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spk04: Good morning and welcome to the FB Financial Corporation's third 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 Mattei, Chief Financial Officer. Greg Bowers, Chief Credit Officer, and Wib Evans, President of FB Ventures, will also be available during the question and answer session. Please note FB Financial's earnings release, supplemental financial information, and this morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on the SB Financials website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation. With that, I would like to turn the call over to Robert Hohen, Director of Corporate Finance. Please go ahead.
spk06: Thank you. During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation B. 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 S&P Financial's earnings release supplemental financial information in this morning's presentation, which are available on the investor relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov. I would now like to turn the presentation over to Chris Holm, S&P Financial's President and CEO.
spk10: 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 8% when you exclude PPP loans, adjusted EPS of 89 cents, adjusted return on average assets of 1.42%, adjusted return on tangible common equity of 15%, and we grew our non-interest-bearing deposits by 20% annualized. Growth continues to be evident across our markets. We received news this quarter that Ford is investing $5.6 billion in an electric vehicle manufacturing hub at a site midway between Memphis and Jackson, Tennessee, in West Tennessee. This investment will create 6,000 direct jobs in West Tennessee, and the state estimates that in total 27,000 jobs will be created to support the site. First Bank's well-positioned to capitalize on the 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. And we've got a very strong commercial team in Memphis that continues to deliver good results. In Nashville, the economic activity continues to roll. and is becoming a technology hub in addition to our traditional strengths of health care, entertainment, and hospitality. And our area just recognized its second unicorn. Tennessee benefits from decades of strong business-friendly leadership from our elected officials, and it's exciting to be at the center of what's become a magnet for economic development. We believe we have the relationship managers and the infrastructure in place to capitalize on that economic environment. 8% loan growth 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. But 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 2021. If trends continue as they have, we would expect to return to our typical 10% to 12% annual loan growth for 2022. On the liability side of the balance sheet, we're pleased with our 20% non-interest-bearing deposit growth during the quarter. Even when the world's awash with liquidity, we place a high value on bringing in strong operating account relationships. As a result of that shift in the composition of our deposits, as well as our continued focus on bringing down our cost of interest-bearing deposits, our total cost of deposits decreased by an additional five basis points this quarter. Moving to mortgage, the team delivered a very strong quarter with $8.9 million of pre-tax contribution. That was an outperformance compared to our guidance for the third quarter as refinance volumes and margins performed better in August and September than we anticipated during last quarter's call. Early results in October have been fairly volatile, so our guidance range will be a bit wider this quarter. Our best guess at the moment is anywhere from 1 million to 4 million contribution in the fourth quarter. Asset quality continues to improve with our non-performing and non-cruel statistics materially declining this quarter. with nonperforming loans to loans down by 24 basis points, nonperforming assets to assets down by 16 basis points. The improvement in our metrics was driven by a $14 million nonperformer leaving the bank this quarter, which resulted in a slightly higher net charge-offs at 13 basis points, as well as a $1.5 million reversal in non-interest income as a swap on the credit was unleaded. 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 release 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 months just in case we run across any speed bumps as folks move back indoors. Assuming that forecasts continue to improve and that we survive the changing of the seasons without material shutdowns or changes, of behavior in our markets, then we'd expect more sizable releases to follow in the next few quarters. On a related note, we saw positive momentum with the disposition of our non-core institutional portfolio. We've just over $100 million of exposure remaining in there and would expect that to continue to decline as credits mature and refinance out of the bank. We're still marking portfolio and would accept the right bid Well, we're down to nine relationships, and the quality of the remaining loans is strong, and the yield is favorable, so it would take a strong bid at this point. Speaking to our capital management plan, our tangible common equity to tangible assets is moving a bit outside of our target at 8.5% to 9.5% 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. We dipped our toe in the water on a buyback this quarter, but with the bank valuations rebounding shortly after our trading window reopened, we ultimately retired less than $1 million worth of shares. Our second priority for the capital deployment behind organic growth is accretive merger and acquisition activity, and it's now been just over a year since we closed and converted the Franklin Financial Network merger. We remain pleased with how the combinations performed as talent and customer retention has gone well. As we look towards future mergers, we're targeting similar characteristics to our Clayton, Atlantic Capital, and Franklin synergy combinations. We look for partners that will provide additional density across our footprint, as well as fill in 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 dynamic support further consolidation is possible that we could have M&A activity in 2022. 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 2021 and into 2022. Mortgage did very well and outperformed our previous expectations, but we expect them to come back down to earth in the fourth quarter due to the seasonal behavior of the mortgage. We're building capital quickly, but M&A activity is possible. And with rebounding bank valuations, we're likely to use as much capital on our – we're not likely to use much capital on our buyback in the near term. I'll now turn the call over to Michael, our CFO, to discuss our financial results in support of town.
