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Fb Financial Corp (FBK) Q3 2021 Earnings Call Transcript

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FBK earnings call for the period ending September 30, 2021.

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Fb Financial Corp (FBK 0.64%)
Q3 2021 Earnings Call
Oct 19, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. 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 Hoehn, Director of Corporate Finance. Please go ahead.

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Robert Hoehn -- Director of Corporate Finance

Thank you. During this presentation, FB Financial may make comments which constitute forward-looking statements under the Federal Securities laws. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. 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.

Chris Holmes -- President and Chief Executive Officer

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 in 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 would be created to support the site.

FirstBank's well positioned to capitalize on the increased economic activity that will come to West Tennessee, as by our estimation, we're number one market share in that part of the state, including third market share in Jackson and we've got a very strong commercial team in Memphis, that continues to deliver good results. In Nashville, the economic activity continues to roll and is becoming a technology hub, in addition to our traditional strengths of healthcare, 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 it's exciting to be at the center of what's become a magnet for economic development.

We believe we have the relationship managers and the infrastructure in place to capitalize on that economic environment. 8% loan growth this quarter is in line with our guidance. We continue to believe that high single-digit growth is a good target for us for the year. But our regional presidents are telling me that they expect strong activity for the fourth quarter. So, a double-digit annual number is not out of the question for 2021. If trends continue as they have, we would expect to return to our typical 10% to 12% annual loan growth for 2022.

On the liability side of the balance sheet, we're pleased with our 20% non-interest bearing deposit growth during the quarter. Even when the world is awash with liquidity, we placed 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 pre-tax contribution. That was an outperformance compared to our guidance for the third quarter as refinance volumes and margins performed better in August and September than we anticipated during last quarter's call. Early results in October have been fairly volatile, so our guidance range will be a bit wider this quarter, our best guess at the moment is anywhere from $1.1 million to $4 million contribution in the fourth quarter.

Asset quality continued to improve with our nonperforming and non-accruals statistics materially declining this quarter with non-performing loans to loans down by 24 basis points, non-performing assets to total assets down by 16 basis points. The improvement in our metrics was driven by a $14 million non-performer leaving the bank this quarter, which resulted in a slightly higher net charge-offs at 13 basis points, as well as a $1.5 million reversal in non-interest income as a swap on the credit was 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 slight ACL release this quarter as a result of the improving economic conditions and forecasts, 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 season without material shutdowns or changes of behavior in our markets and we expect more sizable releases to follow in the next few quarters.

On a related note, we saw positive momentum with the disposition of our non-core institutional portfolio with 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 nine relationships and the quality of the remaining loans are strong and 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 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 with buyback this quarter, but with the bank valuations rebounding shortly after our trading window reopens, we ultimately retired less than $1 million worth 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 toward to future mergers, we're targeting similar characteristics to our Clayton, Atlantic Capital, Franklin Synergy combinations. We look for partners that will provide us additional density across our footprint as well as fill in open market 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 evident, but we believe that the current dynamic support further consolidation is possible that we could have M&A activity in 2022.

So to summarize, we had a good quarter of loan growth as our strong team of relationship managers continues to capitalize on the economic activity on our footprint. We expect that growth to continue over the remainder of 2021 and in to 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 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 -- we're not likely to use much capital on a buyback in the near term.

I'll now turn the call over to Michael, our CFO, to discuss our financial results in more detail.

Michael Mettee -- Chief Financial Officer

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 industry and ultimately we saw refinance business react as one would expect in a lower rate environment. We also saw margin stabilize quarter over quarter, pay-off 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 or two, but the month of September was at 33 basis points versus 34 basis points for the quarter. So we're seeing a bit of a plateau there and I would expect more measured improvement going forward.

As Chris mentioned, we did have success in remixing our deposit portfolio this past quarter with non-interest bearing deposits increasing to 25.9% of total deposits from 24.4% in the second quarter. NIBs will remain a focus going forward though and our next goal is to move that number to 30% plus of total deposits. However, in the near term, that number will continue to fluctuate as public funds come back on after seasonal outflows of approximately $225 million this quarter.

