FB Financial Corporation — Q3 2020 Form 10-Q
Reporting period ended September 30, 2020. Dollar amounts are in millions unless otherwise noted; interim financial statements are unaudited.
Business context and reporting period
FB Financial is a Nashville-based bank holding company operating through FirstBank and its Banking and Mortgage segments. During 2020 it completed the Farmers National acquisition in February and the Franklin Financial Network merger on August 15. Franklin added $3.62 billion of assets and $3.11 billion of deposits at acquisition; the company issued shares and paid cash for approximately $477.8 million of consideration. Reported year-over-year and year-to-date comparisons therefore reflect acquisitions as well as operating changes.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $68.8 | $58.3 | $180.4 | $168.3 |
| Provision for credit losses, including unfunded commitments | $55.4 | $1.8 | $110.9 | $4.1 |
| Noninterest income | $97.0 | $38.1 | $221.2 | $100.2 |
| Noninterest expense | $118.1 | $62.9 | $267.2 | $182.2 |
| Net income (loss) | $(5.6) | $24.0 | $18.0 | $62.2 |
| Diluted earnings (loss) per share | $(0.14) | $0.76 | $0.52 | $1.97 |
- Mortgage banking income rose to $84.7 million in Q3 and $189.6 million year to date, principally reflecting strong refinancing activity and a lower-rate environment. Q3 mortgage sales were $1.77 billion at a 4.32% sales margin.
- Tax-equivalent net interest margin declined to 3.28% in Q3 from 4.28% a year earlier, and to 3.53% for nine months from 4.42%. Lower asset yields and balance-sheet mix pressured margin; lower deposit costs partly offset the effect.
- At September 30, total assets were $11.01 billion, loans held for investment $7.21 billion, deposits $9.09 billion, and shareholders’ equity $1.25 billion. Cash and cash equivalents were $1.06 billion.
- The loan allowance was $184.0 million, or 2.55% of loans, versus $31.1 million and 0.71% at year-end 2019. Nonperforming assets were $70.4 million, including $43.6 million of nonperforming loans held for investment and $12.8 million of nonaccrual loans held for sale.
- Nine-month operating cash flow was negative $142.0 million, versus negative $16.2 million in 2019. Financing activities provided $900.6 million, and cash increased $829.7 million to $1.06 billion.
- Borrowings totaled $438.8 million, including $189.8 million of subordinated debt; the company issued $100 million of subordinated notes during Q3. After quarter-end it chose not to renew $100 million of FHLB advances.
- Company regulatory capital ratios included 11.8% CET1, 12.1% Tier 1 risk-based capital, and 15.3% total risk-based capital. The company and bank reported meeting applicable capital requirements. Tangible common equity to tangible assets, a non-GAAP measure, was 9.2%.
Material changes versus comparable periods
- Q3 shifted from $24.0 million of net income to a $5.6 million net loss; nine-month net income fell from $62.2 million to $18.0 million.
- Credit provisions increased sharply, reflecting CECL’s lifetime-loss approach, pandemic-related forecasts, and acquired loan portfolios. The Franklin acquisition generated $52.8 million of provision expense for non-PCD loans; the company also recorded acquired-loan allowances through purchase accounting.
- CECL adoption on January 1 reduced retained earnings by $25.0 million and increased the opening loan and unfunded-commitment allowances. Prior-period financial statements were not restated.
- Assets, loans, deposits, and equity expanded substantially following the two acquisitions. Excluding acquisitions and PPP loans, management reported year-to-date asset growth of 11.3%, loan contraction of 2.8%, and deposit growth of 17.1%.
- Merger costs were $20.7 million in Q3 and $25.4 million year to date, compared with $0.3 million and $4.7 million, respectively. Q3 costs included contract termination, branch consolidation, professional fees, severance, and conversion expenses.
Outlook, commentary, risks and unusual items
- No formal earnings or financial guidance is provided. Management expected PPP forgiveness applications to begin reducing PPP balances in Q4, with repayment anticipated in full. At September 30, PPP loans totaled $310.7 million.
- Management expected additional Franklin conversion costs through year-end 2020 and certain merger-related severance costs through the first half of 2021. Six Franklin branches were planned for closure and consolidation.
- COVID-19 effects remain uncertain. Management cited risks of borrower distress, elevated unemployment, weaker commercial real estate and collateral values, loan losses, reduced demand, and prolonged economic disruption. It also warned that near-zero rates could compress margins and that dividend levels could be reduced or suspended if earnings weaken.
- COVID-19 payment deferrals remaining at September 30 totaled $464.8 million, or 6.4% of loans held for investment; $1.18 billion of previously deferred loans had returned to normal payment status. Deferrals generally ranged from 60 to 90 days and were not classified as TDRs under applicable relief guidance.
- Management reported improved economic forecasts during Q3 for the existing loan portfolio, excluding the allowance effects of Franklin. However, the allowance estimate is sensitive to economic forecasts and management judgments.
- Mortgage results benefited from refinancing demand and low rates, but management warned production and refinancing could decline if rates rise. Mortgage servicing rights are also sensitive to prepayment assumptions and valuation inputs.
- Other items include a $2.6 million FHLB early-termination cost, a $20.4 million Q3 gain related to fair-value changes in Franklin commercial loans held for sale, and an expected approximately $29–30 million lease asset and liability when the new Nashville headquarters lease begins, anticipated in Q4 2022.
- The company said there were no material pending legal proceedings and no material changes to previously disclosed risk factors other than the expanded COVID-19 risks.
Important facts for investors to verify
- Whether the increased allowance adequately reflects pandemic-related credit risk, particularly in construction, commercial real estate, healthcare, hotels, retail, and other exposed industries.
- Trends in remaining deferrals, delinquencies, nonperforming assets, charge-offs, and acquired Franklin loan performance as relief programs expire.
- Whether unusually strong mortgage production and margins persist, and how a change in interest rates could affect mortgage revenue, servicing rights, and net interest margin.
- Actual integration costs, branch consolidation progress, and realization of anticipated acquisition benefits; Franklin purchase accounting and goodwill were preliminary.
- Liquidity and funding after the $100 million FHLB advance nonrenewal, plus the company’s capacity to maintain dividends and capital through changing credit conditions.
- The effect of crossing the $10 billion asset threshold on interchange fee income; management warned that the Durbin amendment could reduce such fees if assets remained above that level at year-end.