FB Financial Corp (FBK) 2021 Q3 法說會逐字稿

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 Mettee, Chief Financial Officer. Greg Bowers, Chief Credit Officer; and Wib Evans, President of FB Ventures, will also be available during the question-and-answer session.

Please note FB Financial's earnings release, supplemental financial information and this morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com, and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on the FB Financial's website approximately an hour after the conclusion of the call. (Operator Instructions) With that, I would like to turn the call over to Robert Hoehn, Director of Corporate Finance. Please go ahead.

Thank you. During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.

In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release, supplemental financial information 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, FB Financial's President and CEO.

Thank you, Robert. Good morning, and thank you for joining us this morning. We appreciate your interest in FB Financial. We had a solid quarter as we delivered annualized loan growth of 8% when you exclude PPP loans, adjusted EPS of $0.89, adjusted return on average assets of 1.42%, adjusted return on tangible common equity of 15%, and we grew our noninterest-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 and 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. FirstBank is well positioned to capitalize on the increased economic activity that will come to West Tennessee, as by our estimation, we're #1 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 we are just recognized as second unicorn. Tennessee benefits from decades of strong business-friendly leadership from our elected officials and is excited 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% noninterest-bearing deposit growth during the quarter. Even when the world is 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 5 basis points this quarter.

Moving to mortgage. The team delivered a very strong quarter with $8.9 million of pretax 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 portfolio.

Asset quality continues to improve with our nonperforming and nonaccrual statistics materially declining this quarter, with nonperforming loans to loans down by 24 basis points; nonperforming assets to total 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 noninterest income as a swap on the credit was unveiled. 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 a 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 would expect more sizable releases to follow in the next few quarters.

On a related note, we saw positive momentum with the disposition of our noncore 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 bank. We're still marketing portfolio and would accept the right bid, but we're down to 9 relationships and the quality of the remaining loans is strong and the yield is favorable, so it takes 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 targeted 8.5% to 9.5% range. We'd 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 dipped our toe in the water to buy back 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 combination has performed as talent and customer retention is going well. As we look towards future mergers, we're targeting similar characteristics to our Clayton Atlantic Capital and Franklin Synergy combinations. We look for partners that will provide us additional density across our footprint as well as 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 dynamics 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 management 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 some more detail.

Thank you, Chris, and good morning, everyone. Speaking first to mortgage, and illustrated on Slide 6, 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 moved 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 5 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 too, 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 noninterest-bearing deposits increasing to 25.9% of total deposits for 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 that 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, without 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 are 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 held for investment in the securities portfolio to continue to decline as incremental volume comes at rates lower than the current portfolio. We expect continued improvement in cost of funds as CDs continue to reprice and as our relationship managers focus on growing noninterest-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 2 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, we'll feel more comfortable relaxing some of these qualitative factors. Based on what we know today, we would expect releases rate of these key 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 million that we had pointed to last quarter. This was 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 noninterest income, we had a number of nonrecurring 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 held for sale portfolio of $740,000, and a loss on the unwind of a swap of $1.5 million. Netting those 3 items out, the banking segment noninterest income would have been $12.4 million for the quarter.

I'll close my section speaking to this quarter's taxes as there are a few onetime items in that line as well. We had a $1.7 million benefit related to the 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 to return to a 23% to 23.5% tax rate. And with that, I'll turn things back over to Chris to close.

All right. Thank you, Michael, and I appreciate that color. We're pleased with our results for the quarter, and we're particularly proud of our team for the loan growth, the noninterest-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.

(Operator Instructions) And our first question comes from Brett Rabatin of Hovde Group.

Wanted to first ask that 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?

Yes, Brett. So the growth has pretty much come across all of our product types. If you look over the last 2 or 3 quarters, it's been kind of all of our product types. We did have more growth during this particular quarter in C&I than any other product type. And so we're glad to see that, expect to continue to see that grow. I don't know if that will continue to be the leading product type, but we expect to continue to see that.

