FBK - FB Financial: This Regional Bank Held Up

2023-04-18 13:10:29 ET

Summary

• We continue our coverage of regional banks looking for signs of a run on deposits.
• The FB Financial Corporation Q1 earnings were quite strong, as loan demand remains robust, but net interest margins have peaked.
• Asset quality metrics suggest the bank is navigating the current climate well.
• FB Financial Corporation is a fine bank, but the low dividend yield compels us to avoid this stock.

Not all banks are created equal. While shares of many bank stocks have been in selloff mode for about three months, and rightfully so with the uncertainty after several banks went under, some banks have seen strong gains, notably banking majors. However, regional banks have been a big question mark. We will be covering the earnings of regional banks to get a sense of whether the sector is indeed buckling, or if it is bank-specific.

While the higher interest rate environment has been boosting net interest margins we think that those margins have largely hit their peak, because the cost of funds are increasing. Banks are seeing strong competition for deposit dollars. On top of that, banks are now competing with U.S. Treasuries and money market funds which offer strong yields. It is hard to get deposits. Loan demand itself is starting to cool of some with higher rates, but strong banks are seeing gains.

We continue our regional bank coverage today with FB Financial Corporation ( FBK ), which just reported its Q1 earnings . For those who may be unfamiliar, this is a bank in the Southeast, headquartered in Nashville, TN, and having a footprint in 4 states. The main concern has been a run on deposits, specifically in February and March when the banking issues arose. Our coverage of regional banks is helping to investigate this issue.

Outside of a run on deposits, this bank is operationally mixed in our opinion, and FB Financial Corporation stock only offers a paltry 1.77% yield. We do like the consistent dividend hikes the last few years, but bonds and money markets offer a far superior yield without the equity risk, so we do not see a catalyst for the stock any time soon. Overall, we rate FB Financial Corporation a hold, but let's look at the performance metrics.

Mixed performance

FB Financial Corporation's performance metrics were mixed in the quarter. The bank reported top line that narrowed 1.8% to $127.2 million versus last year, missing consensus estimates by $4.0 million. The decrease in revenues comes despite more loans being held for investment versus the sequential quarter, as well as an increase in tangible book value, and $0.49 million in credit loss provisions. Net interest income was strong, but it did decline from the sequential Q4.

Overall, FB Financial reported net income of $36.4 million for the quarter. On a per share basis, this was $0.78 this quarter, down from $0.81 last quarter, but up from $0.74 last year. That was a beat by $0.04 versus estimates.

Loans and deposits grew at FB Financial

Despite the pressure on the sector, loans held for sale are up from the start of the year and from a year ago. Growth in loans and deposits is key for any bank, and frankly this has been a major concern this quarter for the sector. Total FB Financial Corporation assets are $13.1 billion, which rose from $12.8 billion to start the quarter. Total loans held were up from the start of the quarter, and now total $9.37 billion, or up 3% annualized. Despite the high rate environment, loan demand remained strong in Q1.

Total deposits were strong, and were a big highlight of the quarter considering a run on deposits had been feared. In fact, total deposits came in at $11.2 billion at quarter-end, up from the $10.8 billion to start the quarter. It was a strong influx of dollars, and this comes at a time when securing deposits is more difficult as banks compete for customer dollars.

Net interest margin

The cost of deposits is rising. The cost of funds was nearly doubled from last quarter. FB Financial Corporation cost of funds rose to 1.94%, 74 basis points higher than Q4. The cost of interest bearing deposits rose to 2.53% from 1.82% last quarter. Yield on loans rose to 5.9%, but net interest margin narrowed from 3.78% to 3.51% this quarter. While new loans are issued at higher rates, the impact was offset by the higher costs of funds. We predict margins will remain around 3.0-3.5% in coming quarters. This is still a strong margin. We see both the cost of funds and the yield on the loan portfolio both continuing to stay elevated in 2023. Net interest income was $104.5 million, a decrease of $6 million from Q4.

FB Financial's return metrics

Another area where FB Financial saw mixed performance was on its return on average assets and return on average equity. These are critical measures of a bank's operational efficiency. In Q1, the return on average assets fell to 1.15% from 1.22% in Q4, but is up from 1.13% last year. The return on average equity narrowed to 11.0% from 11.7%% in Q4, but up from 10.1% a year ago. Another area where the bank weakened was in its efficiency ratio which rose to 63.4% vs. 62.7% in Q4.

FB Financial's asset quality

The provision for loan losses was $0.49 million, compared to $0.43 million in Q4. Nonperforming assets improved in Q1. They fell from 0.68% of all assets to 0.61% of assets quarter-over-quarter. The allowance for credit losses, however, increased to 1.48% of all loans from 1.44% of all loans. Net charge-offs were flat at 0.02% of loans. Overall, it is mixed, but the loan portfolio continues to exhibit strong credit quality metrics despite all of the uncertainty in Q1.

Take home

The results here suggest that a run on deposits did not materialize in this smaller regional bank. FB Financial Corporation loans and deposits actually grew. Net interest margins have peaked in our opinion for the sector and this set of results backs up that assertion. Book value rose, and asset quality remains strong. FB Financial Corporation is a fine bank, but the low dividend yield compels us to avoid this stock in favor of banks with comparable metrics but a better payout.

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