FB Financial Corp

NYSE:FBK

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, everyone and welcome to FB Financial Corporation's Fourth Quarter, 2021 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, Wade Peery, Chief Administration 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 FB Financial's website, approximately 1 hour after the conclusion of today's call. At this time, all participants have been placed in a listen-only mode. Call will be open for questions after the presentation. With that, I would like to turn the conference call over to Robert Hoehn, Director of Corporate Finance. Please go ahead.

[Robert Hoehn, Director of Corporate Finance]

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.

The 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 and 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, our President and CEO.

[Chris Holmes, President and Chief Executive Officer]

Thank you, Robert, and good morning. Thank you all for joining us this morning. We have always appreciate your interest in FB Financial. We had an excellent quarter that we delivered strong organic growth, reported EPS of a $1.02 and continued growth in our tangible book value per share. Our tangible book value per share at the -- at year-end was $24.67. That represents a compound annual growth rate of 15.5% since the Company became public in September of 2016.

While our returns are slightly less than we've come to expect from ourselves, our return on average assets of 1.6% reported and 1.4% adjusted and our return on tangible common equity of 16.8% reported and 14.7% adjusted are sound given the extended overload environment. Earnings for the quarter were strong and relatively straightforward. During last quarter's call, I mentioned that our regional Presidents thought fourth quarter, which show activity that could get us to double-digit loan growth for the year.

As usual they were right. We had 315 million of net loan growth, excluding BPP or 17% annualized for the quarter. This puts us at nearly 11% for the full year. We also had very strong non-interest bearing deposit growth with 20% annualized for the quarter and 23% for the year. Our non-interest -- sorry, our net interest margin was stable for the fourth quarter at 3.19% in the zero rate environment. Expenses were stable and as expected, our asset quality continue to be very strong with NPAs assets holding flat with the third quarter at 50 basis points and classified loans as a percentage of total loan was dropping to 14 basis -- dropping by 14 basis points to 1.66%.

Charge-off for the year were very manageable, 8 basis points and we had a provision release of 10.8 million in the quarter. Which leaves our allowance for credit losses at a very healthy 1.65% of loans of HFI at year-end. We did have a significant gain on our commercial loans held for sale during the quarter primarily related to 2 relationships that exited the bank. 1 of those had been written down materially prior to the Franklin merger, and 1 paid off and had a mark against it. We've been consistently describing this portfolio from the date of announcement in January of 2020 until today.

We marked it conservatively at the -- at the merger date, we have very capable people managing it, and we have continued to manage it to maximize returns as -- as we work it out of the bank. We had $11.2 million of net gains on the portfolio in 2021, and we have $79 million in loans left. All those, same factors that yielded positive results so far still hold and we look forward to maximizing the value of the remaining portfolio in 2022.

As for the core portfolio of the legacy Franklin Financial, its performance has been stellar. As we entered 2022, if we think about our outlook, our long-term organic target for loans has been towards 10 to 12% annually. With the current environment and the momentum that we're carrying into the year, we believe that we will be on the upper end of that range for 2022. We're targeting similar growth in non-interest bearing deposits. Our net interest margin should remain stable until rates rise and we're positioned for a rising rates and we expect margin expansion throughout the year as rates move upward. Expenses will increase as you would expect, with healthy revenue growth.

We expect an expense growth in mid to high single-digits in 2022. Moving to mortgage, as expected, the fourth quarter was a challenging environment as refinance volumes came down significantly. We expect these volumes, these conditions to persist in the first quarter and don't believe our mortgage contribution first quarter will look much different than it did in the fourth. In short, we believe that 2022 will prevent -- present strong opportunities for organic growth. One other area of opportunity became public last week as we announced, we were one of five founding bank members of the USD F consortium, which will focus on doing foundational work to allow banks to leverage the breakthrough blockchain technology for responsible innovation and growth.