spk08: Thank you, Chris, and good morning, everyone. Speaking first to mortgage and illustrated on slide six, mortgage performed better than expected in Q3 with a contribution of approximately $8.9 million. As mentioned on Q2's call, we were not certain how the late second quarter move lower in rates would impact the industry, and ultimately we saw refinance business react as one would expect in a lower rate environment. We also saw margins stabilize quarter over quarter, payoffs slow in our servicing book and higher servicing revenue, all leading to outperformance. It is early in Q4, but it does appear with the recent run-up in rates and the usual seasonality, the mortgage division will face some headwinds this quarter. As Chris mentioned, our best estimate for contribution is $1 million to $4 million in direct contribution from mortgage in the fourth quarter. Moving on to net interest margin, we saw our headline number remain essentially flat at 3.2% in the third quarter compared to 3.18% in the second quarter. We were able to bring down our cost of total deposits by five basis points. Our relationship managers have continued to focus on bringing down our higher cost interest-bearing accounts, and they've gotten results. I would expect some additional decline on our cost of interest-bearing accounts in the coming quarter or two, but the month of September was at 33 basis points versus 34 basis points for the quarter, so we're seeing a bit of a plateau there, and I would expect more measured improvement going forward. As Chris mentioned, we did have success in remixing our deposit portfolio this past quarter, with non-interest-bearing deposits increasing to 25.9% of total deposits from 24.4% in the second quarter. NIBs will remain a focus going forward, though, and our next goal is to move that number to 30% 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 $225 million this quarter. Our contractual yield on loans dropped by 13 basis points during the quarter, from 4.37% in the second quarter to 4.24% in the third quarter. We are encouraged to yield on new originations in the third quarter held in that same 3.8% to 3.9% range that we experienced in the second quarter. However, with that still being below the 4.24% contractual rate on the legacy portfolio, we would expect to continue to see yield compression until rates begin to rise. As a reminder, we're maintaining our asset sensitivity, and when rates do rise, we have approximately $2 billion in variable rate loans that should reprice immediately. We continue to manage excess liquidity in part by increasing allocation to the securities portfolio. Our securities portfolio increased by $168 million in the third quarter. The average yield on purchased securities during that quarter was approximately 1.33%. Interest rates were volatile during the quarter with a benchmark 10-year U.S. Treasury swinging as much as 36 basis points. And we expect interest rate volatility to continue as monetary and fiscal policy are adjusted from the significant responses to the pandemic. Given that volatility, we continue to invest in securities that do not exhibit excess duration risk while still providing an overall increase 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, helper investment, and the securities portfolio to continue to decline as incremental volume comes at rates lower than the current portfolio. We expect continued improvement in cost of funds as CDs continue to reprice and as our relationship managers focus on growing non-interest-bearing deposits. Liquidity will be slightly volatile quarter to quarter as public funds enter and exit the bank, and we'll continue to strategically deploy excess liquidity into better-yielding assets in order to grow net interest income. Moving to CECL, and as Chris mentioned, at $2.5 million, our release was smaller this quarter than the prior two quarters. Economic forecasts continue to dictate lower reserves relative to the quantitative portion of our CECL model. On the qualitative portion of our allowance, we are maintaining many of our COVID-era factors for 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, then we'll feel more comfortable relaxing some of these qualitative factors. Based on what we know today, we would expect releases rated these Q factors to come sometime between the fourth quarter of 21 and the first half of 2022. As you know, COVID has taken many unexpected turns, so this is subject to change. Speaking to expenses, the banking segment was slightly elevated compared to where we expected for the quarter, coming in at $58.8 million compared to $58.2 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 tangential benefits of approximately $500,000. On banking segment non-interest income, we had a number of non-recurring type events that can muddy the run rate number. The stated segment amount was $13.8 million. Included in that $13.8 million was a gain on sale of real estate owned of $2.2 million. a gain on our commercial loans helper sale portfolio of $740,000, and a loss on the unwind of a swap of $1.5 million. Netting those three items out, the banking segment, non-interest income, would have been $12.4 million for the quarter. I'll close my section speaking to this quarter's taxes. There are a few one-time items in that line as well. We had a $1.7 million benefit related to net operating loss from the Franklin merger. We also had a $2.1 million benefit related to the vesting of the IPO awards. For the fourth quarter, we would expect a return to a 23% to 23.5% tax rate. And with that, I'll turn things back over to Chris to close.
