FB Financial Corporation’s (FBK) CEO Chris Holmes on Q4 2019 Results – Earnings Call Transcript No ratings yet.

FB Financial Corporation (NYSE:FBK) Q4 2019 Results Earnings Conference Call January 21, 2020 6:00 PM ET

Company Participants

Chris Holmes – President and CEO

James Gordon – Chief Financial Officer

Wib Evans – President, FB Ventures

Myers Jones – Chief Executive Officer, Franklin Financial Network, Inc.

Chris Black – Chief Financial Officer, Franklin Financial Network, Inc.

Conference Call Participants

Jennifer Demba – SunTrust

Stephen Scouten – Piper Sandler

Catherine Mealor – KBW

Tyler Stafford – Stephens

Daniel Cardenas – Raymond James

Operator

Good evening. And welcome to the FB Financial Corporation’s Conference Call regarding their Fourth Quarter 2019 Earnings Release and Proposed Merger with Franklin Financial Network Incorporated.

Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by James Gordon, Chief Financial Officer; and Wib Evans, President of FB Ventures; as well as Myers Jones, Chief Executive Officer; and Chris Black, Chief Financial Officer, from Franklin Financial Network Incorporated.

Please note FB Financial’s press release and each of this evening’s presentation are available on the Investor Relations page on the company’s website at https://www.firstbankonline.com. Today’s call is being recorded and will be available for replay on FB Financial’s website approximately one hour after the completion of this call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation.

During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal security 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 any 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 Securities and Exchange Commission, including FB Financial’s most recent Form 10-K, as well as the press release announcing the transaction of the company’s most recent earnings release.

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-Generally Accepted Accounting Principle financial measures as defined by Securities and Exchange Commission Regulation G. A presentation of the most directly comparable Generally Accepted Accounting Principle financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in the FB Financial’s earnings release, supplemental and financial information, this evening’s presentation which are available on the Investor Relations page of the company’s website at https://www.firstbankonline.com and on the Securities and Exchange Commission’s website at http://www.sec.gov.

I would now like to turn the presentation over to Chris Holmes, FB Financial’s, President and CEO.

Chris Holmes

Thank you very much, Keith. Good evening. And thank you for joining us on this call to hear about our fourth quarter earnings and the merger announcement with Franklin Financial Network. We appreciate your interest in both companies.

We have exciting news tonight and I know you all want to hear about, but first I want to walk through the highlights for the year and let James briefly cover our earnings and then I will turn it over to Myers and Chris for a moment, before I share my thoughts on the merger with Franklin Synergy.

Looking at 2019, we feel that we delivered outstanding results. Our high priority is always going to be taking care of our customers and the top initiatives in our strategic plans take just that. When we formalized our strategic planning process 10 years ago that was the case and that’s going to be the case for each of our future strategic plans under this leadership team. The measures of how we execute on that of our core growth and profitability metrics.

For the year, we delivered on those metrics, adjusted EPS of $2.83 or 8.4% growth over 2018 with no share buybacks, which resulted in an adjusted ROAA return on average assets of about 1.55% and a return on average tangible common equity of 16.4%.

Excluding acquired balances, we grew loans by 10% and customer deposits by 6.3%, while non-interest bearing deposits increased by 14.8%. We are proud of those growth and profitability metrics, and as a result, we call 2019, the successful financial Year. 2019 was also an exciting year for us from a strategic standpoint.

We have acquired 10 branches from Atlantic Capital Bank, increasing our market share in Chattanooga from seventh to fifth and in Knoxville from 11th to 9th. That acquisition has performed better than expected so far and we look forward to continuing to build on our presence in those markets.

We also converted to our new treasury platform, which is partially responsible for the — for our outstanding organic non-interest bearing deposit growth of 20.8% over the course of the year. We reorganized our mortgage operations, sharing our wholesale channels and aligning the division more directly with our customer relationship focus strategy.

We feel that we are now properly positioned to excel in the favorable environment while avoiding a drag on earnings and higher rate environments. And we announced the pending acquisition of Farmers National Bank in Scottsville, Kentucky, where we will enter the Bowling Green MSA rank seventh in market share including over 50% market share Scottsville, Kentucky.

We anticipate closing that acquisition in mid-February and look forward to officially welcome these associates and customers to our FirstBank family. Also a very strong year and we are very proud of our associates for continuing to execute and deliver these results.

I will now turn it over to James to talk through our quarterly results.

James Gordon

Thanks, Chris, and good evening, everyone. Obviously, this is an exciting time in the history of our company. But first let me share some thoughts on the fourth quarter and 2019 earnings. We had another solid quarter of results with adjusted EPS of $0.70 per diluted share, adjusted ROAA of 1.42% and adjusted return on average tangible common equity of 15.2%. We delivered annualized loan growth of 5.9% for the quarter, which is in line with our current guidance of 5% to 10% over the near-term.

