Q3 2021 FB Financial Corp Earnings Call
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Okay.
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Good morning, and welcome to the FB financial Corporation's third quarter 2021 earnings conference call.
On the call today from FB financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mcmurray, Chief Financial Officer.
Greg Bowers, Chief Credit Officer, and with 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 Dot first bank online dot com and on the Securities and exchange Commission's website at Www Dot S E C.
<unk> Dot G O V <unk>.
Today's call is being recorded and will be available for replay on the SB Financial's website, approximately an hour after the conclusion of the call.
At this time, all participants have been placed in a listen only mode.
The call will be opened for questions. After the presentation with that I would like to turn the call over to Robert Cohen Director of corporate Finance. Please go ahead.
Thank you.
During this presentation FB financial May make comments, which constitute forward looking statements under the federal Securities laws.
All forward looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB financial.
To differ materially from any results expressed.
Or implied by such forward looking statements.
Many of such factors are beyond FB financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward looking statements.
A more detailed description of these and other risks is contained in FB financial's periodic and current reports filed with the SEC, including FB financials.
<unk> 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.
<unk> regulation.
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 dot.
First bank online dot com and on the SEC's website at Www Dot <unk> Dot Gov.
I'd now like to turn the presentation over to Chris Holmes, FB Financial's, President and CEO.
Thank you Robert and good morning, and thank you for joining US. This morning, we appreciate your interest in FB financial.
Uh huh.
We had a solid quarter as we delivered annualized loan growth of 8% when you exclude PPP loans.
Adjusted EPS of <unk> 89 cents adjusted return on average assets of 114% adjusted return on tangible common equity of 15% and we grew our noninterest bearing deposits.
That's about 20% annualized.
Growth continues to be evident across our markets. We receive news this quarter that Ford is investing back one $6 billion in an electric vehicle manufacturing hub it.
At Assai Midway between Memphis, and Jackson, Tennessee, and West Tennessee.
This investment will create 6000 direct jobs in West, Tennessee, and the state estimates are that in total towards 27000 jobs will be created to support the site.
First bank is well positioned to capitalize on an incurred on the increased economic activity that will come to west Tennessee.
By our estimation, where 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 and Memphis, They continued to deliver good results.
In Nashville, the economic activity continues to roll and is becoming a technology hub. In addition.
Our traditional strengths in health care Entertainment and hospitality.
And we are just recognized in second uniform.
Tennessee benefits from decades of strong business friendly leadership from our elected officials and it's exciting to be at the center of what has become a magnet for economic development.
And two we believe we.
We have the relationship managers and the infrastructure in place to capitalize on that economic environment eight.
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 about our regional presidents are telling me that they expect.
Strong activity for the fourth quarter, so a double 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 are pleased with our 20% noninterest.
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.
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.
<unk> by an additional five 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.
Just in 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 to anywhere from one 1 million to 4 million contribution.
In the fourth quarter.
Asset quality continues.
I'm proud of what our nonperforming and nonaccrual statistics materially declining this quarter.
Nonperforming loans to loans down by 24 basis points nonperforming assets 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.
It resulted in a slightly higher net charge offs at 13 basis points as well as.
Or what are the half million dollars reversal of non interest income as a swap on the credit was ugly.
The overall credit environment is favorable right now what our markets are effectively operating normally despite the COVID-19 activity.
And our footprint experienced during the summer we saw slight ACL released this quarter as a result of the approved improving economic conditions and forecasts, but we've consciously 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 in.
<unk> first.
Assuming that forecast continue to improve and it will survive the changing of the seasons without material shut downs or changes of behavior in our markets and we would expect more sizeable releases to follow in the next few quarters.
On a related note we saw positive momentum with the disposition.
Of our non core institutional portfolio.
We have just over $100 million of exposure remaining in there and would expect that to continue the clad as credits mature and refinance out of the bag, we're still marketing portfolio and would accept the right bid.
But we're down to nine relationship.
<unk> chips 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 even after that.
5% range.
With.
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 kept our toe in the water or buyback this quarter, but with the bad bank valuations rebounding shortly after our trading window reopens.
We.
For tower at less than $1 million worth of shares.
Our second priority for the capital deployed behind organic growth is accretive.
Merger and acquisition activity.
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 for board is talent customer return.
Ultimately, it's going well.