spk10: All right. Thank you, Michael, and I appreciate that, Culler. We're pleased with our results for the quarter, and we're particularly proud of our team for the loan growth, the non-expiring 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.
spk04: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And our first question comes from Brett Rabaton of Hovde Group. Please go ahead.
spk09: Hey, good morning, everyone.
spk08: Good morning, Brett.
spk09: 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 10% to 12%. 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 the 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?
spk10: Yeah, Brad. The growth has pretty much come across all of our product types. If you look over the last two or three quarters, it's been kind of all of our product types. We did have more growth during this particular quarter in CNI than any other product type, and so we're glad to see that. We expect to continue to see that grow. I don't know if they're going to continue to be the leading product type, but we expect to continue to see that. We have not seen our line utilization return to where it was in the last two quarters of 2019. We were closer to... uh, called a 50% utilization. Uh, if you, if you average the last two quarters of 19, then you looked into the third quarter of this past quarter, we were down in the, still in the low forties in terms of utilization. So it's, it's higher than it was, but it's still not high. Um, and so we expect to see that, uh, over the next several quarters, where we think and see it, I'll continue to be strong. We we've seen, um, We have seen good CRE growth as well, good growth in residential construction, and we've seen new customer acquisition. So it's been a combination, and we can't pinpoint any one thing, and I would say it's 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 high 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 existing customers, but there's also we're picking up new customers as well.
spk09: Okay. I appreciate the color there. And then mortgage, you know, 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 2019 because of inflation? investments you've made in the platform, or can you maybe give us some thoughts on how you see mortgage trending as things, quote, get back to normal, assuming that happens at some point?
spk08: Yeah, Brad, I think where would mortgage normalize? Probably 10% to 15% of the contribution is where it typically will play out. You know, being in the low-rate environment we've been in, 2022 is kind of a – a hard kind of a crapshoot at this point. If you look at the NBA, you look at Payne and Freddie, they're predicting volumes to be down fairly significantly. We would expect outperforming that. But we certainly would expect a 10% to 15% number, which is traditionally what we've targeted. And 2022 is a particularly difficult year.
spk10: particularly difficult year to forecast, Brett. And for us, and I think for everybody else, because even if you look at the forecasts that are out there, they're not, they don't all line up for volumes. And then we probably take a slightly different view than even most of the forecasts out there. So it's, we target, you know, somewhere between 10 to
spk09: Okay. Appreciate the cover there. And then, Chris, if I could sneak in one last quick one. You talked a little more optimistically about M&A than I think you have in recent quarters. Are you seeing a pickup in talks with potential acquisition targets? Maybe give us, if you could, any flavor for how you expect 22 to shape up from an M&A perspective for you.
spk10: Yeah. So 22 – You know, Brett, as we think about the last couple years, 20 and 21, well, we had a lot. And so, you know, we announced the Franklin combination, first bank Franklin combination in early 20. Pretty much tried to digest that in 20, and it took all of 20 and into 21. You know, we went over the $10 billion gap. asset threshold with that transaction. And so that has also taken some focus of the company. So it's pretty much been that we've been focused. We think of ourselves as operators and top-level execution on our company. And so as opposed to thinking of ourselves as having to grow through going out in the And so we've been focused on that, and we feel pretty good about where we are with that. We think it's showing through in the numbers, particularly in our organic numbers. 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 list of things that we're interested in And it's as much reliant on those that we're interested in as it is on us just out trolling 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&A. We're quite strategic on that. And so, you know, our feeling is that as we look at that very small list that we During the 2022, we think that there could be, you know, 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 is it's gotten better for us from a timing standpoint, and we think that it – I don't think in 22, and so I think that could play into that.
