FB Financial Corporation (FBK) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are primarily with December 31, 2018. FB Financial is a Tennessee-based bank holding company operating FirstBank and a national mortgage business, through Banking and Mortgage segments. Unless noted otherwise, amounts below are in millions.
Financial performance and position
- Earnings: Net income was $19.6 million, down slightly from $19.8 million in Q1 2018. Diluted EPS was $0.62 versus $0.63. Pre-tax income rose to $25.6 million from $25.2 million.
- Revenue and margins: Net interest income increased 9.5% to $53.0 million; tax-equivalent net interest margin eased to 4.61% from 4.64%. Total noninterest income fell 12.7% to $29.0 million, largely because of lower mortgage banking income. Noninterest expense declined 1.9% to $55.1 million. The GAAP efficiency ratio improved to 67.2% from 68.7%; adjusted tax-equivalent efficiency ratio was 64.9% versus 66.8%.
- Returns and taxes: Return on average assets was 1.54% versus 1.71%; return on average equity was 11.6% versus 13.4%. The effective tax rate increased to 23.4% from 21.7%.
- Cash flow: Operating cash flow was $32.4 million, versus $47.8 million in Q1 2018; investing cash outflow was $90.7 million, versus $139.5 million; financing cash inflow was $128.4 million, versus $45.6 million. Cash and cash equivalents ended the quarter at $195.4 million, up from $125.4 million at year-end 2018.
- Growth and funding: Total assets rose 3.9% from year-end to $5.34 billion. Loans held for investment increased $119.3 million to $3.79 billion, including notable growth in non-owner-occupied commercial real estate. Deposits rose $131.5 million to $4.30 billion. The loan-to-deposit ratio was 88.0%.
- Debt and capital: Borrowings totaled $229.2 million; shareholders’ equity was $694.6 million. At March 31, the Company reported CET1 of 12.0% and total risk-based capital of 13.4%; FirstBank reported CET1 of 12.3% and total capital of 13.0%. Both met applicable regulatory capital requirements.
- Credit quality: The allowance for loan losses was $29.8 million, or 0.79% of loans. Provision expense rose to $1.4 million from $0.3 million; net charge-offs were $0.5 million versus net recoveries of $0.05 million a year earlier. Nonperforming loans were 0.41% of loans, compared with 0.46% at year-end and 0.30% in Q1 2018; allowance coverage of nonperforming loans was 191%. Nonperforming assets totaled $30.4 million.
Material changes and unusual items
- Higher average loan balances and loan yields supported net interest income, but deposit costs increased materially: cost of total deposits was 1.14% versus 0.55% in Q1 2018. The tax-equivalent yield on loans held for investment increased to 6.31% from 5.92%.
- Mortgage banking income declined to $21.0 million from $26.5 million. Mortgage sales volume fell to $966.2 million from $1.68 billion, while the reported sale margin improved to 1.65% from 1.40%. Management cited higher rates, market slowdown, competition, and margin pressure.
- The Company recognized $1.1 million of mortgage restructuring charges and $0.6 million of merger costs in Q1. Management anticipated up to $2.5 million of additional mortgage divestiture-related costs and up to $4.4 million of additional costs related to the Atlantic Capital branch transaction.
- Mortgage servicing rights (MSRs) declined to $64.0 million from $88.8 million at year-end, including a $29.2 million MSR sale on $2.03 billion of serviced loans. The sale produced no material gain or loss and management said it provided approximately $9.2 million of regulatory capital relief.
- Adoption of the new lease standard on January 1, 2019 added operating lease right-of-use assets of $32.5 million and lease liabilities of $34.9 million at adoption, and reduced opening retained earnings by $1.3 million. Management said adoption did not significantly affect income or cash flows.
Outlook, risks and contingencies
- On April 5, 2019, FirstBank completed its acquisition of 14 Atlantic Capital branches in Tennessee and Georgia. Before final purchase-accounting adjustments, it assumed about $598 million in deposits, acquired about $385 million in loans at 99.32% of principal, and paid a 6.25% deposit premium. Management expected the transaction to reduce capital ratios during 2019.
- The Company announced plans to exit its third-party origination (TPO) and Correspondent mortgage channels. The TPO sale agreement was subject to customary closing conditions; the Correspondent channel sale was only at a non-binding letter-of-intent stage. Management expected the exits to reduce mortgage volume and income, while retaining retail and consumer-direct channels. Completion and terms were not assured.
- Management described the Bank’s liquidity position as adequate. Available funding sources included $576.1 million of remaining FHLB capacity and $240 million of correspondent-bank lines, although collateral or availability conditions apply. $331.0 million of securities were pledged at quarter-end.
- Interest-rate simulations showed an asset-sensitive position: modeled net interest income changed by +2.5% in year one under an immediate +400-basis-point shock and by -4.9% under a -100-basis-point shock. Modeled economic value of equity declined 14.1% under a -200-basis-point shock. These are model estimates based on assumptions, not forecasts.
- Management was implementing CECL, effective for the Company beginning in 2020. It expected a one-time increase in the allowance and a retained-earnings adjustment but could not yet reasonably quantify the impact; a range estimate was expected in the Q3 2019 Form 10-Q.
- Off-balance-sheet commitments to extend credit and letters of credit totaled $1.13 billion. The Company stated that material losses were not anticipated. It reported no material pending legal proceedings and no material changes to its risk-management practices.
- Management planned approximately $10 million of branch improvements and expansion over the next 12 months. The Company declared a quarterly dividend of $0.08 per share; the next payment was scheduled for May 16, 2019.
Most important facts for investors to verify
- Whether the TPO sale closed and the Correspondent sale was completed, including final proceeds, costs, and the resulting mortgage segment earnings and capital effects.
- Whether loan and deposit growth can continue without further pressure on funding costs and net interest margin.
- Credit trends in non-owner-occupied commercial real estate, nonperforming loans, charge-offs, and the allowance, particularly following loan growth and the branch acquisition.
- The final purchase accounting, integration costs, deposit retention, loan performance, and capital impact of the Atlantic Capital branch acquisition.
- The eventual CECL allowance increase and retained-earnings impact, along with progress in model validation and implementation.
- Changes in liquidity, regulatory capital, and interest-rate sensitivity as the acquired branches and mortgage-channel exits affect the balance sheet.