As we look towards future mergers, we're targeting similar characteristics to our Clayton Atlantic capital Franklin synergy combinations.
For partners that will provide additional density across our footprint as well as Phil.
Filling open market within Tennessee, and transactions that provide financial returns that support.
Disc 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.
Theres nothing eminent but we believe that the current dynamics support further consolidate the consolidation as possible that we could have M&A activity in 2022.
The risk so to summarize we had a good quarter of loan growth.
As our strong team of relationship manager continues to capitalize on the economic activity of our footprint.
We expect that growth to continue over the remainder of 2021 and into 2022 mortgages did very well and outperforming our previous expectations, but we expect them to come back down to Earth.
Fourth quarter due to the seasonal behavior of the mortgage.
We're building capital quickly, but M&A activity as possible and with rebounding bank valuations were likely to use as much capital.
We're not likely to use it.
Much capital in our buyback in the near term.
I'll now turn the call over to Michael Walsh, our CFO to discuss our financial results as for detail. 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 our Q2.
<unk> 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 margin stabilized quarter over quarter payoffs slow in our servicing book and higher servicing revenue all leading to outperformance.
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.
Chris mentioned, our best estimate for contribution is 1 million to 4 million indirect contribution from mortgage in the fourth quarter.
Moving on to net interest margin, we saw a headline number remained essentially flat.
Flat at three 2% in the third quarter compared to $3, one 8% 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 account and they've gotten results.
I would expect some additional decline on our cost of interest.
It is already accounts in the coming quarter or two but the month of September was at 33 basis points versus 34 basis points for the quarter.
Paying a bit of a plateau, there and I would expect more measured improvement going forward.
As Chris mentioned, we did epic's app and Remixing, our deposit portfolio this past quarter with noninterest bearing deposits increasing.
Interest bearing with 25, 9% of total deposits for 24, 4% in the second quarter.
<unk> will remain a focus going forward and our next goal is to move that number to 30, 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.
<unk> $225 million this quarter.
Our contractual yield on loans dropped by 13 basis points during the quarter from 437% in the second quarter to $4 two 4% in the third quarter.
We are encouraged that yield on new originations in the third quarter held in that same three 8% up to three 9% range.
If appropriate for the second quarter.
However, with that still being below the $4 two 4% 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.
We immediately.
We continue to manage excess liquidity in part by increasing allocation to the securities portfolio or.
Our securities portfolio increased by $168 million in the third quarter.
The average yield on purchase securities during that quarter. It was approximately 133%.
Interest rates were volatile during the quarter with it.
Our 10 year U S treasury swing as much as 36 basis points.
We expect interest rate volatility to continue as monetary and fiscal policy are adjusted from the significant responses to the pandemic.
Given that volatility will continue to invest in securities that do not exhibit excess duration risk while still providing an.
Benchmark increase of interest income.
In the absence of rate increases, we would expect the margin to stay on 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.
Upon the Cds continue to reprice and as our relationship managers focus on growing noninterest bearing deposits <unk>.
Liquidity will be slightly volatile quarter to quarter as public funds interact with the bank and we will continue to strategically deploy excess liquidity into better yielding assets in order to grow net interest income.
Moving to sito.
Overall as Chris mentioned at $2 5 million are released with smaller this quarter than the prior two quarters.
Economic forecast continue to dictate lower reserves relative to the quantitative portion of our seasonal model.
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.
And then our footprint continues they have after everyone may have endured for the season, but we will 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 'twenty one in 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. Two 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 500000.
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 again.
Our commercial loans held for sale portfolio of 740000, and a loss on the unwind of a swap of $1 5 million.
Netting those three items out the banking segment noninterest income would've been $12 4 million for the quarter.
I'll close my section speaking to this quarter's taxes as there were 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 best thing 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 alright.
Alright, Thank you Michael.
And I appreciate that color.
We're pleased with our results for the quarter and we're particularly proud of our team for the loan growth the non interest bearing deposit growth in the mortgage outperformance.
Includes our prepared remarks and Andrea at this point, we'd like to open the line for questions.
We will now begin the question and answer session. You asked a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
[noise] [noise] and our first question comes from Brett Robinson of have decrypt. Please go ahead.
Hey, good morning, everyone.
Morning, Brad.
Wanted to first.