We feel the use cases of USDR are nearly limitless, and in every case it provides efficiency and enhanced experience, both for us and our customers. Our Chief Administrative Officer wait periods on the call. Wade has led our digital strategy and our innovations area, plus he's a board member of the USDF consortium. We will also continue to evaluate acquisition opportunities nearly 18 months after our combination with Franklin, we have a high degree of confidence in our ability to identify and negotiate and execute on mergers in a manner that delivers value for customers, associates, and shareholders. With Franklin merger, we combined with a dominant community bank in attractive markets and added new associates that play vital roles in managing the resulting company and significantly raised the overall talent level of the resulting institution.

The wish list of partners that we've identified would have similar mass in markets that we want to be active in, both in footprint and contiguous to our footprint and all those banks are known in their local markets as the creme of the community banking crop. For its size, we don't need to pursue acquisitions for the sake of growth, we're very excited about our organic growth profit -- probabilities. If a bank hasn't made our list, then we're too focused on organic opportunities in front of us right now to distract our team with the care and effort that we put into the integration process. So with that, I'm going to turn it over to Michael to discuss our financial results in a little more detail.

[Michael Mettee, Chief Financial Officer]

Thank you, Chris and good morning, everyone. Speaking first to mortgage and illustrated on Slide 6, mortgage pay for usual seasonality of the fourth quarter in a different -- difficult operating environment due to excess capacity in the system and lower refinance volumes, ultimately resulting a downward pressure on margins. The mortgage segment provided a $700,000 contribution for the fourth quarter and with the recent rise in rates, continued decline in refinance volumes, and continued seasonality would anticipate similar results in the first quarter.

Before moving on for mortgage, I want to address our gain on sale margin, a mark-to-market value chart in the bottom right of Slide 6. We have pointed to the mark-to-market valuation as a leading indicator of gain on sale margin. This quarter, we had a timing difference related to settlement of hedges versus loan sales. So our mark-to-market valuation was slightly lower and our gain on sale margin, a little higher than otherwise would have been. We expect those numbers to be more in the 220 to 230 range next quarter with mark-to-market pleasure to 2.2% and again, our sale margin closer to 2.3%.

Moving on to the net interest margin for the fourth consecutive quarter, we saw the margin remained essentially flat at 3.19%. Deposit costs declined by a further four basis points in the quarter, which served to mostly offset the six basis point decline that we experienced in our contractual yield on loans. Yields on the new loan originations have held steady in the 3.8% range compared to the existing portfolio at 4.17% and we continue to make incremental progress on lowering our cost of deposits, which offset some of the decline of asset yields.

We expect our margin to remain in the same relative band until rates increase, which seems eminent, and our balance sheet is well-positioned for that increase when it happens. Our latest interest rate shock scenario show 10% upside, our net interest income in a +100 scenario. We have 3 billion of variable rate loans that either don't have floors, or are not currently receiving support from a floor. Those will reprice with any increase in rates with the majority of those repricing within 3 months of a move.

With them I have an additional $500 million in lines that are within 25 basis points of their floors. We also still have $1.6 billion in interest-bearing cash that will reprice with an increase in rates. Our interest income will increase materially in a rising rate environment. What I think the industry is unsure of, at this point, is how quickly deposit costs will follow the increase in asset yields. The confluence of liquidity in the system and new non-bank competitors that weren't nearly as prevalent during the last round of rate increases, making it difficult better to predict. Speaking to deposit growth in the quarter, we once again showed solid growth in non-interest bearing deposits.

Excluding mortgage, escrow-related deposits, our non-interest bearing grew by 31.8% annualized in the fourth quarter. However, interest-bearing deposits grew to more at 33.7%. This growth was driven by an approximate $500 million increase in public funds as those accounts began a seasonally fund up. We would expect those balances to remain elevated through April or May before beginning to decline. Moving to the allowance at $10.8 million. Our release was a bit larger than we expected.

