FB Financial (FBK) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Consolidated Financial Statements This section presents the unaudited consolidated financial statements for FB Financial Corporation for the quarterly period ended June 30, 2021, including detailed notes on accounting policies, mergers, and key financial items Note 1: Basis of Presentation The unaudited consolidated financial statements are prepared in accordance with U.S. GAAP for interim reporting, highlighting continued uncertainty from the COVID-19 pandemic and using the two-class method for EPS calculation - As of June 30, 2021, the company operated 81 full-service branches across Tennessee, Alabama, southern Kentucky, and north Georgia, along with a national mortgage business[24] - The company acknowledges continued uncertainty regarding the long-term economic effects of the COVID-19 pandemic, particularly the Delta variant, which could materially impact business operations and financial results[25] Earnings Per Share (EPS) Calculation | Period | Basic EPS | Diluted EPS | | :--- | :--- | :--- | | Three Months Ended June 30, 2021 | $0.91 | $0.90 | | Three Months Ended June 30, 2020 | $0.71 | $0.70 | | Six Months Ended June 30, 2021 | $2.03 | $2.00 | | Six Months Ended June 30, 2020 | $0.75 | $0.74 | Note 2: Mergers and Acquisitions This note details two acquisitions: the Franklin Financial Network, Inc. merger for approximately $477.8 million, adding $3.63 billion in assets, and the FNB Financial Corp. acquisition for $50.0 million, adding $258.2 million in assets - Effective August 15, 2020, the Company completed its merger with Franklin Financial Network, Inc., acquiring $3.63 billion in assets, $2.79 billion in loans, and $3.12 billion in deposits for aggregate consideration of approximately $477.8 million[31] - Effective February 14, 2020, the Company acquired FNB Financial Corp. for approximately $50.0 million, adding $258.2 million in assets and expanding the Company's footprint into Kentucky[34] - Following the acquisitions, the company recorded provisions for credit losses on non-PCD loans of $52.8 million (Franklin) and $2.9 million (Farmers National), and an increase in provision for unfunded commitments of $10.5 million related to the Franklin acquisition[41] Note 3: Investment Securities The company's available-for-sale (AFS) debt securities portfolio increased to $1.40 billion at fair value as of June 30, 2021, primarily composed of residential mortgage-backed and municipal securities, with no allowance for credit losses recorded Available-for-Sale Debt Securities Portfolio (Fair Value) | Security Type | June 30, 2021 (in millions) | December 31, 2020 (in millions) | | :--- | :--- | :--- | | Mortgage-backed securities - residential | $1,035.0 million | $773.3 million | | Municipal securities | $332.9 million | $356.3 million | | Other Securities | $36.5 million | $42.7 million | | Total | $1.40 billion | $1.17 billion | - As of June 30, 2021, securities with a carrying amount of $998.0 million were pledged to secure a Federal Reserve Bank line of credit, public deposits, and repurchase agreements[46] - The company evaluated AFS debt securities with unrealized losses and recorded no allowance for credit loss, citing that the majority of the portfolio was either government guaranteed, issued by a government-sponsored entity, or highly rated[54] Note 4: Loans and Allowance for Credit Losses Gross loans increased slightly to $7.20 billion, while the Allowance for Credit Losses (ACL) decreased to $144.7 million due to improving macroeconomic forecasts, with nonperforming loans at $59.5 million and COVID-19 deferrals significantly reduced Loan Portfolio Composition | Loan Category | June 30, 2021 (in millions) | December 31, 2020 (in millions) | | :--- | :--- | :--- | | Commercial real estate: Non-owner occupied | $1,675.2 million | $1,599.0 million | | Commercial and industrial | $1,238.9 million | $1,346.1 million | | Construction | $1,145.2 million | $1,222.2 million | | Residential real estate: 1-to-4 family | $1,126.6 million | $1,089.3 million | | Commercial real estate: Owner occupied | $923.6 million | $924.8 million | | Other | $1,089.8 million | $901.5 