FB Financial Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

A regional banking company, primarily focused on Tennessee, with operations expanding to Alabama, North Georgia, and Kentucky. Its business includes banking services, mortgage banking, and consumer financial products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

FB Financial Corporation (FBK) is a regional bank operating mainly in Tennessee, with expanding reach in neighboring states. The bank provides services across commercial and consumer banking, which includes deposit-taking, lending, and wealth management. Its performance and long-term prospects hinge on its ability to grow its loan portfolio while maintaining credit quality and navigating economic fluctuations.

Business Overview and Moat Assessment:

FBK’s business revolves around its banking and mortgage operations. Its revenue stream is diverse, including interest income from loans, non-interest income from fees and commissions, and revenue from mortgage operations, among other sources. Here’s a breakdown:

  • Banking: This segment provides core services to individuals, businesses, and community organizations, generating income from deposits and a variety of loans (including commercial and industrial, real estate, and consumer loans).
  • Mortgage: The bank originates and services residential mortgage loans, with its income dependent on loan origination volume, servicing fees, and gains or losses on the sale of mortgage loans.

Moat Rating: 2 / 5

  • Local Presence and Relationships: FBK has a strong presence within its local markets, and as community banking tends to have relationship-driven characteristics, this provides some advantage. That said, other community banks also have similar relationships.
  • Customer Switching Costs: For retail customers, especially those who are less sophisticated and primarily use the bank for basic transactions, switching costs can be relatively high, making clients somewhat sticky. This creates a degree of customer loyalty, however there are many banking options for clients.
  • Limited Moat: Its moat is not wide. It’s likely to be considered a narrow moat as it is not able to consistently outperform other similar regional banks that compete.

Risks to the Moat and Business Resilience:

  • Interest Rate Volatility: As a financial institution, the bank’s profitability is directly exposed to fluctuations in interest rates, leading to compressed margins and lower lending volumes. While they can use interest rate swaps and hedges to mitigate this somewhat, they are still exposed to a change in rates that can make funding more expensive and negatively impact earnings. This has a direct impact on net interest income, a key driver of profits.
  • Economic Downturns: Recessions and economic downturns can severely affect the repayment of loans by clients, thus causing losses, increasing credit losses and increasing the allowance for credit losses. This is particularly true in the commercial lending segments. A prolonged recession and credit tightening are a big risk to banks in general.
  • Regulatory Scrutiny: Banks are subject to a host of regulations and increased scrutiny that can negatively impact the business and its cost structure. While these are common risks for all banks, any regulatory changes can impact the ability of the bank to make loans and could hurt the revenue generated by them.
  • Intense Competition: The banking industry is incredibly competitive, with many financial institutions from national banks to smaller local banks battling it out for the same customers. This includes digital-first banks and fintech companies. Therefore, they compete by interest rates on deposits, fees, technology, and service. This intense competition can reduce pricing power and cause high churn rates for clients.
  • Regional Concentration: FBK is heavily concentrated in the Southeastern US. This makes it vulnerable to local economic downturns or demographic shifts.
  • Acquisition Risk: While acquisitions may accelerate growth, they also carry integration and execution risk. The bank has been very aggressive in its acquisition strategy in recent times. There is no guarantee that future acquisitions will provide more value and that past ones were a good use of resources.
  • Cybersecurity: As most banks, there is a significant cybersecurity threat that could lead to data breaches and operational disruptions.

Detailed Financial Analysis:

In order to provide a detailed analysis of the financials of FB Financial, please see the 2024 10-Q and 2023 10-K provided at the end of this report.

  • Net Interest Income (NII): FBK’s profitability is highly reliant on NII, as it is essentially the difference between the interest the bank receives from loans and the interest the bank pays for its deposits. From Q1 2023 to Q1 2024, Net interest income has decreased substantially from $150.943 million to $130.586 million, a decrease of 13.4%. This is largely related to high interest rates and lower growth in lending over that time period. The bank has relied heavily on non-interest bearing demand deposits to keep interest costs low, but has seen that strategy decline recently as clients seek higher yielding investment options.
  • Non-Interest Income: This revenue segment is derived from multiple different sources, such as service fees, wealth management, interchange fees, and gains on the sale of mortgage loans. Total non-interest income is a relatively small component of total revenues. For the three months ended March 31, 2024, this came in at $33.02 million. This segment is more susceptible to economic downturns.
  • Return on Invested Capital (ROIC): The company’s ROIC which was over 12% before the FED started raising rates, has now fallen below that. According to the most recent reports, ROIC has been fluctuating between 9% and 10%. The company can create value as long as it earns more than its Weighted Average Cost of Capital (WACC), which is likely in the range of 8% for this bank given the lower quality credit and higher risk nature of the loans compared to a credit worthier company. The spread between ROIC and WACC helps create value for investors.
  • Net Income: For Q1 of 2024, the company’s net income was $27.05 million, which was down quite substantially from $50.762 million in Q1 2023. This was driven by lower NII and a higher provision for credit losses.
  • Credit Quality: The bank has shown improvements in their credit metrics in recent times, especially within their CRE portfolio. The overall provision for loan losses in the recent quarter is at $13.5 million compared to $17 million in the same quarter last year. As the loans have become older and are generally higher quality due to their age, credit metrics improve but does not reduce the bank’s exposure to future credit risks. The ratio of allowance for credit losses to total loans was 1.32% in 2023, down slightly to 1.29% in Q1 2024. While the underlying credit metrics improve and provide greater confidence in the stability of the loans, that figure is also substantially higher than the historical lows experienced.