The economic forecast that we used in our seasonal model stayed relatively flat from third to fourth quarter and had minimal impact on the change in our levels of reserve this quarter. The primary driver of the change this quarter was the release of a portion of our COVID related qualitative reserves. We determined that release was appropriate as economic activity has remained vibrant across our markets on the beginning of winter. However, with the sheer case count of omicron, we maintain some of our cable-related reserves. We will continue to monitor the qualitative factor and we may have further releases over the coming quarters in the absence of any renewed shutdowns or changes in consumer behavior that impacts our customers’ outlook.

With our allowance currently at 1.65%, reserve releases in 2022 are likely to be smaller than they were in 2021. Picking to expenses, core banking segment expenses of $50.87 million were down slightly from last quarter's $58.8 million. Excluded from our core expenses this quarter were 1.4 million of charitable donations that are not run rate expenses going forward. In addition to normal growth, we would expect the first quarter

to be elevated compared to the fourth quarter due to FICA and 401 (k) contributions. For 2022, we expect expense growth to be higher as we invest in innovations and technology and intend to aggressively recruit relationship managers, both of which we feel should lead to topline growth.

Excluding gains related to our non-core commercial loans held for sale portfolio of $9.9 million, our banking segment, non-interest income was $11.9 million. Quarter-to-quarter, we've been in the $12 to $12.5 million range and we would expect that to continue with some growth until the second half of the year, at which point the Durbin amendment's impact on our interchange revenue will begin. We anticipate losing $2 to $2.25 million per quarter as a result.

Touching last on capital management, we were able to redeploy the games on the commercial loans held for sale portfolio and our share repurchase plan as we retired 7.2 million of our stock during the quarter. We have a little over $92 million remaining on our current authorization and will continue to repurchase shares when the financial impact of such transactions makes sense. I'll now turn things back over to Chris to close.

[Chris Holmes, President and Chief Executive Officer]

All right. Thank you, Michael, for the color. We're pleased with our results for the quarter and we're particularly proud of the team for the loan growth and the non-interest bearing deposit growth. That concludes our prepared remarks. Thank you, again, everybody for your interest and Operator, at this point, we'd like to open up the line for questions.

[Operator]

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions]. At this time we will pause momentarily to assemble the roster. Our first question today comes from Brett Rabatin from Hovde Group. Please go ahead with your question.

[Brett Rabatin, Hovde Group]

Hey, guys. Good morning.

[Michael Mettee, Chief Financial Officer]

Morning, Brett.

[Chris Holmes, President and Chief Executive Officer]

Morning, Brett.

[Brett Rabatin, Hovde Group]

Congrats on the strong loan growth. Wanted just -- I guess, first start on that, you mentioned and you think that'll be on the higher side of the 10% to 12% that you usually are giving guidance to and just wanted to see what segments you think that'll come from and then maybe just thinking about the pipeline and the hires that you're looking to make. Maybe just talk about geographies and generally speaking what the pipeline holds for this year.

[Chris Holmes, President and Chief Executive Officer]

Sure. Okay. Brett, thanks. First of all, on the loans, we -- we continue to be bullish and positive on loan growth. And that's because of the -- because it's not combined to any single product, we see it across product lines. This particular core, our construction and development had the largest growth. But in different, depending on which order you look at, it's kind of been spread across the board. We had strong C & I growth as well. We continue to have strong residential growth and so all of those are in a growth move. We had -- if you go back quarter two Multifamily led the way. So it's both spread across product types, but it's also spread across geographies.

Because of that, we continue to feel pretty good about heading into next year. It's hard to predict for the whole year, but again, we've consistently been able to deliver 10% to 12%. Obviously this quarter was significantly above that. In a year that was -- when we went into the year, the outlook for loan growth was very questionable, and we ended up with 11% for the year, right in the middle of that range. So we feel we're looking at the higher end of that range for next year, what our expectation is. Then on the hires, we have -- we generate a lot of capital, we have a lot of capital.