million | | Gross Loans | $7.20 billion | $7.08 billion | - The Allowance for Credit Losses (ACL) decreased from $170.4 million at Dec 31, 2020, to $144.7 million at June 30, 2021, driven by a net provision reversal of $24.5 million for the six-month period, resulting from improving macroeconomic variables used in the CECL model[58][60] - As of June 30, 2021, loans remaining in COVID-19 deferral status totaled $73.9 million (1.0% of total loans), a significant decrease from $202.5 million (2.9% of total loans) at December 31, 2020[88][90] Note 12: Segment Reporting The company operates through Banking and Mortgage segments, with Banking generating $56.2 million in pre-tax income and Mortgage $0.5 million for Q2 2021, following a realignment of mortgage activities Segment Income Before Taxes (in millions) | Segment | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Banking | $56.2 million | $(3.3) million | $108.3 million | $(10.5) million | | Mortgage | $0.5 million | $33.6 million | $16.9 million | $41.6 million | | Consolidated | $56.7 million | $30.3 million | $125.2 million | $31.2 million | - On March 31, 2021, the company realigned its segments to move all retail mortgage activities into the Mortgage segment, with prior period results revised, reclassifying a net contribution of $5.4 million for Q2 2020 and $8.9 million for H1 2020 from the Banking to the Mortgage segment[137] Note 13: Minimum Capital Requirements Both the holding company and its bank subsidiary met all capital adequacy requirements and were considered well-capitalized as of June 30, 2021, opting into the five-year transition period for CECL regulatory capital effects Regulatory Capital Ratios as of June 30, 2021 | Ratio | FB Financial Corporation (Actual) | FirstBank (Actual) | Well-Capitalized Minimum (Bank) | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 12.4% | 12.2% | 6.5% | | Tier 1 Capital | 12.7% | 12.2% | 8.0% | | Total Capital | 14.9% | 14.2% | 10.0% | | Tier 1 Leverage | 10.1% | 9.7% | 5.0% | - The company adopted the five-year transition option to delay the estimated impact of CECL on its regulatory capital[144] Consolidated Balance Sheet Highlights (Unaudited) | Metric | June 30, 2021 (in millions) | December 31, 2020 (in millions) | | :--- | :--- | :--- | | Total Assets | $11.92 billion | $11.21 billion | | Net Loans | $7.05 billion | $6.91 billion | | Total Deposits | $10.20 billion | $9.46 billion | | Total Liabilities | $10.55 billion | $9.92 billion | | Total Shareholders' Equity | $1.37 billion | $1.29 billion | Consolidated Income Statement Highlights (Unaudited) | Metric | Three Months Ended June 30, 2021 (in millions) | Three Months Ended June 30, 2020 (in millions) | Six Months Ended June 30, 2021 (in millions) | Six Months Ended June 30, 2020 (in millions) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $86.6 million | $55.3 million | $169.1 million | $111.6 million | | Provision for Credit Losses | $(12.9) million | $24.0 million | $(24.5) million | $52.0 million | | Noninterest Income | $49.3 million | $81.5 million | $116.0 million | $124.2 million | | Noninterest Expense | $93.0 million | $80.6 million | $187.7 million | $149.1 million | | Net Income | $43.3 million | $22.9 million | $96.2 million | $23.6 million | | Diluted EPS | $0.90 | $0.70 | $2.00 | $0.74 | Management's Discussion and Analysis of Financial Condition and Results of Operation Management analyzes the company's Q2 and H1 2021 financial performance, highlighting increased net income from provision reversals, strong net interest income growth, and a decline in mortgage banking income Overview of Recent Financial Performance Net income significantly increased in Q2 and H1 2021, primarily driven by a reversal of the provision for credit losses due to an improved economic outlook, while noninterest income decreased from lower mortgage banking activity Key Performance Metrics | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Income (in millions) | $43.3 | $22.9 | $96.2 | $23.6 | | Diluted EPS | $0.90 | $0.70 | $2.00 | $0.74 | | ROAA | 1.46% | 1.30% | 1.66% | 0.70% | | ROAE | 13.0% | 11.6% | 14.7% | 6.07% | - The primary driver for the increase in net income was a