We have not seen our land utilization return to where it was in the last 2 quarters of '19. We were closer to, call it, 50% utilization. If you average the last 2 quarters of '19, and you looked into the third quarter -- this past quarter, we were down still in the low 40s in terms of utilization. So it's higher than it was, but it's still not high. And so we expect to see that over the next several quarters grow. We think C&I will continue to be strong. 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 in there. We can't pinpoint 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 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 the existing customers, but we're picking up new customers as well.

Okay. I appreciate the color there. And then mortgage, 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 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.

Yes, Brett. I think, where would mortgage normalize, 10% to 15% of contribution is where it typically will play out. Being in the low rate environment we've been in, 2022 is kind of a hard kind of a crapshoot at this point, if you look at MBA, you look at Fannie and Freddie, they're predicting volumes can be down fairly significantly. We would expect to outperform 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 to forecast. We talked really quite a bit about how to forecast 2022, and it's a particularly difficult year to forecast, Brett, for us and I think for everybody else, because even if you look at the forecast that are out there, they don't all line up for volumes. And then we'd probably take a slightly different view than even most of the forecast out there. So we target somewhere between 10% to 15%. We want mortgage. We want to do as well as we can, make as much as we can. But typically, that's where it comes in for us on just a (inaudible) on an average year.

Okay. Appreciate the color there. And then, Chris, if I could sneak in one last quick one. You talked a little more optimistically about M&A than I think you have in recent quarters. Are you seeing 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?

Yes. So '22, Brett, as we think about the last couple of years, '20 and '21, well, we had a lot, and so we announced the FirstBank Franklin combination in early '20. Pretty much tried to digest that in '20, and it took all of '20, and into '21, we went over the $10 billion 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 as opposed to thinking ourselves as having to grow through going out and acquire. 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. So that's one perspective I would give you.

The second perspective is, we keep a 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 our feeling is that as we look at that very small list that during 2022, 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 the reason we say that it's gotten better for us from a timing standpoint, and we think that it perhaps will get better for others. It's going to be difficult, again, with the interest rate environment. It's not an easy operating environment I think in '22. And so I think that could play into that.

The next question comes from Stephen Scouten of Piper Sandler.

Maybe going back to loan growth quickly. I'm just curious how 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 adds in some of these ancillary markets in the months ahead?

Yes. 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 FirstBank team down there have just been fantastic in terms of fitting our culture and us. It's just been a great match. 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 as 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 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.

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

Yes. Sure. So as we think about M&A, geography is at the top of the list. And really, geography is at the top of the list because operating leverage is at the top of the list. And 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 #6. And I think we're #5 now in Knoxville and about the same in Chattanooga, where we basically didn't have a presence before, as I said, 10 years ago.

And when I say we didn't have a presence, we actually had a location, but we had less than $100 million in each of those markets, again. So we were irrelevant from a market presence standpoint. And so 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. And so we've still got markets in footprint that 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. Going back to your question of Western North Carolina or, say, Northern Georgia, if 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 noninterest-bearing deposit-type institutions; very, very interested in those

And then on what I'll call nonbank -- I'll refer to as nonbank or sort of maybe verticals, we have some interest there. Obviously, that's a way we think of mortgage, it's 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 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 you're selling it.

And that we can create a national -- those product lines for us or those verticals or something that we're interested in, we want to make sure we're 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 in manufactured housing. So that's another factor that we look at. It's something that we intend to be a really significant market player in.

Awesome. That's a fantastic answer. And then just last for me. Do you guys have an update on the expected impact from Durbin in the third quarter?

Go ahead, Mike.

Yes. Third quarter, '22, it's still going to be that same $4 million range, Stephen, for half a year. And so you'd look at about $8 million annualized.

The next question comes from Matt Olney of Stephens.

I want to drill down on the expenses for the bank. I think you mentioned in the prepared remarks, a little bit elevated and there were 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 kind of 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?

