FB Financial Corp Q3 FY2021 Earnings Call

Good morning and welcome to FB Financial Corporation's Third Quarter twenty twenty one Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mettee, Chief Financial Officer. Greg Bowers, Chief Credit Officer; and Wib Evans, President of FB Ventures, will also be available during the question-and-answer session. Please note FB Financial's earnings release, supplemental financial information and this morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on the FB Financial's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation. With that, I would like to turn the call over to Robert Hoehn, Director of Corporate Finance. Please go ahead.

Thank you. During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release, supplemental financial information in this morning's presentation, which are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov. I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO.

Thank you, Robert. Good morning and thank you for joining us this morning. We appreciate your interest in FB Financial. We had a solid quarter as we delivered annualized loan growth of eight percent when you exclude PPP loans, adjusted EPS of zero point eight nine dollars, adjusted return on average assets of one point four two percent, adjusted return on tangible common equity of fifteen percent, and we grew our non-interest bearing deposits by twenty percent annualized. Growth continues to be evident across our markets. We received news this quarter that Ford is investing five point six billion dollars in an electric vehicle manufacturing hub in a site midway between Memphis and Jackson, Tennessee in West Tennessee. This investment will create six thousand direct jobs in West Tennessee and the state estimates that in total twenty seven thousand jobs will be created to support the site. FirstBank is well positioned to capitalize on increased economic activity that will come to West Tennessee as by our estimation, we're number one in market share in that part of the state, including third in market share in Jackson. We've got a very strong commercial team in Memphis that continues to deliver good results. In Nashville, the economic activity continues to roll and is becoming a technology hub in addition to our traditional strengths of healthcare, entertainment, and hospitality. And we just recognized a second unicorn. Tennessee benefits from decades of strong business-friendly leadership from our elected officials and it's exciting to be at the center of what's become a magnet for economic development. We believe we have the relationship managers and the infrastructure in place to capitalize on that economic environment. Eight percent loan growth of this quarter is in-line with our guidance. We continue to believe that high single digit growth is a good target for us for the year. Our regional Presidents are telling me that they expect strong activity for the fourth quarter, so a double-digit annual number is not out of the question for twenty twenty one. If trends continue as they have, we would expect to return to our difficult ten percent to twelve percent annual loan growth for twenty twenty two. On the liability side of the balance sheet, we're pleased with our twenty percent non-interest bearing deposit growth during the quarter, even when the world is watching liquidity, we place a high value on bringing in strong operating account relationships. As a result of that shift in the composition of our deposits as well as our continued focus on bringing down our cost of interest-bearing deposits, our total cost of deposits decreased by an additional five basis points this quarter. Moving to mortgage, the team delivered a very strong quarter with eight point nine million dollars of pre-tax contribution. That was an outperformance compared to our guidance for the third quarter as refinance volumes and margins performed better in August and September than we anticipated during last quarter’s call. Early results in October have been fairly volatile, so our guidance range will be a bit wider this quarter. Our best guess at the moment is anywhere from one million to four million in contribution in the fourth quarter. Asset quality continues to improve with our non-performing and non-accrual statistics materially declining this quarter with non-performing loans to loans down by twenty four basis points, non-performing assets to total assets down by sixteen basis points. The improvement in our metrics was driven by fourteen million dollars of non-performing loans leaving the bank this quarter, which resulted in a slightly higher net charge-offs at thirteen basis points as well as a one point five million dollar reversal in non-interest income as a swap on the credit was unwound. The overall credit environment is favorable right now and our markets are effectively operating normally despite the COVID activity that our footprint experienced during the summer. We saw slight ACL relief this quarter as a result of the improving economic conditions and forecast, but we've cautiously and intentionally held back what reserves we could support ahead of the winter months just in case we run across any speed bumps as folks moved back indoors. Assuming that forecasts continue to improve and that we survive the changing of the seasons without material shutdowns or changes in behavior in the markets, we’d expect more sizable releases to follow in the next few quarters. On a related note, we saw positive momentum with the disposition of our non-core institutional portfolio. We have just over one hundred million dollars of exposure remaining in there and would expect that to continue to decline as credits mature and refinance out of the bank. We’re still marketing the portfolio and would accept the right bid. But we're down to nine relationships and the quality of the remaining loans is strong in yield as favorable, so it takes a strong bid at this point. Speaking to our capital management plan, tangible common equity to tangible assets is moving a bit outside of our target of eight point five percent to nine point five percent range, we prefer to deploy that capital organically, but with the excess liquidity that remains on our balance sheet, we still have some time left before organic growth would materially impact our capital ratios on its own. And we've got that total buyback this quarter, but with the bank valuation rebounding shortly after our trading window reopened, we ultimately retired less than a million dollars worth of shares. Our second priority for capital deployment behind organic growth is accretive merger and acquisition activity and it's now been just over a year since we closed and converted the Franklin Financial Network merger. We remain pleased with how the combinations performed as talent and customer retention is going well. As we look towards future mergers, we're targeting similar characteristics to our Clayton Atlantic Capital and Franklin synergy combinations. We look for partners that will provide us additional density across our footprint as well as fairly open markets within Tennessee and transactions that provide financial returns that support the risk of undertaking a conversion process. We're focused primarily on banks around our footprint that provide a strong cultural fit and ultimately provide operating leverage for us. There's nothing imminent, but we believe that the current environment supports further consolidation and that we could have M&A activity in twenty twenty two. So, to summarize, we had a good quarter of loan growth as our strong team of relationship managers continues to capitalize on the economic activity of our footprint. We expect that growth to continue over the remainder of twenty twenty one and into twenty twenty two. The mortgage segment did very well and outperformed our previous expectations, but we expect them to come back down in the fourth quarter to the seasonal behavior of the mortgage. We're building capital quickly, but M&A activity is possible and rebuilding bank valuations and we’re not likely to use much capital for buyback in the near term. I'll now turn the call over to Michael, our CFO, to discuss our financial results in some more detail.