Customer deposits were up slightly at 1.5% annualized growth for the quarter, excluding the $104.1 million decline in mortgage and other deposits. The overall deposits in our banking markets grew 10.5% annualized. Our net interest margin felt the impact of September and October’s rate cuts as we were at 3.91% when excluding the 21 basis points impact of accretion and non-accruals within our expected range of 3.85% to 4.15%.

As a current guidepost for the month of December, our contractual yield on loans was 5.19%, our cost of total deposits was 99 basis points and our net interest margin, excluding accretion and non-accrual interest collections, was 3.86%.

We believe that we have seen a pause at downward pressure on our loan yields and we are actively managing our deposit costs down. We may have a slight dip in the first quarter margin from the fourth quarter margin given where December was compared to the quarter, but we believe that we have an opportunity to improve on that over the second half of the year.

Mortgage delivered better than anticipated results as volumes and margins remain higher than expected in November and December, resulting in a total mortgage pre-tax contribution of $3 million.

For 2020, we hope to deliver total mortgage pre-tax contribution results that would be flat to slightly down from 2019 adjusted contribution of $11.7 million. That target will be largely depended upon the overall rate environment.

On credit, you saw our net charge-offs and provision expense increase this quarter as we had a single loan that accounted for $2.6 million of our charge-offs or 24 basis points of our 30 basis points of net charge-offs for the quarter. The remaining balance of that credit is $1.6 million and it accounted for the majority of our increase in non-accrual loans this quarter.

The credit referenced is an isolated occurrence related to specific events with a single borrower. The underlying trends of our loan portfolio remain solid and we continue to see overall strengths in our markets.

With that summary of the quarter, I will turn it over to Chris Black to speak about Franklin Financials quarter.

Chris Black

Thanks, James. Good evening, everyone. We had a strong quarter at Franklin Financial. We delivered core EPS of $0.68 for the quarter, up 11.5% from the fourth quarter of 2018. We continue to see progress on our balance sheet rotation optimization and our reduction of non-core banking activities, our select portfolio is $112 million smaller than it was in the fourth quarter of 2018 and is down to just 4.9% of the total portfolio.

Our securities portfolio was $500 million smaller than it was in the fourth quarter of 2018, down to 16.7% of total assets from 27.1% a year ago. We have also significantly decreased our non-core funding, down $379 million over the course of 2019.

As a result, profitable metrics have improved with our net interest margin up 14 basis points from last quarter and 43 basis points from the fourth quarter of 2018. We are excited to join forces with the FB Financial going forward and build upon a very strong core community bank.

I will now turn it to Myers to share his thoughts on our merger.

Myers Jones

Thanks, Chris. Hello, everyone. We are here tonight celebrate a momentous occasion. This period with FirstBank is the beginning of a great partnership. Together we believe that we have the opportunity to be Tennessee’s premier community bank, it became clear over the course of diligence and negotiation that each of our customer-centric cultures would be very compatible.

I will truly believe that we will be better together and our ability to serve our customers and our communities will be stronger than ever. I want to thank all of our Franklin Synergy associates for getting us to this point and I think that we should all be excited about this next chapter and our potential together with FirstBank.

With that, I will turn the call back over to Chris Holmes for his comments on our merger.

Chris Holmes

Thank you, Myers and Chris. We are excited to be sitting here at the table with you tonight. And there are three driving reasons for this combination. First, expanding the presence and deepening the penetration of the combined bank in the Nashville MSA.

Second, combining the talent base of FirstBank with Franklin Synergy strong community bankers.

And third, the opportunity to meaningfully improve our earnings per share, while taking a protective approach to our balance sheet and tangible book value per share.

On the first item, we will add eight branches to the distribution network across the MSA, all at the highly attractive locations. As we said time and again, we believe that density in scale in banking — in a market provides tremendous value and brand recognition, pricing power and ability to accelerate growth. That is growth and profitability.

The two objectives that we preach every day, with this merger we achieve the density and scale that we have been building towards in NASH since 2012 and that we believe is going to prepare — propel our growth and profitability.

Following the close of transaction, we are ranked first in Williamson County, second in Rutherford County and 10th in Davidson County in terms of deposit market share. In the broader Nashville MSA we will move from 12 up to six with $4 billion in deposits.

From a demographic standpoint, we have intent that Rutherford counties are driving forces behind the Nashville MSA being as attractive as it is. We have seen it’s the wealthiest accounting in Tennessee, while Rutherford is the third wealthiest.