We're always trying to think of the best way to deploy that and acquisitions tend to grab most of the headlines. But frankly, being able to recruit folks both in our existing geographies as well as in -- well, pretty much in our existing geographies. And there's a chance we could do something on a de novo basis. We're not out there searching for that, but sometimes it comes to us. And so those would be the 2 -- the areas where we would be active with that strategy.

There's not one particular geography where were -- that we've got over on geography or any particular competitors. It's more a matter of being aggressive every day, having people talked about it every day and taking advantage of the opportunities when they present themselves.

[Brett Rabatin, Hovde Group]

That's very helpful, Chris, appreciate it. And then maybe more of a question for Michael on the margin. And you mentioned the 10% upside to NII with a 100 basis points. If we get 3 rate hikes this year, I know people are talking about 4, but if we assume we'll only get 3 rate hikes this year starting in March, it would seem like your margin could be up 20 basis points to 25 basis points. But I know there's a lot of variables that go into that with the cash and liquidity and everything else. I'm curious just from a margin perspective, assuming we do get 3 rate hikes this year, how do you think the margin might progress?

[Michael Mettee, Chief Financial Officer]

Yeah. Brett. Good morning. I think you're thinking about that right in that 2025 basis point range. You did -- you mentioned that a key point, like excess liquidity is still weighing on us about 22 basis points on margins. If we see some of that exit or redeploy in some things, either loan growth or securities, you could see a little bit of a benefit there as well. But I think in general that 25 basis point range is pretty along.

[Brett Rabatin, Hovde Group]

Okay. Then one last clarification. I just want to make sure I understood the mortgage guidance for the year. It sounds like you're expecting the relative efficiency ratio and the contribution to remain similar to 4Q levels for basically for the full-year of 22. Is that a fair way to think of that?

[Michael Mettee, Chief Financial Officer]

No. We were -- I was pointing to first quarter. It will look a lot like the fourth quarter, not the full year. We're on a wait-and-see approach on the full year at this point. We've tried to go quarter-to-quarter and get some decent guidance and so that's kind of what we're looking at for the first quarter.

[Brett Rabatin, Hovde Group]

Okay. Thanks for that.

[Chris Holmes, President and Chief Executive Officer]

Can I just add this? Mark Michael is -- knows a lot about the mortgage business in addition to being the CFO, he's got a background in the mortgage business. We'll start us any notes, he knows more that I do. We've saw pattern of really not going out much more than a quarter as we do think about the year. The seasonality pattern, we do think should hold for the year where the second quarter and the third quarter tend to be the quarters where we certainly have the most contribution, and the first and the fourth tend to be more -- tend to be the quarters where we don't have as much contribution.

[Brett Rabatin, Hovde Group]

Okay, great [Indiscernible].

[Chris Holmes, President and Chief Executive Officer]

All right, thanks, Brett.

[Operator]

Our next question comes from Jennifer Demba from Truist Securities. Please go ahead with your question.

[Jennifer Demba, Truist Securities]

Thank you. Good morning.

[Chris Holmes, President and Chief Executive Officer]

Good morning Jennifer.

[Jennifer Demba, Truist Securities]

I'm just curious about your expense growth guidance, mid-to-high single-digit for '22. What kind of hiring plan is baked into that assumption?

[Chris Holmes, President and Chief Executive Officer]

Yes. So when we have made it -- when we look out and we've done budgets for the year, projected for the year, and we've banked in hiring in a lot, frankly in quite a few places. It mostly a lot of revenue producers, but not all all revenue producers. Some of them are significant hirings in the operational side of our business and the technology side of the business and in our innovations unit. And so there are some significant hires there on revenue producers within the bank. I think kind of the major category, most loading is revenue producers within the bank. Like I said, a few in what I'll call our operation support area and some in our innovations unit. We've mentioned the USDF Consortium in some things we're doing there on the innovation side and so that -- there's going to be some talent there.