Thank you, Chris, and good morning to everyone. Speaking first to mortgage and illustrated on Slide six, mortgage performed better than expected in Q3 with a contribution of approximately eight point nine million. As mentioned on Q2’s call, we were not certain how the late second quarter move lower rates would impact the industry and ultimately we saw refinance business reactive, as one would expect in a lower rate environment. We also saw margin stabilize quarter over quarter, payoffs slow in our servicing book and higher servicing revenue, all leading to outperformance. It is early in Q4, but it does appear with the recent run-up in rates and the usual seasonality, the mortgage division will face some headwinds this quarter. As Chris mentioned, our best estimate for contribution is one million to four million in direct contribution for mortgage in the fourth quarter. Moving on to net interest margin, we saw our headline number remain essentially flat at three point two percent in the third quarter compared to three point one eight percent in the second quarter. We were able to bring down our cost of total deposits by five basis points. Our relationship managers have continued to focus on bringing down our higher cost interest-bearing accounts and they've gotten results. I would expect some additional decline on our cost of interest-bearing accounts in the coming quarter or two, but the month of September was at thirty three basis points versus thirty four basis points for the quarter, and we're seeing a bit of a plateau there and I would expect more measured improvement going forward. As Chris mentioned, we did have success in remixing our deposit portfolio this past quarter with non-interest bearing deposits increasing to twenty five point nine percent of total deposits from twenty four point four percent in the second quarter. The number will remain a focus going forward though and our next goal is to make that number thirty percent plus of total deposits. However, in the near term, that number will continue to fluctuate as public funds come back on after seasonal outflows of approximately two hundred twenty five million this quarter. Our contractual yield on loans dropped about thirteen basis points during the quarter from four point three seven percent in the second quarter to four point two four percent in the third quarter. We are encouraged to see yield on new originations in the third quarter hold in that same three point eight to three point nine percent range that we experienced in the second quarter. However, with that still being below the four point two four percent contractual rate on the legacy portfolio, we would expect to continue to see yield compression until rates begin to rise. As a reminder, we're maintaining our asset sensitivity and when rates do rise, we have approximately two billion in variable rate loans that will reprice immediately. We continue to manage excess liquidity in part by increasing allocation to the securities portfolio. Our securities portfolio increased by one hundred sixty eight million in the third quarter. The average yield on purchased securities during that quarter was approximately one point three three percent. Interest rates were volatile during the quarter with the benchmark ten-year U.S. Treasury swinging as much as thirty six basis points and we expect interest rate volatility to continue as monetary and fiscal policies adjust from the significant responses to the pandemic. Given that volatility, we continue to invest in securities that do not exhibit excess duration risk, while still providing an overall increase in interest income. In the absence of rate increases, we would expect the margin to stay in the same relative band that we've been in for the past few quarters. We expect yields on loans held for investment in the securities portfolio to continue to decline as incremental volume comes at rates lower than the current portfolio. We expect continued improvement in cost of funds as CDs continue to reprice and as our relationship managers focus on growing non-interest bearing deposits. Liquidity will be slightly volatile quarter-to-quarter, as public funds enter and exit the bank and we'll continue to strategically deploy excess liquidity in the better yielding assets in order to grow net interest income. Moving to CECL, as Chris mentioned, at two point five million, our release was smaller this quarter than the prior two quarters. Economic forecasts continue to dictate lower reserves relative to the quantitative portion of our CECL model. On the qualitative portion of our allowance, we are maintaining many of our COVID factors from now as we head into the winter. Assuming that the economic trends in our footprint continue as they have after everyone moves indoors for the season, we'll feel more comfortable relaxing some of these qualitative factors. Based on what we know today, we expect releases related to these key factors to come sometime between the fourth quarter of twenty one and the first half of twenty twenty two. As you know, COVID has taken many unexpected turns, while this is subject to change. Speaking to expenses, the banking segment was slightly elevated compared to where we expected for the quarter coming in at fifty eight point eight million dollars compared to fifty eight point two that we had pointed to last quarter. This is primarily related to the vesting of stock grants from the IPO resulting in additional payroll taxes and tangent benefits of approximately five hundred thousand. In the banking segment's non-interest income, we had several non-recurring items that can distort the run rate number. The stated segment amount was thirteen point eight million. Included in that thirteen point eight million dollars was a gain on sale of real estate owned of two point two million dollars, a gain on our commercial loans held for sale portfolio of seven hundred forty thousand, and a loss on the unwind of a swap of one point five million. Netting those three items out, the banking segment's non-interest income would have been twelve point four million in the fourth quarter. I'll close my section by speaking to this quarter's taxes as there are a few one-time items in that line as well. We had a one point seven million benefit related to net operating loss from the Franklin merger. We also had a two point one million benefit associated with the vesting of the IPO awards. For the fourth quarter, we expect to return to a twenty three percent to twenty three point five percent tax rate. And with that, I'll turn things back over to Chris to close.

