10-K: FB Financial Corporation 2023 Annual Report: Subsidiary Performance and Strategic Overview

FB Financial Corporation's 2023 annual report details the performance of its subsidiaries, including FirstBank, and outlines strategic priorities for future growth and efficiency.

Summary

• FB Financial Corporation's 2023 annual report highlights a year of strategic focus on both metropolitan and community markets, with total assets reaching $12.60 billion.
• The company operates primarily through its wholly-owned bank subsidiary, FirstBank, which provides commercial and consumer banking services across Tennessee, Kentucky, Alabama, and North Georgia.
• FirstBank's footprint includes 81 full-service branches and several other limited service banking, ATM, and mortgage loan production locations.
• The report emphasizes a community banking approach with personalized service, delivered by experienced local bankers.
• The company's strategy includes enhancing market penetration, pursuing strategic acquisitions, improving efficiency through technology, and developing niche banking opportunities.
• As of December 31, 2023, the company had loans held for investment of $9.41 billion, total deposits of $10.55 billion, and total common shareholders equity of $1.45 billion.
• The company's mortgage banking services are provided through its bank branch network and mortgage banking offices located throughout the southeastern United States.
• The report also details the company's risk management framework, which includes credit, interest rate, liquidity, compliance, and cybersecurity risks.
• The company's enterprise risk management program is designed to identify, manage, monitor, and control potential risks.
• The company's loan approval process is characterized by local authority supported by a centralized review process.
• The company's legal lending limits were approximately $205.6 million (15%) and $342.7 million (25%) based on the capitalization of the Bank at December 31, 2023.
• The company's funding structure consists primarily of deposits and common equity.
• The company's liquidity planning framework is focused on robust forecasting and risk management to ensure predictable funding needs and availability.
• The company's cybersecurity measures are overseen by the Risk Committee of the Board of Directors and implemented by the Chief Information Security Officer.
• The company competes with a variety of financial institutions, including commercial banks, credit unions, and online lenders.
• The company employed 1,591 full-time equivalent associates with an average tenure of 6 years of service as of December 31, 2023.
• The company has a strong focus on diversity, equity, and inclusion, with several employee resource groups.
• The company has invested significantly in technology and process automation to support future growth and increase operating efficiencies.
• The company is subject to extensive federal and state regulation and supervision by the FDIC, Tennessee Department of Financial Institutions, the Federal Reserve Board, and the CFPB.
• The company is required to maintain specified minimum levels of capital based on ratios of capital to total assets and to risk-weighted assets.
• The company's ability to pay dividends is limited by regulatory capital rules and other aspects of the regulatory framework.
• The company's deposits are insured by the Deposit Insurance Fund of the FDIC up to applicable legal limits.
• The company is subject to various consumer laws and regulations, including the Equal Credit Opportunity Act and the Fair Credit Reporting Act.
• The company is subject to anti-money laundering rules and economic sanctions.

Sentiment

Score: 5

Explanation: The document presents a mixed picture with both positive and negative aspects. While the company has a strong capital position and a focus on growth, there are concerns about declining profitability and increasing credit risk. The sentiment is neutral to slightly negative.

Positives

• The company maintains a strong liquidity position with $1.35 billion in on-balance sheet liquidity and access to $7.08 billion in contingent liquidity.
• The company's capital ratios are well above the standards to be considered well-capitalized under regulatory requirements.
• The company has a strong risk management culture and a comprehensive risk management framework.
• The company has a highly regarded culture and has consistently won awards for being a great place to work.
• The company has a strong focus on diversity, equity, and inclusion, with several employee resource groups.
• The company has invested significantly in technology and process automation to support future growth and increase operating efficiencies.
• The company has a high retention rate of first year hires at 93%.

