Business context and reporting period
FB Financial Corporation, through FirstBank, operates Banking and Mortgage businesses across Tennessee, Kentucky, Alabama and north Georgia, with 82 full-service branches and a regional mortgage business. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are to December 31, 2021. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $111.4 | $88.5 | $301.7 | $257.6 |
| Net income attributable to FB Financial | $31.8 | $45.3 | $86.4 | $141.5 |
| Diluted EPS | $0.68 | $0.94 | $1.83 | $2.95 |
| Tax-equivalent net interest margin | 3.93% | 3.20% | 3.50% | 3.19% |
| Noninterest income | $22.6 | $59.0 | $97.2 | $175.0 |
| Noninterest expense | $81.8 | $95.0 | $268.1 | $282.7 |
Q3 provision for credit losses was $8.2 million on loans and $3.2 million on unfunded commitments; for the first nine months, the respective provisions were $10.2 million and $9.2 million. The prior-year nine-month periods included reversals of $27.3 million on loans and $2.9 million on unfunded commitments. The Q3 GAAP efficiency ratio was 61.1% (64.4% prior year); the nine-month ratio was 67.2% (65.3%). The nine-month adjusted, tax-equivalent ratio was 63.3% versus 65.4%.
At September 30, loans were $9.11 billion, up from $7.60 billion at year-end; deposits were $10.01 billion, down from $10.84 billion. Cash and cash equivalents were $618.3 million versus $1.80 billion. Borrowings rose to $722.9 million from $171.8 million, including $540 million of FHLB advances. Total assets were $12.26 billion and total equity was $1.28 billion.
Operating cash flow was $743.7 million for the nine months, compared with cash used of $41.0 million in 2021; investing activities used $1.58 billion and financing activities used $344.8 million. Cash declined by $1.18 billion over the period. Operating cash flow is affected substantially by mortgage loan originations and sales and should not be read as a direct measure of recurring earnings.
The available-for-sale securities portfolio had $1.48 billion fair value and $258.6 million of net unrealized losses, versus $4.7 million of unrealized gains at year-end 2021. Accumulated other comprehensive loss was $187.4 million. The company attributed the securities losses to noncredit factors and recorded no securities credit-loss provision. Book value per share was $27.30, down from $30.13; tangible book value was $21.85, down from $24.67.
The allowance for loan credit losses was $134.5 million, or 1.48% of loans, compared with $125.6 million, or 1.65%, at year-end. Nonperforming loans held for investment were 0.47% of that portfolio, down from 0.62%; total nonperforming assets were $75.7 million, or 0.62% of assets, up from $63.0 million, or 0.50%. Company and Bank CET1 ratios were each 10.9%; all regulatory capital requirements were met.
Material changes versus comparable periods
- Higher loan balances and interest rates lifted Q3 net interest income 25.9% year over year and improved the tax-equivalent margin. Rising funding costs partly offset the benefit: Q3 interest expense was $17.1 million versus $8.2 million.
- Mortgage banking income fell to $12.4 million in Q3 from $45.4 million and to $64.5 million for the nine months from $136.2 million. Q3 mortgage sales were $569.7 million versus $1.54 billion; nine-month interest-rate-lock volume declined 57.4%.
- Despite lower noninterest expenses, lower mortgage revenue and higher credit-loss provisions reduced net income. Nine-month results also included $12.5 million of mortgage restructuring expense.
- Deposits declined by $830.8 million from year-end, mainly as the company exited certain high-cost public deposits. Noninterest-bearing deposits increased $226.3 million, while interest-bearing checking and money-market balances fell.
- The securities portfolio’s sharp fair-value decline reduced equity through other comprehensive loss. The company also repurchased $32.7 million of common stock during the nine-month period.
Outlook, commentary, risks and unusual items
- Management outlook: No quantified earnings or revenue guidance is provided. Management expects loan growth to slow as it prepares for potential economic headwinds, construction and commercial real estate growth to moderate, and mortgage lock volume and mortgage banking income to decline further in Q4 2022. It expects customer time and money-market deposits to increase in Q4 and loan yields to continue rising in the prevailing rate environment.
- Mortgage restructuring: The company exited its direct-to-consumer mortgage channel, completing the wind-down in Q3. It plans to continue retail mortgage origination and sales, servicing, and residential mortgage lending. The $12.5 million nine-month restructuring charge included compensation and accelerated stock vesting, software costs, lease impairment and asset disposal.
- GNMA repurchase-option accounting: Prospectively, the company began recording eligible seriously delinquent GNMA loans previously sold. It recognized $26.5 million in loans held for sale with an offsetting borrowing; these are treated as nonperforming assets and earn no interest while the option remains unexercised. This change contributed about 22 basis points to the reported nonperforming-assets ratio.
- Credit and concentration risks: Management incorporated inflation, tighter monetary policy, slower projected GDP growth, higher unemployment and possible recession into credit-loss estimates. Construction lending was 123.6% of Bank Tier 1 capital plus allowance, above the cited 100% monitoring threshold; commercial real estate concentration was 298.5%, close to the cited 300% threshold. Management said it was moderating growth in these areas.
- Rate, liquidity and funding risks: The bank reported an asset-sensitive position, but modeled results depend on assumptions and can differ from actual outcomes. Uninsured deposits were $4.96 billion, or 50% of deposits. FHLB advances were $540 million; the bank also reported $1.20 billion of FHLB borrowing capacity, $315 million of unsecured, uncommitted bank lines and $50 million available through the Promontory network.
- Other disclosed risks include mortgage-market contraction, inflation and economic deterioration, deposit competition, regulatory changes, cybersecurity and third-party technology risks, and LIBOR transition. Management said disclosure controls were effective, there were no material changes to internal control over financial reporting, no material pending legal proceedings, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth, credit quality and reserve levels remain consistent with the worsening economic assumptions management described, particularly in construction and commercial real estate.
- How deposit balances, deposit pricing, uninsured deposits and reliance on FHLB or other wholesale funding evolve as rates change.
- Whether mortgage production, margins and restructuring savings meet management’s expectations, and whether further mortgage-related costs arise.
- How the $258.6 million securities unrealized loss and accumulated other comprehensive loss affect capital, liquidity and future results if securities are sold or rates change.
- The continuing impact of GNMA repurchase-option accounting and any changes in delinquent balances, repurchases or related funding.