And then the other thing that's baked in there is we are seeing our costs increase, our employee costs increase. We're headquartered in Nashville, balance of our folks are -- the biggest concentration of our folks are in Nashville. We're seeing cost increases. Not only there but across the board. One of the keys to us continuing to grow revenue is to continue to be a great place to work and continue to have -- make sure our associates are taken care of, and so we intend to do that both defensively and offensively. That's an important part of our '22 strategy.

[Jennifer Demba, Truist Securities]

Thank you. And just a follow-up question on asset quality. Looks like '22 is going to be another great year in asset quality for you in the industry. How low do you think this reserve could go given the fact that you should be producing pretty strong double-digit loan growth?

[Chris Holmes, President and Chief Executive Officer]

Good question, Jennifer. And I'm knocking on wood as we say that this looks like it's going to be another great year for asset quality for the record. It seems like every time that we think that, something negative happens to the industry. And so, but after knocking the wood, I'll tell you, we feel actually quite good and have been able to do some pruning on portfolio wise. As we look out in the asset quality front, we feel actually quite good. When we think about where that settles, let's say just a normalize allowance for credit loss settles out.

Keep in mind our combination with Franklin, the FirstBank -Franklin combination took place -- we announced it in January '22. We closed it in August. I'm sorry, January of '20, we closed in August of '20 and so see that was also right in them, obviously right in the middle of the CECL adoption. We think probably a 130 or 150 range is probably where we'll settle out. As I'll call it, normalize is really kind of what we think.

[Jennifer Demba, Truist Securities]

Thanks so much.

[Chris Holmes, President and Chief Executive Officer]

Keep in mind that all those factors change. All those factors that we used to set that are evaluated by a committee, are audited and we are -- and those factors change every quarter, but that's -- that's 1 of the range. So we think -- we think it will probably settle out the 130 to 150 range.

[Jennifer Demba, Truist Securities]

Thank you.

[Operator]

Our next question comes from Matt Olney from Stephens. Please go ahead with your question.

[Matt Olney, Stephens]

Thanks. Good morning, guys. I wanted to go back and ask about the loan floors. And Michael, you gave us some great details there. I wrote down $3 billion of variable rate loans without floors that were priced immediately and another $500 million that were repriced a nether 25 bp higher move. What about anything beyond 25 bps or is that pretty much the $500 million? And then on variable rates side, are these prime or LIBOR, SOFR? Any color on that?

[Chris Holmes, President and Chief Executive Officer]

Yes. I'll just say, the biggest portion of move comes for the first couple of rate books for us, and it's a combination of Prime and so in prime -- but mostly -- most prime and LIBOR, but mostly -- go ahead, Michael.

[Michael Mettee, Chief Financial Officer]

No. That's right. Prime and LIBOR and we're actually transitioning much LIBOR to prime. For this one, although we are doing some so for but yeah, Matt, as Chris mentioned it's minimal beyond the 25 basis Forex. Got $50 to a $100 million beyond that per rate hike.

[Matt Olney, Stephens]

Okay. Got it. And then on the mortgage front, you gave us some great commentary for near-term. Definitely appreciate [Indiscernible] predict that but I guess taking a step back to try and appreciate where the profitability of mortgage could be longer term, whatever metric you think is the best way to look at that? Where do you think that will eventually land?

[Chris Holmes, President and Chief Executive Officer]

Yeah. So we've said, if you look at the bottom line of the Company, we think it should be somewhere more than 5%, but probably less than 10% of the total Company, bottom line. And so we're still kind of -- we still think that. I will say that business, as you said, Matt, thank you for saying it. Thank you for saying that it's hard -- they're hard to predict and project. We certainly do it and we projected, but we -- but it's hard to project. And so we don't get too far out other than what we said, we do expect certainly a meaningful contribution during the year. But if you look at MBA predictions on volumes, I think they're down what percent, Michael?

[Michael Mettee, Chief Financial Officer]

35 - ish.