All right. Thank you, Michael, and I appreciate that color. We're pleased with our results for the quarter and we're particularly proud of our team for the loan growth, the non-interest bearing deposit growth, and the mortgage outperformance. This concludes our prepared remarks. And Andrea, at this point, we'd like to open the line for questions.

And our first question comes from Brett Rabatin of Hovde Group. Please go ahead.

Hey good morning, everyone. I wanted to first ask, the loan growth was obviously nice in the quarter and in the prepared comments you talked about the possibility of a return to ten percent to twelve percent. Could you give us a little more detail on the C&I growth in Q3, and if that's where you expect the bulk of growth to come from here and what you're seeing is that market share movement or is that new client additions, is it activity from new customers, where is that growth coming from?

Yes. Brett, so the growth has pretty much come across all of our product types. If you look over the last two or three quarters, it's been across all of our product types. We did have more growth during this particular quarter in C&I than any other product type. And so, we are glad to see that and expect to continue to see that grow. I don’t know that it will continue to be the leading product type, but we expect to continue to see that. We have not seen our land utilization return to where it was in the last two quarters of twenty nineteen. We were closer to approximately fifty percent utilization, if you average the last two quarters of twenty nineteen, then you looked into the third quarter and this past quarter we were still down in the low forties in terms of utilization. So, it's higher than it was, but it's still not hot. As we expect to see that over the next several quarters, we think C&I will continue to be strong. We've seen good CRE growth as well, good growth in residential construction. We've seen new customer acquisition. It's been a combination and we can't pinpoint any one thing. I would say, I always think about the rate at which our markets are growing and when we're growing our loan balances for the most part, either have single digits or low double digits that's still going to be a little faster than our markets are growing. So, there is some share that's coming with that as well. So, it's a combination across all product types and I can't give you one that I would say is negative. It's a combination of the existing customers that there's also – we’re picking up new customers as well.

Okay. Appreciate the color there. And then mortgage, the guidance for the fourth quarter, maybe a bit of a tough question, but as you guys think longer term, where do you see mortgage normalizing? Would it be at a higher level than twenty nineteen because of the investments you've made in the platform? Or can you maybe give us some thoughts on how you see mortgage trending as things get back to normal, assuming that happens at some point?

