FB Financial Corp
NYSE:FBK
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FB Financial Corp
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00:04 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.
00:31 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.
00:53 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.
01:10 With that, I would like to turn the call over to Robert Hoehn, Director of Corporate Finance. Please go ahead.
01:17 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.
01:40 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.
01:59 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.
02:12 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.
02:43 I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO.
02:50 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.
03:20 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.
03:50 FirstBank’s well positioned to capitalize on an increased economic activity that will come to West Tennessee as by our estimation, we're number one market share in that part of the state, including third market share in Jackson. We've got a very strong commercial team in Memphis that continues to deliver good results.
04:10 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 is exciting to be at the center of what's become a magnet for economic development.
04:39 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. Of 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.
05:06 If trends continue as to 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’s a watch with liquidity, we placed a high value on bringing in strong operating account relationships.
05:28 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.
05:43 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.
06:02 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 contribution in the fourth quarter.
06:17 Asset quality continues to improve with our non-performing and non-accrual statistics materially declining this quarter with nonperforming loans to loans down by twenty four basis points, non-forming assets to total assets down by sixteen basis points. The improvement in our metrics was driven by fourteen million dollar non-performer 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] [ph].
06:51 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 reserve we could support ahead of the winter month just in case we run across any speed bumps as folks moved back indoors.
07:20 Assuming that forecast continue to improve and that we survive the changing of the seasons without material shutdowns or changes of behavior markets, and 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.
07:42 We've 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 bank. We’re still marketing portfolio and would accept the right bid. But we're down to nine relationships and the quality of the remaining loan just strong in yield as favorable, so it takes a strong bid at this point.
08:07 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 get that total [indiscernible] 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.
08:42 Our second priority for the capital deployment behind organic growth is accretive. Merger and acquisition activity and has 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 merger, we're targeting similar characteristics to our Clayton Atlantic Capital and Franklin synergy combinations.
09:08 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 net support further consolidation is possible that we could have M and A activity in twenty twenty two.
09:39 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. Mortgage 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.
10:04 We're building capital quickly, but M and A activity is possible and rebuilding bank valuations we're likely to use as much capital – we're not likely to use much capital order buyback in the near term.
10:20 I'll now turn the call over to Michael, our CFO to discuss our financial results in some more detail.
10:26 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, one would expect in a lower rate environment.
10:50 We also some margin stabilize quarter over quarter, payoff’s 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 pay 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.
11:15 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.
11:30 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.
11:52 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 for twenty four point four percent in the second quarter.
12:05 In [indiscernible] will remain a focus going forward though and our next goal is to make that number to 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 twenty five million this quarter.
12:23 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 yield on new originations in the third quarter held in that same three point eight percent to three point nine percent range that we experienced in the second quarter.
12:42 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 doe raise, we have approximately two billion in variable rate loans that share reprice immediately.
13:01 We continue to manage excess liquidity in part by increasing allocation to the securities portfolio. Our securities portfolio increased by hundred sixty eight million in the third quarter. The average yield on purchase securities during that quarter was approximately one point three three percent. Interest rates are volatile during the quarter with the benchmark tenure year U.S. Treasury swinging as much as thirty six basis points and we expect interest rate volatility to continue with monetary and fiscal policy or adjusted from the significant responses to the pandemic.
13:32 Given that volatility, we continue to invest in securities that do not exhibit excess duration risk, while still providing an overall increase of 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.
13:57 We expect continued improvement in cost of funds of 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.
14:18 Moving to CECL and as Chris mentioned, at two point five million, our release was smaller this quarter than the prior two quarters. Economic forecast continues 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 indoor for the season, we'll feel more comfortable relaxing some of these qualitative factors.
14:48 Based on what we know today, we would expect releases rate of 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.
15:02 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.
15:24 On banking segment, non-interest income, we had a number of nonrecurring type there that can [money] [ph] the run rate number. The stated segment amount was thirteen point eight billion. 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.
15:47 Netting those three items out, the banking segment non-interest income would have been twelve point four million fourth quarter. I’ll close my section 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 related to the vesting of the IPO awards. For the fourth quarter, we would expect to return to twenty three percent to twenty three point five percent tax rate.
