwest Georgia Bank loans. The tax-equivalent net interest margin increased 13 basis points.
- Noninterest income rose 56.6%, primarily from mortgage growth and a favorable rate environment through the third quarter. Mortgage lock volume declined in the fourth quarter as rates rose.
- Assets grew 13.0%; loans held for investment rose 8.6% and deposits rose 9.6%. Noninterest-bearing deposits increased 11.2% to $697.1 million.
- The IPO generated approximately $115.5 million net proceeds. The company used $55.0 million for a distribution to its majority shareholder, repaid $10.1 million of shareholder-held subordinated notes and injected $20 million into FirstBank.
- Northwest Georgia Bank, acquired in September 2015, contributed to 2016 balances and earnings. The company recorded $3.3 million of merger and conversion costs in 2016.
Outlook, risks, contingencies and unusual items
- Management expected gradual interest-rate increases during 2017 and anticipated industry-wide mortgage origination declines; it expected lower mortgage contribution in the first quarter of 2017. No specific company-wide earnings guidance is provided in the filing.
- On February 8, 2017, the company agreed to acquire Clayton Bank and Trust and American City Bank for an announced value of approximately $284.2 million. The stated planned consideration included 5.86 million shares and $60 million of subordinated debt. The transaction, expected to close in the third quarter of 2017, remained subject to regulatory, shareholder and other closing conditions; integration costs and execution risks are noted.
- A material weakness was identified in controls over mortgage-loan-held-for-sale recording and related reconciliations. The weakness caused certain 2016 transactions to be recorded in incorrect interim periods, though no previously reported interim statements were restated. Management said remediation was underway; disclosure controls were deemed ineffective at year-end.
- Key exposures include geographic concentration in Tennessee, real-estate-related lending (approximately 73% of loans had real estate as a primary or secondary collateral component), commercial real estate and construction credit risk, competition, interest-rate sensitivity, mortgage servicing and repurchase obligations, and cybersecurity and technology risks.
- The company does not anticipate paying common-stock dividends in the foreseeable future. James W. Ayers held approximately 71.3% of common shares and controlled the company. The filing reports no material pending legal proceedings.
Important facts for investors to verify
- Track whether the Clayton Banks acquisition closed, its final consideration, integration costs and realized earnings benefits.
- Review subsequent disclosures on remediation and testing of the mortgage-accounting control weakness, including whether any restatement or additional control deficiencies arise.
- Assess mortgage earnings and servicing-rights values as rates, originations, margins and servicing costs change.
- Monitor loan concentrations, criticized and nonperforming credits, charge-offs, allowance adequacy and Tennessee-area real estate conditions.
- Reconcile recurring cash generation and liquidity needs with mortgage origination volume, short-term borrowings, deposit trends and capital levels.
- Distinguish reported 2016 earnings from pro forma C-corporation results and evaluate dilution from IPO shares, equity awards and any acquisition issuance.