From 2010 to 2020 Williamson and Rutherford counties were the two fastest growing markets in the state, when you exclude counties with less than 15,000 residents. Over the next five years, we have seen is expected to be the fastest growing county in Tennessee and Rutherford, the third fastest again excluding the small accounting.

Well, FirstBank is have presence in Franklin for a number of years, we have been largely irrelevant there with the exception of the Farbee [ph] community. Our lack of progress in the market has been partially due to Franklin Synergy dominance.

We have been doing our best to compete within Williamson County. But we have been largely unable to do so due to Franklin’s deep relationships in the community. It feels great to stop beating our head against the wall and be on the same team going forward.

Bradford County has been a steady market for FirstBank since we expanded there with the acquisition in 2007, but we have not had the distribution network and scale we have needed to fully take advantage of the growth that Rutherford County has experienced, compared with Franklin Synergy and become the second largest market share bank in that county, we are excited about our future in that community.

On the reason number two for partnering with Franklin Synergy, their bankers are the best in their markets. What we found during diligence was a powerful team of community bankers that had built a very strong core asset and we believe that core asset has been less recognized by the public markets in the past due to the noise in risk around the non-core assets and the funding issues.

If you look at our assumptions, we have modeled 30% cost saves on this transaction. This relatively low rate of cost saving is despite our plan to consolidate seven branches in our combined footprint or almost half of the 15 branches that get added in this merger and not all of those closures will be Franklin Synergy branches, we will keep the best of what our two banks offer.

If I were a bank analyst or investor, I might assume that we were sandbagging with that 30% number. We are not. We have entered into employment agreements with key members of Franklin senior leadership. We value this team of bankers and we are making their transition our highest priority. Some of the management cost savings that you get from most bank M&A or not present or desired in this transaction.

At the core Franklin Synergy is an incredibly strong group of relationship managers they have epitomizes our definition of everything that community banker should be. They live in interactive in their communities. They bank their friends and neighbors. They have a travel club for their customers. They serve all board and hold specific leadership positions and they dominate their markets.

In fact, they were managed of ourselves and our community markets. In Nashville, FirstBank has a very strong commercial bank, but we have never been able to transition into the strong community bank that we have desired to be, the Franklin team is exactly that. We are very excited to pair with this exceptional team and hopefully, provide them with additional resources to enable them to go out and win even more than they already do.

One other compelling part of the union between the two companies is that for some time FirstBank has been considering bringing several pieces of the operations — of the operations part of the company together in a centralized operations center.

Following the close of this transaction, we plan to keep Franklin Synergy’s headquarters location in Downtown Franklin, while we will maintain some of the portions in Lexington, Tennessee, we will be turning that cluster of buildings into — in Downtown Franklin into our primary operation center.

We want the combined company to be a cornerstone of Williamson County community and we want our impact there to grow as our company continues to mature into the Southeast the leading community bank franchise.

To summarize, we highly value the core bank, its associates, their customers and their path to the community, and we want to support them as they combine — as they continue to dominate the markets.

Moving to the third point, the financial results of the transaction, we think the — we think this checks the boxes that enable us to make the investment. We are tangible book value neutral. We are picking up roughly 10% in EPS accretion and we do that while protecting our balance sheet more than in the second, and paying across the $10 million asset threshold. We achieve all that while training true mass in our most by market. Personally, I believe this creates significant franchise value for the company and value for our shareholders.

I will also want to touch on the risk of the transaction and how we double those. Heading in the diligence we felt that we needed to be comfortable with four things, the credit culture, the construction and commercial real estate concentration, the funding profile in the healthcare, SNC and leverage lending portfolios.

Following a thorough review of the portfolio, credit culture, underwriting practices and credit monitoring, we are comfortable with the credit culture and understand the construction in CRE portfolios.

In our meeting with Franklin Synergy’s management team over the course of diligence and negotiations they describe themselves time after time as a leading Middle Tennessee real estate franchise and we agree with their assessment.

We will implement some of the residential construction credit monitoring practices that they put in place over the past few years. Their credit officer will take a senior role with the combined company continuing to serve Franklin Synergy’s existing relationship managers while taking up responsibility for our Rutherford and Williamson County bankers and we will work closely with FirstBank Chief Credit Officer.

Construction and development balances will move over to the 100% risk-based capital threshold at the close of this transaction. However, we do think managing the concentration in that portfolio to near 100% of risk-based capital is good policy and our goal is to gradually through the growth of our risk-based capital and controlling exposures managed to that goal over the four quarters that following the close and operate at that level.