reversal of provisions for credit losses of $13.8 million in Q2 2021, compared to a provision expense of $25.9 million in Q2 2020[183] Results of Operations Analysis Net interest income grew significantly due to the Franklin merger and lower cost of funds, despite NIM compression to 3.18%, while noninterest income fell due to decreased mortgage banking activity and noninterest expense rose from higher salaries - Tax-equivalent net interest income increased 56% to $87.3 million in Q2 2021, driven by higher loan volumes from the Franklin merger and a lower cost of customer time deposits (0.63% in Q2 2021 vs. 1.78% in Q2 2020)[196] - Net interest margin (tax-equivalent) decreased by 32 basis points to 3.18% in Q2 2021, negatively impacted by approximately 37 basis points from excess liquidity[183][199] - Mortgage banking income decreased to $35.5 million in Q2 2021 from $72.2 million in Q2 2020, as interest rate lock volume fell 20.7% and refinancing activity dropped to 58.2% of volume from 79.8% in the prior year[220][222] - Salaries, commissions, and employee benefits expense increased by $7.1 million (12.9%) in Q2 2021, mainly due to increased headcount from the Franklin acquisition and investment in revenue producers[227] Financial Condition Analysis Total assets grew 6.3% to $11.92 billion, driven by increases in cash and AFS securities, while asset quality improved with nonperforming assets decreasing to $78.2 million, and total deposits grew to $10.20 billion with a shift to lower-cost accounts - Total assets increased by $711.0 million to $11.92 billion at June 30, 2021, primarily due to a $399.0 million increase in cash and cash equivalents and a $232.0 million increase in available-for-sale securities[186][236] - Total deposits increased by $746.0 million to $10.20 billion, reflecting growth in noninterest-bearing and interest-bearing checking accounts, while customer time deposits decreased by $134.0 million[278] - Nonperforming assets decreased to $78.2 million, or 0.66% of total assets, at June 30, 2021, compared to $84.2 million, or 0.75% of total assets, at December 31, 2020[259][262] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, monitored via NII and EVE simulations, indicating an asset-sensitive balance sheet that benefits from rising rates, with derivatives used for mitigation Interest Rate Sensitivity Analysis (as of June 30, 2021) | Change in Interest Rates (bps) | % Change in Year 1 Net Interest Income | % Change in Economic Value of Equity (EVE) | | :--- | :--- | :--- | | +400 | 41.4% | 13.8% | | +300 | 30.6% | 11.7% | | +200 | 19.8% | 8.86% | | +100 | 9.40% | 4.86% | | -100 | (5.62)% | (6.98)% | | -200 | (7.08)% | (10.6)% | - The company's interest rate risk modeling indicates an asset-sensitive position as of June 30, 2021, primarily due to the floating-rate structure of its loan portfolio and a strong core deposit base[309] Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective[313] - No changes occurred during the quarter ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[313] PART II. OTHER INFORMATION Legal Proceedings The company reports no material pending legal proceedings against it or its subsidiaries - As of the report date, there are no material pending legal proceedings against the company or its subsidiaries[317] Risk Factors There have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes to the risk factors from the company's 2020 Form 10-K were reported[318] Unregistered Sales of Equity Securities and Use of Proceeds A stock repurchase plan for up to $100 million was approved in February 2021, but no shares were repurchased under this plan during the quarter ended June 30, 2021 - A stock repurchase plan for up to $100.0 million was approved in February 2021[319] - No shares of common stock were repurchased by the company during the three months ended June 30, 2021[319][320] Exhibits This section lists the exhibits filed as part of the Form 10-Q, including corporate governance documents, a new employment agreement, CEO and CFO certifications, and Inline XBRL documents - Key exhibits filed with the report include the CEO and CFO certifications required under Sarbanes-Oxley Sections 302 and 906[322]