Negatives

• Net income decreased during the year ended December 31, 2023 to $120.2 million from $124.6 million for the year ended December 31, 2022.
• Net interest margin decreased to 3.44% for the year ended December 31, 2023 as compared to 3.57% for the year ended December 31, 2022.
• Noninterest income decreased by $44.1 million to $70.5 million for the year ended December 31, 2023, primarily due to a decrease in mortgage banking income and a net loss on investment securities.
• The company experienced a $14.0 million net loss on investment securities primarily related to the sale of $100.5 million of AFS securities.
• The company's mortgage banking income decreased by $28.9 million to $44.7 million for the year ended December 31, 2023, due to rising interest rates and decreased demand for residential mortgages.
• The company's nonperforming loans HFI increased to 0.65% as of December 31, 2023, from 0.49% as of December 31, 2022.
• The company's classified loans increased to 0.74% of loans HFI as of December 31, 2023, compared to 0.56% as of December 31, 2022.

Risks

• The company is subject to credit and loan risks, including risks of nonpayment and changes in economic conditions.
• The company is subject to market and interest rate risks, including fluctuations in interest rates and market conditions.
• The company is subject to liquidity risk, including the risk of a lack of access to funding sources.
• The company is subject to mortgage banking risk, including the risk of decreased mortgage origination volume and pricing decisions of competitors.
• The company is subject to legal, regulatory, and compliance risks, including the risk of changes in laws and regulations.
• The company is subject to technology and operational risks, including the risk of system failures and cybersecurity breaches.
• The company is subject to strategic and other business risks, including the risk of unsuccessful acquisitions and competition from other financial institutions.
• The company is subject to general risks, including the risk of negative publicity and volatility in the banking industry.

Future Outlook

The company plans to focus on leveraging existing technical capabilities and investments while supporting the initiatives from the FirstBank Way, its forward-looking strategic improvement plan. The FirstBank Way initiatives will enable the company to continually define its business model to be scalable, yet community banking focused as it continues to grow.

Management Comments

• Throughout our history, we have maintained a community banking approach of personalized relationship-based service, which is delivered locally through experienced bankers in each market.
• In our experience, business owners and operators prefer to deal with decision makers, and our banking model is built to place the decision maker as close to the client as possible.
• We believe we have a competitive advantage in our markets versus both smaller community banks and larger regional and national banks.
• We seek to leverage our operating model by focusing on profitable growth opportunities across our footprint, both in high-growth metropolitan markets and in stable community markets.
• Our bankers and branches, especially in the metropolitan markets, continue to scale in size, and we believe there is capacity to grow our business without adding significantly to our branch network.
• We plan to continue to invest, as needed, in our technology and business infrastructure to support our future growth and increase operating efficiencies.
• We intend to continue emphasizing these business lines which we believe serve as customer acquisition channels and provide us with a range of cross-selling opportunities, while making our business stronger and more profitable.
• Our operating model demands a strong risk management culture built to address multiple areas of risk, including credit risk, interest rate risk, liquidity risk, price risk, compliance risk, information security/cyber risk, third-party risk, operational risk, strategic risk and reputational risk.
• Our risk management culture is supported by investments in the right people and technologies to protect our business.
• Our credit policies support our goal of maintaining sound credit quality standards while achieving balance sheet growth, earnings growth, appropriate liquidity and other key objectives.
• We maintain a risk management infrastructure that includes local authority, centralized policymaking and a system of checks and balances.
• We believe that our loan approval process provides for thorough internal controls, underwriting, and decision making.
• We strive to maintain the lowest cost of funding available while maintaining stable sources of liquidity.
• We remain continually focused on growing our noninterest-bearing and other low-cost core deposits while replacing higher cost funding sources, including wholesale time deposits and other borrowed debt, to fund our balance sheet growth.
• At the Company, we value our associates, because our associates are FirstBank. They do the work; they serve our communities, and they build relationships with our customers.
• We pride ourselves on our culture which cultivates the talents of our associates by helping them give more and get more out of their jobs than they thought possible.
• Providing a great place to work includes our commitment to diversity, equity, and inclusion.
• We continue to remain committed to hiring qualified diverse associates.
• We are committed to attracting and retaining the best talent in our markets.
• We provide competitive compensation and benefits that meet the needs of our employees, including market-competitive pay, healthcare benefits, equity incentives, and an employee stock purchase plan.
• We also provide meaningful training and development opportunities designed to train our next generation of leaders and provide them opportunities for advancement within the Company.
• During the year ended December 31, 2023, the Company continued its expansion of process automation efforts and data management capabilities, focusing on enhancing utilization of data and automating manual processes.
• The Company initiated a comprehensive data management program to enhance the utilization of data by improving confidence, availability and usability of data.
• The ongoing embedded banking technology development will allow the Company to continue to serve the needs of its evolving customers.