Yes. 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, flattish. And that $500,000 related to vesting was really the main peculiarity. And so as we look forward, I would still expect in that same kind of $58 million to $59 million range. Knowing that we're going to take opportunities to hire talent as it comes, a bit in RMs and in 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 and 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, grow on the revenue side of the balance sheet, continue to push down our efficiency ratio.

Okay. That's great. 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 2.55% 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?

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, late third quarter, September, 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 to refinance some of the lenders, which was a boost to volume on the refi side, lowered rates about an 8% and 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 go through the fourth quarter. So a lot of moving parts in there, but housing is still constrained due to inventory and supply, supply chains too.

The next question comes from Jennifer Demba of Truist Securities.

Wondering if you could talk about your priorities in terms of technology investment and spend right now over the next 1 to 2 years, where you feel like maybe you're in line with peers or falling short or ahead?

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 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, in several measures, the leading customer experience in the Southeast and in almost all the measures is quite good. But we think about, first, how can we innovate 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 we very much believe that the industry is really transforming over the next few years. And we're transforming our business at the same time because I think our options are to do that or lose value, and we're not going to do the latter.

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

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

Yes. That's a great question, actually, Kevin, because, again, we've talked about that a lot. And I want to say, first off, deals are hard, okay? And I don't care what size they are. And first option for us would be to hire great people and pay a smaller premium for those folks 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 bigger ones. Franklin and FirstBank, that combination was big, and it was in some ways, particularly in Middle Tennessee, we regarded it as a merger of equals really between those markets, because we totally merged those.

And in the Nashville 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 FirstBank employees. But all that being said, it's going 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 what we look at potential targets, frankly, most of them are smaller than what that would have been for us at that time. One of those -- FirstBank would have been, say, 60% and Franklin Synergy would have been 40%. As we look at those targets that I've mentioned and 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 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, 1/3 your size, it gets really hard to digest.

Great. I appreciate that. And it's been mentioned a few times today, but we hear lots of stories in your reports about supply chain disruption and worker shortages. And 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 is it more of just solely a loan growth headwind? Or is it a potential credit headwind in your mind as well?

Yes, it's not quite as much of -- from my mind, the potential for a credit headwind comes from a shutdown. And so if we have something where somethings got shut down again for whatever reason, whether it's just COVID and we go back into a shutdown status or disruptions from the 2 things you mentioned, either supply chain or labor, those would be the things we would worry about. We see both of those; the supply chain, we certainly see the effects of that, and 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 of 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, 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, I think the labor shortages are going to persist. There's a lot of wage pressure where we are at every level. Even at some of our highest-paid folks. I mean they get offers too. And so it's going to be a difficult -- from that standpoint, those are first-class problems. But there are still things that you have to deal with. And so as we look at it, 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?

Yes. I think relative to the reserve, Kevin, all those things are part of the consideration. We also had eviction moratoriums coming off, 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 those things, that drive a little bit about 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.

Okay. And Chris, you've mentioned -- one last one for me. You mentioned the long-term attractiveness and focus on noninterest-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 upfront versus trying to (inaudible) and get it over a period of years?

Yes. You read that correctly. It's 2 things. It is the long-term view that noninterest-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, 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, okay? And Birmingham would be an example where they certainly don't have as much in deposits as they do in loans, not even close, but that's fine with us for now.

Again, because we're taking that long-term approach and those deposits will come over time, but if we got the opportunity, that's a good example, if we got the opportunity for the right, 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 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% noninterest-bearing deposits. And so we want to get there.

The next question comes from Catherine Mealor of KBW.

Just wanted to follow up, 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?

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. But clearly, this liquidity has been here to stay. So we deployed some there. We also did some 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 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.

Yes. And Catherine, I would just add on the loan side, our regional presidents are very optimistic, very optimistic. When we look at the kind of the pipeline today and we look at '22, 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 loan growth side of the balance sheet.