First ask the loan growth was obviously nice in the quarter and in the prepared comments you talked about possible returned to 10% to 12% maybe you could could you give us a little more color around the C&I growth in <unk> and if that's where you expect the bulk of the growth to come from here and what Youre seeing is that market share movement or is that.
New client additions is it activity from new customers, where is that growth coming from.
Yeah Brad.
So.
Uh huh.
The growth has pretty much come across all of our product types.
If you look over.
The last two or three orders, it's been kind of all of our product types. We did have more group during this particular quarter in C&I.
Than any other product type and so we glad to see that.
Expect to continue to see that grow I don't know that it will continue to be the leading product type.
But we we expect to continue to see that we have not seen our land utilization return to where it was.
In the last two quarters of 19, we were we were closer to.
Call it a 50% utilization.
If you average the last two quarters.
Orders of 19, and then you look 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 higher than it was but it's still not high.
Until then we expect to see that.
Over the next several quarters.
We think C&I will continue to be.
Strong we've seen.
We have seen good CRE growth as well good growth in residential construction.
And we've seen new customer acquisition.
So it's been a combination in AG, we can't pinpoint any one thing.
And I would say.
I always think about the rate at which our markets are growing and we're growing our loan balances.
You know for the most part either high single digits or low double digit that's still going to be a little faster than you know our markets are growing so there is some.
Some share that's coming with that as well. So so it's a so so it's a combination across all product types and I can't give you one and I would say is as a negative.
And it's a combination of existing customers, but theres also we're picking up new customers as well.
Okay.
Okay.
The color there and then mortgage you know the guidance for the fourth quarter, maybe a bit of a tough question, but as you guys think.
Longer term, where do you see mortgage normalizing would it would be a higher level than 2019 because of investments you've made in the pipe.
Form or can you maybe give us some thoughts on how you see mortgage.
Trending you know as things get back to normal assuming so assuming that happens at some point.
Yeah, Brad I think wherewith mortgage normalized 510% to 15% of contribution of is where it typically will play out.
Been in the low rate environment, we've been in 2022 is kind of a.
Our hard at kind of a crap shoot at this point if you look at the MBA, Fannie and Friday, they're predicting volumes to be down fairly significantly we would expect to outperform that.
But we certainly would expect a J.
At 10 to 15.
15% number which is traditionally what we've targeted.
In 2020, two is a pretty difficult difficult year to forecast we talked about.
Really quite a bit about how to forecast 2022, and it's a particularly difficult year to forecast.
Bret and for Us and I think for everybody else because even if you look at.
Has that are out there they're not they don't all lined up for volumes and then we'd probably take a slightly different than even even most of the forecast out there. So.
It's we target.
Somewhere between 10% to 15%, we won't mortgage we want them to do as well as we can.
And maybe as much as we can.
Typically that's where it comes in for US I would just as cycles or the average here.
Okay.
I appreciate the color there and then Chris if I could sneak in one last one last quick one you talked a little more optimistically about M&A and then I think you have in.
In recent quarters are you seeing.
We pick up in and talks with potential.
Acquisition targets, you know maybe give us if you go to any flavor for how you expect 22 to shape out from an M&A perspective for you.
Yeah.
So 22.
Uh huh.
As we think about the last couple of years 2020 one.
Well, we had a lot in and so we announced the Franklin combination first bank Franklin combination in early 'twenty.
Pretty much tried to digest that in 'twenty and it took all.
All of 'twenty and into 'twenty. One you know we went over the $10 billion.
Asset threshold.
With that transaction and so that has also taken.
<unk> 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 the on our company and so as opposed to thinking of ourselves as having to grow through borne out and acquire and so we've been focused on that and we feel.
Pretty good about where we are with that and we think it's showing through in the numbers, particularly in our part of our organic numbers.
So.
We're we're more open to talk about that and so that's one perspective I would give you the second perspective as well.
So we keep a pretty targeted.
Uh huh.
We keep a targeted list of things that we're interested in.
And it's as much rely.
Rely on.
Those that were interested in as it is on.
US just out trolling the market actually it's much much more reliant on those that were interested in rather than us just saying hey, the doors are open for M&A were quite strategic on that and so.
You know our feeling is that as we look at that very small less than that.
During the 2022.
We think that there could be could be a warner.
One or even more and more of those that would come to us and go Hey, we think it might be a good time to have a kind of 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.