16:15 And with that, I'll turn things back over to Chris to close.
16:18 All right. Thank you, Michael and 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.
16:39 [Operator Instructions] And our first question comes from Brett Rabatin of Hovde Group. Please go ahead.
17:15 Hey good morning, everyone.
17:17 Good morning, Brett.
17:18 Good morning, Brett.
17:19 I wanted to first ask the loan growth was obviously nice in the quarter and in the prepared comments you talked about possible return to ten percent to twelve percent, maybe could you give us a little more color around the C&I growth in 3Q, 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?
17:47 Yes. Brad, so – the growth has pretty much come across all of our product types. If you look over the last two or three orders, it's been kind of all of our product type. We did have more growth during this particular quarter in C and I than any other product type. And so, we are glad to see that 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.
18:23 We have not seen our land utilization return to where it was in the last two quarters of twenty nineteen. We were closer to call it a fifty percent utilization, if you average the last two quarters of twenty nineteen than you looked into the third quarter and this past quarter, we were down still in the low 40’s in terms of utilization. So, it's higher than it was, but it's still not hot. And so, as we expect to see that over the next several quarters, where we think and C&I continue to be strong, we've seen – we have seen good CRE growth as well good growth in residential construction. And we've seen new customer acquisition.
19:16 So, it's been a combination and we can't pin point any one thing. And 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. And it's a combination of the existing customers that there's also – we’re picking up new customers as well.
20:00 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 a higher level than twenty nineteen because of 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?
20:31 Yeah, Brett. I think where would mortgage normalize by ten percent to fifteen percent of the contribution is where it typically will play out been in the low rate environment we've been in twenty twenty is kind of a hard kind of a craft sheet 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 to attend the fifteen percent number, which is traditionally what we've targeted.
21:04 Yeah, and twenty twenty two is a particularly difficult year to forecast. We talked about really quite a bit about 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 forecast that are out there, they're not, they don't all line-up for volumes. And then, we probably take a slightly different view than even most of the forecast out there. So, it's, we target somewhere between ten percent to fifteen percent. We won't mortgage – we won’t do as well as we can, make as much as we can, but typically that's where it comes in for us. [Indiscernible] on an average year.
21:48 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 and 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 and A perspective for you?
22:12 Yes. So, twenty two, you know as we think about the last couple of years, twenty and twenty one, well we had a lot and so, we announced the Franklin combination, FirstBank Franklin combination in early twenty. 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.
22:53 So it's pretty much been that we've been focused. We think of ourselves as operators in top level execution on our company. And so, as of opposed to thinking of our ourselves as having to grow through going out the [indiscernible]. And so, we've been focused on that, and we feel pretty good about where we are with that. We think it shows through in the numbers, particularly in our organic numbers.
23:20 And so, we're more open to talk about that. And so that's one perspective, I would give you. The second perspective is, we keep a pretty targeted – we keep a 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 upon us just outcoming the market actually, it's much, much more reliant on those that we're interested in, rather than us just saying, hey, the doors are open for M and A.
23:58 We're quite strategic on that. And so, our feeling is that as we look at that very small list that during the 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 – that's the reason we say that, it's gotten better for us from a timing standpoint and we think that and perhaps will get better for others. It's going to be a difficult again with an interest rate environment. It's not an easy operating environment I think in twenty two. And so, I think that could that could play into that.
24:43 Okay. Great. Appreciate the color.
24:47 Sure. Thank you for being on the call.
24:50 The next question comes from Stephen Scouten of Piper Sandler. Please go ahead.
24:57 Hey, good morning everyone.
25:00 Good morning, Stephen.
25:01 Good morning, Stephen.
25:02 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?
25:25 Yeah. So, I'll say we have been really, really pleased with Birmingham as a market with our folks in Birmingham and the reception that they have gotten and we have gotten in the market has been really, really humbling for us. It's been really good and the folks that we've been able to get on the first nineteen down there have just been fantastic in terms of fitting our culture and us. It's been a great match.