On the third concerned, we will have an initial core funding whole upon close that will have to grow out of both organically and potentially through acquisition. The culture of Franklin Synergy prior to 2019 had not been to concentrate on the liability side of the balance sheet, their strategy was let — to let the treasury function provides the funding and that was done with extensive use of wholesale liabilities and broker deposits.

Over the past year, Franklin Synergy’s management team has begun the process of adding more deposit relationships to the objectives for their bankers and they started to see some results over the past couple of quarters. We look forward to fostering that progress with our treasury management services and retail products. We will work with — we work together to continue the trend of growing customer deposits.

On the last concern, we have decided to wholly divest of Franklin’s shared national credits, healthcare and corporate portfolios totaling $430 million. We have assumed a mark of these portfolios reflected of — reflective of liquidation value and if not wholly divested on day two after the close, we plan to be fully exited in the first quarter following the close of transaction. I will let James walk through the financial impact that we have assumed from exiting this business.

All I have to say, we are thrilled with the strategic nature of this deal and we are also related to the financial impact and think we — that we think we are going to see. We can’t wait to welcome the Franklin Synergy team members and customers into our FirstBank family.

With that, overview, I will turn the call over to James to talk about the transaction and a little bit more financial detail.

James Gordon

Thanks, Chris. First, I just want to emphasize how excited we are about this merger. We believe that Franklin Synergy is one of the strongest community banking franchise in the Middle Tennessee and we are thrilled to be able to add their associates to the FirstBank family. Our team obvious to feel the same way and they have been working tirelessly over the course of this process to make this a reality.

Moving on — I won’t go slide by slide, but I do want to provide some color on a few of our key financial assumptions for this transaction. Looking first to their credit assumptions, we underwent a thorough review of the portfolio.

We hired a big four firm on the loan review side and we evaluated 66% of the non-owner occupied CRE portfolio, 41% of the construction and development portfolio and 46% of the core C&I portfolio, including owner-occupied CRE, supplemented by additional deeper discussions of the construction and development CRE, as well as the shared national credit, healthcare and corporate portfolios.

We also had extensive discussions with senior management on credit philosophy, monitoring and the current portfolio. Ultimately, we developed a view that there are two distinct portfolios at the bank, their core community banking book of business, which is approximately $2.4 billion and the $430 million corporate, SNC, healthcare and leverage lending book.

We feel good about the core community banking book. We think that it looks and feels like loans we would be making in those markets if we have their presence there and we are excited to continue growing that portfolio. The corporate book was not aligned with our philosophy as it does not generally involve local customers or financial sponsors.

We will not be putting that on to our balance sheet and we have assumed a discount on the portfolio to protect tangible book value if that portfolio is exited. We have plumped that number into our CCD mark assumption for this presentation and we will treat any of those loans that come over to our balance sheet at close is held for sale.

We have assumed roughly $10 million in loss net income as a result of divesting that $430 million of loans and have assumed that will decrease their wholesale funding on a roughly matching basis.

Through that review we have ultimately assume non-accretable credit marks of 2.7% that will handle the losses in the exit of the non-strategic portfolio and a seasonal based allowance for credit loss reserve for the core portfolio.

We have also assumed an accretable mark of 1.3% on the portfolio roughly evenly split between fair value credit and interest rate marks. This will come back in through income over the lives of the loans also that are approximately $110 million of initial combined gross credit and rate marks on Franklin Synergy’s loan portfolio are approximately 3.9%.

We have assumed 30% cost savings to Franklin Synergy’s stand-alone net interest expense, with 50% phase in over 2020% and 100% phased in 2021. We have assumed lost interchange revenue due to the Durbin of roughly $4.5 million after tax, when fully phased in during 2022. If we are close as possible we could choose to try to stay under the $10 billion in assets for December 31, 2020.

But we have modeled that income loss beginning on June 30, 2021 to be safe. We have assumed that we are taking advantage of Franklin Synergy’s REIT subsidiary and gained conservatively $2.5 million from state tax benefit annually going forward. With those adjustments in Franklin stand-alone earnings power, we estimate that we will achieve roughly 10% EPS accretion through this transaction, while staying tangible book value neutral.

As is typical, we assume no revenue synergies in our modeling, but we do believe that there are plenty of opportunities to grow revenues, easily identifiable items include improving Franklin’s funding base, the hiring additional bankers and wealth managers in Middle Tennessee due to the increased brand strength of FirstBank across Nashville.

In summary, we created a transaction that protects our balance sheet and intangible book value per share, while providing for earnings per share accretion in growth, which creates value for all of our stakeholders. I am happy to answer any additional questions that you all might have on the modeling and due diligence process in the question-and-answer session.

Now I will turn it back over to Chris.

