FB Financial Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; filed August 8, 2022. FB Financial is a Nashville-based financial holding company operating FirstBank and a mortgage business, with 81 full-service branches across Tennessee, Alabama, southern Kentucky, and north Georgia.
Financial performance and condition
- Q2 earnings: Net income attributable to FB Financial was $19.3 million, or $0.41 diluted EPS, versus $43.3 million, or $0.90, in Q2 2021. Pretax income was $26.1 million versus $56.7 million.
- First-half earnings: Net income was $54.6 million, or $1.15 diluted EPS, versus $96.2 million, or $2.00, in the first half of 2021.
- Net interest income and margin: Q2 net interest income rose to $102.2 million from $86.6 million; tax-equivalent net interest margin was 3.52%, up from 3.18%. First-half net interest income was $190.4 million versus $169.1 million, and tax-equivalent margin was 3.28% versus 3.18%. Management cited loan growth, higher rates, lower funding costs, and reduced excess liquidity.
- Noninterest income: Fell 32.6% to $33.2 million in Q2 and 35.7% to $74.6 million for the first half, chiefly because mortgage banking income declined to $22.6 million from $35.5 million in Q2 and to $52.1 million from $90.8 million for the first half.
- Costs and efficiency: Q2 noninterest expense was $97.0 million, up from $93.0 million, including $12.5 million of mortgage restructuring costs. First-half expense was $186.3 million, down from $187.7 million. GAAP efficiency ratio was 71.6% for Q2 and 70.3% for the first half; adjusted tax-equivalent ratios were 61.1% and 64.5%, respectively.
- Credit costs and quality: Q2 provision for loan and unfunded-commitment losses totaled $12.3 million, compared with a $13.8 million net reversal in Q2 2021. First-half loan and unfunded-commitment provision expense totaled $8.1 million, versus a $27.7 million reversal. Loans were $8.62 billion, up from $7.60 billion at year-end; allowance for loan losses was $126.3 million, or 1.46% of loans, versus $125.6 million, or 1.65%. Nonperforming assets declined to $55.5 million from $63.0 million at year-end.
- Cash flow: First-half operating cash flow was $528.4 million, compared with $75.1 million used in the prior-year period. Investing activities used $1.11 billion and financing activities used $342.9 million. Cash and cash equivalents declined $924.9 million to $872.9 million.
- Balance sheet and liquidity: Total assets were $12.19 billion, down from $12.60 billion at December 31, 2021. Deposits were $10.54 billion, down from $10.84 billion; noninterest-bearing deposits were $2.90 billion. Uninsured deposits totaled $5.57 billion, or 53% of deposits. The loans-held-for-investment-to-deposit ratio rose to 81.8% from 70.2%.
- Debt and capital: Balance-sheet borrowings were $160.4 million. The company and bank met regulatory capital requirements; company CET1 was 11.5% and total risk-based capital was 13.6%, compared with 12.3% and 14.5% at year-end. Shareholders’ equity fell to $1.32 billion from $1.43 billion, largely due to securities-related accumulated other comprehensive losses. Book value per share was $28.15; tangible book value per share was $22.67.
- Comprehensive loss: First-half other comprehensive loss was $126.4 million, mainly from unrealized losses on available-for-sale securities; accumulated other comprehensive loss was $120.5 million at June 30.
Material changes versus comparable periods
- Higher net interest income and margin did not offset lower mortgage income, increased credit-loss provisions, and restructuring charges; Q2 and first-half net income fell materially year over year.
- Mortgage production weakened: Q2 interest-rate lock volume fell 60.5% year over year and first-half volume fell 45.1%. First-half mortgage sale margin declined to 2.34% from 3.30%.
- Loans grew approximately $1.02 billion from year-end while deposits decreased approximately $294 million. Cash and securities-related equity value declined, including a $167.5 million net unrealized loss on available-for-sale debt securities versus a $4.7 million unrealized gain at year-end.
- Nonperforming assets improved from year-end, while the allowance for unfunded commitments increased to $20.4 million from $14.4 million.
Outlook, risks, and unusual items
- On May 10, 2022, the company announced it would exit its mortgage direct-to-consumer channel, with wind-down expected to be completed in Q3 2022. It plans to continue retail mortgage origination and servicing. The exit generated $12.5 million of restructuring expense; management expects lower mortgage lock volume and mortgage banking income as a result.
- Management cited rising rates, inflation, possible slower GDP growth, elevated unemployment, supply-chain uncertainty, and the possibility the economy may be nearing a recession. It increased credit-loss estimates to reflect its economic outlook and loan growth.
- Management described the company as asset-sensitive in its interest-rate simulations. A modeled +100-basis-point shock increased Year 1 net interest income 6.08%, while a -100-basis-point shock reduced it 6.29%. These are simulations, not forecasts, and depend on assumptions about rates, deposit behavior, prepayments, and balance-sheet composition.
- Available-for-sale securities had substantial unrealized losses attributed by management to noncredit factors; no securities credit-loss provision was recorded. Management cited low portfolio duration as a mitigating factor.
- Construction loans were 119.2% of FirstBank Tier 1 capital plus allowance, above the 100% regulatory monitoring guideline cited by the company; commercial real estate concentration was 293.6%, near the 300% guideline. Construction exposure and unfunded commitments increased.
- Management expected interchange-fee income to decline beginning in the second half of 2022 due to the Durbin amendment. The filing provides no formal earnings or margin guidance.
- Credit commitments and letters of credit totaled $3.42 billion; the company stated that material losses were not anticipated. No material pending legal proceedings were reported, and the filing disclosed no material changes to the prior annual report’s risk factors.
- The board declared a $0.13-per-share quarterly dividend after quarter-end. The company repurchased 650,000 shares during Q2 for approximately $26.5 million; $73.4 million remained under its $100 million authorization.
Key facts for investors to verify
- Whether mortgage restructuring is completed as planned and whether production, margins, and servicing income stabilize after the direct-to-consumer exit.
- How rising rates affect deposit pricing, net interest margin, deposit balances, and the company’s modeled asset sensitivity.
- Whether loan growth, construction exposure, and the $20.4 million unfunded-commitment reserve lead to further credit provisions or deterioration in asset quality.
- How unrealized securities losses and any further rate changes affect accumulated other comprehensive loss, tangible book value, and regulatory capital.
- Whether deposit composition and the 53% uninsured-deposit share change, and how the higher loans-to-deposits ratio affects liquidity and funding costs.
- The timing and continuing financial impact of the Durbin amendment, the mortgage channel wind-down, and share repurchases.