26:03 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. And it's been, like I said, we couldn't be more thrilled with the quality of what we're seeing. And we're continuing to talk to other folks and they're about joining that team. We want to get ahead of ourselves, but we're continuing to talk to some other folks as well. So, we couldn't be happier with the way it's going up – it is pulling. In the pipeline, actually maybe even more encouraging than what I just gave you. So, we've been very, very pleased.
26:53 That's great. That's great. Okay. And on the M and 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 and A?
27:27 Yes. Sure. So, as we think about M&A, geography is at the top of the list, and so – and really geography is at the top of the list because operating leverage is at the top of the list. And so, we have, 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.
28:01 Maybe even the top fifty in Nashville from a market share standpoint and today we're number six. And 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 so, before, as I said ten years ago, and so – when I say we did have presence, we actually had a location, but we had less than one hundred million in each of those markets again. So, we were irrelevant from a market present standpoint.
28:36 And so, when you have that presence, we like to get – we like to have enough density to make sure we're getting a great return on the capital and we're creating operating leverage. And so, we've still got markets in footprint that would be, we don't have as much operating leverage, we're not creating much operating leverage as we'd like. And so, that's part of our M and A strategy as to continue to improve our profitability through that.
29:04 And 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 and let's say East Tennessee and Western Carolina, and we would be interested in that and so we would tend to think of our market extension being something that is partnering with an institution that has a presence in our geography, but it draws us into a contiguous geography.
29:47 And so that's really the way 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.
30:06 And then on what I'll call non-bank, I'll refer to as non-bank or sort of maybe verticals, we had some interest there, also we have – that's the way we think of mortgage is really like a vertical. We more and more think of our specialty lending group, our manufactured housing group in the same way. That group is performing really well. And so, if we came across a vertical like that, that was – had particularly good yield, we love assets that we can even either portfolio or sell into the market like both of those.
30:52 We have option of either portfolio you're selling in, and that we can create a national, those product lines for us or those verticals or something that we're interested in being, we want to make sure we're competitive in those with any – more than competitive, we want to make sure we're able to win against any competitor in those spaces, which we do in both mortgage and the [manufacturing housing] [ph]. So that's another factor that we look at is something that we intend to be a really significant [Technical Difficulty].
31:27 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?
31:39 Yes, third quarter twenty twenty two, it's still going be that same four million dollar range, Stephen for half a year and you could look at about eight million annualized.
31:51 Got it. Okay. Thanks, Michael. Appreciate the color guys.
31:55 Thanks Stephen.
31:57 The next question comes from Matt Olney of Stephens. Please go ahead.
32:02 Thanks. Good morning guys.
32:04 Hey, Matt, how are you?
32:06 Hi, I'm good. 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 was 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.
32:36 Yes. So, the reality or the [indiscernible] was around on the IPO and the vesting. We were expecting flat quarter over quarter, second to third flattish and that five hundred thousand dollars related divesting was really the main peculiarity. And so, as we look forward, I would expect in that same kind of fifty eight million to fifty nine million range. Knowing that we're going to take opportunities to hire talent as it comes bid in [indiscernible] and 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 kind of risk management. And so, we continue to do that.
33:31 We're seeing a lot of disruption in our markets, which allow 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 growing the revenue side of the balance sheet, continue to push down our efficiency ratio.
33:52 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.
34:21 Yes. Margins really hung in there over the past couple of months. We've been pleasantly surprised with that even as capacities, kind of return to the mortgage space. We saw volumes start to slow there in the third quarter [indiscernible] September, which is kind of leading us to kind of normal seasonality type.
34:49 Expectation for Q4, we're also seeing a lot of inventory pressure still on the purchase side. I think that there was a little bit of hope that inventory would increase and we get some of minimum purchase that typically hadn't been there, having spoke at this point, we're not seeing a whole lot of that in our markets.
35:10 In the third quarter as well, FHFA gave back the refunds to some of the lenders which was a boost to volume on the refi side, lower growth about eight. And so, you saw pickup in our refinance percentage from fifty eight percent to sixty six percent from that. And so, that's all fully priced into the market. You'd expect that to kind of tail down as we get through the fourth quarter.