Our contractual yield on loans dropped by 13 basis points during the quarter from 4.37% in the second quarter to 4.24% in the third quarter. We are encouraged 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, with that still being below the 4.24% contractual rate on the legacy portfolio, we would expect to continue to see yield compression until rates begin to rise. As a reminder, we 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 the benchmark 10-year US Treasury swinging as much as 36 basis points and we expect that trade volatility to continue with monetary and fiscal policy 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 yield on loans held for investment in the securities portfolio to continue to decline as the incremental volume comes at rates lower than the current portfolio. We expect continued improvement in cost of funds, the CDs continue to reprice, and as our relationship managers focus on growing non-interest bearing deposits. Liquidity will be slightly volatile quarter to quarter as public funds enter and exit the bank and we'll continue to strategically deploy excess liquidity in the better yielding assets in order to grow net interest income.

Moving to CECL, and as Chris mentioned, at $2.5 million, our releases are smaller this quarter than the prior two quarters. Economic forecasts continue to dictate lower reserves relative to the quantitative portion of our CECL model. On the qualitative portion of our allowance, we are maintaining many of our COVID [Indecipherable] 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 are 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 non-interest income, we had a number of non-recurring type events that can muddy the run rate number. The stated segment amount was $13.8 million, included in that $13.8 million was a gain on sale of real estate owned of $2.2 million, again on our commercial loans held for sale portfolio of $740,000 and a loss on the unwind of the swap of $1.5 million. Netting those three items out, the banking segment non-interest income would have been $12.4 million for the quarter.

I'll close my session speaking to this quarter's taxes as there are few one-time 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.

Chris Holmes -- President and Chief Executive Officer

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 and non-interest bearing deposit growth and the mortgage outperformance. This concludes our prepared remarks. And Andrea, at this point, we'd like to open the line for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Brett Rabatin of Hovde Group. Please go ahead.

Brett Rabatin -- Hovde Group -- Analyst

Hey, good morning, everyone.

Chris Holmes -- President and Chief Executive Officer

Good morning, Brad.

Brett Rabatin -- Hovde Group -- Analyst

I wanted to first ask the loan growth was obviously nice in the quarter. In the prepared comments you talked about possible return to 10% to 12%. Maybe you could -- 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?

Chris Holmes -- President and Chief Executive Officer

Yeah, Brad. So the growth has pretty much come across all of our product types. If you look over the last two or three quarters, it's been kind of all of our product types. We did have more growth during this particular quarter in 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 it'll continue to be the leading product type, but we expect to continue to see that. We have not seen our line utilization return to where it was in the last two quarters of '19, we were closer to call it a 50% utilization, if you average the last two quarters of '19, then you look into the third quarter, this past quarter, we were down in the -- 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 where 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 [Indecipherable] we can't pinpoint any one thing and I would say it -- I always think about the rate at which our markets are growing and 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 a negative, and it's a combination of the existing customers, but there's also -- we're picking up new customers as well.

Brett Rabatin -- Hovde Group -- Analyst

Okay. I appreciate the color there, and then mortgage, the guidance for the fourth quarter, maybe a bit of a tough question, but as you guys think longer term, where do you see mortgage normalizing, would it be higher levels in 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 could get back to normal assuming that happens at some point?

Chris Holmes -- President and Chief Executive Officer

Yeah, Brett, I think, where would mortgage normalize, 10% to 15% contribution is where it typically will play out, being in the low rate environment we've been in, 2022 is kind of a hard to kind of crapshoot at this point, if you look at MBA, look at Fannie and Freddie, they're predicting volumes to be down fairly significantly. We would expect outperforming that, but we certainly would expect a 10% to 15% number, which is traditionally what we've targeted.

Michael Mettee -- Chief Financial Officer

Yeah. And 2022 is a particularly 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, Brett, and for us and I think for everybody else, because even if you look at the forecasts that are out there, they're not -- they don't all line up for volumes. And then we probably take a slightly different view than even -- even most of the forecasts out there. So it's -- 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 [Indecipherable] an average year.

Brett Rabatin -- Hovde Group -- Analyst

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?

Chris Holmes -- President and Chief Executive Officer

Yeah. So '22, Brett, as we think about in the last couple of years, '20 and '21, we had a lot. And so, we announced the Franklin combination -- 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 in top level execution on our company. And so 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. And we think it showing through in the numbers particularly in our organic numbers, and so we are more open to talk about that. So that's one perspective I would give you. The second perspective is we keep a pretty targeted -- we keep a targeted list of things that we're interested in, and it's as much 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, during the 2022, we think that there could be -- could be one or even more than one of those that would come to us and go, hey, we think it might be a good time to have a conversation. And so that's how we -- that's the reason we say that it's gotten better for us from a timing standpoint, and we think that it perhaps will get better for others, it's going to be difficult -- again with interest rate environment, it's not an easy operating environment, I think in '22. And so I think that could -- that could play into that.