Chris Holmes

Thank you, James. We will welcome Myers and Chris and the entire Franklin Synergy team into the FirstBank family. We welcome has to remain unofficial until we close but it’s already heartfelt.

We think that together we will be very well positioned to serve our customer base better than ever. We are thrilled with the financial metrics, and most importantly, we believe that this combination creates the premier community banking franchise in Middle Tennessee.

Operator, that completes my remarks on this evening’s call and we would now like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will take our first question from Jennifer Demba with SunTrust. Please go ahead.

Jennifer Demba

Thank you. Good evening.

Chris Holmes

Good evening, Demba.

Jennifer Demba

Can you just talk about the background of the deal, how long you guys have been talking and how everything came together yet?

Chris Holmes

Yeah. So, first off, we are sitting, I guess, two box, we are pushing the box, a branch two blocks from the Franklin Synergy headquarters and so we know each other. Our headquarters office in Downtown Nashville and Downtown Franklin. But we do compete, we know each other and we see each other socially and when we go to football games and things like that. So we know the folks.

This conversation really started, I guess, in the last quarter and of the year. And we — it sort of picked up steam near the end of that quarter and led to the announcement. So we also — we have known several folks there, Chris Black is sitting at table was — has been an employee of both the organizations.

He left FirstBank to go to become the CFO at Franklin Synergy left with good — left on good terms and so luck with hands, good thing for him, he left with good terms. But — and so that was, that’s how it. And he didn’t anything with the coming together, other than the fact he was — he did — he was the CFO, but it — there was a comfortable level as with some of their financial information because we sort of talk the same language there.

Jennifer Demba

Okay. Thank you. Appreciate it.

Chris Holmes

Sure.

Operator

We will take our next question from Stephen Scouten with Piper Sandler.

Stephen Scouten

Hi, everyone. Good evening.

Chris Holmes

Good evening, Stephen.

Stephen Scouten

So congrats on the deal. I think it’s pretty exciting, it’s exciting to see all focusing on the Nashville MSA. I guess, first of all, is it fair to assume that this will be what you focus on for 2020 or would you still think about looking at other incremental deals if they came about, came to you in other markets?

Chris Holmes

Yeah. This can be what we focus on for 2020 and so we are going to be — it’s going to take all of our attention, where we have totally focused on execution on this deal a little, like, I was talking about seeing these guys, they are not seeing each other.

We will continue to see bankers at conferences and things like that and I am sure there will be casual dialog as Stephen, but we are going to be focused on this and really solely this during 2020.

Stephen Scouten

Great. And you put a lot in the presentation of spoke to hear about retention of talent, retention of management. When you are talking about the assumed retention of all the revenue producers, are those folks that you have look to put under retention agreements currently or will that be transpiring or what are the targets or goals around retaining all those people.

Chris Holmes

Yeah. Well, our target is to retain 100% and so that — we want to retain all of them. There are some really good bankers on both side. But certainly in terms of Williamson and Rutherford counties, the bulk of the key revenue producers, the vast majority is with Franklin Synergy. So we will work through the retention tools that we have things like, well, all the retention tools that you would apply will be the types of things we will be using to try to hang on to those folks.

And I will add this, I mean, we — when we talk about what makes our company’s success, the first thing we — the first thing on that list is being a great place to work, second one is being an elite financial performer and the third one is being a great community bank.

This is going to move our asset size up to close to $10 billion, but we are still a community bank because we think it’s about how you do it not the size of the bank. And so, but the first of those has been a great place to work and that’s the real way that you retain folks is having a great culture and a great environment and both companies do that. So when we think we bring it together, we think that will keep people on the site.

Stephen Scouten

That’s great. And then, obviously, Franklin has a much lower NIM than you guys do on a standalone basis. And then you are doing some balance sheet restructuring here and other things. Can you talk a little bit about where you think the pro forma NIM will shake out roughly or what the impact of that will be, if you have any preliminary numbers there?

Chris Holmes

Yeah. I will let James talk about, but you are right, there’s a difference in the NIM and we have modeled that in and we haven’t been terribly aggressive going forward because we don’t think that’s probably the last way to do it. But James will comment further on the NIM.

James Gordon

Yeah. I think as we take out some of the wholesale funding with the sale of the $400 million portfolio that will happen. And, I think, as we focus going forward on growing the deposits will be the opportunity to bring the margin back into our levels over time with that to immediately, it will bring our margin down in the 360 kind of range. But we expect to rebuild that over time as we, work on the funding side of the balance sheet.

Stephen Scouten

Okay. That’s helpful. And maybe just one last thing on kind of FBK standalone, it looked like loan growth was pretty much in line with kind of where you guys had been guiding. But just kind of curious what you are seeing in terms of kind of overall customer demand and some of the late cycle type of activities or lending structures that you were talking about a little bit last quarter?

