U.S. Markets closed

Edited Transcript of FBK earnings conference call or presentation 23-Jan-19 2:00pm GMT

Q4 2018 FB Financial Corp Earnings Call

Nashville Apr 19, 2019 (Thomson StreetEvents) -- Edited Transcript of FB Financial Corp earnings conference call or presentation Wednesday, January 23, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Christopher T. Holmes

FB Financial Corporation - President, CEO & Director

* James R. Gordon

FB Financial Corporation - CFO

================================================================================

Conference Call Participants

================================================================================

* Alex Lau

JP Morgan Chase & Co, Research Division - Research Analyst

* Catherine Fitzhugh Summerson Mealor

Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP

* Christopher William Marinac

FIG Partners, LLC, Research Division - Director of Research & Partner

* Daniel Edward Cardenas

Raymond James & Associates, Inc., Research Division - Research Analyst

* Peter Finley Ruiz

Sandler O'Neill + Partners, L.P., Research Division - Director

* Stephen Stone

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Tyler Stafford

Stephens Inc., Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to the FB Financial Corporation's Fourth Quarter 2018 Earnings Conference Call. 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, who will 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 under SEC's website at www.sec.gov. Today's call is being recorded and will be available for a replay on FB Financial's website approximately an hour after the conclusion of the call. (Operator Instructions)

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 risk 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 reconciliation of the non-GAAP measures to comparable GAAP measures is available in the 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.

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [2]

--------------------------------------------------------------------------------

Thank you, Jan. Good morning, and thank you for joining us on this call to review our results for the fourth quarter of 2018. We appreciate your interest in FB Financial.

On today's call, I'll review the highlights of our fourth quarter, and then I'll turn the call over to James Gordon, our Chief Financial Officer, who will provide additional analysis on our financial results, and then that'd be followed by your questions.

This quarter, we continued to see strong balance sheet growth. Our team continues to delivered outstanding organic growth balanced with solid profitability, while our returns on assets and tangible equity were less than recent quarters, primarily due to our previously signaled mortgage results and also some margin compression that we experienced. But we're proud of the annual results, and we have a great foundation heading into 2019.

Last quarter, I covered 4 main themes for the company: First of those, loan growth, deposit growth and margin; second, mortgage; third, credit; and fourth, capital. Those same themes hold true for this quarter, and I'll address each of those, but I also want to add M&A as a fifth topic since we have the Atlantic Capital branch transaction pending, and I'll provide an update on that.

First, covering our balance sheet growth and margin. We once again showed robust loan growth with 14.5% annualized growth over the third quarter. For the year, we grew our loans held for investment by 15.8%. We're fortunate to be in markets with very vibrant economies, resulting in strong companies with increasing loan demand, and given the strength of our core markets, we expect to continue to see robust demand and a steady supply of good lending opportunities for the foreseeable future. We continue to target long-term loan growth of 10% to 12%, and we intend to manage within that range as we tweak our management process to bring additional focus on deposit relationships and the margin.

On the liability side, customer deposit growth has been robust at 13.7% in 2018 and 5.1% annualized for the fourth quarter. However, low-cost customer deposit growth has become our biggest challenge in the year with most of the incremental growth over the last couple of quarters coming in the form of higher-cost current deposits. Our execution has not been as focused on the deposit portion of the business over the last couple of years because it didn't have to be, and that's not a positive statement on our execution, but it's a fact. So growing relationships that result in core deposits is a high priority for most of our relationship managers.

Success in deposit business comes slowly, but we expect results to show over future quarters. In addition to the focus on our organic deposit growth, we'll also look to continue to bolster our deposit portfolio and liquidity through acquisition activity.

The deposit portfolio is one of the most important criteria for us in evaluating acquisition opportunities. We believe that M&A is a very viable avenue for growing high-quantity deposit relationships for us. This is more viable for us than it is many of our competitors as demonstrated by the recent Atlantic Capital transaction since our community banking model is understood and embraced by many of the banks throughout our geography seeking to partner with another institution.

With that background of loan-to-deposit growth, our net interest margin, excluding accretion and nonaccrual collections, decreased to 4.33% this quarter. We're continuing to see solid loan growth opportunities with our customers, which put pressure on our funding, leading to lower incremental spreads.

We anticipate the core NIM to experience less pressure in the first quarter and to be in the 4.25% to 4.35% range. The margin decrease, once we close the Atlantic Capital branch transaction -- I'm sorry, the margin will decrease once we close the Atlantic Capital branch transaction because the yield on the loans we're acquiring is less than our current loan yield, but the core deposits we are acquiring will decrease our cost of funds, and the excess liquidity will give us flexibility to slow the growth in the higher-cost deposits or to pay down the cost of borrowings in the short term as we deploy in the new loans over the long term.