Brett Rabatin -- Hovde Group -- Analyst

Okay, great. Appreciate all the color.

Chris Holmes -- President and Chief Executive Officer

Sure. Thank you for being on the call.

Operator

The next question comes from Stephen Scouten of Piper Sandler. Please go ahead.

Stephen Scouten -- Piper Sandler -- Analyst

Hey, good morning, everyone.

Chris Holmes -- President and Chief Executive Officer

Good morning, Stephen.

Stephen Scouten -- Piper Sandler -- Analyst

Maybe going back to loan growth quickly, I am just curious how the team in Birmingham has been performing. I think maybe it was $40 million that you referenced last quarter, they contributed just continuing to the question how that -- 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?

Chris Holmes -- President and Chief Executive Officer

Yeah. So I'll say we have been really, really pleased with Birmingham as a market with our folks in Birmingham and the reception that they have gotten and we have gotten in the market has been really -- really humbling for us, it's been really good. And the folks that we've been able to get on the FirstBank team down there have just been fantastic in terms of fitting our culture and us -- it's just been a great match. They have actually -- when we talked about where they were last quarter, they've almost doubled that again. And so they are in the mid 70s in terms of volume at this point, and it's been -- 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 are continuing to talk to some other folks as well. So we couldn't be happier with the way it's going up at this point. In the pipeline, actually is -- may be even more encouraging than what I just gave you. So we've been very, very pleased.

Stephen Scouten -- Piper Sandler -- Analyst

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

Chris Holmes -- President and Chief Executive Officer

Yeah, sure. So as we think about M&A, geography is at the top of the list. And so, and really geography is at the top of the list because operating leverage is at the top of the list. And so we have, if you look at where we are in Nashville from a market share standpoint a decade ago, we didn't even make the top 30, maybe even the top 50 in Nashville from a market share standpoint and today we're number 6 and we're right at, I think we're number 5 now in NOCs 4 and about the same in Chattanooga where we basically didn't have a presence before and so before, as I said 10 years ago, and so, when I say we didn't have presence, we actually had a location but we had less than $100 million in each of those markets again, 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 markets in footprint that would be -- we don't have as much operating leverage -- we are not creating as much operating leverage as we'd like. And so that's part of our M&A strategy, is to continue to improve our profitability through that. And so for that reason, we look in and around our footprint, a lot of times we are going back to your question of Western North Carolina or say Northern Georgia, lot of times, we'll get a market extension, for instance, we could -- 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 contiguous geography. And so that's really the way we think about bank M&A. We also think about culture obviously and we think of heavily about the deposit side of the balance sheet. We're very, very interested in legacy non-interest bearing deposit type institutions, very, very interested in those.

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 mortgage is really like a vertical. We, more and more, think of our specialty lending group, our manufactured housing group in the same way that that group is performing really well, and so if we could -- if we came across vertical like that, we would -- that was -- had particularly good yield, we love assets that we can either portfolio or sell into the market like both of those, we have the option of either portfolio you're selling it and that we can create a national -- those product lines for us are those verticals are something that we're interested in being. We want to make sure we're competitive in those with any -- more than competitive. We will make sure we're able to win against any competitor in those spaces which we do in both mortgage and the 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.

Stephen Scouten -- Piper Sandler -- Analyst

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

Michael Mettee -- Chief Financial Officer

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

Stephen Scouten -- Piper Sandler -- Analyst

Got it, okay. Thanks, Mike. Appreciate the color, guys.

Michael Mettee -- Chief Financial Officer

Thanks, Stephen.

Operator

The next question comes from Matt Olney of Stephens. Please go ahead.

Matt Olney -- Stephens -- Analyst

Thanks, good morning guys.

Chris Holmes -- President and Chief Executive Officer

Hey Matt, how are you?

Matt Olney -- Stephens -- Analyst

I'm good. I'm good. I want to drill down on the expenses for the bank. I think you mentioned in prepared remarks a bit elevated and there was some unusual items. I think it was the stock grants for the IPO explained a portion of this, but it seems like there was something else in there as well versus your original expectations. So, any more color on that from the third quarter and then an outlook here in the fourth quarter and into next year as well? Thanks.