And perhaps we will get better for others, it's going to be a difficult to again with the interest rate environment. It's not an easy operating environment I would think in 'twenty, two and so I think that could that could.
Could play into that.
Okay great.
Great appreciate all the color.
Sure. Thank you for being on the call.
The next question comes from Stephen Scouten of Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Good morning, David.
Maybe going back to loan growth quickly I'm just curious how the.
Eamonn Birmingham has been performing I think maybe it was $40 million that you referenced last quarter. They contributed just continuing to.
It's a question how that how that is shaping up and if you think there could be additional team adds and some of these ancillary.
Markets in the in the months ahead.
Yeah, So I'll say.
We have been really really pleased with.
Birmingham is a market with our folks in Birmingham.
And the reception that that they have.
Ancillary.
We have gotten in the market has been really.
Really humbling for us it's been really good in the.
The folks that we've been able to.
Get the first bank team down there have just been fantastic in terms of fitting in our culture and us.
It's been.
Got it.
They have <unk>.
Actually when we talk about where they were last quarter. There was almost double that again, so they're in the mid seventy's 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.
Great Man.
We're continuing to.
Talked to other folks down there, but back joining that team. We don't want to get ahead of ourselves, but we can we're continuing to talk to some of their other folks as well so.
We couldnt be happier with the way it's gone up.
At this point.
And our.
The pipeline.
Actually is.
As.
Is it maybe even more encouraging than what I. Just gave you. So we've been very very pleased.
That's great that's great, Okay and on the M&A front I think last quarter, maybe you had referenced western North Carolina.
Areas, maybe that were.
Slight extensions to your existing footprint is there any when you when you look at that list of banks you spoke to that that you would.
Targeted list is there any specific geographic focus that you guys would prefer to move into currently or or are there even product expansion or extensions that you would look to especially given the.
And some uncertainty around mortgage or could you give us a deeper feeling ideology around potential M&A.
Yeah.
Sure.
So.
As we think about M&A.
<unk>.
Geography is at the top of the list.
Got it.
And really geographies at the top of the list because of 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.
Right at I think we're number five now in Knoxville.
And about the same in Chattanooga, where we basically didn't have a presence before and so.
<unk> as I said 10 years ago.
And so.
And so.
When I say, we do have 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 get we'd 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 mortgage in footprint that would be.
We don't have as much operating leverage we are not creating as much operating reputation we'd like and so that's part of our M&A strategy.
As to.
To continue to improve our profitability through that and so.
And so for that reason, we look in and around our footprint a lot of times that going back to your question of Western North Carolina, or say northern Georgia.
A lot of times, we will get a market extension.
For instance, we could it could be.
An institution that has a presence in lets say east, Tennessee and Western Carolina.
We would be interested in that.
And so we would tend to think of our market extension being something that.
Yes.
Partnering with an institution that.
Presence in our geography, but it draws us into in contiguous geography, and so that's really the way we think about bank M&A. We also think about culture, obviously, and we think a heavily about the deposit side of the balance sheet very very interested in the legacy non interest bearing.
Deposit type.
It Hasnt petitions are very very interested in those.
And then on.
What I'll call non bank I'll refer to as non bank or sort of maybe verticals, we have some interest there.
Obviously, we have what we think that's the way we think of mortgages.
<unk> to go up.
Vertical we.
More and more think of our specialty lending group our manufactured housing group in the same way that that group is performing really well and so if we could.
If we came across.
A vertical like that we would that was.
Really line had a particularly good yield we love assets that we can even either portfolio or sell into the market like both of those we have the option of either portfolio you're selling it.
And that we can create a national.
Product lines for us are those vertical.
Those are something that were interested in me in.
We want to make sure we're competitive and those with any more than competitive we will make sure we're able to win against any competitor in those spaces, which we do in both mortgage and the.
And the manufactured housing so that's another factor that we look at it as something that we intend.
Tend to be a really significant market player in.
Awesome, that's fantastic answer thanks, Chris for all the detail and then just.
Last for me do you guys have an update on the <unk>.
Did impact from Durbin and in the third quarter.
Great.
Third quarter 'twenty two it's.
Article that same $4 million range Steven.
Perhaps a year until you look at about $8 million annualized.
Got it okay. Thanks, Mike I appreciate the color guys.
Thanks, David.
The next question comes from Matt Olney of Stephens. Please go ahead.