Industry Context

The report reflects the broader trends in the banking industry, including increased competition, regulatory scrutiny, and the need for technological innovation. The company's focus on community banking and personalized service is a response to the increasing competition from larger regional and national banks, as well as online lenders. The company's investment in technology and process automation is also in line with the industry's move towards digital banking and enhanced customer experience.

Comparison to Industry Standards

• The company's net interest margin of 3.44% is within the range of regional banks, but lower than some of the top performing banks in the industry.
• The company's efficiency ratio of 68.0% is higher than some of the most efficient banks, indicating room for improvement in operational efficiency.
• The company's return on average assets of 0.95% is slightly below the average for regional banks, suggesting a need to improve profitability.
• The company's return on average equity of 8.74% is also below the average for regional banks, indicating a need to improve shareholder returns.
• The company's nonperforming assets as a percentage of total assets of 0.69% is within the range of regional banks, but higher than some of the best performing banks.
• The company's loan to deposit ratio of 89.2% is higher than some of its peers, indicating a higher reliance on deposits for funding.
• The company's capital ratios are well above the regulatory requirements, indicating a strong capital position.
• Compared to peers like Pinnacle Financial Partners and First Horizon Corporation, FB Financial Corporation has a smaller market share in Tennessee, indicating potential for growth.
• The company's focus on both metropolitan and community markets is a strategy that is also used by other regional banks, but the company's emphasis on local decision-making is a differentiator.
• The company's investment in technology and process automation is similar to other banks in the industry, but the company's focus on embedded banking technology is a unique approach.

Related Party Transactions

• The Bank has made and expects to continue to make loans to the directors, certain management, significant shareholders, and executive officers of the Company and their related interests in the ordinary course of business, in compliance with regulatory requirements.
• The Bank held deposits from related parties totaling $316,141 and $347,660 as of December 31, 2023 and 2022, respectively.
• The Bank leases various office spaces from entities owned by certain directors of the Company under varying terms.
• FBK Aviation, LLC maintains a non-exclusive aircraft lease agreement with an entity owned by one of the Company's directors.
• The Company invested in preferred stock of a privately held entity of which an executive officer of the Company is on the Board of directors of the investee.
• The Company also entered a separate master loan purchase agreement with the entity to purchase up to $250,000 in manufactured loan housing production over an initial five-year term.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and net interest margin, as well as the increase in nonperforming loans.
• Employees may be affected by the company's focus on efficiency and scalability, which could lead to changes in staffing levels.
• Customers may benefit from the company's focus on personalized service and technological innovation.
• The company's suppliers and creditors may be affected by the company's financial performance and risk management practices.

Next Steps

• The company intends to continue to efficiently increase its market penetration through organic growth and strategic acquisitions.
• The company plans to continue to invest, as needed, in its technology and business infrastructure to support future growth and increase operating efficiencies.
• The company intends to continue emphasizing niche banking and noninterest income opportunities.
• The company will continue to evaluate the impact of any changes to the regulations implementing the CRA and their impact to our financial condition, results of operations, and/or liquidity.
• The company plans to focus on leveraging existing technical capabilities and investments while supporting the initiatives from the FirstBank Way, its forward-looking strategic improvement plan.

Key Dates

Keywords

financial services, banking, community banking, mortgage banking, risk management, capital management, regulatory compliance, credit risk, interest rate risk, liquidity risk, cybersecurity, acquisitions, technology, deposits, loans