Michael Mettee -- Chief Financial Officer

Yeah, I'd say 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 $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 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 yeah, efficiency-wise, we look to continue to become more efficient, grow on the revenue side of the balance sheet, continue to push on our efficiency ratio.

Matt Olney -- Stephens -- Analyst

Okay, that's great, thank you for that. And then on the mortgage front, I want to circle back there and drill down a little bit more on the near-term outlook. I'm trying to appreciate the dynamics between both the margins and the volume. I think there 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 a concern more on the -- the volume side given the higher rates in recent weeks? Thanks.

Chris Holmes -- President and Chief Executive Officer

Yeah. Margins really hung in there over the past couple of months. We've been pleasantly surprised with that even as capacity has kind of returned to the mortgage space. We saw volume start to slow there in the third quarter, like our quarter September-ish, which is kind of leading us to a kind of normal seasonality type expectation for Q4. We're also seeing a lot of inventory pressure, still on the purchase side. I think that there was a little bit of hope that inventory would increase and we get some momentum on purchase that typically hadn't been there, still at this point we're not seeing a whole lot of that in our markets, in the third quarter as well, FHFA gave back the refunds of the lenders, which was a boost to volume on the refi side, lowered range about a [Indecipherable] in place, you saw pickup in our refinance percentage from 58% to 66% from that and so that's all fully priced into the market, you would expect that to kind of tail down as we get through the fourth quarter. So a lot of moving parts in there, but housing is still constrained due to inventory and supply -- supply chains.

Matt Olney -- Stephens -- Analyst

Okay, that's all from me. Thanks guys.

Chris Holmes -- President and Chief Executive Officer

Thanks Matt.

Michael Mettee -- Chief Financial Officer

Thanks Matt.

Operator

The next question comes from Jennifer Demba of Truist Securities. Please go ahead.

Jennifer Demba -- Truist Securities -- Analyst

Thank you. Good morning.

Chris Holmes -- President and Chief Executive Officer

Good morning, Jennifer.

Jennifer Demba -- Truist Securities -- Analyst

Wondering if you could talk about your priorities in terms of technology investment and right now over the next one or two years where you feel like maybe you're in line with peers or fallen short or ahead.

Chris Holmes -- President and Chief Executive Officer

Yeah. So we spend a lot of time in dialog internally around that very thing and we look at it as we're really thinking about innovation there through tech -- with our -- 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 couple of investments also, a small handful of investments in that area but when we think about it, we think about first customer experience, our research which is third-party research says that we have a leading customer in many -- in several measures, the leading customer experience in the Southeast and some but in almost all the measures 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 efficiency of the company. And so we are -- we have active dialogs with several fintech companies, also with several fintech investors and Mike said and we are an active investor in a few ways there. So it is -- we very much believe that the industry is really transforming over the next few years and so we are -- and we are 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.

Jennifer Demba -- Truist Securities -- Analyst

Okay, thank you.

Chris Holmes -- President and Chief Executive Officer

Okay.

Operator

Your next question comes from Kevin Fitzsimmons of DA Davidson. Please go ahead.

Kevin Fitzsimmons -- DA Davidson -- Analyst

Good morning, everyone.

Chris Holmes -- President and Chief Executive Officer

Good morning, Kevin.

Kevin Fitzsimmons -- DA Davidson -- Analyst

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, was complicated deal, 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 -- it's going to be more of a fit for more digestible traditional type deals in your view?

Chris Holmes -- President and Chief Executive Officer

Yeah, that's a great question actually Kevin because we -- again, we've talked about that a lot and I want to say first off deals are hard. Okay. What size they are? And first option for us would be go hire great people and pay a smaller premium for those folks and be able to be a little more selective with where -- with those investments. And so we love doing that. We do get the opportunity to make some bigger ones. Franklin and FirstBank, that combination was big, and it was -- in some way, particularly in Middleton, say we regarded it as a merger of equal really between -- there was market because we totally merged those and in the national market, the market now has more if you look at the total employees in Middle Tennessee, there are more legacy Franklin Synergy employees than legacy FirstBank employees. And so, but all that being said, it's going well. We've retained the customers, we retained the folks and on both sides by the way and now we have retained them, they're ahead of budget. So it's that -- 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 the time the -- one of those -- FirstBank would have been say 60% and Franklin Synergy would have been 40%. As we look at those targets that I mentioned and those ones that we are really, really interested in, they're smaller than that as a percentage of the company. And so that would be what we would opt for not only because that's the specific target list, but that's just executionally that's what we would opt for. I think once it gets much bigger than saying, I don't know, a third your size, it gets really hard to digest.

