FBK - FB Financial: Lock In Those Gains And Run A House Position (Rating Downgrade)

2024-01-16 18:23:40 ET

Summary

• FB Financial Corporation reported mixed results for Q4, with a decrease in revenues but an increase in loans held for investment.
• Margin compression seems to have hit an end, with slight expansion here in Q4.
• The bank's asset quality remains strong, although nonperforming loans have increased slightly.
• With massive gains on this trade, it is prudent to lock in some profit.

We recently highlighted FB Financial Corporation ( FBK ) for a trade back in October. We now think that if you have held through this period that you should backout the initial investment, plus 20% of the profit, and let the rest run as a house position. This concept is a key teaching at our investing group, when we have returns like this. Shares are up 33% plus since our call. We now think you execute this strategy and hold a house position with the profit, collecting all future gains, dividends, spinoffs, etc.

We think that you can hold the rest comfortably, as the situation for regional banks should improve in the next few years as rates normalize. So long as the cuts are not drastic and swift, the banking space should continue to do well. The Q4 earnings were just reported and the results suggest holding is appropriate. Let us discuss.

Headline performance

We saw mixed results in Q4 . The bank reported a top line that fell 9% to $116.4 million versus last year, missing consensus estimates by $5.78 million. The decrease in revenues comes once again despite more loans being held for investment, as well as another increase in tangible book value.

However, we have seen margin compression. The cost to acquire deposits has increased dramatically, but we see margins having hit a bottom, and that bodes well for future quarters. When rates are cut, the cost of deposits will plummet, though new loans will still come at high rates.

Overall, FB Financial reported adjusted net income of $36.2 million, or $0.77 per share, compared to $0.71 in the previous third quarter, and $0.85 in the fourth quarter of last year. This surpassed estimates by $0.07.

Loans grew at FB Financial once again

Loans held for sale are up from the start of the year and from a year ago. Total assets are $12.6 billion, which rose from $12.5 billion in the sequential quarter. Total loans held grew to $9.41 billion, or 5.19% annualized, as of the end of Q4, compared to $9.29 billion at the start of Q4, and $9.30 billion as of the end of last year's Q4.

Deposits fall

Deposits however dipped slightly. Deposits were $10.55 billion at the end of Q4, compared to $10.64 billion to start the quarter, and $10.86 billion as of one year ago. The decrease largely stemmed from a reduction in mortgage escrow deposits of $59.1 million due to the housing market slowing down.

Net interest margin in focus

FB Financial Corporation's cost of funds increased to 2.65% during Q4 from 2.58% in the sequential quarter. The cost of interest-bearing deposits increased to 3.40% from 3.33% for the same periods. This is a rise, but the spike in the cost of funds has slowed. That said, the yield on loans increased to 6.43% from 6.32% for the previous quarter. While margins are down from a year ago, they expanded slightly from the sequential quarter, lending evidence to our thesis that margins have bottomed out. Net interest income was $101.9 million, a very slight increase from $101.8 million in the sequential quarter.

FB Financial's return metrics

With improving margins from last quarter, the return metrics were positive relative to the sequential quarter. In Q4, the return on assets rose to 1.15% from 1.05% in Q3 but is still down from 1.28% last year, but moving in the right direction. The return on average equity widened to 12.9% from 11.8% in Q2 adjusted. Overall, the metrics are improving, as we predicted

FB Financial's asset quality

As we reviewed the quarterly print, we still see this bank's asset quality as strong. There was a provision for loan loss expense that was $3.1 during Q4, falling from Q3's $6.0 million, but also a provision reversal of $2.8 million for net provision expense of $0.3 million. Nonperforming loans increased however to 0.65% of all loans from 0.59% last quarter. Nonperforming assets as a percentage of total assets decreased to 0.69% from 0.71% last quarter. Overall, we see this as mixed, but still quite positive.

Take home

This was another winning trade, and we think you lock in that profit by backing out the initial investment plus 20% of the profit and let the rest run. We like holding here as the bank is improving, despite the shaky macro environment. While the dividend and its increases are routine each year, the yield is currently low, but you are now entitled to all future dividends, capital gains, and spinoffs. Tangible book expanded to $25.69, up from $23.93 to start the quarter, which is positive. However, shares are rich now relative to tangible book, which suggests new money should wait to enter FB Financial Corporation stock.

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