Yeah, Brett. I think where mortgage would normalize is at ten percent to fifteen percent of the contribution is where it typically will play out. In the low rate environment we've been in twenty twenty is kind of a hard benchmark at this point. If you look at the MBA, you look at Fannie and Freddie, they're predicting volumes to be down fairly significantly. We would expect outperformance. But we certainly would expect at that ten to fifteen percent number, which is traditionally what we've targeted.

Yeah, and twenty twenty two is a particularly difficult year to forecast. We talked about quite a bit how to forecast twenty twenty two. It's a particularly difficult year to forecast Brett and for us and I think for everybody else because even if you look at the forecasts that are out there, they don't all line-up for volumes. We probably take a slightly different view than even most of the forecasts out there. So, we target somewhere between ten percent to fifteen percent. We won’t do as well as we can, but that typically that's where it comes in for us in an average year.

Okay. Appreciate the color there, and then Chris, if I could sneak in one last quick one? You talked a little more optimistically about M&A than I think you have in recent quarters. Are you seeing pickup in talks with potential acquisition targets? Maybe give us if you could any flavor for how you expect twenty two to shape up from an M&A perspective for you?

Yes. So, twenty two, you know as we think about the last couple of years, twenty and twenty one, we’ve had a lot going on. We announced the Franklin combination, FirstBank Franklin combination in early twenty. We pretty much tried to digest that in twenty twenty and it took all of twenty twenty and into twenty one. You know we went over the ten billion dollar asset threshold with that transaction. And so, that has also taken some focus of the company. We’ve been focused on operating and top-level execution on our company. We feel pretty good about where we are with that. We think it shows through in the numbers, particularly in our organic numbers. We're more open to talk about that now. We keep a pretty targeted list of things that we're interested in and it's as much relied on those that we’re interested in as it is on us just coming into the market. We're quite strategic on that. Our feeling is that as we look at that very small list that during twenty twenty two, we think that there could be one or more of those that would come to us and go, hey, we think it might be a good time to have a conversation and so that’s how we see it. It's gotten better for us from a timing standpoint. We think that perhaps it will get better for others as well.

Okay. Great. Appreciate the color.

The next question comes from Stephen Scouten of Piper Sandler. Please go ahead.

Hey, good morning everyone.

Good morning, Stephen.

Good morning, Stephen.

Maybe going back to loan growth quickly, I’m just curious how the team in Birmingham has been performing? I think maybe it was forty million that you referenced last quarter that they contributed to. Just continuing to question how that is shaping up, and if you think there could be additional team ads in some of these ancillary markets in the months ahead?

Yeah. So, I'll say we have been really, really pleased with Birmingham as a market. The reception that they have gotten and we have gotten in the market has been really humbling for us. It's been really good and the folks that we've been able to recruit from the first nineteen down there have just been fantastic in terms of fitting our culture. It's been a great match. They have actually when we talked about where they were last quarter, they've almost doubled that again. And so, they're in the mid-seventies in terms of volume at this point. We've been very pleased with the quality of what we're seeing. We're continuing to talk to other folks there about joining that team. We don't want to get ahead of ourselves, but we're continuing to talk to some other folks. So, we couldn't be happier with the way it's going up – it is pulling. The pipeline is actually maybe even more encouraging than what I just gave you. So, we've been very, very pleased.

That's great. That's great. Okay. And on the M&A front, I think last quarter, maybe you had referenced Western North Carolina and some areas, maybe that were slight extensions to your existing footprint. Is there any when you look at that list of banks you spoke to that you would – that targeted list, is there any specific geographic focus that you guys would prefer to move into currently or are there even product expansion or extensions that you would look to, especially given the uncertainty around mortgage or can you give us a deeper feel on ideology around potential M&A?

Yes. Sure. So, as we think about M&A, geography is at the top of the list, and really geography is at the top of the list because operating leverage is at the top of our agenda. If you look at where we are in Nashville from a market share standpoint, a decade ago, we didn't even make the top thirty, or maybe even the top fifty in Nashville from a market share standpoint. Today we're number six. We're right at, I think we're number five now in Knoxville and about the same in Chattanooga where we basically didn't have a presence before. And when I say we didn’t have presence, we actually had a location, but we had less than one hundred million in each of those markets and we were essentially irrelevant from a market presence standpoint. When you have that presence, we like to have enough density to make sure we're getting a great return on our capital and we're creating operating leverage. We've still got markets in our footprint that would provide us with operating leverage as we'd like to improve our profitability. So, that's part of our M&A strategy as we continue to improve our profitability through that.