[Chris Holmes, President and Chief Executive Officer]

35 - ish percent year-over-year. In addition to normal running of the business where we're making sure that we're trying to maximize our originations, try and maximize margin, trying to maximize our customer experience. We're thinking about how we continue to evolve that business with things like blockchain technology and other technologies and we were also thinking about some investment in that business. As we continue to move forward. So we want to continue to have a meaningful contribution, but also we're trying to think in entrepreneur way about that business.

[Matt Olney, Stephens]

Thank you.

[Chris Holmes, President and Chief Executive Officer]

All right.

[Operator]

Our next question comes from Alex Lau from JP Morgan. Please go ahead with your question.

[Alex Lau, JPMorgan]

Hi. Good morning.

[Chris Holmes, President and Chief Executive Officer]

Good morning, Alex.

[Alex Lau, JPMorgan]

Can you speak -- morning. Can you speak more on the USDF involvement? And what are some potential use cases for the blockchain technology in the near-term to be applied to your businesses, whether it's the core banking or the mortgage business. Thank you.

[Chris Holmes, President and Chief Executive Officer]

Yes, Alex. In Wade Peery's list. And they said he's on the board member of USDF so I'll let him talk just a little about a couple of things, but I'll say this about the consortium. One, we're very excited to be a founding member and do think it -- as the industry continue to evolve, that's going to be very important moving forward. And, Wade, I'll let you talk about it, maybe give an example of a use case or 2 that -- and even some that could be specific to us.

[Wade Peery, Chief Administrative Officer]

Hi, good morning, Alex. When we think about the block chain technology, what we know and recognize is its revolutionary and it will have the potential change in almost every aspect of the financial services industry. We see that, we're watching closely what's going on in the decentralized finance ecosystem that's proving out to be true and as you see, that non-bank ecosystem growing. So we want to come together with technologists and regulators and find a way to utilize that inside the banking space. So that's -- the intent of the Consortium is to do foundational work there and part of that has to be the creation of a stable coin which is what we're working toward here with USDF and that is actually [Indiscernible] [Indiscernible].

Once you are able to allow banks to be an on-ramp to use blockchain technology, then you basically have a set of opportunities that can be quite expansive. So specifically for us we're looking at things that we have deep knowledge in as we get started in this space. Particularly around mortgage, we know that the manufacturer and delivery in sale of mortgages can be done at a significantly less costly -- in a significantly less costly manner manner using blockchain technology because as truth replaces trust if that resonates with you.

So that's one of spaces and of course we do -- we do a lot of obviously our manufactured housing business is quite large, so we're thinking about those 2 areas today. What can happen on the payments and settlement front? It has the potential to really help us with with some of the things we're facing, particularly around revenue loss in [Indiscernible] in those things. As you look at the payment systems today that we actually run our economy on their 40 plus years old. We will be able to cut substantial costs out of those systems and get 24/7, 365 real-time settlement out blockchain. So particularly those two areas are starting places for us, but we have a quite a long list of opportunities that we think help us on both the revenue and expense side.

[Chris Holmes, President and Chief Executive Officer]

Very good. Thanks, Wade. Alex?

[Alex Lau, JPMorgan]

Thank you for that, and a separate question. Just digging into the very strong loan growth. Are you seeing any borrowers tap into the kind of excess liquidity on their balance sheet to pay down loans at all? Or is the preference still to hold on to extra cash? Can you just speak on the recent pay down activity, if any? Thanks.

[Chris Holmes, President and Chief Executive Officer]

Yeah. We haven't seen a big move towards tapping the liquidity on our balance sheet to pay down loans. That's not something that we -- that has been a notable move for us. We do still see customers at half-point with their liquidity and then we see -- we continue to see room in our utilization of lines where it has not returned to normal levels for us. If we go back to '19, halfway it was over -- it was on the low 50% in terms of our utilization and we'd be in the low 40% today. We think part of our, again continued bullishness on loans is that we're seeing great originations and we still see room for additional draws on some of our commitments. If that's the color helps, Alex.

