We previously provided a suggestion on FB Financial Corporation (NYSE:FBK) for a trade back in October 2023. In January of this year, we recommended that you consider backing out the initial investment, plus 20% of the profit, and let the rest run as a house position. We saw limited near-term upside so this suggestion, if executed, allowed you to move your money into more lucrative trades or investment opportunity, but having the house position with the profit, allows you to collect all future long-term gains, dividends, spinoffs, etc. And the dividend here should attract dividend growth investors with a history of raises.
Seeking Alpha FB Dividend History
Right now, we think the bank will plod along in this tough macro environment. It looks like we will be under a higher for longer rate environment, so it is going to be a waiting game before we see heavy loan demand and a return to strong and growing margins. That said, by holding a house position, the near-term does not matter. Let the position compound and grow, creating real long-term wealth. The situation for regional banks should improve in the next few years as rates normalize, even if cuts are looking to be a few more months out, if not longer. As long as the Fed is not backed against a wall and forced to cut dramatically and quickly, it is just a waiting game. The Q1 earnings were just reported and in this column, we check in on the investment and discuss the earnings.
Headline performance
Once again, results in Q1 were mixed, justifying a hold rating. The bank reported a top line which was down 15.5% from a year ago to $107.5 million, missing consensus estimates by $13 million. To be clear, this was a quarter of contraction, as both loans held for investment and total deposits were down from the sequential Q4. However, we saw strong earnings power despite lower loans and deposits.
In the last few quarters in this rate environment, we have seen margin compression because the cost to acquire deposits has increased dramatically, as banks have had to pay up to attract customer deposits. With that said, we have opined that for the regional banks for a while, we think margins have hit a bottom. While margins fell slightly from Q4, the sharp drops have ceased. Eventually, when the Fed cuts rates, the cost of deposits will plummet, though new loans will still come at high rates, and existing loans will continue paying current rates.
On the bottom line, FB Financial reported adjusted net income of $39.9 million, or $0.85 per share, compared to $0.77 in the sequential Q4 and $0.71 a year ago. This is a very positive result, and EPS surpassed estimates by $0.15.
Loans and deposits both decline at FB Financial
Loans held for sale had been on a decent growth path in 2023 despite the operating environment but fell back in Q1 slightly. Total assets were $12.55 billion, dipping $12.60 billion in the sequential quarter. Total loans held slipped from $9.41 billion to start 2024, to $9.29 billion at the end of Q1. The decline primarily stemmed from a decline in construction loans in the quarter of $128 million. Another commercial borrower also paid of a large $48 million dollar loan. So it was not all bad news. Deposits also dipped slightly. Deposits fell to $10.50 from $10.55 billion at the end of Q4. The decline was mostly in non-interest bearing deposits.
Net interest margin narrows slightly
FB Financial Corporation’s cost of funds increased to 2.76% from 2.65% during Q4. The cost of interest-bearing deposits increased to 3.49% from 3.40% for the same periods. There were also lower loan fees collected, weighing on the margin. That said, the yield on loans increased to 6.55% from 6.43% in the linked Q4. So a 4 basis point decline is still a decline, but a far cry from the huge declines we saw in late 2022 and 2023. We think margins have bottomed out in the sector. Net interest income was $100.2 million, a tiny dip from $101.9 million in the sequential Q4. As we assert, the bank continues to operate decently in this tough environment. The reason earnings were so strong was from much higher non-interest income related to sales of investments.
FB Financial’s return metrics decline, while asset quality mixed
Perhaps unsurprisingly, with lower revenue and reduced margins, the return metrics declined from Q4. In Q1, the return on assets fell to 0.89% from 0.94% in Q4. The return on average equity narrowed to 7.70% from 8.41% in Q4. On a tangible basis, the return on average equity also dipped to 9.295 from 10.3% in Q4. While this was not exactly outside the realm of expectations, seeing continued pressure explains why the stock has not moved much (and is, in fact, lower) since we guided to take profit and hold a house position.
Despite the return metrics falling, the asset quality remains strong. There was a provision expense of $1.9 million but a provision reversal, a credit, of $1.1 million related to unfunded loan commitments, resulting in a net provision expense of $0.8 million. This is down from $3.1 billion during Q4, and also lower from Q3’s $6.0 million. Nonperforming loans increased however to 0.73% of all loans from 0.65% in the sequential Q4. Further, nonperforming assets as a percentage of total assets ticked up to 0.75% from 0.69% in Q4.
Overall, it was not a great quarter, but considering the macro environment, operations are holding up well in our opinion.
Final thoughts
We had a great trade here netting 33% gains, and now running house money, it is just a waiting game. We like holding here as the bank is performing well regardless of the tough macro. Margins have about bottomed, and earnings remain strong. Credit quality is strong, even though the metrics we follow declined in Q1. We should note that the tangible book expanded again, this time to $26.21 from $25.69 to start 2024, so this is positive. Still, even with shares muddling along, FB Financial Corporation stock is a bit pricey for the performance. We remain neutral/hold, and suggest collecting all future gains and dividends with house money. New money should wait for mid-$20’s on the share price.
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