Thanks, Good morning, guys.
I wanted to drill down on the expenses for the bank I think you mentioned in prepared remarks.
And there was some unusual items I think it was the stock grants from the IPO explained a portion.
It seems like there was something else in there it was well versus your original expectations. So any more color on that from the third quarter and then an outlook here and in the fourth quarter and into next year as well.
Yes.
The reality or the oddity was around the IPO.
And the best thing.
We were expecting flat quarter over quarter kind of second to third flattish.
And that $500000 related divesting.
What was really the main peculiar.
[laughter] peculiarity.
And so.
As we look forward I would still expect that same kind of $58 million to $59 million range.
Knowing that.
We're going to take opportunities to hire talent.
As it comes bid in RMS and some of these areas Chris mentioned going over 10 billion. There are investments that we're making there to continue.
You too.
Strengthen the bench and strengthen our.
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.
Youll see some expense in there but.
Efficiency.
<unk> wise, we look to continue to become more efficient.
On the revenue side of the balance sheet continue to push down our efficiency ratio.
Okay. That's great. Thank you for that.
And then on the mortgage front I wanted to circle back there and drill down a little bit more on the near term outlook.
I'm trying to.
The dynamics between both the margins and the volume I think there is 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.
Appreciate margins really hung in there.
Last couple of months, we've been pleasantly surprised with that even if capacity is kind of a return to the mortgage space.
We saw volume start to slow there in the third quarter.
Third quarter September ish, which is kind.
That's too.
Sure.
I kind.
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 yeah.
Inventory would increase and we get some momentum.
A leading <unk> that typically hadn't been there I would still at this point, we're not seeing a whole lot of that in our markets.
In the third quarter as well.
<unk>.
Gabe gave back a refi incentive to lenders, which was a boost of volume on the refi side.
<unk> writes about at night, and say you saw a pick up in our refinance percentage from 58% to 66% from that and so that's.
That's all fully priced into the market you would expect that to kind of tail down as we got through the fourth quarter.
So a lot of moving parts in there but housing is still.
<unk> constrained.
Due to inventory and supply supply change too.
Yeah.
Yeah.
Okay. That's all for me thanks, guys.
Thanks, Matt Thanks, Matt.
The next question comes from Jennifer Dunbar of Truth Securities. Please go ahead.
Good morning.
Good morning, Jennifer.
I'm wondering if you could talk about your priorities in terms of technology investment and stand right now.
It's one where you feel like maybe you know inline with tears Oh, sorry go ahead.
Yeah. So.
We spent a lot of time in.
And dialogue.
Internally around that very thing.
And.
And when we look at it.
As we're really thinking about innovation there.
<unk> taken it through it where there are with some of our folks and have them really focused on that.
And we are actually making some changes to create.
Even more intense focus on that.
And we've done a couple of things with a with a couple of investments also.
Oh, a small handful of investments in that area, but when we think about it.
We think about first customer experience.
Our our research, which is third party research says that we have a.
A leading customer in many may in several measures the leading customer.
Experience in the South East.
And some but.
Almost all of the major 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 what can we how can we be applying technology to improve the.
The efficiency.
Of the company and so we're.
We have active dialogues with several fintech companies.
<unk> also with several fintech investors and like I said, it and we are an active investor in a in a few ways there so.
It is.
We are.
Yes, we are.
Very much believe that the industry is really.
<unk> transforming over the next few years and so we are.
Sure.
But transforming our business at the same time, because you just said that.
I think our options are to do that or lose value and we're not going to do the latter.
Thank you.
Okay.
The next question comes from Kevin Fitzsimmons of D. A Davidson. Please go ahead.
Hey, good morning, everyone.
Good morning.
Chris it's been up a hand.
Handful of questions on M&A.
Okay I just wanted to ask was.
You know coming out of the Franklin synergy experience seems large deals complicated deal took a while.
Do you feel.
More confident and more emboldened to go with like a larger bank transaction like that where do you think your appetite.
One is going to be more it's going to be more of a fit for you know more digestible traditional type deals in your view.
Yeah, that's a great question and actually Kevin because we again, we've talked about that a lot and.
And I Wanna.
St.
I think first off.
You know deals are hard.
I don't care, what what what size they are.
First option for us would be go hire great people.
And in pay a smaller premium for those books, and you know and be able to to.
Be a little more selective with where with it with.
