FB Financial Corporation — 2019 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; financial statements are unaudited. FB Financial is a Tennessee-based bank holding company operating FirstBank, with 68 branches in Tennessee, north Alabama and north Georgia, and a mortgage business. Amounts below are in millions of dollars unless noted.
Business context and financial performance
The company reports Banking and Mortgage segments. Growth in the period reflects organic loan and deposit growth and the April 5 acquisition of 14 Atlantic Capital Bank branches. In 2019 it also exited wholesale mortgage channels, selling its third-party origination and correspondent channels.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $58.3 | $52.8 | $168.3 | $152.7 |
| Provision for loan losses | $1.8 | $1.8 | $4.1 | $3.2 |
| Noninterest income | $38.1 | $34.4 | $100.2 | $103.4 |
| Noninterest expense | $62.9 | $57.2 | $182.2 | $169.7 |
| Net income | $24.0 | $21.4 | $62.2 | $63.2 |
| Diluted EPS | $0.76 | $0.68 | $1.97 | $2.01 |
| Tax-equivalent net interest margin | 4.28% | 4.71% | 4.42% | 4.72% |
Q3 net income rose about 12% year over year, while nine-month net income fell about 2%. Q3 net interest income increased 10.5%, largely on loan growth and the acquired branches, but the higher cost of deposits pressured margin. Noninterest income increased in Q3, with stronger mortgage production partly offset by adverse mortgage servicing rights (MSR) valuation changes. For the nine-month period, lower mortgage income contributed to the decline in noninterest income.
Noninterest expenses increased 10.0% in Q3 and 7.3% for the first nine months. Drivers included staffing, branch and operating costs, merger expenses, and mortgage restructuring costs. Nine-month merger costs were $4.7 million and mortgage restructuring charges were $2.0 million.
Financial condition, cash flow and capital
- Scale and growth: Total assets were $6.09 billion, up 18.5% from December 31, 2018. Loans were $4.35 billion, up $677.8 million, and deposits were $4.92 billion, up $750.0 million. The company attributes much of the increase to the branch acquisition; excluding it, assets rose 6.1%, loans 8.3% and deposits 3.9%.
- Liquidity and funding: Cash and cash equivalents were $243.0 million, compared with $125.4 million at year-end 2018. The loan-to-deposit ratio was 88.3%. Total borrowings were $307.1 million, including $250.0 million of FHLB advances; brokered and internet time deposits declined to $25.4 million from $103.1 million. Management stated it believed liquidity was adequate and reported available secured and correspondent borrowing capacity.
- Cash flow: For the first nine months, operating cash flow was negative $16.2 million versus positive $140.7 million in 2018; investing cash flow was negative $86.9 million versus negative $402.2 million; and financing cash flow was positive $220.7 million. Cash increased $117.6 million to $243.0 million. Operating cash flow was affected substantially by mortgage loan originations and sales.
- Credit quality: The allowance for loan losses was $31.5 million, or 0.72% of loans, versus $28.9 million, or 0.79%, at year-end. Nonperforming assets were $38.0 million (0.62% of assets), up from $31.4 million; nonperforming loans were $20.4 million, or 0.47% of loans, versus $16.7 million, or 0.46%, at year-end. Allowance coverage of nonperforming loans declined to 154.5% from 173.0%. Nine-month net charge-offs were $1.6 million, compared with net recoveries of $0.4 million in 2018.
- Capital and shareholder returns: Company total capital to risk-weighted assets was 12.0%, CET1 was 10.8%, and Tier 1 leverage was 10.1%; the company and bank met applicable capital requirements. Shareholders’ equity was $744.8 million and book value per share was $24.08. The company declared dividends of $0.08 per share in Q3 and $0.24 per share year to date.
Material changes, outlook and risks
- Mortgage restructuring and MSRs: The company completed sales of its TPO channel on June 7 and correspondent channel on August 1, focusing mortgage operations on retail and Consumer Direct. Nine-month MSR fair-value changes were negative $23.8 million, partly offset by $13.1 million of gains on hedging instruments. Management cited faster-than-expected prepayments as a factor in MSR valuation pressure. Q3 interest-rate lock pipeline was $679.5 million, compared with $318.7 million at year-end.
- Acquisitions: The Atlantic Capital branch purchase added $588.9 million of deposits and $375.0 million of loans; purchase accounting remained preliminary. A definitive agreement to acquire Farmers National was signed September 17, with closing expected in Q1 2020, subject to approvals and other conditions. The notes estimate consideration at about $51.9 million, including approximately $15 million cash and 954,827 shares based on the signing-date share price. Elsewhere, the liquidity discussion refers to a $20 million payment to Farmers National shareholders; investors should reconcile this difference.
- Accounting and contingencies: Adoption of the new lease standard in January added $34.8 million of lease liabilities and $34.8 million of right-of-use assets at quarter-end; it did not significantly affect income. The company expects CECL adoption to increase the allowance and produce a one-time retained-earnings adjustment, but said the amount could not yet be reasonably quantified. It planned to use the regulatory three-year capital phase-in. Off-balance-sheet commitments to extend credit were $1.19 billion and letters of credit were $22.4 million; management did not anticipate material losses. The filing reports no material pending legal proceedings and no material risk-factor changes.
- Outlook: The filing provides no quantified earnings or margin guidance. Management describes continued focus on core deposits, loan growth, mortgage retail and Consumer Direct channels, and says it considers current liquidity adequate. Results remain exposed to interest-rate changes, deposit costs, credit conditions, real-estate collateral values, mortgage volumes and MSR assumptions. Management’s rate simulations indicate that a 100-basis-point rate decrease would reduce projected net interest income by 5.9% in year one and 7.8% in year two; modeled outcomes depend on assumptions and are not forecasts.
Important facts for investors to verify
- Reconcile the Farmers National cash consideration: approximately $15 million in the acquisition note versus $20 million in the liquidity discussion, and confirm the final share count, approvals and expected closing timing.
- Track deposit pricing and net interest margin, which fell despite loan growth, and assess the effects of future rate changes on both assets and funding costs.
- Monitor nonperforming loans, past-due loans, allowance coverage and nonperforming real estate as the loan book expands.
- Review mortgage segment profitability, MSR valuation assumptions, hedge effectiveness and the impact of the wholesale-channel exits.
- Confirm CECL’s eventual allowance and capital effects; the filing says the expected retained-earnings adjustment was not yet quantifiable.
- Assess ongoing merger, integration and branch investment costs. The company reported no share repurchases under its authorization through September 30, 2019.