[Alex Lau, JPMorgan]

Yes. That's very helpful. Thank you for taking my question.

[Chris Holmes, President and Chief Executive Officer]

Sure.

[Operator]

[Operator Instructions]. Our next question comes from Catherine Mealor from KBW. Please go ahead with your question.

[Catherine Mealor, Keefe, Bruyette and Woods (NYSE:KBW)]

Thanks. Good morning.

[Chris Holmes, President and Chief Executive Officer]

Good morning, Catherine.

[Catherine Mealor, Keefe, Bruyette and Woods (NYSE:KBW)]

It's a follow-up on the margin discussion, that contractual loan yield is now 417. Where are you seeing new loan yields coming on? As we try to think about where that bottoms before we start to get the lift from higher rates.

[Michael Mettee, Chief Financial Officer]

Hey, Catherine, it's Michael. Good morning. Yes. For the past --

[Catherine Mealor, Keefe, Bruyette and Woods (NYSE:KBW)]

Good morning,

[Michael Mettee, Chief Financial Officer]

-- couple of quarters, we've consistently seen it in the 3.8% range. That's been pretty steady for the back half of the year and what we're seeing early on this year.

[Catherine Mealor, Keefe, Bruyette and Woods (NYSE:KBW)]

Would you say more of your current loan production is in the variable rate or fixed rate category?

[Michael Mettee, Chief Financial Officer]

Yeah, it's still pretty split and obviously, all of our customers who have fixed rates and all of our -- we prefer the variable for there's a balancing act there. So it's kind of ebbs and flows every time that it's been pretty consistent, 50-50 split, maybe slightly more on the fixed rate here lately but we expect it to to get back to our historical norms.

[Catherine Mealor, Keefe, Bruyette and Woods (NYSE:KBW)]

Okay. And then on your [Indiscernible] modeling, you mentioned that there's 10% upside with 100 basis point rate move. Do you -- what kind of deposit Beta assumptions do you make within that? And also, is that a static balance sheet or are you assuming some deployment of your cash within that 10% assumption too? Thanks.

[Michael Mettee, Chief Financial Officer]

That's a great question, static balance sheet and -- the past has made us -- as we mentioned, we look kind of difficult to truly look at on a -- in this kind of new economy that Wade was just mentioning. But we've got about 43% basis points on every 100 basis points, maybe we expect a third on deposits. I would think that lag a little bit. But time will tell as to how much we see competitive pressures on rates going off and what customers demand.

[Catherine Mealor, Keefe, Bruyette and Woods (NYSE:KBW)]

Okay. Awesome. Thank you. So that it deals with your commentary that even 10% feels conservative if that cash is deployed more aggressively in deposit costs, flag that a fair --

[Michael Mettee, Chief Financial Officer]

We are currently sitting on a lot of excess liquidity. We don't -- as you know, generally, over deploy into the investment portfolio. We've stuck at kind of 13%, 13.5% of assets, and that's where we wound up, which we really appreciate now that the tenure's above 180 this morning and have some opportunities there. We are conscious of public funds and how long that sticks around in deposits. But yes, I would say there's definite upside.

[Catherine Mealor, Keefe, Bruyette and Woods (NYSE:KBW)]

Okay. Great. Thank you for the caller.

[Chris Holmes, President and Chief Executive Officer]

Thanks, Catherine.

[Operator]

And our next question comes from Kevin Fitzsimmons from D.A. Davidson. Please go ahead with your question.

[Kevin Fitzsimmons, D.A. Davidson]

Hey, good morning, everyone.

[Chris Holmes, President and Chief Executive Officer]

Morning, Kevin.