35:38 So, a lot of moving parts in there, but housing is still constrained, due inventory and supply, supply chains too.
35:50 Okay, that's all from me. Thanks guys.
35:53 Thanks Matt.
35:54 Thanks Matt.
35:56 The next question comes from Jennifer Demba of Truist Securities. Please go ahead.
36:03 Thank you. Good morning.
36:05 Good morning, Jennifer.
36:08 I’m wondering if you could talk about your priorities in terms of technology investment and expand right now over the next one or two years, where you feel like maybe you're in line with peers or phones or their ahead?
36:25 Yes. So, we spent a lot of time in dialogue internally around that very thing. And we look at it as we're really thinking about innovation there through – with some of our folks and have been really focused on that.
36:52 And we actually are making some changes to create even more intense focus on that. And we've done a couple of things with a couple of investments also, 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 in many – in several measures, the leading customer experience in the Southeast, but in almost all the measures quite good, but we think about, first, after we innovate mostly using technology in the customer experience process.
37:43 And then secondly, we think of efficiency and what can we – how can we be applying technology to improve the efficiency of the company? And so, we have active dialogues with several fintech companies. Also, with several fintech investors and like I said and we are an active investor in a few ways there. So, it is, we very much believe that the industry is really transforming over the next few years. And so, we are – and we're transforming our business at the same time because you just that – I think options are to do that or lose value and we're not going to do the latter.
38:45 Okay. Thank you.
38:47 Okay.
38:50 The next question comes from Kevin Fitzsimmons of D.A. Davidson. Please go ahead.
38:57 Hey, good morning, everyone.
39:00 Hey, Kevin.
39:02 Chris, there’s been a handful of questions on M and A. One thing. I just wanted to ask was coming out of the Franklin synergy experience, it was a large deal, complicated deal took a while. Do you feel more confident and more important to go with like a larger bank transaction like that, or do you think your appetite is going to be more, it's going to be more of a fit for more digestible traditional type deals in your view?
39:35 Yes, that's a great question actually, Kevin, because, again, we've talked about that a lot. And I want to say, first off, deals were hard. Okay. What size they are? And first option for us would be go higher grade people and pay a smaller premium for those folks and be able to be a little more selective with where – with those investments. And so, we love doing that. We do get the opportunity to make some bigger ones.
40:14 Franklin and FirstBank, that combination was big and it was in some ways, particularly in Middle Tennessee, we regarded it as a merger of equal really between those markets because we totally merged those and 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. And so, but all that being said, it's going well. We’ve retained the customers; we’ve retained the folks and – on both sides by the way.
40:58 And now, have we retained them they had a budget. So – but it's hard and as we look at going back to what we – when we look at potential targets, frankly, most of them smaller than what that would have been for us at the time. You know, one of those, FirstBank would been say sixty percent and Franklin synergy would have been forty percent. As we look at those targets that I mentioned in those ones that we're really interested in, they're smaller than that as a percentage of the company. And so that would be what we opt for, not only because that’s the specific target list, but that's just [indiscernible] that’s what we would opt for.
41:46 I think once it gets much bigger than say, I don't know a third your size, it gets really hard to [adjust] [ph].
41:57 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 the 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 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 and just, you know, is it more of just solely a loan growth headwind or is it a potential credit headwind in your mind as well? Thanks.
42:47 Yes, it’s not quite as much of – from my mind a potential for a credit headwind comes from a shutdown. And so, if we have something where something if we got shutdown again for whatever reason, whether it's just COVID and we go back into a shutdown status or disruptions from the two things you mentioned, either a supply chain or labor.
43:17 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 is going up in the residential space, and the cost of living in our largest market of Nashville has gone up significantly.
43:53 So, we see all of those, but the supply chain, I personally think that will settle down sooner versus later. I don't think that – I don’t mean next month, but I think it begins to normalize because the forces of capitalism tend to take over there and tend to really kick in and so I think they do normalize sooner versus later. The labor shortages, you know, I’m going to speak regionally and locally as opposed 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.