So, for that reason, we look in and around our footprint a lot of times going back to your question of Western North Carolina or say Northern Georgia. A lot of times we’ll get a market extension, for instance, it could be an institution that has a presence in say East Tennessee and Western Carolina, and we would be interested in that. We would tend to think of our market extension as being something that is partnering with an institution that has a presence in our geography but draws us into a contiguous geography. That's how we think about bank M&A. We also think about culture, obviously, and we think of heavily about the deposit side of the balance sheet. We’re very, very interested in legacy non-interest-bearing deposit type institutions. Very, very interested in those. On the non-bank front, we have some interest there also. We consider some of our specialty lending group, our manufactured housing group in the same way. That group is performing really well. If we came across a vertical like that that had particularly good yield, we love assets that we can either portfolio or sell into the market like both of those. We have options of either portfolio or sell, and we can create national product lines for us or those verticals are something that we're interested in being. We want to make sure we're competitive in those spaces, especially mortgage and the manufactured housing.

Awesome. That's a fantastic answer. Thanks, Chris for all the detail. And then just last for me, do you guys have an update on the expected impact from Durban in the third quarter?

Yes, third quarter twenty twenty two, it's still going to be that same four million dollar range, Stephen for half a year and you could look at about eight million annualized.

Got it. Okay. Thanks, Michael. Appreciate the color guys.

Thanks Stephen.

The next question comes from Matt Olney of Stephens. Please go ahead.

Thanks. Good morning guys.

Hey, Matt, how are you?

Hi, I'm good. I wanted to drill down on the expenses for the bank. I think you mentioned in prepared remarks will be elevated and there were some unusual items. I think with the stock grants from the IPO explained a portion of this, but it seems like there was something else in there as well versus your original expectations, so any more color on that from the third quarter and then an outlook here in the fourth quarter and into next year as well? Thanks.

Yes. So, the reality regarding the IPO and the vesting was that we were expecting a flat quarter-over-quarter, second to third flattish, and that five hundred thousand dollars related to vesting was really the main peculiarity. As we look forward, I would expect in that same fifty-eight million to fifty-nine million range, knowing that we're going to take opportunities to hire talent as it comes available in some of these areas, Chris mentioned going over ten billion, there are investments that we're making there to continue to strengthen the bench and strengthen our operating and risk management. We continue to do that. We're seeing a lot of disruption in our markets, which allows us to capitalize on some talent. So, you'll see some expense in there, but efficiency-wise, we look to continue to become more efficient in growing the revenue side of the balance sheet and continue to push down our efficiency ratio.

Okay. That's great. Thank you for that. And then on the mortgage front, I want to circle back there and drill down a little bit more on the near-term outlook. I'm trying to appreciate the dynamics between both the margins and the volume. I think it’s that two fifty five gain on sale margin in the third quarter. Are you seeing some incremental pressure on that in recent weeks, or is the concern more on the volume side given the higher rates in recent weeks? Thanks.

Yes. Margins really hung in there over the past couple of months. We've been pleasantly surprised with that even as capacity returned to the mortgage space. We saw volumes start to slow there in the third quarter and the usual seasonal behavior. Expectation for Q4, we're also seeing a lot of inventory pressure still on the purchase side. There was a little bit of hope that inventory would increase and we’d get some minimum purchase that typically hadn't been there, but having spoken at this point, we're not seeing a whole lot of that in our markets. In the third quarter as well, FHFA gave back refunds to some of the lenders which was a boost to volume on the refi side, lowering the growth about eight. So, you saw a pickup in our refinance percentage from fifty-eight percent to sixty-six percent from that. That's all fully priced into the market. You'd expect that to kind of tail down as we get through the fourth quarter. There are a lot of moving parts in there, but housing is still constrained because of inventory and supply chains too.

Okay, that's all from me. Thanks guys.

Thanks, Matt.

Thanks, Matt.

The next question comes from Jennifer Demba of Truist Securities. Please go ahead.

Thank you. Good morning.

Good morning, Jennifer.