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 -- you were saying public funds will come in higher this quarter. And can you just remind us (inaudible) what the seasonal fluctuations are of that.

Yes. We saw about $225 million rollout during the quarter, and we'd expect some (inaudible) come back will be higher in the fourth quarter. There's still a lot of funding that has not been deployed from the government. So we expect those balances to increase.

Okay. So 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?

Yes, Yes.

Yes.

The next question comes from Alex Lau of JPMorgan.

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?

Yes. Alex, sure. The competition is king. There are 4,000 banks out there, and I think we all think that's too many. And I joke about this all the time. We've got one market, there are only 2 banks in the market. And every time I talk to them, they tell me it's the most competitive market we got. And so everybody thinks it's competitive. And the fact of matter, it is. But I would say, specifically, one, rate pressure right now particularly 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, in times past, have found concerning. And Greg, you might check me on this. I haven't seen that of late, concerning relaxing of credit. We just pretty much don't relax our credit standards with cycles. Greg, correct me on that. I don't think we've seen relaxing...

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 the growth. But I'm not seeing anything like you're talking about in previous cycles where we'd call it, it's gotten crazy or loose.

Right. We have made that turn of statement on these calls before. We're seeing crazy things. We're seeing loose things. But we haven't seen that, frankly, this time. And I 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 2 at the lowest pricing terms we've ever priced. And frankly, every one of that we've done now, we haven't won a single one. And so somebody is bolder than we are there. So... I hope that answered your question.

Yes, it does. And on the potential reserve releases, on the allowance ratio of 1.91%, so as economic conditions improve, do you have a range that you see that normalizing towards?

I'll give you a couple of references. If we go back to FirstBank stand-alone and Franklin stand-alone before the 2 companies got together, FirstBank stand-alone was in the 1.10% to 1.20% in terms of a reserve as a percent of loans. I think around 1.20%, I think, is a reserve allowance to loans. And keep in mind, that was pre-CECL. And Franklin, I think was a little higher than that because they have a real estate concentration and so it would naturally be a little higher. And so if they were at say, 1.50%, I would think it would be somewhere probably between those. But again, post-CECL, I can remember, so we've had a significant combination of 2 institutions. And we've added CECL in there. So we think it's somewhere probably in the, I'll call it, 1.30% to 1.60%, something like that probably.

And just last one on your mortgage efficiency ratio of 80%. How do you think about that ratio going through year-end?

Yes. I mean that 80% in the third quarter, obviously, it was at about $8.9 million contribution. So from a $1 million to $4 million, you think that, that push in low 90s. But really, I think as we've said for, Alex, our target in the mortgage space, 80%, 85%, in that range. And so for the year, I think we'll wind up right in that targeted efficiency ratio.

The next question comes from William Wallace of Raymond James.

I just had 2 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?

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.

That's kind. Yes, it's going to take a couple of quarters. I don't think you'd see it happen overnight. Certainly, there's a lot of moving parts relative to the model, quantitative versus qualitative. But I would expect over the next 2 to 3 quarters, you'll see we'd return to that range.

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 margin and take 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?

Yes. So I think there's 2 factors working in '22. One is continued addition of growth in the loan portfolio and taking up some liquidity there. So I think you could see some margin expansion from that. But the bigger margin expansion of things comes when we get a rate increase, because we've got about $2 billion of adjustable rate loans that would adjust with a rate increase. And so I think the bigger expansion comes when that happens. And until either of those -- as we add incrementally on the loan growth, actually, you could see a little bit of expansion. But we generally are going to bounce around the same margin where we are in a band that doesn't move up or down very much. We still probably, over the next couple of quarters, we'll get a little bit of what we think anyway. We think we'll get a little bit of reduction on the cost side, but it will be less than probably what we've got in the previous 2 quarters. And so we think that keeps it -- 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 up, as those rates move up, we'll move up with them on the mortgage side.

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

Yes.

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

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

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