FB Financial Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. FB Financial is a Nashville-based bank holding company operating FirstBank and a national mortgage business. Unless noted, amounts below are in millions of dollars; the filing presents financial statement amounts in thousands.
Business context and key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $55.3 | $57.0 | $111.6 | $110.0 |
| Noninterest income | $81.5 | $33.0 | $124.2 | $62.0 |
| Net income | $22.9 | $18.7 | $23.6 | $38.3 |
| Diluted EPS | $0.70 | $0.59 | $0.74 | $1.21 |
| Tax-equivalent net interest margin | 3.50% | 4.39% | 3.70% | 4.50% |
| Efficiency ratio | 58.9% | 71.2% | 63.3% | 69.3% |
- Revenue and earnings: Q2 mortgage banking income rose to $72.2 million from $24.5 million, supporting higher quarterly net income despite much higher credit provisions. For the first half, net income fell as pandemic-related provisions outweighed strong mortgage results. Total noninterest expense was $80.6 million in Q2 and $149.1 million for the half, including higher mortgage commissions, acquisition-related staffing costs, and merger expenses.
- Credit costs and asset quality: Provision for credit losses, including unfunded commitments, was $25.9 million in Q2 and $55.5 million for the first half, versus $0.9 million and $2.3 million in the comparable 2019 periods. The loan allowance was $113.1 million, or 2.34% of loans, at June 30, compared with $31.1 million, or 0.71%, at year-end 2019. The comparison is affected by adoption of CECL and is not directly comparable. Nonperforming loans were $34.8 million (0.72% of loans), versus $26.6 million (0.60%) at year-end; nonperforming assets totaled $51.2 million.
- Cash flow: For the six months, operating cash flow was negative $147.7 million, investing cash flow was negative $190.0 million, and financing cash flow was positive $822.7 million. Cash and cash equivalents increased $484.9 million to $717.6 million, largely alongside significant deposit growth and mortgage loan origination and sale activity.
- Balance sheet and liquidity: Total assets were $7.26 billion, up from $6.12 billion at December 31, 2019. Loans held for investment were $4.83 billion and total deposits were $5.95 billion. Borrowings were $328.7 million; shareholders’ equity was $805.2 million. Management said liquidity was higher than typical and reported no significant pandemic-related funding pressure. The loan-to-deposit ratio was 81.1%.
- Capital: At June 30, the company’s CET1 ratio was 11.6%, Tier 1 risk-based capital ratio 12.1%, and total risk-based capital ratio 13.4%. The Bank’s corresponding ratios were 12.3%, 12.3%, and 13.5%. Both met applicable capital requirements; the company elected the five-year CECL regulatory capital transition.
Material changes versus comparable periods
- Quarterly net income increased 22% year over year, while first-half net income declined 38%. The differing results primarily reflect the timing and scale of pandemic-related credit provisions and the surge in mortgage banking income.
- Net interest margin contracted in both comparison periods as lower market rates reduced asset yields; lower deposit costs partly offset the effect. Q2 tax-equivalent asset yield was 4.14%, down from 5.52% a year earlier.
- Mortgage activity benefited from low rates and refinancing: Q2 mortgage sales were $1.60 billion, with a 2.85% sales margin, compared with $1.26 billion and 1.67% a year earlier. Refinancing represented 79.8% of Q2 rate-lock volume. MSR fair-value changes, net of hedging, were negative $13.2 million in Q2 and negative $19.1 million for the first half.
- Deposits increased about $1.02 billion from year-end, while loans grew about $417 million. Growth included the Farmers National acquisition, PPP lending, customer deposits, and mortgage escrow balances. Excluding Farmers National and PPP effects, management reported first-half loan contraction and deposit growth.
Outlook, management commentary, risks and unusual items
- COVID-19: Management said the duration and financial impact remained uncertain. Restrictions had eased in parts of the footprint late in Q2, but rising case counts subsequently led to renewed restrictions and slower commerce. Management warned that prolonged disruption could impair borrower repayment and asset values, increase credit losses, and affect earnings and capital.
- Deferrals and PPP: Loans in COVID-related payment deferral status totaled $918.3 million, or 19.0% of loans held for investment, at June 30; management reported approximately $1.01 billion at July 31. The company had funded $314.7 million of PPP loans and expected SBA forgiveness activity to begin in Q3, with those loans anticipated to be repaid in full. These expectations are not guaranteed.
- CECL and unusual accounting impact: Adoption of CECL on January 1 reduced retained earnings by $25.0 million and increased the opening allowance. Pandemic-related economic forecasts and qualitative adjustments materially increased provisions. Actual losses may differ as forecasts and management estimates change.
- Mergers: Farmers National was acquired February 14, adding $258.2 million of assets, $182.2 million of loans, and $209.5 million of deposits; purchase accounting remained preliminary. The proposed Franklin Financial Network merger had regulatory and shareholder approvals and was expected to close August 15, 2020. Its implied value was approximately $394 million using FB Financial’s June 30 share price, versus approximately $602 million using the pre-announcement price.
- Mortgage and interest-rate risks: Management noted that rising rates could materially reduce mortgage production and refinancing. The company also cited margin compression risk from near-zero policy rates, although loan floors and deposit repricing could mitigate some pressure. Interest-rate sensitivity estimates rely on assumptions and may differ from actual results.
- Dividends and contingencies: The company declared $0.09 per share for Q2 and a further $0.09 per share dividend after quarter-end. Management cautioned that the elevated first-half dividend payout ratio was not reflective of historical payout or longer-term intent; pandemic-driven earnings pressure could affect future dividends. No material pending legal proceedings were reported.
Most important facts for investors to verify
- Subsequent-quarter changes in deferrals, delinquencies, criticized loans, charge-offs, and the allowance—especially in commercial real estate, construction, hospitality, and other exposed industries.
- Whether the CECL forecasts and qualitative adjustments remain appropriate as economic conditions and government support programs evolve.
- Durability of unusually strong mortgage income and sales margins, including refinancing volumes, MSR valuations, and hedging results.
- Completion and integration of the Franklin merger, final purchase accounting for Farmers National, and resulting capital, expense, and synergy effects.
- Deposit retention and liquidity as PPP funds and other temporary customer balances move, and the timing and extent of PPP loan forgiveness.
- Capital and dividend capacity under weaker credit or earnings scenarios; reported capital ratios include elected CECL transition relief.