Kevin Fitzsimmons -- DA Davidson -- Analyst

Great. I appreciate that. And just, it's been mentioned a few times today. But you know we're still lots of stories and hear reports about the 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 what -- how much of a concern that is, whether you think it's something that's very temporary or could persist a while, I don't know if this falls into the camp of those things you're watching and why you're not taking the reserve down as aggressively as you probably could have this quarter. And just, is it more of just solely a loan growth headwind or is it a potential credit headwind in your mind as well?

Chris Holmes -- President and Chief Executive Officer

Yes, it’s not quite as much of it [Indecipherable] the potential for a credit headwind comes from a shutdown. And so if we have something where someone if you got shut down again for whatever reason, whether it's just COVID and we go back into shutdowns stats or disruption from the two things, you mentioned in 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 in, particularly in the real estate side of our portfolio both residential and commercial, costs have absolutely gone up, rents have gone up in the commercial space. Cost of housing is going 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 it will settle down sooner versus later. I don't think that that will mean next month. But I think it's -- I think it begins to normalize because the forces of capitalism tend to take over there and tend to really kick in. And so I think they do normalize sooner versus later. The labor shortages, also I'm going to speak regionally and locally as opposed to nationally, the labor shortage is very real, and we live in a very attractive spot that’s attracting as much in migration is any spot in the country. And so I don't think the labor shortages 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 hash 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. We even at some of our highest paid folks. I mean there is -- they get offers too. And so, it's going to be a difficult -- from that standpoint. Those are first-class problems but from that -- but those are -- but there's still things that you have to deal with. And so as we look at it, that's what we see -- we do see the labor shortages probably being the biggest issue right now in our markets. Supply chain being also an issue, but I think it will resolve itself sooner versus later, but in general the markets like I said, we are -- it's because of the growth and the attractiveness of the area we're in. Michael, would you add anything to that?

Michael Mettee -- Chief Financial Officer

Yeah, I think relative to the reserve Kevin you're -- all those things are part of the consideration. You also had eviction moratoriums coming off yet, PPP loans being forgiven. And so there is a little bit, especially earlier in the quarter, we have Delta variant been dealt with. And what impact that would have on businesses with labor with all the things that drive a little bit of the hesitancy to get too aggressive there. But do expect that to kind of abate, a little bit of concern around inflation, Chris mentioned home prices and wage and we are certainly seeing price increases across the board and the impact on the economy is a wait and see at this point.

Kevin Fitzsimmons -- DA Davidson -- Analyst

Okay. And Chris, you've mentioned -- one last one for me, you mentioned the long-term attractiveness and focus on non-interest bearing deposits. If you're looking at institutions now, one could say, well, why not go out into attractive markets and 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 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 cost and get it over a period of years?

Chris Holmes -- President and Chief Executive Officer

Yeah, it's -- yeah, you read that correctly. It's two things. It is the long-term view that non-interest bearing deposits are very attractive and will always be attractive. And so we think about what's driving -- what we're targeting? That's what we're targeting and deposits just from a pure monetary value given where interest rates are less valuable today than they traditionally are but in our mind, relationship -- the relationship that comes with the primary operating account is very valuable to us long term. And those are the ones we want and -- and so that's what we mean by that. We are doing some hiring of loan officers to get loans on the balance sheet. Okay. And so we are -- and Birmingham would be an example where we -- that's certainly -- 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 and -- but if we got the opportunity, that’s as a good example, if we got the opportunity for the right, I'll call it legacy community bank and those are in and around those markets, it'd be one we'd be very interested in and we bring on those operating account relationships sooner, then we would bring them in, just organically growing them. I'm very envious Kevin of those banks that have that fund their loan portfolio with 40% non-interest bearing deposits. And so we want to get there.

Kevin Fitzsimmons -- DA Davidson -- Analyst

Got it, OK. Thanks, Chris.