44:41 And so, I don't think the labor shortages, I just talked about forward coming and twenty seven 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 highest growth, the East being also a high growth area. I think the labor shortage are going to persist. There's a lot of wage pressure where we are at every level. You know, we even at some of our highest paid folks. I mean, they get offers too. And so, it's going to be a difficult – from that standpoint, those are first class problems, but from that, but there's still things that you have to deal with.
45:30 And so, as we look at it, that's that we see – we do see the labor shortages probably being the biggest issue right now in our markets. Supply chain being also an issue, but I think it will resolve a itself sooner versus later, but in general, the markets, like I said [indiscernible] it is because of the growth and the attractiveness of the area we're in. Michael, would you add anything to it?
45:59 I think relative to the reserve Kevin, you know all other things are part of the consideration you also had eviction moratorium coming off, you know PPP loans being forgiven. And so, 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, with all their things that drove a little bit of a [indiscernible] to get too aggressive there, but do expect that to, kind of abate a little bit of turnaround inflation. Chris mentioned home prices and wage and we are certainly seeing price increases across the board. And the impact on the economy is a wait and see at this point.
46:54 Okay. And Chris, you've mentioned – one last one from me, you mentioned the long term proactiveness and focus on non-interest bearing deposits, if you're looking at institutions. Now, one could say, well why not go out into attractive markets and 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?
47:43 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. And so, as we think about what we're targeting that's what we're targeting and deposits, just from a pure monetary value, given where interest rates are, less valuable today than they traditionally are, but in our mind, relationship, the relationship that comes with the primary operating account is very valuable to us long term and those are the ones we want.
48:26 And so that's what we mean by that. We are doing some hiring of loan officers to get loans on the balance sheet, okay. And so, we are – in Birmingham with being example where we, you know they certainly don't have as much in deposits as they do in loans, not even closed, but that's fine with us for now.
48:53 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, I'll call it legacy community bank in those, in and around those markets it'd be one we be very interested in and we bring on those operating account relationships sooner than we would bring them in just organically growing them. I'm very envious Kevin of those banks that have that fund their loan portfolio with forty percent non-interest bearing deposits. And so, we want to get there.
49:33 Got it. Okay. Thanks, Chris.
49:36 All right. Thanks, Kevin.
49:38 The next question comes from Catherine Mealor of KBW. Please go ahead.
49:44 Thanks. Good morning.
49:46 Good morning, Catherine.
49:48 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.
50:12 Hey. Catherine, it’s Michael. I'll take that part. Our target has been in that thirteen percent, thirteen point five percent range of total assets versus earning assets. So, we're actually right in that range came a little bit quicker. We were kind of looking at year-end, but clearly, because liquidity has been here to stay, so we deployed some there. We also, it's some repo, reverse repo transactions that are short-term in nature and deployed some liquidity there as well, in their thirty day paper. So that helped a little bit. I don't think you'll see material growth above this thirteen percent, thirteen point five percent range.
51:00 We prefer loan growth as we mentioned. We think that there's strong opportunity there. And we have a lot of opportunity in our markets. That's what we'll likely deploy.
51:13 And Catherine, I would just add on the loan side. Our regional presidents are very optimistic, very optimistic. When we look out at twenty two, we look at the – kind of the pipeline today, and we look at twenty two, we're – I mean, we're not having to coax them up when we're thinking about targets for twenty twenty two. So, we're – and so for that reason, we feel better about the outlook for the loan growth side of the balance sheet.
51:59 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, [indiscernible] with the seasonal fluctuations are that?
52:15 Yeah. We saw that two twenty five million rollout out during the quarter and we'd expect them to some version I come back will 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.
52:36 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?
52:44 Yes.
52:47 Okay, perfect. Perfect. Alright. Great. That's all I got. Thank you.
52:51 Thanks, Catherine.
52:53 The next question comes from Alex Lau of JPMorgan. Please go ahead.
52:59 Hi, good morning.
53:01 Good morning, Alex.
53:03 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.
53:17 Yeah. Alex, sure. The competition is king. It’s, you know there are four thousand banks out there and I think we all think that's too many. And so, it's – I joke about this all the time. We've got one market that has two – there are only two banks in the market, and every time I talk to them, they tell me it is the most competitive market we got. So, everybody thinks it's competitive and the fact of matter it is. And so, but I would say, specifically, one, rate pressure right now is particularly it is more competitive than what we see on credit structure.
