FB Financial Corporation — Q3 2021 Form 10-Q
Business context and reporting period. FB Financial is a Nashville-based financial holding company operating through FirstBank, with Banking and Mortgage segments. It reported unaudited results for the quarter and nine months ended September 30, 2021; balance-sheet comparisons are to December 31, 2020. Amounts below are in U.S. dollars unless stated otherwise.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $88.5 million | $68.8 million | $257.6 million | $180.4 million |
| Total noninterest income | $59.0 million | $97.0 million | $175.0 million | $221.2 million |
| Net income attributable to FB Financial | $45.3 million | Loss of $5.6 million | $141.5 million | $18.0 million |
| Diluted EPS | $0.94 | Loss of $0.14 | $2.95 | $0.52 |
| Net interest margin, tax-equivalent | 3.20% | 3.28% | 3.19% | 3.53% |
- Q3 total revenue, defined as net interest income plus noninterest income, was $147.5 million, versus $165.9 million a year earlier. Nine-month total revenue was $432.7 million, versus $401.6 million.
- Credit-loss provision was a net benefit of $2.5 million in Q3 and $30.2 million for the first nine months, compared with expenses of $55.4 million and $110.9 million in the respective 2020 periods. Management attributed the reversals primarily to improved economic forecasts.
- Q3 return on average assets was 1.51%, return on average equity 12.9%, and GAAP efficiency ratio 64.4%. For the first nine months, those measures were 1.61%, 14.1%, and 65.3%, respectively.
- Mortgage banking income fell to $45.4 million in Q3 from $84.7 million; for nine months it was $136.2 million versus $189.6 million. Q3 mortgage sale margin declined to 2.55% from 4.32%.
- At September 30, total assets were $11.81 billion, loans held for investment $7.29 billion, and deposits $10.07 billion. Compared with year-end 2020, assets rose 5.4%, loans 3.0%, and deposits 6.5%. Available-for-sale securities increased to $1.57 billion from $1.17 billion.
- Cash and cash equivalents were $1.32 billion, approximately unchanged from year-end. Nine-month operating cash flow was negative $41.0 million and investing cash flow negative $475.3 million; financing cash flow was positive $523.0 million, largely reflecting deposit growth. Mortgage loan originations and sales materially affect operating cash flow.
- Borrowings were $172.7 million, down from $238.3 million at year-end; the company repaid $60 million of subordinated debt during the nine months. Shareholders’ equity was $1.40 billion; book value per share was $29.36 and tangible book value per share $23.90.
- Regulatory capital ratios remained above minimum requirements. Company CET1 was 12.4% and FirstBank CET1 12.2% at September 30.
Material changes versus comparable periods
- Net income improved substantially year over year, reflecting higher net interest income, lower credit-loss provisions, and the absence of 2020 merger costs. The comparison is affected by Franklin and Farmers National acquisitions completed in 2020.
- Net interest income increased, supported by the larger loan portfolio and lower deposit funding costs, while net interest margin contracted. Management cited low loan yields and excess liquidity; excess liquidity reduced NIM by an estimated 28 basis points in Q3 and 32 basis points for the nine months.
- Mortgage revenue declined as interest-rate-lock volume, refinance activity, and sale margins weakened from unusually strong 2020 levels. Noninterest expense was lower in Q3 because 2020 included $20.7 million of merger costs, but nine-month expense increased to $282.7 million from $267.2 million, including higher payroll and operating costs.
- Asset quality indicators improved overall: nonperforming assets declined to $59.0 million from $84.2 million at year-end, and nonperforming loans to loans held for investment were 0.59% versus 0.91%. The allowance for credit losses fell to $139.4 million, or 1.91% of loans, from $170.4 million, or 2.41%.
- Accumulated other comprehensive income declined to $12.6 million from $27.6 million at year-end, including a $15.0 million net other-comprehensive loss for the nine months, primarily reflecting changes in unrealized available-for-sale securities gains.
Outlook, risks, contingencies, and unusual items
- The filing provides no formal earnings or financial guidance. Management anticipated a seasonal slowdown in mortgage sales during Q4 2021 amid low housing inventory. It also warned that higher rates could further reduce refinance activity and mortgage production, with margin compression and industry capacity adding pressure.
- Management cited continuing uncertainty from COVID-19 and variants, vaccine and policy developments, supply-chain disruptions, labor shortages, inflation, interest-rate changes, and local economic and real-estate conditions. These could affect borrowers, asset valuations, credit costs, and results.
- Credit exposures include commercial real estate and construction lending. Construction loans were 16% of loans and non-owner-occupied commercial real estate 23%; the company reported its regulatory concentration ratios remained within monitored thresholds. Management identified several industries of concern, including retail, healthcare, hotels, leisure, transportation, and restaurants.
- Outstanding commitments to extend credit and letters of credit totaled $2.89 billion. Management did not anticipate material losses on these commitments. The mortgage loan repurchase reserve was $5.4 million. No material pending legal proceedings were reported.
- The company said interchange fee income was expected to decline beginning in the second half of 2022 due to the Durbin amendment and its asset-size threshold. It is also transitioning LIBOR-referencing products to alternative rates.
- Management reported adequate liquidity, no significant COVID-related funding pressure, and available borrowing capacity, including $1.28 billion against the FHLB line and $345 million in unsecured, uncommitted bank lines. These facilities are subject to availability and terms.
- Unusual/comparable-period items include 2020 acquisition and merger costs, large pandemic-related credit provisions in 2020, 2021 credit-reserve reversals, and a $1.5 million Q3 2021 loss on cancellation of an interest-rate swap.
Most important facts for investors to verify
- How sustainable earnings are after separating the $30.2 million nine-month credit-provision benefit and the prior-year merger and acquisition effects.
- Whether mortgage volumes and margins continue to weaken, and how rates, housing supply, and refinance mix affect segment profitability.
- Whether the lower allowance and improved nonperforming-asset trends remain justified as economic forecasts and borrower conditions change.
- The impact of excess liquidity and securities growth on future net interest margin, including interest-rate sensitivity and unrealized securities gains or losses.
- Deposit growth, funding costs, and liquidity reliance on public or other potentially less stable deposits and uncommitted credit lines.
- Capital and lending exposure to commercial real estate, construction, and other industries of concern, as well as the scale and funding likelihood of off-balance-sheet commitments.