FB Financial: Riding Stronger Margins And Renewed Interest In Southeast Regional Banks

“I owe you an apology. I wasn’t really familiar with your game.” Shaquille O’Neal

Writing about FB Financial (NYSE:FBK) in October of 2023, my feelings were that there was nothing really wrong with this Tennessee-based community lender, but there was likewise nothing really compelling about the outlook or the valuation to make it a preferred option. That was clearly a bad call, as the shares have since climbed almost 60%, outpacing regional banks as a group, as well as most Southeast banks in general (which have been outperforming as a group, with 50%-plus appreciation over that period not unusual).

Although FB Financial has done a little better than I expected, including a surprisingly good Q2’24 result driven by some balance sheet restructuring, the magnitude of the outperformance and subsequent estimate revisions (not just mine, but the Street’s) don’t really explain the outsized performance. That leads me to wonder whether the Street is starting to price in M&A premiums again, as the Southeast remains quite attractive to banks and political/regulatory resistance to bank M&A may ease after the upcoming elections.

Whatever the case may be, I can’t really make the numbers work with FB Financial today. I respect the growth story, driven by both strong underlying market fundamentals like population growth and the hiring of proven revenue-generators from rival banks, and I’m looking for strong core earnings growth, but it’s tough to find a compelling fair value relative to today’s price.

A Healthy Q2 Beat, But Repeatability Is A Fair Question

FB Financial reported better than expected results for the second quarter, and the beat was driven overwhelmingly by “above the line” core items. While the sustainability of the drivers can be argued, I do believe it establishes a higher floor for at least the next few quarters.

Revenue rose about 1% year over year and close to 3% quarter over quarter, beating expectations by about 4% (equating to about $0.07/share of outperformance). Net interest income rose 1% yoy and 3% qoq, beating by 3% ($0.04/share), with net interest margin improving 15bp qoq to 3.57% and beating expectations by about 16bp. That’s a surprisingly strong result given present circumstances in the market, and it was driven in large part by a balance sheet restructuring that boosted the yield on the securities portfolio by 58bp qoq (to 3.29% from 2.71%).

Fee income rose 2% yoy and 1%, though, and that was about 8% better than expected (or around $0.03/share), so the revenue upside certainly wasn’t overwhelmingly driven by that NIM outperformance. Although mortgage banking was softer (down 5% qoq), it was still a little better than expected, and other lines like wealth management contributed to the beat.

Operating expenses fell 7% yoy and rose 3% qoq on a core adjusted basis, matching expectations in absolute terms but coming in better than expected in terms of efficiency ratio (earning more revenue on an as-expected opex base). Pre-provision profits rose almost 16% yoy and 2% qoq, beating by 9% or $0.07/share. Provisioning expense and taxes were also better than expected, driving the rest of the operating beat.

The securities restructuring that FB did in the second quarter isn’t really repeatable, so a NIM beat of similar magnitude is unlikely to occur. What’s more, as an asset-sensitive bank, upcoming rate cuts are not going to be particularly beneficial to the bank, or at least relative to peers given similar deposit costs. Still, the yield reset does establish a higher floor for NIM, and it has added around 5% to my 2024 pre-provision profit expectations.

Waiting For Re-acceleration In The Core Business

Absent the securities repricing, not a lot happened in the quarter in terms of exciting growth.

Earning asset growth (down 4% yoy and more than 1% qoq) was weaker than expected, driven by weaker loan growth (average balances down about 1% yoy and qoq). FB management has been actively reducing its construction loan book (generally considered one of the riskiest and most economically-sensitive lending categories), and construction loan balances declined about 27% yoy and 5% qoq.

Absent this line, loans would have been up 4% yoy and down 1% qoq; that sequential result is still soft relative to peers, with C&I loans down 0.5% (worse than peers) and multifamily loans down 3%.

Deposit-gathering was lackluster, but I’m not as troubled by this. Overall, average deposits declined 5.5% yoy and 2% qoq, but non-interest-bearing deposits were only down marginally on an average balance basis. With FB shrinking the loan book, there was no need to chase after higher-cost deposits, though the 21% ratio of NIB to total deposits is still a little lower than I’d like (but basically in line with the 20% at Pinnacle Financial (PNFP) and 22% at Synovus (SNV) among regional peers that have reported).

The real question is the extent to which the business re-accelerates. Management revised loan growth guidance lower for 2024 (low- to mid-single-digit growth), but is looking for a rebound to 10% growth next year. Granted, the bank operates in economically healthy areas and recently hired additional revenue producers (14 relationship managers and 11 producers in wealth management and mortgages), but that’s a big ask for an economy that I think will still be sluggish at the start of the year.

The Outlook

I don’t think my expectations for FB are particularly conservative. I’m a couple of pennies above the Street for FY’24 and FY’25 earnings, and I’m looking for core earnings growth of over 9% over the next five years and close to 9% over the next 10 years. That’s a lot of growth, particularly in the context of increasing competition in many of FB’s targeted markets. I do think there’s an opportunity to leverage market growth (Nashville, Jackson, Birmingham, et al) and take share from less attentive larger banks and less capable smaller banks, but again, there are a lot of quality banks competing for the same business.

I do also believe that M&A will continue to factor in FB’s future. Not only would the company be a potential target for larger banks looking to establish a presence in Tennessee, FB could look to use M&A to expand its presence in Gulf markets or other adjacent growth markets. Honestly, though, if the bank can continue to hire experienced loan officers away from other banks, that’s a more capital-efficient way to grow.

Discounting those core earnings back doesn’t get me to a compelling fair value. Likewise, a 12.8x multiple on my ’25 EPS (the same multiple I use with Pinnacle) only gets me to $43. Using the current published high estimate for ’25 ($3.61) likewise only gets me to around $46, and ROTCE-driven P/TBV is no help (not so surprising, as that valuation approach doesn’t reward growth).

The Bottom Line

I clearly underestimated FB Financial before – more so on the market sentiment/reaction side than underlying financial performance, but whatever. I do think there’s a credible growth story here, and maybe I did fail to appreciate that FB Financial can stand out from its peers with double-digit pre-provision profit growth over the next two or three years on the back of strong loan growth. Even so, it’s really tough to make the argument that these shares are undervalued now unless there is even more growth lying in wait for 2025 and beyond.