spk09: Okay. Great. Appreciate all the color. Sure.
spk10: Thank you for being on the call.
spk04: The next question comes from Stephen Skelton of Piper Sandler. Please go ahead.
spk11: Hey, good morning, everyone.
spk10: Good morning, Stephen.
spk11: Maybe going back to loan growth quickly, I'm just curious how the – The team in Birmingham has been performing, I think maybe it was $40 million that you referenced last quarter that they contributed. 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.
spk10: 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 humbling for us. It's been really good, and the folks that we've been able to get on the first-bank team down there have just been fantastic in terms of fitting our culture and us. It's just been a great match. They have... Actually, when we talked about where they were last quarter, they've almost doubled that again. And so they're in the mid-70s 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 down there about joining that team. We don't 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 at this point. And the pipeline actually is maybe even more encouraging than what I just gave you. So we've been very, very pleased.
spk11: That's great. That's great. Okay. And on the M&A front, I think last quarter maybe you had referenced Western North Carolina and and some areas maybe that were slight extensions to your existing footprint. Is there any, when you look at that list of banks you spoke to that you would, that targeted list, is there any specific geographic focus that you guys would prefer to move into currently, or are there even product expansion or extensions that you would look to, especially given the uncertainty around mortgage, or can you give us a deeper feel on ideology around potential M&A?
spk10: Yeah, sure. So as we think about M&A, geography is at the top of the list. And really, geography is at the top of the list because operating leverage is at the top of 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 – 30, maybe even the top 50 in Nashville from a market share standpoint, and today we're number six. You know, and we're right at – I think we're number five now in Knoxville and, you know, about the same in Chattanooga, where we basically didn't have a presence before, and so before, as I said, 10 years ago. And so – When I say we didn't have presence, we actually had a location, but we had less than $100 million in each of those markets. Again, we were irrelevant from a market presence standpoint. When you have that presence, we like to have enough density to make sure we're getting a great return on the capital and we're creating operating leverage. We've still got markets in footprint that would be We don't have as much operating leverage. We're not creating as much operating leverage as we'd like. And so that's part of our M&A strategy is to continue to improve our profitability through that. 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 in, 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. And so that's really the way we think about bank M&A. We also think about culture, obviously, and we think 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. And then on what I'll call non-bank, I'll refer to it as non-bank or sort of maybe verticals. We have some interest there. Obviously, that's the way we think of mortgages, really, like a vertical. 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 could, if we came across a vertical like that, we would, that was, had Particularly good yield. We love assets that we can either portfolio or sell into the market. Like both of those, we have the option of either portfolio or selling it. And that we can create a national – those product lines for us or those verticals are something that we're interested in being – we want to make sure we're competitive in those 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 manufactured housing. That's another factor that we look at. It's something that we intend to be a really significant market player in.
spk11: Awesome. That's a fantastic answer. Thanks, Chris, for all the detail. Just last for me, do you guys have an update on the expected impact from Durban in the third quarter?
spk08: Yeah, third quarter, 22. It's still going to be in that same $4 million range, Stephen, for half a year. And so you'd look at about $8 million annualized.
spk11: Got it. Okay. Thanks, Michael. Appreciate the call, guys.
spk08: Thanks, David.
spk04: The next question comes from Matt Oney of Stevens. Please go ahead.
spk12: Thanks. Good morning, guys. Hey, Matt.
spk10: How are you?
spk12: Hey, I'm good. I'm good. I want to drill down on the expenses for the bank. I think you mentioned in prepared remarks a little bit elevated and there was some unusual items. I think it was 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.
spk08: Yeah, so the reality or the oddity was around the IPO and the vesting. We were expecting flat quarter over quarter, kind of second to third, flat-ish. And that $500,000 related to vesting was really the main peculiarity. And so, you know, as we look forward, I would still expect in that same – kind of $58 to $59 million range, knowing that, you know, we're going to take opportunities to hire talent as it comes, be it in RMs and some of these areas. Chris mentioned going over $10 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. 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 and grow on the revenue side of the balance sheet and continue to push down our efficiency ratio.
spk12: 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 there's that 255 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.