Chris Holmes -- President and Chief Executive Officer

All right. Thanks, Kevin.

Operator

The next question comes from Catherine Mealor of KBW. Please go ahead.

Catherine Mealor -- KBW -- Analyst

Thanks, good morning.

Chris Holmes -- President and Chief Executive Officer

Good morning, Catherine.

Catherine Mealor -- KBW -- Analyst

Just wanted to follow up just as we model the margin in the balance sheet, how to think about the deployment of excess liquidity both into loans and securities and how you're thinking about how big the securities portfolio potentially could get as a percentage of average earning assets and how much you plan to put there versus in your strong loan growth? Thanks.

Michael Mettee -- Chief Financial Officer

Hey Catherine, it's Michael, I'll take that part. Our target has been at 13%, 13.5% range of total assets -- earning assets. So we're actually right in that range, came a little bit quicker. We were kind of looking at year-end, but clearly this liquidity has been here to stay, so we deployed some there. We also did some repo, reverse repo transactions that are short term in nature and deployed some liquidity there as well in our 30-day paper. So that -- that helped a little bit. I don't think you'll see material growth above the 13%, 13.5% range. We prefer loan growth, as we mentioned, we think that there is strong opportunity there and we have a lot of opportunity in our market. So that's what we'll likely deploy.

Chris Holmes -- President and Chief Executive Officer

Yeah. And Catherine, I would just add on the loan side, our regional presence are very optimistic -- very optimistic. When we look out into '22, 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. So we're -- and so for that reason, we feel better about the outlook for the loan growth side of the balance sheet.

Catherine Mealor -- KBW -- Analyst

Understood. And then on the seasonality of the public funds, I think you mentioned this in your prepared remarks, Michael, can you remind us that you're saying public funds will come in, will come in higher this quarter and you just remind us, have to do with [Phonetic] seasonal fluctuations are?

Michael Mettee -- Chief Financial Officer

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

Catherine Mealor -- KBW -- Analyst

Guys, do you think excess liquidity could actually increase a little bit next quarter before we see that more deployed next year at the loan growth, is that a fair way to think about it?

Chris Holmes -- President and Chief Executive Officer

Yes.

Michael Mettee -- Chief Financial Officer

Yeah.

Catherine Mealor -- KBW -- Analyst

Okay, perfect, perfect. All right. Great. That's all I got. Thank you.

Chris Holmes -- President and Chief Executive Officer

Thanks, Catherine.

Operator

The next question comes from Alex Lau of JPMorgan. Please go ahead.

Alex Lau -- JPMorgan -- Analyst

Hi, good morning.

Chris Holmes -- President and Chief Executive Officer

Good morning, Alex.

Alex Lau -- JPMorgan -- Analyst

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.

Chris Holmes -- President and Chief Executive Officer

Yeah, Alex sure. The competition is king, it's -- there are 4,000 banks out there and I think we all think that's too many. And so it's -- I joke about this all the time. We've got one market that has two -- there are only two banks in the market. And every time I talk to them, they tell me it's the most competitive market we got. It's -- everybody thinks it's competitive and the fact of matter it is. And so -- but I would say specifically when rate pressure right now is particularly, it is more competitive than what we see on credit structure, at sometimes at times like this, some are -- occasionally in times like this, you will see relaxing of credit standards that we find we have in times past have found concerning. And Greg you might check me on this, and I haven't seen that of late a concerning relaxing of -- we just pretty much don't relax our credit standards with cycles. And so we haven't -- correct me now, I don't think we've seen --

Greg Bowers -- Chief Credit Officer

No. I think you're right, I mean I think. 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 when in previous cycles where we call it, it's got crazy or loose.

Chris Holmes -- President and Chief Executive Officer

Right. We have made that tariffs statement on these calls before we were seeing crazy things, we were seeing loose things. We haven't seen that frankly this time. So at that – and don’t think that's a very good thing. We are seeing brutal rate pressure. Okay. We're seeing brutal rate pressure. We have priced a competitive deal or two at the lowest price, the lowest rate terms, lowest pricing terms we've ever priced and frankly every one of them that we've done that we haven’t won a single one. And so somebody is bolder than we are there.

Alex Lau -- JPMorgan -- Analyst

Thanks for the color.

Greg Bowers -- Chief Credit Officer

Does that answer your question, Alex?

