FB Financial Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. FB Financial is a Nashville-based financial holding company operating FirstBank, with Banking and Mortgage segments and 81 full-service branches across Tennessee, Alabama, southern Kentucky, and north Georgia. Comparisons with 2020 are affected by the 2020 acquisitions, including Franklin Financial Network.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $86.6 million | $55.3 million | $169.1 million | $111.6 million |
| Noninterest income | $49.3 million | $81.5 million | $116.0 million | $124.2 million |
| Net income attributable to FB Financial | $43.3 million | $22.9 million | $96.2 million | $23.6 million |
| Diluted EPS | $0.90 | $0.70 | $2.00 | $0.74 |
| Tax-equivalent net interest margin | 3.18% | 3.50% | 3.18% | 3.70% |
| Efficiency ratio | 68.4% | 58.9% | 65.8% | 63.3% |
Q2 net income rose about 89% year over year; first-half net income more than quadrupled. Higher net interest income—reflecting acquired loan balances and lower deposit funding costs—and credit-loss provision reversals supported earnings. Noninterest income was lower, chiefly because mortgage banking income declined. Total noninterest expense increased to $93.0 million in Q2 and $187.7 million for the half, reflecting higher personnel and other costs associated with growth and the Franklin acquisition.
- Credit provisions: The company recorded a net benefit of $13.8 million in Q2 and $27.7 million for the first half, versus provision expense of $25.9 million and $55.5 million, respectively, in 2020. Management attributed the releases to improved economic forecasts; the allowance for credit losses fell to $144.7 million from $170.4 million at year-end 2020.
- Balance sheet and liquidity: Assets were $11.92 billion at June 30, up from $11.21 billion at December 31, 2020. Cash and cash equivalents were $1.72 billion, versus $1.32 billion; available-for-sale debt securities were $1.40 billion, versus $1.17 billion. Deposits grew to $10.20 billion from $9.46 billion. The loans-to-deposits ratio was 70.6%.
- Loans and asset quality: Loans held for investment were $7.20 billion, up from $7.08 billion at year-end. Nonperforming assets were $78.2 million, or 0.66% of assets, versus $84.2 million, or 0.75%, at year-end. Nonperforming loans to loans were 0.83%, compared with 0.91% at year-end. Troubled debt restructurings increased to $42.7 million from $16.0 million.
- Debt and capital: Balance-sheet borrowings were $184.0 million, down from $238.3 million at year-end; this includes subordinated debt and other borrowing categories. The company repaid $40 million of subordinated notes during the first half and repaid a further $20 million note on July 1. At June 30, company and bank total risk-based capital ratios were 14.9% and 14.2%, respectively; CET1 ratios were 12.4% and 12.2%. Both exceeded applicable requirements.
- Cash flow: Operating activities used $75.1 million in the first half, compared with $147.7 million used in 2020. Investing activities used $205.7 million; financing activities provided $680.0 million, mainly reflecting deposit growth. Cash and cash equivalents increased $399.2 million. The filing’s cash-flow presentation includes substantial mortgage-loan originations and sales.
- Shareholder measures: Book value per share was $28.96 and tangible book value per share was $23.43 at June 30. Dividends declared were $0.11 per share in Q2. No shares were repurchased under the $100 million repurchase authorization during the quarter.
Material changes and management commentary
- Tax-equivalent net interest margin declined year over year as low rates on new and repriced loans and elevated excess liquidity weighed on asset yields. Management estimated excess liquidity reduced Q2 margin by about 37 basis points, compared with 7 basis points a year earlier.
- Mortgage banking income fell to $35.5 million in Q2 from $72.2 million and to $90.8 million for the half from $104.9 million. Management cited lower interest-rate-lock volume, reduced refinancing activity, and rising rates. It expected mortgage production to decline in the second half of 2021 as rates rose and housing inventory remained limited; no quantified earnings guidance was provided.
- Management reported that economic activity improved through the first half, but had not returned to pre-pandemic levels. It highlighted uncertainty from COVID-19 and the Delta variant, and possible effects on borrowers, asset values, and results.
- The company revised segment reporting in 2021 to place all retail mortgage activity in the Mortgage segment; comparative 2020 segment figures were reclassified.
- Interest-rate simulations showed an asset-sensitive position: a hypothetical immediate 100-basis-point increase was estimated to raise first-year net interest income by 9.40%, while a 100-basis-point decrease was estimated to lower it by 5.62%. These are model scenarios, not forecasts, and depend on assumptions about balances, repricing, and customer behavior.
Risks, contingencies, and unusual items
- Management cautioned that COVID-19, the Delta variant, interest-rate movements, economic conditions, real estate values, problem credits, and the integration and realization of benefits from acquisitions could materially affect results. Cybersecurity, third-party technology, competition, and the LIBOR transition were also identified as risks.
- Credit quality remains subject to uncertainty despite lower reserves and improved forecasts. At June 30, $73.9 million of loans remained in COVID-related deferral status, down from $202.5 million at year-end; $1.36 billion of previously deferred loans were no longer in deferral status.
- Off-balance-sheet commitments to extend credit and letters of credit totaled $2.60 billion. The filing states that material losses are not anticipated, but these commitments carry credit risk.
- The company reported no material pending legal proceedings and no material changes to the risk factors in its 2020 Form 10-K. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
- Unusual or notable items included the $27.7 million first-half net credit-provision benefit, the $787,000 Q2 gain on lease modifications and terminations, and $605,000 of secondary-offering expenses. The filing also notes an estimated $29 million right-of-use asset and $30 million lease liability upon commencement of the new Nashville headquarters lease, anticipated in late 2022.
Key facts for investors to verify
- Whether credit trends, borrower performance, and the allowance remain consistent with the improved economic assumptions that drove provision releases.
- How higher rates, lower refinance volumes, housing supply constraints, and mortgage margins affect Mortgage-segment earnings in subsequent quarters.
- Whether deposit growth and excess liquidity persist, and how they affect net interest margin and asset sensitivity.
- How the Franklin integration, higher operating costs, and balance-sheet growth affect efficiency and returns.
- The post-June repayment of the remaining $20 million subordinated note, the next dividend, and any use of the $100 million share-repurchase authorization.
- The assumptions behind the interest-rate simulations and the potential impact of COVID-19 variants, credit commitments, and the new headquarters lease.