Those investments until we love doing that we can get the opportunity to make some some bigger ones.
Franklin and first bank that combination was big and it was in some ways, particularly in Middletown C. We regard it as a merger of equals really between those markets.
St totally merged those in.
And.
And in the Nashville market the market now has more.
If you looked at the total employed in.
In Middle Tennessee, there more legacy.
Franklin synergy and poised and legacy birthday employees.
But all that being said.
It's going well, we retain the customers we retained the the folks and and on both sides by the way.
And.
And not only have we retained them Theyre ahead of budget. So it's.
But.
So it's hard and as we look at.
Ed.
Going back to what we when we look at potential targets frankly, most of them are smaller than what that would've been for us at the time that the that the.
You know one of those games first bank would have been say, 60% Franklin synergy would've been 40%.
Look at those targets that I mentioned and there's there's one 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 we would opt for not only because that's the specific target list, but that's just execution really that's what we would opt for it.
Uh huh.
I think once it gets.
Much bigger than say I don't know.
A third of your size it gets really hard to digest.
Great I appreciate that.
It's been mentioned a few times today, but.
Lots of stories and he reports about supply chain disruption and worker shortages and and you know.
<unk>.
The good fortunate to be operating at very healthy markets, but can you kind of speak big picture about.
What how much of a concern that is whether you think it's.
It's something that's very temporary or could persist for a while I don't know if this falls into the camp of those things you're watching and why you're not taking the reserve down as aggressively as you probably could have this quarter and just.
Is it more just solely a loan growth headwind or is it a potential credit headwind in your mind as well.
Yeah, its not quite as much of it.
From my memory and the potential for a credit headwind comes from shut.
<unk> down and so you know if we have something where.
Some industry got shut down again for whatever reason whether it's.
Just COVID-19.
And we go back into them.
Shutdown status or.
Disruption from the two things you mentioned either supply chain or labor.
Those would be the things that we 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.
Cost of have absolutely gone up rents have gone up in the commercial space cost of housing is going up in the residential space.
And the cost of living and in our largest market of Nashville.
Going 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 think that I don't mean next month.
But I think it's I think it begins to normalize because the forces of capitalism tend to take over their intend to really kick in and so I think they do normalize.
Sooner versus later the labor shortages you know.
Oh, I'm going to speak regionally and locally.
As opposed to nationally.
The labor shortage is very real.
And we live in in a very attractive spot that's attracting as much in migration is is any spot in the country.
And so I don't think the labor shortages I, just I just talked about Ford come in 'twenty.
<unk> 7000 jobs being created in the western part of our state, which has been the slowest growing part of our stake, but the middle being the highest growth of the east being also a high growth area.
You know I think the labor shortages are going to persist.
Lot of wage pressure, where we are.
At every level.
Even.
At some of our.
Highest paid folks I mean, there's there's they they they they get offers too and so.
It's gonna be a difficult from that standpoint, those are those are first class problems, but from that but.
But those are but there are still things that you have to deal with and so as we look at it.
That's what we that we see we do see the labor shortages are probably being the biggest issue right now in our markets.
Fly chain being also.
An issue, but like I said.
I think it will resolve itself.
Alf sooner versus later and Ah, but in general the market. So like I said we're.
It's because of the growth and the attractiveness of the area. We're in like what would you add anything to that.
I think with relative to the reserve Governor.
All of those things are part of the considering.
We also had the eviction moratoriums coming off yet.
PPP loans being forgiven and said there was a little bit.
Especially earlier in the quarter with Delta it's been dealt with.
And what impact that would have on businesses with labor with all of those things.
Our action.
That drove a little bit about the hesitancy.
Hesitancy.
To get too aggressive there, but but do expect that to kind of abate a little bit of concern around inflation, and Chris mentioned home prices and wage and there.
We're certainly seeing price increases across the board.
Board.
And the impact on the economy.
The wait and see at this point.
Okay, and then Chris you you've mentioned.
One last one for me you mentioned the long term, there's some focus on.
Noninterest bearing deposits.
So you're looking at institutions now one could say well why not go out into attractive markets and higher 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.
That's it.
Having what you have today and that May proceed at some point and you'd rather go in the traditional way.
Get the deposits right upfront versus trying to claw and get it over a period of years.
Yeah. It's yeah, you you read that.
