FB Financial Corporation — Q1 2020 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2020. FB Financial is a Tennessee-based bank holding company operating FirstBank, with 73 branches across Tennessee and neighboring states, plus a national mortgage business. Results reflect the COVID-19 shock, adoption of CECL on January 1, 2020, and the February 14 acquisition of Farmers National.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net interest income | $56.2 million | $53.0 million |
| Net interest margin, tax-equivalent | 3.92% | 4.61% |
| Noninterest income | $42.7 million | $29.0 million |
| Noninterest expense | $68.6 million | $55.1 million |
| Provision for credit losses, including unfunded commitments | $29.6 million | $1.4 million |
| Net income / diluted EPS | $0.7 million / $0.02 | $19.6 million / $0.62 |
| Operating cash flow | $(101.7) million | $32.4 million |
Mortgage banking income rose to $32.7 million from $21.0 million, supported by higher refinancing activity and a 2.92% mortgage sales margin versus 1.65%. However, lower rates and faster prepayments reduced the fair value of mortgage servicing rights (MSRs); the reported net MSR and hedging fair-value impact was a $5.9 million loss. The GAAP efficiency ratio was 69.3%, versus 67.2%; adjusted, tax-equivalent efficiency ratio was 65.7%, versus 64.9%.
At March 31, total assets were $6.66 billion, deposits $5.38 billion, gross loans $4.57 billion, and shareholders’ equity $782.3 million. Cash and cash equivalents were $425.1 million, up $192.4 million from year-end. Borrowings totaled $327.8 million, including $250.0 million of FHLB advances, $30.9 million of subordinated debt, $15.0 million of other borrowings and $31.9 million of repurchase agreements and federal funds purchased. Management reported no significant pandemic-related liquidity pressure and said liquidity was being maintained at higher-than-typical levels.
The allowance for credit losses was $89.1 million, or 1.95% of loans, compared with $31.1 million, or 0.71%, at year-end. Nonperforming loans were $31.0 million (0.68% of loans); total nonperforming assets were $49.3 million (0.74% of assets). Regulatory capital remained above stated requirements: company CET1 was 11.0% and FirstBank CET1 was 11.7%. The company elected the five-year CECL regulatory-capital transition option.
Material changes versus comparable periods
- Net income fell to $0.7 million from $19.6 million, primarily as the credit-loss provision rose sharply amid COVID-19 forecasts and CECL adoption. The provision included $2.9 million related to acquired non-PCD Farmers National loans.
- CECL adoption reduced opening retained earnings by $25.0 million and increased the allowance; prior-year results were not restated, limiting direct comparability.
- Net interest income increased, but the tax-equivalent net interest margin declined 69 basis points, reflecting lower rates and asset yields.
- Assets, deposits and loans increased from year-end, partly due to the Farmers National acquisition. Excluding that acquisition, management reported assets up 4.45%, loans down 0.5%, and deposits up 4.71% from December 31.
- Noninterest expense increased $13.5 million, including higher personnel and mortgage commissions, acquisition-related costs and $3.1 million of merger expenses.
Outlook, risks and unusual items
- Management said the duration and financial impact of COVID-19 were unknown. Risks identified include borrower delinquencies and defaults, falling collateral values, higher credit costs, lower demand, continued margin pressure, operational and cybersecurity risks, and effects on customers and vendors.
- By May 1, 2020, the company had processed $325.8 million in PPP loans through the SBA. It reported $791.3 million of loans with deferred payments through May 1 in the notes; MD&A separately reported approximately $791.2 million across commercial and consumer deferrals. Deferrals were generally 60–90 days, with possible extensions, and were not classified as TDRs under the cited guidance.
- The completed Farmers National acquisition added approximately $258.2 million of assets and $209.5 million of deposits; preliminary goodwill was $5.8 million and purchase accounting remained subject to finalization.
- The proposed Franklin Financial Network merger was valued at approximately $602 million using the January 21 share price; the filing cited an implied value of approximately $338 million using FB Financial’s May 5 share price. Closing was expected in Q3 2020, subject to approvals and other conditions.
- No specific earnings or financial guidance was provided. The company declared a $0.09-per-share quarterly dividend after quarter-end and stated the unusually high Q1 payout ratio was not representative of its longer-term intent.
Important facts for investors to verify
- Whether COVID-19 conditions, payment deferrals and PPP lending lead to further credit deterioration, provision increases or charge-offs.
- CECL allowance assumptions and forecast sensitivity, including the $25.0 million opening retained-earnings adjustment.
- Subsequent loan performance, especially in the disclosed retail, healthcare, hotel, transportation, leisure and restaurant exposures.
- Mortgage production, sales margins, refinancing activity and MSR valuation changes as rates and prepayment speeds shift.
- Franklin merger approvals, valuation, timing, integration costs and expected benefits, as well as final Farmers National purchase accounting.
- Liquidity, deposit mix and funding costs, operating cash-flow volatility, and capital ratios as the pandemic and acquisitions evolve.