I’m wondering if you could talk about your priorities in terms of technology investment and expansion right now over the next one or two years, where you feel like maybe you're in line with peers or ahead?

Yes. So, we spent a lot of time in internal dialogue around that very thing. We look at it as we're really thinking about innovation there with some of our folks and have been really focused on that. We actually are making some changes to create even more intense focus on that. We've done a couple of things with a small handful of investments in that area. But when we think about it, we think about first customer experience. Our research, which is third-party research, says that we have a leading customer experience in many – in several measures, the leading customer experience in the Southeast, but in almost all the measures it's quite good. We think about, first, after we innovate mostly using technology in the customer experience process. Secondly, we think of efficiency and what can we apply technology to improve the efficiency of the company? We have active dialogues with several fintech companies, also with several fintech investors, and we are an active investor in a few ways there. We very much believe that the industry is transforming over the next few years. We're transforming our business at the same time because you just that – I think options are to do that or risk losing value and we're not going to do the latter.

The next question comes from Kevin Fitzsimmons of D.A. Davidson. Please go ahead.

Hey, good morning, everyone.

Hey, Kevin.

Chris, there’s been a handful of questions on M&A. One thing I just wanted to ask was coming out of the Franklin synergy experience, it was a large deal, a complicated deal that took a while. Do you feel more confident and more open to go with a larger bank transaction like that, or do you think your appetite is going to be for more digestible traditional type deals in your view?

Yes, that's a great question actually, Kevin, because, again, we've talked about that a lot. First off, deals are hard, okay, what size they are? Our first option for us would be to go higher-grade people and pay a smaller premium for those folks and be able to be a little more selective with those investments. We love doing that. We do get the opportunity to make some bigger ones. Franklin and FirstBank, that combination was big and it was in some ways, particularly in Middle Tennessee, we regarded it as a merger of equals really between those markets because we totally merged those. In the national market, the market now has more, if you looked at the total employees in Middle Tennessee, they are more legacy Franklin synergy employees than legacy FirstBank employees. That all being said, it's going well. We’ve retained the customers; we’ve retained the folks on both sides, by the way. And, have we retained them, they had a budget. So, but it's hard. As we look at going back to potential targets, frankly, most of them are smaller than what would have been at the time. One of those, FirstBank would have been say sixty percent and Franklin synergy would have been forty percent. As we look at the targets that I mentioned in those ones that we're really interested in, they're smaller than that as a percentage of the company. That would be what we opt for, not only because that’s the specific target list, but that's just about being selective.

Great. I appreciate that. And just – it's been mentioned a few times today, but lots of stories and hear reports about supply chain disruption and worker shortages and you know you love the good fortune of operating in very healthy markets, but can you kind of speak big picture about how much of a concern that is, whether you think it's something that's very temporary or could persist for a while? I don't know if this falls into the camp of those things you're watching and why you're not taking the reserve down as aggressively as you probably could have this quarter. Is it more of just solely a loan growth headwind or is it a potential credit headwind in your mind as well? Thanks.

Yes, it’s not quite as much of a concern for loan growth but a potential credit headwind comes from a shutdown. If we have something where we get shutdown again for whatever reason, whether it's just COVID and a return to shutdown status, or disruptions from the two things you mentioned, either a supply chain or labor. Those would be the things we would worry about. We see both of those; the supply chain, we certainly see the effects of that in particularly in the real estate side of our portfolio, both residential and commercial. Costs have absolutely gone up, rents have gone up in the commercial space, cost and housing has gone up in the residential space, and the cost of living in our largest market of Nashville has gone up significantly. We see all of those, but I personally think that the supply chain will settle down sooner versus later. I don't think that will happen next month but I think it begins to normalize because the forces of capitalism tend to take over there. The labor shortages, I’m going to speak regionally and locally as opposed to nationally, the labor shortages are very real, and we live in a very attractive spot that's attracting as much in migration as any spot in the country. I don't think the labor shortages will abate. I just talked forward, twenty seventy thousand jobs being created in the Western part of our state which has been the slowest growth part of our state, but the middle being the highest growth and the east also being a high growth area. I think the labor shortages are going to persist. There’s a lot of wage pressure where we are at every level. Even at some of our highest paid folks, they get offers too.

