FB Financial Corp annual report, FY2022

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FB Financial Corporation — 2022 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022, with comparisons primarily to 2021. FB Financial is a Nashville-based bank holding company operating FirstBank across Tennessee, Kentucky, Alabama and North Georgia, alongside a mortgage banking business. At year-end, the company reported $12.85 billion in assets, $9.30 billion in loans held for investment, $10.86 billion in deposits and $1.33 billion in common shareholders’ equity.

Financial performance and position

  • Profit: Net income attributable to FB Financial was $124.6 million, down from $190.3 million; diluted EPS was $2.64 versus $3.97. Return on average assets was 1.01% and return on average equity was 9.23%.
  • Revenue and margins: Net interest income increased to $412.2 million from $347.4 million. Tax-equivalent net interest margin improved to 3.57% from 3.19%. Total noninterest income fell to $114.7 million from $228.3 million, while noninterest expense declined to $348.3 million from $373.6 million. The GAAP efficiency ratio rose to 66.1% from 64.9%; the adjusted tax-equivalent ratio improved to 62.7% from 65.8%.
  • Credit costs and quality: The company recorded $19.0 million of combined provision expense for loans and unfunded commitments, compared with a $41.0 million reversal in 2021. The allowance for credit losses was $134.2 million, or 1.44% of loans held for investment, versus $125.6 million, or 1.65%. Nonperforming loans were 0.49% of loans, down from 0.62%; nonperforming assets increased to $87.5 million, or 0.68% of assets, from $63.0 million, or 0.50%.
  • Cash flow: Operating activities provided $789.3 million; investing activities used $1.744 billion; and financing activities provided $184.1 million. Cash and cash equivalents decreased by $770.7 million to $1.027 billion. These flows reflect, among other items, loan growth, mortgage loan sales and deposit movements.
  • Liquidity and funding: Deposits were nearly flat year over year at $10.86 billion. The year-end total deposit cost was 0.54%, compared with 0.30% in 2021. The company reported $5.66 billion of uninsured deposits, 52% of total deposits. It also had $1.27 billion of FHLB borrowing capacity and $350 million of correspondent-bank lines; year-end FHLB advances were $175 million and federal funds purchased were $65 million.
  • Debt and capital: Total borrowings were $415.7 million, including $126.1 million of subordinated debt. Company CET1 and total risk-based capital ratios were 11.0% and 13.1%; the Bank’s were 11.1% and 12.9%. The Bank met the regulatory definition of well-capitalized.
  • Shareholder returns and equity: Dividends declared rose to $0.52 per share from $0.44. The company repurchased $40.0 million of shares in 2022. Book value per share fell to $28.36 from $30.13, primarily reflecting a $175.3 million after-tax other comprehensive loss, largely from unrealized available-for-sale securities losses.

Material changes versus 2021

  • Higher interest rates and loan growth lifted net interest income, but also raised funding costs: interest expense increased to $69.2 million from $37.6 million, and the cost of interest-bearing liabilities rose to 0.87% from 0.48%.
  • Mortgage banking income declined 56.1% to $73.6 million. Mortgage sales fell to $2.99 billion from $6.20 billion, and interest-rate-lock volume dropped 62.3% to $2.70 billion.
  • The company exited its direct-to-consumer mortgage channel, recording $12.5 million of restructuring costs. Mortgage segment results shifted from $26.5 million of pretax income to a $23.3 million pretax loss.
  • Interchange fee income decreased following the expiration of the company’s temporary Durbin Amendment exemption in the second half of 2022, despite higher transaction volume.
  • Available-for-sale debt securities moved from a $4.7 million net unrealized gain to a $234.4 million net unrealized loss. Management attributed the decline to interest rates rather than credit deterioration and stated it did not expect to sell the securities before recovery.
  • Loans held for investment grew to $9.30 billion from $7.60 billion. The loan portfolio remained concentrated in real estate-related lending; approximately 82% of loans had real estate as a primary or secondary collateral component.

Outlook, commentary and risks

  • Management gave no explicit full-year earnings or revenue guidance. It said commercial and industrial, construction and commercial real estate growth would be more moderate than recent periods given economic forecasts and potential recession risk.
  • For 2023, management expected interest-rate-lock volume in the remaining retail mortgage channel to be similar to 2022 retail-channel experience. The company plans to continue mortgage originations, loan sales and servicing after closing its direct-to-consumer channel.
  • Management’s credit-loss estimate incorporated expectations for slower GDP growth, elevated unemployment, higher rates, inflation, supply-chain pressures and possible recession. Actual credit costs may differ materially because the estimate depends on forecasts and judgment.
  • Interest-rate risk is significant. The company described itself as asset-sensitive; its model projected that an immediate 100-basis-point rate increase would raise first-year net interest income by 5.98%, while a 100-basis-point decrease would reduce it by 6.32%. These are modeled scenarios, not forecasts, and rely on assumptions about customer behavior and balance-sheet composition.
  • Other notable risks include uninsured-deposit concentration, regional and real-estate exposure, deposit competition and rising funding costs, mortgage-market cyclicality, cybersecurity and third-party technology dependence, regulatory and compliance costs, and execution risks from acquisitions and technology initiatives.
  • The company reported no material pending legal proceedings and no goodwill impairment for 2022. Management and the external auditor concluded internal control over financial reporting was effective, with no material weaknesses identified.

Most important facts for investors to verify

  • Deposit stability and funding costs, particularly the $5.66 billion of uninsured deposits and the effect of further rate competition on deposit retention and margins.
  • Credit trends in construction and commercial real estate portfolios, including classified loans, delinquencies, charge-offs and future allowance requirements.
  • The extent to which mortgage revenue and profitability stabilize after the direct-to-consumer exit, and whether restructuring delivers expected cost reductions.
  • The duration and capital impact of the $234.4 million unrealized securities loss, including whether liquidity needs could require securities sales before recovery.
  • Capital and liquidity capacity after loan growth, share repurchases, dividends and the scheduled phase-out of CECL regulatory capital transition relief.