James Gordon

Yeah. So during the quarter, yes, we were at come around we are 597, I think.

Chris Holmes

Yeah. Absolutely.

James Gordon

In terms of loan growth, so almost like 6% for the quarter, 10% for the year. And so, we like those numbers. We still — and I think specifically on the quarter, we have seen a few things on the price front that had been a little bit crazy to us, especially when you — on the fixed rate side, we will see some fixed rate things that go out for longer terms.

But I would have to say, not quite as much as we had seen in the middle part of the year in terms of things that just made us wonder what was happening in the market demand and we haven’t seen much change in demand, it’s still relatively strong, so we haven’t seen a lot of change in the market, particularly Nashville continues to be strong, but we see — still see pretty good momentum in places like Nashville or Chattanooga or Memphis.

James Gordon

We did probably see some elevated early payoffs and expect that to continue to keep us in that range over the near-term as well.

Chris Holmes

Yeah. That is a good point, James. We did see more payoffs actually in the fourth and we have some in the first then we have seen earlier — in the early part of the year.

Stephen Scouten

Great. Well, thanks, again, guys and congrats on two really solid quarters and a great deal.

Chris Holmes

Yeah. Thanks, Stephen.

James Gordon

Thanks, Stephen.

Operator

We will take our next question is from Catherine Mealor with KBW.

Catherine Mealor

Thanks. Good evening.

Chris Holmes

Good evening, Catherine.

James Gordon

Good afternoon, Catherine.

Catherine Mealor

I wanted to start digging into the expense savings a little bit. You were clear, Chris, that you are not being too conservative on the 30%, given the retention of people at Franklin, but how should we think about that 30% cost saving number and maybe expense growth into the next couple of years as you prepare for the $10 billion across and how much of those assumptions are baked into your estimates?

James Gordon

So, Catherine, this is James. I will answer that. I think two things. We started about 18 months ago, started laying the infrastructure in knowing that $10 billion was out there someday. We didn’t know that day would be sooner or later. So we have been laying that in and that’s one reason there our expense grew. It’s been a little bit higher than, I would say, historically over the last, say, 18 months.

And then as part of the 30%, I think, some things that we look at — if you looked at, I would say, would be higher, as Chris said, the branch consolidations then I think offsetting that or keeping a lot of people to maintain that balance sheet and the customers that we are bringing over built into that, as well as building in some incremental cost to keep positions and increase our overall infrastructure to meet the demands of passing the $10 billion level from — particular from a regulatory. But we think we are well-positioned for that. A lot of it’s in our run rate and a lot of that we have kept through keeping a very achievable 30% cost saving rate.

Chris Holmes

Hey, Catherine. I will add two things here just to bring for a little bit of commentary and clarity. First, we did mention that operation center, we will be having some expense related to the operations center in Franklin that will be having there that will be establishing there.

And so there’s a little bit of that expense doesn’t get eliminated. And then the other thing there’s non-expense side, but we do have Durbin, the Durbin amendment, we take that into account. That didn’t come in until the second half of ‘21, but we do allow for the revenue reduction related to the Durbin amendment.

Catherine Mealor

Okay. And then speaking the big picture. How do you think about the big picture profitability with the combination of these two companies, I know that will bring the margin down originally and then you should kind of get some of that back as you grow core deposits. But, just generally, you mentioned that it’s accretive to the ROE, but how should we think about the pro forma effect on the ROA?

Chris Holmes

Yeah. I am going to comment on big picture, let James to comment on the pro forma effect on the ROE. From a big picture standpoint, when you think about the profitability moving forward and we have modeled in and it’s slightly accretive to our ROE and slightly accretive to our return on average tangible common.

But I guess the exciting part there’s, we haven’t built in what we are all excited about on the deposit side of the balance sheet. The deposit side it has been a something that we are reasonably provision at and so we haven’t built really much in there and so excited about the opportunities that it gives us particularly, I’d say there.

And the other thing, I’d say, that I am excited about is, we are — in a lot of our communities we are the community bank. We are 30%, 40%, 50% market share in a lot of smaller communities. In Nashville, we have never been that, we never been that community bank that really is knows the customer with a lot of debt.

And then, so we have been more — we have been successful, but we are a lot more of a commercial success in Nashville. And so this does give us that and so, again, there going to be some revenue from that, but we don’t, that’s of course not built in the model, but we are excited about that opportunity. And so, specifics, I know we — it was, I don’t know exactly how many basis points it was in ROA and in ROTC but it was…

James Gordon

Yeah. ROTC, I think, to our consensus number that’s out there, that’s a little over 14%, it will — at a little over 100 basis points back on that and I think that’s before, I think, consensus generally doesn’t take in capital planning on that. We would end up with a lot of excess capital at that point to deploy to help increase that as well.