Alex Lau -- JPMorgan -- Analyst

Yes, it does. Thank you. And on the potential reserve releases, on the allowance ratio of 191, so as economic conditions improve. Do you have a range that you see that normalizing towards? Thanks.

Chris Holmes -- President and Chief Executive Officer

I'll give you a couple of references. If we go back to FirstBank and stand-alone and Franklin stand-alone before the two companies got together, FirstBank stand-alone was in the 110 to 120 in terms of a reserve as a percent of loans, I think around 120, I think is a reserve for allowance to loans. And keep in mind that was pre-CECL. And Franklin, I think it was a little higher than that because they have a real estate concentrator. They have a higher real estate concentration, and so it would naturally be a little higher. And so if they were to say 150, I would think it would be somewhere in that -- somewhere probably between those, again, post-CECL, I can remember we had -- so we've had a significant combination of two institutions and so we're -- and we've had added CECL in there. So we think it's somewhere, probably in the 1, I'll call it 130 to 160, something like that probably.

Alex Lau -- JPMorgan -- Analyst

Thanks for that. And just a last one on your mortgage efficiency ratio of 80%, how do you think you've been about that ratio going through year-end?

Chris Holmes -- President and Chief Executive Officer

Yeah, I mean the 80% in the third quarter obviously was at about $8.9 million contributions from $1 million to $4 million, you take that that push in low 90s but really, yeah, I think as we've said for Alex our target in that -- in the mortgage space 80%, 85% in that range. And so for the year, I think we’ll wind that right in that targeted efficiency ratio.

Alex Lau -- JPMorgan -- Analyst

Thanks for taking my questions.

Chris Holmes -- President and Chief Executive Officer

Thank you. All right. We appreciate Alex.

Operator

The next question comes from William Wallace of Raymond James. Please go ahead.

William Wallace -- Raymond James -- Analyst

Hi, thanks for taking my questions. I just had two quick follow-ups on the commentary that you just gave on the reserves to loans whenever we get to the point where you guys feel comfortable that we won't have a rebound or bounce back in COVID pressures and you decided 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?

Chris Holmes -- President and Chief Executive Officer

Yeah. Set tough one Michael's, so I’ll let you answer. Michael, run that process, so I'll let him talk about.

Michael Mettee -- Chief Financial Officer

Yeah, it's going to take a couple of quarters, I don't think it's -- it happened overnight. Certainly there's a lot of moving parts relative to the model and quantitative versus qualitative, but I would expect over the next two to three quarters, you will see if we turn to that range.

William Wallace -- Raymond James -- Analyst

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?

Chris Holmes -- President and Chief Executive Officer

Yes. So I think there's two factors working in '22. One is continued addition of growth in the loan portfolio and taking up some liquidity, there is, I think you could see some margin expansion from there. But the bigger margin expansion of things come when we get a rate increase and because we've got about $2 billion of adjustable rate loans that would adjust with the rate increase. And so I think the bigger expansion comes when that happens and so and until either of those -- as we add incrementally on the loan -- on the loan growth, actually you can see a little bit of expansion, but we generally are going to bounce around the same margin where we are without in a band that doesn't -- move up or down very much. 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 got in the previous two quarters. And so we think that keeps it -- as long as rates kind of bounce around where they are, keeps us relatively flat, but position to move up as rates that drive our adjustable loans up, as those rates move up, we’ll move up with them.

Michael Mettee -- Chief Financial Officer

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

Chris Holmes -- President and Chief Executive Officer

Yes.

William Wallace -- Raymond James -- Analyst

Thank you. That's all I had. I appreciate it.

Chris Holmes -- President and Chief Executive Officer

Thank you, William.

William Wallace -- Raymond James -- Analyst

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

Chris Holmes -- President and Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Robert Hoehn -- Director of Corporate Finance

Chris Holmes -- President and Chief Executive Officer

Michael Mettee -- Chief Financial Officer

Greg Bowers -- Chief Credit Officer

Brett Rabatin -- Hovde Group -- Analyst

Stephen Scouten -- Piper Sandler -- Analyst

Matt Olney -- Stephens -- Analyst

Jennifer Demba -- Truist Securities -- Analyst

Kevin Fitzsimmons -- DA Davidson -- Analyst

Catherine Mealor -- KBW -- Analyst

Alex Lau -- JPMorgan -- Analyst

William Wallace -- Raymond James -- Analyst

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