While their credit metrics have seemed to have improved in the recent reports, there is no guarantee that this trend will continue, given the highly volatile and uncertain economic climate, the credit quality may deteriorate considerably, putting the bank in financial danger.

  • Margins: While the bank had a net interest margin of 3.29% for 2023, in recent times, the margin has dropped substantially to a low of 2.83%. This compression of margins reflects a more competitive credit landscape and higher expenses for deposits.
  • Balance Sheet: The bank has an equity/asset ratio of 11%, which seems stable. The ratio of loans to deposits is 85%, which gives the bank some liquidity concerns if it fails to attract deposits.
  • The bank earns the most revenue from its lending operations. This means the bank is more susceptible to volatility in interest rates. Also, most revenue is derived from within the region which makes the bank dependent on regional economic conditions.
  • The bank has been expanding its mortgage business over time and is attempting to offset losses by improving productivity and cutting costs.
  • The industry is seeing more competition for lending as well as deposits, which are driving down yields. Also, fintech disruptors are trying to compete and take away market share from incumbents. Finally, more and more stringent regulations are making it harder to conduct business and making it more expensive.
  • The industry is also affected by macroeconomic trends as rising interest rates affect deposit and lending products.
  • Banks continue to be a good long term investment as they facilitate our economy. However, the long term trends, including inflation and interest rates, affect banks’ performance.

Recent Concerns:

  • A significant decrease in net interest income due to increased interest rates impacting deposit costs, as well as decrease in volume of loans being provided in the recent reporting quarters.
  • Increased provision for credit losses to manage the risk of defaults in their loans.

Understandability Rating: 2 / 5

  • Basic Banking Model: While the core operations of a bank are relatively straightforward, the financial statements, especially with accounting rules, can be complicated and tricky to analyze.
  • Complexity of Lending Operations: Lending operations involve numerous factors to assess the risk involved, making analysis of the loans especially hard to determine. There can be many factors affecting loan repayments, including credit quality, economic environment, and individual borrower conditions, so assessing how those will affect revenue and profit is hard to pinpoint and predict.
  • Impact of External Factors: The profitability of the bank depends heavily on the economic outlook and interest rates, among other external factors, which makes it harder to predict future profits.
  • Acquisitions: The bank is actively acquiring other companies which adds an element of complexity, requiring an analysis of the quality of the acquired businesses.
  • Need for Financial Literacy: Valuing banks requires a decent understanding of accounting and finance, which makes it harder for new investors to understand and assess the bank.

Balance Sheet Health Rating: 4 / 5

  • Adequate Capital Ratios: The bank’s Tier 1 ratio of 11.9% is well above the regulatory requirements of 10.5%. This implies that they have enough equity to absorb losses in their loan portfolio and weather potential recessions.
  • Liquidity Management: The loans/deposits ratio of 85%, implies the bank could face liquidity issues if the bank faces substantial withdrawals of deposits. However, they are able to manage this through other sources.
  • Strong Loan Portfolio: While there are some concerns surrounding the real estate sector, the company has a diversified loan portfolio, allowing them to absorb potential losses over a wide variety of sectors. Additionally, credit metrics have improved recently, as their loans have become older and of higher quality.
  • Good Interest Rate Management: The bank has maintained stable net interest margins, which shows that the assets are able to perform during times of high inflation.
  • Adequate Management of Assets and Liabilities: The bank has shown that it can adjust to changing economic cycles through proper management of assets, liabilities, and capital.

Conclusion

FB Financial is a bank that operates in a competitive and challenging environment. Although they have a somewhat sustainable presence in the local communities, they are still vulnerable to several risks including macroeconomic and interest rate risk, and credit risk. Therefore, a rating of 2/5 for moat is justified. As a bank, it relies heavily on complex financial metrics and accounting, giving it a understandability score of 2/5. It does, however, have a good capital position, implying it can withstand shocks with an equity to asset ratio of 11%. Therefore, the bank has a good balance sheet health of 4/5. A more detailed deep-dive into this company needs to be performed before determining its long-term viability and sustainability.