Then, I think, the other big opportunity and when we talk about there’s a lot scale density and markets creates a lot of operating efficiency irregardless of the 30% cost savings, that’s still on a — they operate with a fairly strong efficiency ratio already adding that together along with that it will help our overall efficiency.

It’s lessens the impact on the efficiency front for mortgages that becomes smaller to the overall pile, still large, but the smaller to the overall pile on that too. Our goal is to be in the lead financial performer and we think over time we will continue with that after this transaction.

Catherine Mealor

Great. And one last thing if I may is on growth, you will be over $10 billion in asset pro forma. How do you think about your pro forma growth rate?

Chris Holmes

Yeah. We have kept things steady. What we modeled in than the pro forma growth rate on our balance sheet.

James Gordon

Yeah. We monitor for the first couple of years the consensus number and then about 8% going forward after that. I would say, we will have by taking off the non-strategic assets and then focusing on deposits.

I think we will have a big opportunity to add producers in that, I will call it, the middle market, C&I business that will help us both in deposits and help to replace some of that. We did not model that into our numbers and I think that will continue to help us to have fairly solid loan growth going forward, as well as deposit growth.

Catherine Mealor

Great. Thank you so much and congrats.

Chris Holmes

Thank you.

James Gordon

Thank you, Catherine.

Operator

We will take our next question from Tyler Stafford with Stephens.

Tyler Stafford

Hey. Good evening, guys.

Chris Holmes

Good evening.

James Gordon

Good evening, Tyler. How are you doing?

Tyler Stafford

Good. Thanks and congratulations on the deals guys. Maybe, Chris Holmes, first, just to start on legacy FBK, the quarter and kind of outlook. At this point, could you give us any clarity or do you have any clear you had about how you are viewing the mortgage business for 2020?

Chris Holmes

Yeah. As we are, what we view it at this point, we think 2020 is going to be similar to 2019 in terms of our production and in terms of our profitability. And it could — it, yeah, of course, it’s all dependent on the rate cycle. It could be down just slightly but we are thinking of it today has been a flat or could be slightly down, is the way we are thinking of it.

Tyler Stafford

Okay. Thanks. And then, James, just going back to one of the comments in the earnings release tonight about just the margin trajectory for 2020. You mentioned kind of stabilized over the first half and then some opportunities for expansion in the back half. Just as you see the margin on a standalone basis for 2020, what is the kind of puts and takes that you see impacting that view?

James Gordon

Yeah. So, I think, on the second half, we have a lot of opportunity. If you will remember back to the third and fourth quarters of 2018. We did a lot of promo CD campaigns that was — one of those products was 11-month, we have kind of gone through the first renewal cycle of that in ‘19 that’s helped us.

Then we also did a 30-month product, I mean, sorry, 25-month product that was at 3% that will start maturing. There’s around $200 million of that that starts in the third quarter and carries through the fourth quarter.

We think the data rate would be 165, 170 as rates go today and we continue to balance that. We have had a good success rate on capturing that 11-month around 70% of rollover rate at the new rates. So you factor that in there and kind of kept the balance flat.

So we were also still growing net-net we keeping that balanced flat in the term deposit. So I think it’s a big opportunity for us in — particularly in the second half of the year. There’s a little bit in the second quarter, but I think, most of the others come in the third quarter and the fourth quarter.

Tyler Stafford

Okay. That’s helpful. Thanks. Just shifting over to the Franklin deal. Can we just — just to confirm the $6 million pre-tax of Durbin that does include both FBK and Franklin, it impacts not just FBK?

Chris Holmes

It — yeah, it does.

Tyler Stafford

Okay.

Chris Holmes

Primarily ours, but yes. Yeah.

Tyler Stafford

Primarily, FirstBank…

James Gordon

Tyler, we must have it relates, say, FBK, we have got a bigger retail book — retail assignment.

Tyler Stafford

Yeah. Yeah. All right. Thanks. Thanks for clarifying that. On the $50 million of merger cost, I was a little bit surprised of the magnitude of that. Can you give us any color about what’s baked into that $50 million?

James Gordon

Yeah. I would say, in round numbers about a third of that is, I will call it, employment and related items, then about another third of that is related to contract buyouts, data processing, those kind of contracts and conversion cost, which will be fairly high on a deal that size and then roughly the other third is kind of split between branch closing cost and then transaction deal fees to investment, bankers, lawyers and other professionals that will need through the process.