Well, our total mortgage operations, including our retail footprint, contributed a $1.8 million pretax loss for the quarter and $5 million of income for the year. This compares to a $4.4 million contribution in the fourth quarter of 2017 and a $18.1 million contribution for the full year of 2017.

2019 is currently shaping up to be a challenging year for the mortgage industry, similar to the second half of 2018, in our view. We, like everybody else on the planet, are not capable of predicting mortgage volumes with any degree of reliability, so we're going to stay away from that. Our evaluation of mortgage is ongoing with a focus on delivering better results than this quarter, and we expect mortgage performance in 2019 to be similar to 2018.

Credit metrics continued to reflect the benign credit environment. We don't have signs in our portfolio of deteriorating credit. We're seeing continued strong employment in job growth, high confidence among business owners and good loan demand in our markets. Speaking briefly on capital, our capital levels remain in a position of strength as solid returns have continued to build our equity, and our Board of Directors have approved another quarterly dividend of $0.08 for this quarter, and we maintain our buyback authorization as a tool to manage our excess capital.

One use of that excess capital in addressing M&A is our previously announced acquisition of the branches in each of, say, North Georgia from Atlantic Capital. Time lines, conversion and integration are all scheduled. We're pleased with everything about that transaction but especially with the quality of the approach and the attitude that the Atlantic Capital people bring to the table, both those that will be joining FirstBank with the transaction and those that are part of Atlantic Capital's corporate team that are assisting in the conversion.

To summarize, we delivered strong loan and deposit growth, a solid margin, and managed expenses. Our returns were less than we typically deliver due to mortgage results and the compressed margin. But even so, our full year results outperformed most of our peers. We're proud of our team for delivering those results. In between our Sydney branch deal and our organic growth prospect, we're excited about what '19 -- 2019 has in store. With that overview, I want to turn the call over to James to review our results in some more detail.

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [3]

--------------------------------------------------------------------------------

Thanks, Chris, and good morning, everyone. First, I want to recap our operating results for the quarter as highlighted on Slide 3.

Our adjusted diluted earnings per share were $0.55 on an adjusted net income of $17.3 million, delivering an adjusted return on assets of 1.37% and an adjusted return on tangible common equity of 13.5%, and we produced an adjusted return on assets of 1.69% and adjusted return on tangible common equity of 17.1% for the full year.

Our performance fourth quarter 2018 versus fourth quarter of last year was driven by outstanding organic growth, offset by higher funding cost and provisions for loan losses of $2.2 million due primarily to our robust loan growth as well as the $1.8 million loss from our mortgage operations. Our performance for the full year 2018 versus 2017 was driven primarily by organic growth, 7 more months of the Clayton Bank acquisition as well as the lower tax rate, offset by the decline of mortgage overall.

Now Slide 4, it illustrates the underlying fundamental trends of the company's profitability and demonstrates the consistent performance that we are targeting. Our adjusted return on average assets was 1.69% for 2018, demonstrating the strength and durability of our core franchise earnings power, which enables consistent growth and profitability. This sustained level of profitability has been driven by balanced loan growth, a margin that remains one of the highest among our peers, expense control and fundamentally sound credit quality while being slightly offset by a challenging mortgage environment and increasing deposit cost.

Slide 5 presents the fundamental elements of our net interest margin, in particular healthy loan yields, fees and core deposit portfolio. As Chris mentioned, our deposit cost increased this quarter partially due to the full impact of the time deposits raise in the third quarter. But our net interest margin remains strong at 4.5% or 4.33% excluding accretion and nonaccrual interest collections.

Accretion and nonaccrual interest collections, along with the loan fees, decreased $1.2 million from the last quarter. Taking a minute to speak about our margin, we felt the full impact of the customer time deposit balances that we raised in the third quarter. However, our cumulative beta since rate increases began December 2015 is approximately 31%, and our net interest margin remained towards the upper end of our peers at 4.5%.

One piece of the margin and interest income impact that I think gets lost at times is the loans for sale balance. In the fourth quarter, we had $1 million left in interest income related to that portfolio than we had in the third quarter due to lower mortgage production. As we go forward anticipating lower balances in mortgage, we've recently purchased additional securities, increasing that portfolio to approximately $650 million at the end of the year. That shift in earning asset mix contributes some of the decline in the margin.