54:07 Sometimes in times like this, occasionally in terms like this, you will see, you'll see relaxing of credit standards that we find we have at times past have found concerning. And Greg, you might check me this. I haven't seen that off-late, a concerning relaxing of credit. We just pretty much don't relax our credit standards with cycles. And so, we haven't, you can correct me there, I don’t think we've seen…
54:45 I think you’re right. I mean, I think it is very competitive, but as far as being flexible, we're always flexible. We want to encourage the growth, but I'm not seeing anything like you're talking about when in previous cycles where we've called it it's got crazy or lose.
55:03 Right. We have made that current statement on these calls before we're seeing crazy things we're seeing lose things. We haven't seen that frankly this time. So, I now think that's a very good thing. We are seeing brutal rate pressure. Okay. We're 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 on that we've done that all, we haven’t won a single one. And so, somebody is just boulder than we are there. So…
55:42 Thanks for the color.
55:43 Did that answer your question?
55:44 Yes, it does. Thank you. And on the potential reserve releases, on the allowance ratio of one hundred ninety one, so as economic conditions improve, do you have a range that you see that normalizing towards? Thanks.
56:07 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.
56:38 And Franklin, I think was a little higher than that because they have a real estate concentration – they have a higher real estate concentration and so it would naturally be a little higher. And so, if they were to say one fifty, I would think it would be somewhere in that, somewhere probably between those, begin post CECL, I can remember we had, so we've had a significant combination of two institutions and so, and we've added CECL in there. So, we think it's somewhere probably in the one, I'll call it to one thirty to one sixty something there probably.
57:26 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?
57:40 Yes. I mean, eighty percent in the third quarter, you know obviously, was at about eight point nine million contribution from one million dollars to four million, you think that that push in low 90, but really, I think as we've said before Alex, our target in the mortgage space, eighty, eighty five percent in that range in terms of the year, I think we'll wind up right in that target efficiency ratio.
58:08 Thanks for taking my questions.
58:11 Thank you.
58:12 All right. We appreciate Alex.
58:14 The next question comes from William Wallace of Raymond James. Please go ahead.
58:21 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 Q factors, how quick would you anticipate we might get to that one hundred and thirty to one hundred and sixty range that you anticipate you could settle out at?
58:54 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.
59:03 That's kind [Technical Difficulty]. Yes, it's going to take a couple of quarters. I don't think it did happen overnight. Certainly, there's a lot of moving parts relative to the model and quantitative versus qualitative, but I would expect over the next two to three quarters, you'll see. This is part of that range.
59:30 That's helpful. Appreciate that. And then just maybe trying to put a bow on the margin commentary. So, what I hear you saying is that the pipeline growth is promising, 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 to account the fact that you are anticipating pressures on the loan yields, do you think that growth in the loan portfolio and improving the loan portion of the earning asset mix is enough to maybe drive margin expansion or do you think that the yield pressures will offset that and we could see on a core basis, margin contraction?
60:22 Yes. So, I think there's two factors work in twenty two. One is, continuing addition of growth in the loan portfolio and taking up some liquidity there. So, I think you could see some margin expansion from there, but the bigger margin expansion of things come – 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. And so, I think the bigger expansion comes when that happens. And so, and until either of those, as we add incrementally on the loan, on the loan growth, actually, you can see a little bit of expansion, but 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.
61:30 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 got in the previous two quarters. And so, we think that keeps it, you know as long as rates kind of bounce around where they are, keeps us relatively flat, but positioned to move up as rates – that drive our adjustable loans as those rates move up we'll move up with them on the margin side.
62:02 Okay. So, basically kind of flattish plus or minus until we get some help from the Fed?
62:11 Yes.
62:13 Thank you. That's all I had. Appreciate it.
62:17 Thank you, William.
62:19 This concludes our question and answer session. I would like to turn the conference back over to Chris Holmes for any closing remarks.
62:28 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.
62:42 The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.