Correctly, it's two things it is the long term view that noninterest bearing deposits are very attractive and we will always be attractive.
And so we think about.
Whats driving what were targeting a 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 arm, but but in our mind in relationship to the relationship that comes with the primary operating account is very valuable to us long term and those are the those are the <unk>.
One we want.
And.
And.
And so that's that's that's what we mean by that we are doing some hiring of loan officers to get loans on the balance sheet, Okay and so we are.
Birmingham would be an example, where we you know that certainly they certainly don't have as much in.
And deposits as they do in let alone not even close but that's fine with us for now.
Again, because we're taking that long term approach and no deposits will come over time, but if we got the opportunity. That's a good example, if we got the opportunity for the REIT.
Call It legacy community bank in those.
In and around those markets it'd be one we'd be very interested in and we bring on those.
Operating account relationships sooner than we would bring them in just organically growing them I'm very envious Kevin of theirs.
<unk> that have that fund there.
One portfolio with 40.
40% noninterest bearing deposits and so we want to get there.
Got it okay. Thanks, Chris.
Alright, Thanks, Kevin.
The next question comes from Catherine Mealor of K B W. Please go ahead.
Thanks, Good morning.
Good morning.
Catherine.
Just wanted to follow up just as we model the margin and the balance sheet, how how to think about the deployment of excess liquidity 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.
Do you plan to put there versus them.
Strong loan growth.
Hey, Catherine it's Michael I'll take the Microsoft part.
The.
Our target has been at 13, 35% range of total assets.
Earning assets so we're actually right in that range came.
Came a little bit Cui.
Quicker, we were kind of looking at year end.
But clearly this liquidity has been here to stay so we just we deployed from there we also.
Some some repo reverse repo transactions that are short term in nature and dips.
Deployed some liquidity.
Quiddity, there as well.
And their 30 day paper, so that that helped a little bit I don't think you'll see material growth above.
This 13% 13, 5% range.
We preferred loan growth as we mentioned, we think that there's a strong opportunity there.
And we have a lot of opportunity in our markets.
That's what we'll likely deploy.
Yeah.
Kevin I would just add on the loan side.
Our regional Presidents our R. R.
I'm very optimistic.
I'm very optimistic when we.
When we.
When we look out into 'twenty two when we look at the.
Kind of the pipeline today, and we look at 'twenty two.
Where we are.
I mean, we're not having to coax them up when we're thinking about targets for 2022. So so.
And so for that reason we feel.
Better about.
About the outlook.
For the loan growth side of the balance sheet.
Okay understood and then on the.
It does.
Ah seasonality of the public funds I think he mentioned this in your prepared remarks, Michael can you remind us.
You were saying public funds will come in well come in higher this quarter can you just remind us how can you live with the seasonal fluctuations on that.
Yeah, we saw about $225 million roll out during the quarter and we'd expect them to her.
Some version of that come back there'll be higher in the fourth quarter.
Yeah.
There's still a lot of funding that has not been deployed from the government to we expect those balances to increase.
So you'd think excess liquidity could actually increase a little bit next quarter before we see that more deployed next year into long grass is that a fair way to think about it.
Yes.
Yep.
Okay, perfect Alright, great Thats, all I got thank you.
Thanks, Kevin.
The next question comes from Alex Lau of J P. Morgan. Please go ahead.
Hi, good morning.
Good morning, Alex.
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.
Yeah.
I'm sure that the.
Our competition is king.
It's.
<unk> there are 4000 banks out there and I think we all think that's too many.
It's a.
Joke about this all the time, we got one market.
That has two there are only two banks in the market and you know every time I talk to them. They tell me, it's the most competitive market we got.
Uh huh.
Everybody thinks it's competitive and in fact matter it is and so so but I would say.
Specifically one rates rate pressure right now is particularly is more competitive than what we see on credit structure.
At sometimes.
And so at times like this.
There are occasionally in times like this you will see.
Yeah.
You'll see relaxing of credit standards that we find we have at times past have found concerning.
And Greg you might check.
Sometimes on this I haven't seen that of late.
Concerning relaxing of credit, we just just pretty much don't relax our credit standards.
<unk> cycles, and so we haven't.
Craig will then I don't think we've seen crinone.
Youre right I mean, I think I think it is very competitive.
Check me up 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 when.
Previous cycles, where we'd call it you know and Scott.
Crazy or loose right.