[Kevin Fitzsimmons, D.A. Davidson]

I just wanted to follow up on your commentary on the M&A outlook and I recognize your point that you don't need it. You feel very confident new organic growth, but I'm just curious what your assessment of the environment is like out there. On one hand, it seems like you guys are pretty selective in terms of your wish list and you know who those names are. On the other hand, do you -- when you look at the environment too and now we're moving toward higher rates, do you think that has an effect on would be sellers that maybe they're not going to be in quite as of a hurry to sell as they might otherwise have been, or just, I guess, and then just what your expectation. Would you expect in '22 to be announcing a deal, would you be disappointed if you didn't, just trying to drill down stat? Thanks.

[Chris Holmes, President and Chief Executive Officer]

Yeah. Good questions, Kevin, and I'll try to cover all that and don't hesitate to tell me if I miss a piece you're interested in. So as we look out we are comfortable with our organic growth picture, and again, that's where we get to ASH return on capital. So we like going out in organic growth and we have -- I've said before we kind of keep a targeted list and we've talked some about that, but we also will entertain other opportunities that come our way. That folks bring to this, like investment bankers are primarily investment bankers and they may not be on our list. I guess more and more as we think about the environment going and moving forward.

It's probably more focus on the list and less focus on less hopefulness that somebody that's not on the list will become a reality because with the thing that Wade talked about and the things that are changing in the industry because we've got really strong opportunities there. That being said, when we have the opportunity to get really -- geographies that we're interested in with a meaningful share, okay? Geographies that really bring us a strong brand and strong people. That's something that we're interested in. If you looked our list, every one of them would be a very strong community bank. Either in or near our markets. But again, there aren't many of those, and we're always interested in the liability side of the balance sheet where we were very interested in non-interest bearing deposits.

Those are things that we really think about and look at out there. It's not that others don't have value, they certainly do, but when you look at our strategy, that's where the most value is. And so that's -- so we're pretty focused on the things that we're looking for which leads to a relatively small list. And when it comes to the higher rates, I think actually more than the sellers -- I think what happens with higher rates is it leads to higher stock prices, stock price -- stock is usually going to be in your currency. And so -- and that usually leads to folks at least under the impression that they're getting more while on a relative basis, they actually might not be.

But I think it leads people to feel better. And so I think what the really rate driver is, is the higher stock -- is the higher stock prices is what -- it's driven by our rates. The one other thing I want to mention is -- and I want to big shout out here to the -- legacy -- Franklin folks and legacy, legacy FirstBank folks. Integration on these things, Kevin, is really hard and to actually put them together, get everybody in the same company and thinking the same way when they didn't use to do that is not easy. And it takes a lot of care and a lot of work. And it's really hard.

And so we've been able to do that with -- and I think the what you saw on what we announced on the gain on the held for sale portfolio, what we announced in loan growth, we've been able to integrate those in a way that has made it work. But man, I tell you, it takes a lot out of you, and it takes your focus off of everything else. And so it's got to be something that we just like Franklin that makes a big difference to the combined company for us to undertake that at this point. And so when we do it, it's going to be something that we really, really want.

[Kevin Fitzsimmons, D.A. Davidson]

All right, that was perfect thanks. Thanks, Chris. Just one quick follow-up. Michael I believe you mentioned in your commentary buybacks, and apologies if you already covered this, but with the stock price where it is, is it in the preference for organic growth and funding that? Is it fair to assume buybacks are really not going to be a big focus in the near-term?

[Michael Mettee, Chief Financial Officer]

Yes, that's fair. We've got better more optimal uses of capital right now, and so we'll adequately continue to monitor that and deployed appropriate.

[Kevin Fitzsimmons, D.A. Davidson]

Okay. Thanks very much.

[Michael Mettee, Chief Financial Officer]

Yes, Kevin.

[Chris Holmes, President and Chief Executive Officer]

I appreciate Kevin.

[Operator]

Ladies and gentlemen, with that, we'll be concluding today's question and answer session. I would like to turn the floor back over to Chris Holmes for any closing remarks.

[Chris Holmes, President and Chief Executive Officer]

All right. Thank you very much, everybody, for being on the call. We really appreciate your interest and we look forward to a fantastic 2022. Thanks, everybody.

[Operator]

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.