Tyler Stafford

Okay. Got it. I may have missed this in the deck, but the page five, I guess, talked about how there are key Franklin executives that enter employment agreements, but I didn’t see any exact roles for Myers or Chris or the others. Is that something that you can share about what — at this point, what the expected — expectation is for their involvement in the combined company going forward.

Chris Holmes

Yeah. We can share this. They are going to be involved and they look forward to be in involved, but all those details are worked out and so as A and B, in general, because all those details on it worked out and so, at this point, we don’t want to share any deeper than that, we will, just not yet.

Tyler Stafford

Okay. And then just lastly from me, following up on Steve’s earlier question just around the core margin impacts. I think a couple of quarters ago and this maybe more of a question for Chris Black. I think a couple of quarters ago, you guys talked about that Franklin that the syndicated book was around LIBOR 220. So do you guys just kind of have ballpark what the $430 million yield is that you are running off and just kind of think about the margin pick-up once you do exit those 230 rate at HLB list and the lower yielding assets that you are running off?

James Gordon

Sure. So I think on that book we are probably in the 5.5% ballpark on loan yields and so a little bit akin to what James said, in terms of standalone that become some of the re-pricing. I think we see that similarly situated on the horizon as well. So both inside with the wholesale and across the, — across the footprint, but specifically on the loans about governance.

James Gordon

Okay. We have signed about a 3.25 spread on that portfolio. That’s roughly how we came up with the $10 million after tax.

Tyler Stafford

All right. That’s what I was looking for. Thanks guys. I appreciate it.

Chris Holmes

Thank you.

James Gordon

Thanks, Tyler.

Operator

We will take our next question from Daniel Cardenas with Raymond James.

Daniel Cardenas

Good afternoon, guys.

Chris Holmes

Hi, Daniel.

James Gordon

Hi, Dan.

Daniel Cardenas

Congrats on the deal. Just a couple of quick follow-up questions, kind of going back to the legacy margin for FirstBank, I guess, question one here, just as I look at the accretion contribution, in Q4, seems to be a little bit more accelerated than in previous quarters. I mean what kind of a good run rate at least for the first half of 2020 to think about in terms of accretion contribution.

Chris Holmes

Yeah. So it was a little bit higher and that really is generally generated by payoffs on some of those credits that different from the marks that you have. I would say, we are going to run somewhere in the $1.2 million to $1.5 million range on a go-forward basis before this transaction just on a standalone basis, may be slightly higher than that when you payoffs on that, so.

Daniel Cardenas

Okay. In the 3. 6 range that you gave on a pro forma basis that’s core, is that a core number is that all in.

Chris Holmes

That’s more core. Yes.

Daniel Cardenas

Okay. Excellent. And then just quickly jumping back to mortgages in terms of expenses for the mortgage division. How should we be thinking about that in 2020? Is there room for additional improvement there?

Chris Holmes

We hope so. There’s always room for improvement and imagine the guys that’s responsible for mortgage, we hope so. It’s gotten more efficient with our — with the downsizing and we hope it continues to improve an efficiency, say, it’s adjusting for the seasonality of the business.

James Gordon

Yeah. The other thing I would say on that, that distorts, one is, because of the size of last quarter, say, versus this quarter. The other thing that’s distorted somewhat is on the way you do the presentation of the mortgage servicing rights income or the mortgage servicing income and you take the fair value against the revenue, so — and that, that’s actually been a law.

So that’s in the revenue, I guess, the revenue number of at least for the last two quarters or three quarters, we hope that slows down over the course of next year as well. And so if you take that out, the efficiency ratio for mortgage looks a little better, but still opportunity is there over the course of time to work through that.

Daniel Cardenas

Okay. Great. And then, I guess, given the deal that was announced in the pending transaction in Kentucky should — is it safe to assume that maybe buybacks take — going to the back burner here?

Chris Holmes

Yeah. It’s safe to assume at least in the near-term.

James Gordon

Yeah. I mean, I think, even from a legal standpoint, we still have that authorization, but not the ability to use that at this point, but based on the structures of really both deals.

Daniel Cardenas

Okay. Great. All my other questions have been asked and answered. Again congrats on the transaction.

Chris Holmes

Thanks, Dan.

James Gordon

Thanks, Dan.

Operator

At this time, we have no further questions in the queue. I would like to turn the conference back to Chris Holmes for any additional or closing remarks.

Chris Holmes

Okay. Thank you very much. Once again, we appreciate you staying with us into the evening and we are more excited about moving forward with as partners with Franklin between FDK and Franklin. So thank you all and have a good evening.

Operator

Ladies and gentlemen, this concludes today’s conference. We appreciate your participation. You may disconnect at this time.

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