I think Kevin, relative to the reserve, all other things are part of the consideration. You also had eviction moratoriums coming off and PPP loans being forgiven. There was a little bit, especially earlier in the quarter, with how Delta variant has been dealt with and what impact that would have on businesses with labor and all other factors that drove a little bit of wait and see there to get too aggressive there. But do expect that to turn around as Chris mentioned regarding turnaround inflation. We certainly are seeing price increases across the board.

Okay. And Chris, you've mentioned long-term proactive focus on non-interest bearing deposits. If you're looking at institutions, now, one could say, well why not go out into attractive markets, hire and get the loan growth, and you've got so much excess liquidity right now to fund that? So, is it just more of taking a long-term approach to that funding that you can't necessarily count on having what you have today and that may proceed at some point? And you'd rather go in the traditional way and get the deposits right upfront versus trying to cloth and get it over a period of years?

Yes, you read that correctly. It's two things. It is the long-term view that non-interest bearing deposits are very attractive and will always be attractive. So, as we think about what we're targeting, that's what we're targeting in deposits. Just from a pure monetary value, given where interest rates are, deposits are less valuable today than they traditionally are, but in our mind, the relationship that comes with the primary operating account is very valuable to us long term and those are the ones we want. We are doing some hiring of loan officers to get loans on the balance sheet. In Birmingham, for example, they certainly don't have as much in deposits as they do in loans, not even close, but that's fine with us for now. Again, because we're taking that long term approach and those deposits will come over time. But if we got the opportunity, that's a good example. If we got the opportunity for the right legacy community bank in those, in and around those markets, it'd be one we'd be very interested in so we could bring on those operating account relationships sooner than we would bring them in just through organic growth. I'm very envious of those banks that fund their loan portfolio with forty percent non-interest bearing deposits. We want to get there.

Got it. Okay. Thanks, Chris.

All right. Thanks, Kevin.

The next question comes from Catherine Mealor of KBW. Please go ahead.

Thanks. Good morning.

Good morning, Catherine.

Just wanted to follow-up just as we model the margin and the balance sheet. How to think about the deployment of excess liquidity both into loans and securities? And how you're thinking about how big the securities portfolio potentially could get as a percentage of average earning assets and how much you plan to put there versus in your strong loan growth? Thanks.

Hey, Catherine, it’s Michael. I'll take that part. Our target has been in that thirteen percent to thirteen point five percent range of total assets versus earning assets. We're actually right in that range. It came a little bit quicker than we were looking at year-end, but clearly, because liquidity has been here to stay, we deployed some there. It's some repo, reverse repo transactions that are short-term in nature, and we deployed some liquidity there as well, with thirty-day paper. So that helped a little bit. I don't think you'll see material growth above this thirteen percent to thirteen point five percent range. We prefer loan growth as we mentioned. We think that there's strong opportunity there. We have a lot of opportunity in our markets, and that's what we'll likely deploy.

And Catherine, I would just add on the loan side. Our regional presidents are very optimistic when we look out at twenty two. We look at the pipeline today, and we look at twenty two. We're not having to coax them up when we're thinking about targets for twenty twenty two. For that reason, we feel better about the outlook for the loan growth side of the balance sheet.

Understood. And then on the seasonality of the public fund. I think you mentioned this in your prepared remarks, Michael. Can you remind us that you're saying public trends will come in higher this quarter and can you just remind us, with the seasonal fluctuations?

Yeah. We saw that two hundred twenty five million rollout this quarter and we'd expect them to some version to come back and be higher in the fourth quarter. There's still a lot of funding that has not been deployed from the government and we expect those balances to increase.

Got it. So, you think excess liquidity could actually increase a little bit next quarter before we see that more deploying next year with the loan growth? Is that a fair way to think about it?

Yes.

Okay, perfect. Perfect. Alright. Great. That's all I got. Thank you.

Thanks, Catherine.

The next question comes from Alex Lau of JPMorgan. Please go ahead.

Hi, good morning.

Good morning, Alex.

Appreciate the loan growth guidance. Can you talk about loan competition in your markets as you looked at that low double digit range both on the rate and credit structure competition front? Thank you.