We have made that statement on these calls before we were seeing crazy things, we're seeing and lose things were just wait.
We haven't seen that frankly this time, so I think that's a very good thing we are seeing brutal rate pressure, okay, we're seeing brutal right back pressure.
We are.
We have priced a competitive deal or two.
The lowest.
Price the lowest rate term.
Terms lowest pricing terms, we've ever priced and frankly every one of them that we've done that all we had more of a single one. So so somebody is a bolder than we are there so.
Thanks for the color.
Yes. It does thank you and then.
And on the Patel.
So reserve releases.
On the allowance ratio of 191, so as economic conditions improve do you have a range that you see that normalizing towards.
Huh.
Uh huh.
I'll give you.
A couple of references.
If we go back to.
First bank and stand alone and in Franklin Standalone.
Before the two companies got together first bank Standalone was in the 110 to 120 <unk> in terms of our reserve as a percent.
That alone I think around 120, I think is a reserved.
Reserved for it.
Allowance to loans.
Keep in mind that was pretty seasonal.
And frankly, frankly, I think it was a little higher than that because they they have a real estate.
Concentrate or they they have a higher real estate concentration and so it.
Naturally.
Be a little higher and so if they were to say 150, I would think it would be somewhere in that somebody somewhere probably between those.
But again post Cecil.
And remember we had so we've had a significant combination of two institutions and.
And and so where and we've had I've added Cecil in there. So we think it's somewhere probably in the one I'll call. It a 130 to 160 something like that probably.
Thanks, a lot for that.
And just a last one on your mortgage efficiency ratio of 80%. How do you think about that ratio going through year end.
Yeah, I mean, 90% in the third quarter.
You know obviously was at about $8 9 million in contributions from them.
4 million, you would think that that pushing low 90, but really I think as we've said for Alex or our target and that in the mortgage space 80, 85% in that range and so for the year I think we'll wind up right in that that targeted official.
Efficiency ratio.
Wonderful thanks for taking my questions.
Thank you all right we appreciate Alex.
The next question comes from William Wallace of Raymond James. Please go ahead.
Hi, Thanks for taking my questions I just had two quick follow ups.
On the on the commentary that you just gave on the reserve.
Reserves to loans.
Whenever we get to the point, where you guys feel comfortable that we won't have a.
A rebound or bounce back in in Covid pressures and you decided to start loosened.
Loosening up those two factors how how quick would you anticipate we might get to that one.
<unk> hundred 30 to 100.
60 range that you anticipate you could send a lot of that.
Yeah.
Yeah, that's a tough one Michael so I'll, let you visit.
Michael runs that process, so I'll, let him talk about that.
I understand.
Yes.
Yes, it's going to take a couple of quarters on it I don't think you'd see.
Happen overnight certainly there's a lot of moving parts.
Relative to.
The model and the quantity of diverse qualitative.
But I.
I would expect over the next two to three quarters, you'll see.
If we're.
Thanks.
That's helpful. Appreciate that and then just.
Just maybe trying to put a bow on the margin commentary. So so what I hear you, saying is that the pipeline.
Growth is promising the conversations as you were budgeting for next year.
Our promising when you think about loan growth so.
If we look at net interest margin.
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.
We will offset that and we could see on a core basis margin contraction.
Yes.
So I think there's two factors at work in 'twenty two.
Two.
One is.
Continued addition.
Growth in the loan portfolio.
And in taking up some liquidity there. So I think you could see.
Some margin expansion from there, but the bigger margin expansion of things.
I.
Think comes when we get a rate increase and because we've got about $2 billion of adjustable rate loans.
Just with the rate increases so I think the bigger expansion comes with that with that happens and so.
And until either of those.
Yeah.
We added incrementally on the.
On the.
Loan growth.
So you could see a little bit of expansion, but we generally youre going to bounce around the same margin, where we are without you know in a band that.
Does it move up or down.
Much.
We'll get a little bit of reduction on the cost side, but it'll be less than probably what we got in the previous two quarters.
And so we think that keeps it.
As long as rates kind of bounce around where they are.
Barry keeps us relatively flat, but my position to move up as rates are.
That drive our adjustable loans up as those rates move up or move up with it.
On the margin side, okay. So 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.
Thank you Wade.
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 F B financial and we look forward to.
Another quarter or next quarter or hopefully great results like.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.