spk08: Yeah, margins really hung in there over the past couple months. We've been pleasantly surprised with that, even as capacities kind of returned to the mortgage space. You know, we saw volume start to slow there in the third quarter, late third quarter, September-ish, which is kind of leading us to a kind of normal seasonality type 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'd get some momentum on purchase that typically hadn't been there. At this point, we're not seeing a whole lot of that in our markets. In the third quarter as well, FHFA gave back the refi incentive to lenders, which was a boost to volume on the refi side, lowered rates about an eight. And so you saw a pickup in our refinance percentage from 58 to 66% 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. So a lot of moving parts in there, but housing is still constrained due to inventory and supply chains, too.
spk12: Okay. That's all for me. Thanks, guys.
spk08: Thanks, Matt.
spk10: Thanks, Matt.
spk04: The next question comes from Jennifer Demba of Truist Securities. Please go ahead. Thank you.
spk02: Good morning.
spk10: Good morning, Jennifer. Good morning.
spk02: I'm wondering if you could talk about your priorities in terms of technology investment and spend right now over the next one or two years where you feel like maybe you're, you know, in line with tears or falling short or ahead.
spk10: Yeah, so we spend a lot of time and dialogue internally around that very thing. And And we look at it as... We're really thinking about innovation there with some of our folks and have them really focused on that. And we're actually making some changes to create an 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 several measures, the leading customer experience in the Southeast, but in almost all the measures quite good. But we think about first how can we innovate better mostly using technology in the customer experience process. And then secondly, we think of efficiency and 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, we are an active investor in a few ways there. So it is – we are – We very much believe that the industry is really transforming over the next few years, and so we are transforming our business at the same time because I think your options are to do that or lose value, and we're not going to do the latter.
spk02: Okay, thank you.
spk04: The next question comes from Kevin Fitzsimmons of DA Davidson. Please go ahead.
spk07: Hey, good morning, everyone. Good morning, Kevin. Chris, there's been a handful of questions on M&A. One thing I just wanted to ask was, you know, coming out of the Franklin Synergy experience, it was a large deal. It was a complicated deal. It took a while. Do you feel – more confident and more emboldened to, to go with like a larger bank transaction like that? Or do you think your appetite is going to be more, it's, it's going to be more of a fit for, you know, more digestible traditional type deals in your view?
spk10: Yeah, that's a great question actually, Kevin, because we, again, we've talked about that a lot and, um, uh, and I want to say, say first off, um, You know, deals are hard, okay? I don't care what size they are. And, you know, first option for us would be go hire great people and pay a smaller premium for those folks and, you know, and be able to be a little more selective with those investments. And so we love doing that. We do get the opportunity to make some money. Some bigger ones. Franklin and First Bank, that combination was big. And it was in some ways, particularly in Middleton C, we regarded it as a merger of equals, 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, there are more legacy Franklin Synergy employees than legacy EarthBank employees. But all that being said – It's gone well. We've retained the customers. We've retained the folks on both sides, by the way. And not only have we retained them, they're ahead of budget. But it's hard, and as we look at – Going back to when we look at potential targets, frankly, most of them are smaller than what that would have been for us at the time. You know, one of those instances, the first bank would have been, say, 60%, and Franklin Synergy would have been 40%. As we look at those targets that I mentioned and those ones that we're really, really interested in, they're smaller than that as a percentage of the company, and so that would be what we would opt for, not only because that's the specific target list, But that's just executionally, that's what we would opt for. I think once it gets much bigger than, say, I don't know, a third your size, it gets really hard to digest.
spk07: Great. I appreciate that. And just – it's been mentioned a few times today, but, you know, we see lots of stories and hear reports about supply chain disruption and worker shortages. And, you know, you have the good fortune to be 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.
spk10: Yeah, it's not quite as much of a... From my mind, the potential for a credit hit win comes from a shutdown. And so if we have something where some industry got shut down 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 supply chain or labor, Those would be the things we worry about. We see both of those. The supply chain, we certainly see the effects of that, 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 of housing has gone up in the residential space. And the cost of living in our largest market in Nashville has gone up significantly. So we see all of those. But the supply chain, I personally think that will settle down. Sooner versus later, 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. So I think they do normalize sooner versus later. The labor shortages, you know, I'm going to speak regionally and locally as opposed to nationally. The labor shortages are very real. And we live in a very attractive spot that's attracting as much in-migration as any spot in the country. And so I don't think the labor shortage is – I just talked about Ford coming and 27,000 jobs being created in the western part of our state, which has been the slowest-growth part of our state, but the middle being the highest growth, the east being also a high-growth area. You know, I think the labor shortages are going to persist. There's a lot of wage pressure where we are at every level. You know, 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 they're still things that you have to deal with. And so as we look at it, that's what 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, like I said, I think it will resolve itself sooner versus later. But in general, the markets, like I said, it's because of the growth and the attractiveness of the area we're in. Michael, would you add anything to that?
