FB Financial: Better To Avoid This One (NYSE:FBK)

We began pushing our members to start buying financials in late summer and fall of 2022. But not all banks are created equal. While shares of many bank stocks have been in rally mode for about three months, and rightfully so, some have struggled. While the higher interest rate environment has been boosting net interest margins, along with net interest income per loan, we need to watch the cost of funds which are increasing.

Competition for deposit dollars is growing. Loan demand itself has slowed with higher rates. Despite a major set of returns in the financial stocks, we still believe banks, and especially those that are more regionally focused, will enjoy tailwinds for many quarters thanks to the return of higher rates. Many banks are now well-positioned for growth over the next few years. We will be covering many banks this earnings season, and we are starting to see real winners and losers emerge, even in the early innings of earnings season.

We resume coverage today with FB Financial Corporation (NYSE:FBK), which just reported its Q4 earnings. This is a bank doing business with consumers and businesses in the southeast, headquartered in Nashville, TN, and having a footprint in 4 states. While we think that banks are poised to do well in 2023 and 2024 as rates are and will be much higher on the loans they make, ultimately we think this stock is a hold. We would not commit new money due to valuation, a low dividend payout, and questionable return metrics.

This bank is operationally mixed in our opinion, especially compared to other banks, and the stock only offers a paltry 1.4% yield. We do like the consistent dividend hikes the last few years, but bonds offer a far superior yield without the equity risk. Overall, we rate FB Financial Corporation a hold. Let us discuss the bank’s just-reported earnings, which show mixed performance and justify avoiding putting new money to work.

Mixed performance

FB Financial Corporation’s Q4 headline numbers were mixed in the quarter. There was a decline on both the top and bottom lines. The bank reported top line contraction of 10.5% to $128.0 million, missing consensus estimates by a sizable $8.9 million. The decrease in revenues comes despite more loans being held versus the sequential quarter, an increase in tangible book value, and $0.46 million in credit loss provisions. There was however some strong net interest income.

Overall, FB Financial reported net income of $38.1 million for the quarter. On a per share basis, this was $0.81 this quarter, down from $1.02 last year, but up from the $0.81 reported this year. So, EPS is down from a year ago, though rates are higher which should help longer-term. Compared to many banks we follow, this one is expensive.

Valuation metrics

The valuation numbers here suggest an expensive stock, especially with the declining performance. With a share price of $36.60 at the time of this writing, we have a stock trading at 12.3X trailing twelve-month earnings, which is expensive on its own relative to the pace. What about on a forward basis? Well, we assume earnings will fall 5% in 2023 versus 2022, so that would suggest we are over 13X FWD EPS.

FB Financial Corporation stock is also well above tangible book value of $22.36. Most banks are trading well above their tangible book values now, as well as book value, which, in this case, FNK is 1.4X book. This is not overpriced, but it is more than fair in our estimation for the lack of growth and dividend power.

Loans and deposits grew, a big plus

We do not think FB Financial Corporation stock is a sell. We see it as a hold, and we were pleased to see that loans are up from the start of the year and from a year ago. Growth in loans and deposits is key for any bank. Total assets are $12.8 billion, which rose from $12.3 billion to start the quarter. Total loans held were up from the start of the quarter, and now total $9.3 billion, or up 8% annualized. Despite the rising rate environment, loan demand for loan products remained strong.

Total deposits were strong, and were a big highlight of the quarter. In fact, total deposits came in at $10.9 billion at quarter-end, up 8% from the start of 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. But, with higher rates on new loans, margins should be expanding. We expect net interest income to remain strong in the next few quarters.

Net interest margin

Rates are higher, so the yield per loan but also the cost of deposits is rising. The cost of funds was nearly doubled from last quarter. Cost of funds rose 68 basis points from a year ago to 1.2%, while cost of interest bearing deposits rose to 1.84%. Yield on loans rose to above 5%, but net interest margin narrowed from Q3 to 3.78% versus 3.93% in Q3. While new loans are issued at higher rates, the impact was offset by the higher costs of funds. We predict margins will remain well over 3.5% in coming quarters, however, so this bodes well for earnings here. We see both the cost of funds and the yield on the loan portfolio both continuing to increase in 2023. Net interest income was $110.5 million, a decrease of $0.9 million from Q3.

A look at return metrics

We closely watch the return metrics for banks when considering an investment. We need to know if the return on average assets and return on average equity are improving, as these are critical measures of a bank’s operational efficiency. In Q4, the return on average assets rose to 1.22% from 1.05% in Q3, but is down from 1.60% last year, while the return on average equity expanded to 11.7% from 9.45% in Q3, but still down from 13.7% in Q4 2021. FB Financial Corporation became less efficient as well, with the efficiency ratio hitting 62.7% vs. 61.1% in Q3.

Asset quality mixed

Asset quality metrics should also be followed. The provision for loan losses was $0.46 million, compared to a credit in Q3. Nonperforming assets are on the rise and increased to 0.68% of all assets versus 0.62% of assets. This is moving in the wrong direction, folks. The allowance for credit losses, however, decreased. They fell to 1.44% of all loans, of $134.2 million. Net charge-offs rose to 0.02% of loans from none in Q3. Overall, it is mixed, but the loan portfolio continues to exhibit strong credit quality metrics as a whole.

Take home

This was a mixed quarter for FB Financial Corporation. In the universe of regional banks that we cover, we think that you can do much better in selecting a bank stock. There is a ton of room for the dividend to grow here, and we like that the bank has raised the dividend each year, but FB Financial Corporation’s yield is so low that it does not justify the equity risk. We think margins will remain strong and earnings power, while down from a year ago, should remain high thanks to net interest income, but noninterest income sources have been reduced drastically as fee income is down on lower volumes. We think FB Financial Corporation is not quite a sell, but new money should look elsewhere.