FB Financial, the parent company of FirstBank, has carved an interesting niche for itself in the regional banking world. They've consistently championed a "local authority" community banking model, emphasizing personalized service and decision-making power within individual branches. It's a strategy that seems almost quaint in an era of banking behemoths and streamlined, centralized operations. But what if this focus on local autonomy is more than just a feel-good customer service strategy? Could it be a cunning tactic, a Trojan horse of sorts, designed to make FB Financial the most attractive partner for smaller banks yearning for consolidation?

The recent Q1 2024 earnings call transcript reveals clues that suggest FB Financial's "local authority" model isn’t just a customer retention tactic; it's a calculated M&A play. While analysts focused on margin stability and loan growth guidance, a more subtle and potentially game-changing narrative was unfolding.

Christopher Holmes, FB Financial's President and CEO, repeatedly underscored the importance of their "local authority" model, calling it a “key differentiator for associate and customer satisfaction.” But he also emphasized its attractiveness “as a merger partner for smaller community banks.” This wasn't just a passing remark. Holmes doubled down, stating "We believe that we are due for some consolidation… [and] we have a compelling story for those banks that are interested."

It's not hard to see why smaller banks might find FB Financial's model alluring. In a world where they're increasingly squeezed by regulatory burdens and the efficiency of larger institutions, the prospect of joining a network that preserves their local identity and decision-making power could be incredibly appealing.

FB Financial's Financial Strength

The numbers paint a compelling picture of FB Financial's preparedness for M&A. Their tangible common equity to tangible assets ratio stands at a formidable 10%, and their total risk-based capital ratio is a robust 15%. This excess capital isn't just a safety net; it’s fuel for potential acquisitions. Holmes acknowledged their readiness, stating, "We have significant excess capital that should allow us to absorb the interest rate mark prevalent in today's M&A."

But here's where the "local authority" model adds a unique twist to their M&A potential. It allows FB Financial to acquire smaller banks without forcing them into a rigid, centralized structure. This approach minimizes the culture clashes and operational disruptions that often plague M&A integration. Holmes alluded to this advantage, highlighting "very strong risk compliance and operations, functions that we believe will be able to navigate the current regulatory and operating environment."

While FB Financial emphasizes organic growth as their primary capital deployment strategy, their modest mid-single-digit loan growth target for 2024 suggests that they might be reserving their firepower for more strategic endeavors. Holmes stated that they aim to return to their historical 10% to 12% organic growth target in 2025, hinting that the current year might be a period of building momentum for a more aggressive approach in the future.

A Calculated M&A Strategy

The transcript also revealed a fascinating glimpse into their M&A evaluation process. Holmes stated, "As a reminder, on our financial parameters, we value banks on their work and performance rather than our ability to pay." This suggests that they are not simply chasing deals based on cheap valuations. Instead, they are seeking quality institutions that align with their long-term vision and demonstrate a track record of sustainable performance.

Adding to the intrigue, FB Financial is led by a CEO with a deep understanding of the company's culture and legacy. Holmes, who has been with the company for over two decades, frequently cites the influence of Jim Ayers, the company's founder, who instilled a "DNA of performance and winning." This continuity of leadership and adherence to core values suggests that FB Financial's M&A strategy will be guided by a long-term vision, not short-term opportunism.

Loan Growth and Deposit Costs: A Balancing Act

One of the key takeaways from both the Q4 2023 and Q1 2024 earnings calls is the delicate balancing act between loan growth and deposit costs. FB Financial acknowledges the need to grow their loan portfolio, but they are also acutely aware of the rising cost of deposits in a competitive market.

As the chart above illustrates, FB Financial's loan growth has slowed in Q1 2024, while the cost of interest-bearing deposits has continued to rise. This emphasizes the challenging environment for regional banks, and it highlights FB Financial's cautious approach to balancing growth with profitability.

Conclusion

While the current economic climate presents challenges, FB Financial is well-positioned to capitalize on the expected surge in consolidation. Their "local authority" model, coupled with their strong capital position and a deliberate acquisition strategy, sets them apart from the pack. It’s a combination that could make them a formidable force in the regional banking landscape, potentially allowing them to acquire and integrate smaller banks while preserving their unique identities and local expertise.

It seems FB Financial’s "local authority" approach is more than just a charming facade. It might be the secret weapon that propels them to become a dominant force in the coming wave of regional bank consolidation.

"Fun Fact: FB Financial's headquarters is located in Nashville, Tennessee, a city known for its vibrant music scene and entrepreneurial spirit. This location puts them at the heart of a thriving regional economy, giving them access to a talented workforce and a growing customer base."