Yeah. Alex, sure. The competition is king. You know there are four thousand banks out there and I think we all think that's too many. I joke about this all the time. We've got one market that has only two banks in the market, and every time I talk to them, they tell me it's the most competitive market we got. So, everybody thinks it's competitive and the fact of the matter is it is. I would say, specifically, one, rate pressure right now is particularly more competitive than what we see on credit structure. Sometimes in times like this, you will see, you'll see relaxing of credit standards and we have, at times past, found that concerning. Greg, you might check me on this, I haven't seen anything concerning regarding relaxing of credit. We just pretty much don't relax our credit standards with cycles. So, I don't think we've seen that off-late, a concerning relaxing of credit. I would say that's a very good thing. We are seeing brutal rate pressure. We have priced a competitive deal or two at the lowest price, the lowest rate terms, lowest pricing terms we've ever priced and frankly, everyone we've done that with, we haven’t won a single one. So, somebody is just bolder than we are there.

Thanks for the color.

Did that answer your question?

Yes, it does. Thank you. And on the potential reserve releases, on the allowance ratio of one hundred and ninety one, do you have a range that you see that normalizing towards? Thanks.

I'll give you a couple of references. If we go back to FirstBank and standalone and Franklin standalone, before the two companies got together, FirstBank standalone was in the one ten to one twenty in terms of a reserve as a percent of loans. I think around one twenty I think is a reserve allowance to loans. Keep in mind that was pretty seasonal, and Franklin, I think was a little higher than that because they have a real estate concentration and would naturally be a little higher. If they were to say one fifty, I would think it would be somewhere in that range, probably between those, one thirty to one sixty something there.

Thanks a lot for that. And just a last one, on your mortgage efficiency ratio of eighty percent, how do you think about that ratio going through year end?

Yes. I mean, eighty percent in the third quarter was at about eight point nine million contribution. From one million dollars to four million, I think that will push in low nineties, but really, I think as we've said before Alex, our target in the mortgage space is around eighty to eighty-five percent in that range in terms of the year. I think we'll wind up right in that target efficiency ratio.

Thanks for taking my questions.

Thank you.

Alright. We appreciate it, Alex.

The next question comes from William Wallace of Raymond James. Please go ahead.

Hi. Thanks for taking my questions. I just had two quick follow-ups. On the commentary that you just gave on the reserves to loans, whenever we get to the point where you guys feel comfortable that we won't have a rebound or bounce back in COVID pressures, and you decide to start loosening up those qualitative factors, how quick would you anticipate we might get to that one hundred thirty to one hundred sixty range that you anticipate you could settle out at?

Yes, that's a tough one, Michael. So, I'll let you answer. Michael runs that process, so I'll let him talk about it.

Yes, it's going to take a couple of quarters. I don't think it’ll happen overnight. There are many moving parts relative to the model and the quantitative versus qualitative, but I would expect over the next two to three quarters, you'll see this part of that range.

That's helpful. Appreciate that. And then just maybe trying to put a bow on the margin commentary. What I hear you saying is that the pipeline growth is promising, and the conversations as you're budgeting for next year are promising when you think about loan growth. So, if we look at net interest margins, and taking into account the fact that you are anticipating pressures on loan yields, do you think that growth in the loan portfolio and improving the loan portion of the earning asset mix is enough to drive margin expansion or do you think that the yield pressures will offset that and we could see a core basis of margin contraction?

Yes. I think there are two factors at play in twenty two. One is the continuing addition of growth in the loan portfolio and taking up some liquidity there. So, I think you could see some margin expansion from that, but the bigger margin expansion of things comes – I think comes when we get a rate increase because we got about two billion of adjustable rate loans that would adjust with a rate increase. The bigger expansion comes with those rate increases. Until either of those, as we add incrementally on the loan growth, actually, you can see a little bit of expansion; however, we generally are going to bounce around the same margin where we are without in a band that doesn’t move up or down very much. We still probably over the next couple of quarters, we'll get a little bit of what we think, anyway, we think we'll get a little bit of reduction on the cost side, but it will be less than probably what we've gotten in the previous two quarters and so, we think that keeps us, you know, as long as rates kind of bounce around where they are, keeps us relatively flat positioned to move up as rates drive our adjustable loans with those rates that move up.

Okay. So, basically kind of flattish plus or minus until we get some help from the Fed?

Yes.

Thank you. That's all I had. Appreciate it.

Thank you, William.

This concludes our question and answer session. I would like to turn the conference back over to Chris Holmes for any closing remarks.

Okay. Thanks everybody for joining us. As always, we appreciate your interest in FB Financial, and we look forward to another quarter, next quarter, hopefully great results. Thank you.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.