spk08: I think relative to the reserve, Kevin, you know, you're – All those things are part of the consideration. You also had eviction moratoriums coming off, you know, PPP loans being forgiven. And so there was a little bit, especially earlier in the quarter, you know, with how Delta variant was being dealt with and what impact that would have on businesses with labor, with all those things. You know, that drove a little bit of the hesitancy to get too aggressive there. But do expect that to kind of abate. A little bit of concern around 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.
spk07: Okay. And, Chris, you've mentioned one last one for me. You mentioned the long-term effectiveness and focus on inflation. 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 recede at some point, and you'd rather go in the traditional way and get the deposits right up front versus trying to claw and get it over a period of years?
spk10: Yeah, you read that correctly. It's two things. It is the long-term view that non-intra-bearing deposits are very attractive and will always be attractive. And so we think about what we're targeting. That's what we're targeting. And, you know, deposits... just from a pure monetary value, given where interest rates are less valuable today than they traditionally are. But in our mind, the relationship that comes with the primary operating account is very valuable to us long term, and those are the ones we want. And so that's what we mean by that. We are doing some hiring of loan officers to get loans on the balance sheet. And so we are – Birmingham would be an example where we – they certainly don't have as much in – And deposits, as they do in loans, not even close, but that's fine with us for now. Again, because we're taking that long-term approach and those deposits will come over time. But if we got the opportunity, that's a good example. If we got the opportunity for the right, I'll call it legacy community bank in and around those markets, it would be one we'd be very interested in and we'd bring on those funds. operating account relationships sooner than we would bring them in just organically growing them. I'm very envious, Kevin, of those banks that fund their loan portfolio with 40% non-interest-bearing deposits. And so we want to get there.
spk07: Got it. Okay. Thanks, Chris.
spk10: All right. Thanks, Kevin.
spk04: The next question comes from Catherine Mueller of KBW. Please go ahead. Thanks. Good morning.
spk10: Good morning, Catherine.
spk03: 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 is. 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.
spk08: Hey, Catherine. It's Michael. I'll take that part. Our target has been that 13, 13.5% range of total assets versus earning assets. So we're actually right in that range. It came a little bit quicker. We were kind of looking at year-end closures. But clearly, this liquidity has been here to stay. So we deployed some there. We also did some repo, reverse repo transactions that are short-term in nature and deployed some liquidity there as well in their 30-day paper. So that helped a little bit. I don't think you'll see material growth above 30%. It's 13%, 13.5% range. 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. So that's what we'll likely deploy next.
spk10: Yeah, and, Kevin, I would just add on the loan side, our regional presidents are very optimistic, you know, very optimistic. When we look out at 22, when we look at kind of the pipeline today and we look at 22, you You know, we're not having to coax them up when we're thinking about targets for 2022. And so for that reason, we feel better about the outlook for the long-growth side of the balance sheet.
spk03: Great. Understood. And then on the – seasonality of the public funds. I think you mentioned this in your prepared remarks, Michael. Can you remind us that you're saying public funds will come in higher this quarter, and can you just remind us what the seasonal fluctuations are with that?
spk08: Yeah, we saw about $225 million roll out during the quarter, and we'd expect some version to come back. They'll be higher in the fourth quarter. And there's still a lot of funding that has not been deployed from the government, and we expect those balances to increase.
spk03: Guys, do you think excess liquidity could actually increase a little bit next quarter before we see that more deployed next year with the loan growth? Is that a fair way to think about it?
spk00: Yes. Yes.
spk10: Yes.
spk04: The next question comes from Alex Lau of J.P. Morgan. Please go ahead.
spk05: Hi, good morning.
spk08: Good morning, Alex. Good morning, Matt.
