FB Financial Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. FB Financial is a Tennessee bank holding company operating FirstBank, with banking and mortgage segments. It reported 65 full-service branches and a mortgage business serving markets across the Southeast.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $57.0 million | $51.5 million | $110.0 million | $99.9 million |
| Provision for loan losses | $0.9 million | $1.1 million | $2.3 million | $1.4 million |
| Noninterest income | $33.0 million | $35.8 million | $62.0 million | $69.0 million |
| Noninterest expense | $64.1 million | $56.4 million | $119.2 million | $112.5 million |
| Net income | $18.7 million | $22.1 million | $38.3 million | $41.8 million |
| Diluted EPS | $0.59 | $0.70 | $1.21 | $1.33 |
- Q2 net interest margin was 4.39% on a tax-equivalent basis, down from 4.81%; H1 margin was 4.50%, versus 4.73%. Management attributed compression chiefly to higher deposit costs, partly offset by higher contractual loan yields.
- Q2 return on average assets was 1.30% (1.86% prior year); return on average equity was 10.6% (14.4%). The Q2 GAAP efficiency ratio rose to 71.2% from 64.6%; adjusted tax-equivalent ratio was 65.9% versus 63.4%.
- Mortgage banking income declined to $24.5 million in Q2 from $28.5 million and to $45.5 million for H1 from $55.0 million. Higher interest expense and lower mortgage income outweighed growth in net interest income.
Financial position, cash flow and capital
- At June 30, assets were $5.94 billion, loans held for investment $4.29 billion, deposits $4.84 billion, borrowings $257.3 million, and shareholders’ equity $718.8 million. Compared with December 31, 2018, assets increased 15.6%, loans $622.0 million, and deposits $671.1 million.
- Growth included the April 5 Atlantic Capital branch acquisition: 14 Tennessee and Georgia branches, $588.9 million of deposits assumed, and $375.0 million of loans acquired. Excluding the acquisition, assets, loans and deposits grew 3.2%, 6.7% and 2.0%, respectively, from year-end.
- Cash and cash equivalents were $164.3 million, up from $125.4 million at year-end. H1 operating cash flow was negative $13.1 million, compared with positive $78.8 million in H1 2018; investing cash outflow was $42.9 million, including securities and loan activity, partly offset by $171.0 million net cash received in the branch acquisition. Financing cash flow was positive $95.1 million.
- Borrowings included $185.0 million of FHLB advances, $41.4 million of repurchase agreements and federal funds purchased, and $30.9 million of subordinated debt. The filing reports $447.6 million of remaining FHLB availability and $240 million in correspondent bank lines, of which $15.9 million was drawn.
- At June 30, company and bank CET1 ratios were 10.4% and 10.7%; total capital ratios were 11.6% and 11.3%. Both met applicable requirements. Book value per share was $23.29 and tangible book value per share was $17.18.
Material changes, outlook and risks
- Mortgage restructuring: The company exited its wholesale mortgage channels to focus on retail and Consumer Direct. The TPO channel sale closed June 7; the correspondent channel sale closed August 1, after quarter-end. Management expected mortgage lock volume to decline further in H2 2019 as a result. Restructuring costs were $0.8 million in Q2 and $1.9 million in H1.
- Acquisition costs: Atlantic Capital acquisition-related merger expenses were $3.8 million in Q2 and $4.4 million in H1. Purchase accounting remained preliminary, and adjustments could be made through the measurement period ending December 31, 2019.
- Credit quality: Nonperforming loans were $18.2 million, or 0.43% of loans, versus $16.7 million, or 0.46%, at year-end and $8.8 million at June 2018. Nonperforming assets were $35.3 million, or 0.59% of assets. The allowance was $30.1 million, 0.70% of loans and 165.3% of nonperforming loans. H1 net charge-offs were $1.1 million, compared with net recoveries of $0.9 million in H1 2018.
- CECL: Management expected adoption of the new expected-credit-loss standard to require a one-time increase to the allowance and a retained-earnings adjustment, but said the amount could not yet be reasonably quantified.
- Interest-rate and funding sensitivity: The company described itself as asset-sensitive. Its simulation estimated that a 100-basis-point rate decrease would reduce net interest income 4.8% in year one and 6.5% in year two; a 200-basis-point decrease would reduce it 10.8% and 14.6%. The filing cautions that actual results may differ from modeled estimates.
- Liquidity and contingencies: Commitments to extend credit were $1.19 billion and letters of credit $17.5 million. Management said material losses on these commitments were not anticipated. It considered liquidity adequate. No material pending legal proceedings or material changes to previously reported risk factors were disclosed.
- No formal earnings or full-year financial guidance is provided in the filing. Management declared a subsequent quarterly dividend of $0.08 per share, payable August 16, 2019.
Important facts for investors to verify
- Whether deposit pricing and funding costs continue to pressure net interest margin as acquired and organic balances grow.
- Post-sale mortgage production, servicing-rights valuations and earnings contribution after both wholesale channels exited.
- Credit trends, particularly nonperforming loans, commercial real estate exposure and the adequacy of the allowance as CECL implementation advances.
- Integration results and final purchase accounting for the Atlantic Capital branches, including any subsequent fair-value adjustments.
- Liquidity and capital effects of the $150 million of FHLB advances entered into after quarter-end, and the company’s capacity to fund growth and commitments.