spk05: I appreciate the loan growth guidance. Can you talk about loan competition in your markets as you look at that low double-digit range, both on the rate and credit structure competition front? Thank you.
spk10: Yeah, Alex, sure. uh... competition is keen uh... it 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's the most competitive market we've got. And so everybody thinks it's competitive, and the fact of the matter, it is. And so – but I would say – Rate pressure right now is particularly – it is more competitive than what we see on credit structure. Sometimes at times like this – or occasionally in times like this, you will see – relaxing of credit standards that we find we have, in times past, have found concerning. And, Greg, you might check me on this. I haven't seen that of late, a concerning relaxing of credit. We just... just pretty much don't relax our credit standards with cycles. And so we haven't, or Craig will then, I don't think we've seen credit relax. I think you're right. I mean, I think it is very competitive, but as far as being flexible, we're always flexible and we want to encourage good growth. But I'm not seeing anything like you're talking about in previous cycles where we'd call it, you know, it's gotten crazy or loose. Right. We have made that statement on these calls before. We're seeing crazy things. We're seeing loose things. We haven't seen that, frankly, this time. And I think that's a very good thing. We are seeing brutal rate pressure. We're seeing brutal rate pressure. We have priced a competitive deal or two at the lowest rate terms, lowest price. pricing terms we've ever priced, and frankly, every one of them that we've done at all, we haven't won a single one. And so somebody's bolder than we are there. Thanks for the color.
spk05: Yes, it does. Thank you. And on the potential reserve releases, On the allowance ratio of 191, so as economic conditions improve, do you have a range that you see that normalizing towards?
spk10: Thanks. I'll give you a couple of references. If we go back to First Bank and Standalone and Franklin Standalone, Before the two companies got together, the first bank stand alone was in the 110 to 120 in terms of a reserve as a percent alone. I think around 120. Allowance to loans. Keep in mind that was pre-CECL. And Franklin, I think, was a little higher than that because they have a real estate concentrator. They have a higher real estate concentration, and so it would naturally be a little higher. And so if they were at, say, 150, I would think it would be somewhere in that, somewhere probably between those. But, again, post-CECL, I can remember we've had – so we've had a significant combination of two institutions. And so we're – and we've added CECL in there. So we think it's somewhere – probably in the one, I'll call it 130 to 160, something like that, probably.
spk05: Thanks a lot for that. And just the last one, on your mortgage efficiency ratio of 80%, how do you think about that ratio going through year-end?
spk08: Yeah, I mean, the 80% in the third quarter is, Obviously, we're at about an $8.9 million contribution, so from $1 million to $4 million, you'd think that that'd push in low 90s. But really, I think, as we've said before, Alex, our target in the mortgage space is 80%, 85% in that range, and so for the year, I think we'll wind up right in that targeted efficiency ratio.
spk05: Thanks for taking my questions.
spk08: Yes, sir. Thank you. All right. We appreciate it, Alex.
spk04: The next question comes from William Wallace of Raymond James. Please go ahead.
spk01: 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 130 to 160 range that you anticipate we could settle out at?
spk10: Michael runs that process, so I'll let him talk about it.
spk08: That's kindness. Yeah, it's going to take a couple quarters. I don't think you'd see it happen overnight. Certainly there's a lot of moving parts relevant to the model and quantitative versus qualitative. But, you know, I would expect over the next two to three quarters. You'll see a return to that range.
spk01: 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 into 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?
spk10: Yes. I think there's two factors working in 22. One is continued addition of growth in the loan portfolio and expansion of things comes when we get a rate increase. Because we've got about $2 billion of adjustable rate loans And until either of those, you know, as we add incrementally on the loan growth, you can see a little bit of expansion, but generally you're going to bounce around the same margin where we are without it. in a band that doesn't move up or down very much. We still probably over the next couple of quarters will 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'll be less than probably what we've gotten 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.
spk01: Okay. So basically kind of flattish plus or minus until we get some help from the Fed. Yes. Thank you. That's all I had. I appreciate it.
spk10: Thank you, William.
spk04: This concludes our question and answer session. I would like to turn the conference back over to Chris Holmes for any closing remarks.
spk10: Okay. Thanks, everybody, for joining us. As always, we appreciate your interest in FB Financial, and we look forward to another quarter, next quarter, of hopefully great results. Thank you.
spk04: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.
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