Another item that will impact the net interest margin is the Atlantic Capital acquisition. Right now, we estimate that, that will be approximately 5 to 10 basis points dilutive to our margin after closing and going forward without considering the inclusion of any accretion from the transaction.

We continue to feel good about the relative strength of our margin, but we anticipate ongoing headwinds from our cost of funds throughout 2019, particularly if the Fed's continuing to raise the target rate further bleeds through to customers across our market seeking higher rates.

Moving on to Slide 6. As Chris mentioned previously, we produced another quarter of robust loan growth above our long-term 10% to 12% target range. We finished the year at 15.8% growth, but we believe that we'll settle back in the 10% to 12% organic growth in 2019. Our objective remains consistent, profitable in relationship growth, not merely focusing on hitting quarterly targets, especially given our increased funding cost.

We also stay comfortably within the regulatory thresholds on construction and development in commercial real estate concentration ratios. Overall, loan pricing has not expanded at levels similar to deposit cost. However, we have benefited from approximately 50% of our portfolio being variable primarily tied to LIBOR or prime rates. On the fixed-rate side, we have not seen the same lift due to the flatter yield curve and overall competitive pressures.

Now moving to Slide 7. Our customer deposits were $4.1 billion, up 13.7% from the fourth quarter of last year. It's up 5.1% on an annualized basis from the third quarter of 2018. We had decent growth this quarter that was partially impacted by a $24.6 million decline in noninterest-bearing mortgage servicing escrow deposits. Without this impact, customer deposit growth was more in the 8% range for the quarter.

While we saw deposit costs move up this quarter, we believe that the magnitude of the increase was more a result of the catch-up from the deposit promotion that we ran during the second half of the third quarter. We will, however, continue to see deposit cost increase as we grow our deposit base to fund our loan growth. However, we have been able to lower our promotional time deposit rates by 25 to 30 basis points since the end of the third quarter. In the latter half of this year, we expect to see a little bit of relief as we bring on approximately $200 million of excess deposits from the pending branch deal, as Chris mentioned.

Turning to Slide 8, during the fourth quarter, our total mortgage operations had a pretax loss of $1.8 million when our retail footprint is included. For 2018, our total mortgage contribution equaled only approximately 4.6% of the company's adjusted pretax income, which is down from 19.6% in 2017.

Our lock volume declined to $1.3 billion in the quarter compared to $1.7 billion last quarter and $1.8 billion in the fourth quarter of last year. Competitive pricing pressures from the rate environment were weighing on both volumes and margins. We took some serious strides towards expense reduction and rightsizing the channels during the quarter. We are hopeful that this should pay off in 2019, but we continue to monitor to see if additional steps need to be taken. Ideally, mortgage will show a modest improvement for the full year 2019 as compared to 2018.

On Slide 9, our operating leverage declined slightly this quarter compared with prior quarter staying near 50% for the Banking segment at our target. The quarter-over-quarter movement from 52.4% to 52.9% in our Banking segment efficiency ratio is primarily explained by the decline in the market -- margin, while expenses were overall stable.

We expect Banking segment net interest expenses, include -- excluding mortgage-related expenses, to grow in the mid-single-digit range, reflecting a growth in additional investments in revenue producers and technology across 2019. Our effective tax rate was 24.9% for the fourth quarter. For 2009 (sic) [2019], we expect our effective tax rate to be in the 24.5% to 25.5% range.

As shown on Slide 10, asset quality remains sound and provides a strong foundation for our company. Nonperforming assets to assets picked up a bit for the quarter as we had a couple of the legacy loans get downgraded with 1 credit going on nonaccrual. But on the whole, our loan portfolio remains in solid shape.

As largely expected, our loan loss provision of $2.2 million for the quarter was driven by strong loan growth, renewals of previously acquired loans and net charge-offs of 6 basis points of average loans as compared to net charge-offs of 6 and 5 basis points for the linked quarter and fourth quarter of 2017, respectively.

Our capital levels as shown on Slide 11 remain strong, enabling future growth, both organically and through the Atlantic Capital transaction. Our capital structure remains relatively simple, giving us flexibility as needed to potentially add noncommon equity sources. Since the first quarter after our IPO, our tangible book value per share has increased by $5.46 or 47.2% to end the quarter and year at $17.02, driven by our strong financial results and the accretive Clayton Banks merger.

We expect our tangible common equity ratio to settle into the 8% to 9% range immediately following the closing of the branch transaction in the second quarter. Additionally, in the first quarter, we are selling approximately $2 billion of servicing with $30 million of associated mortgage servicing rights to manage overall regulatory capital levels. We expect to experience no material gain at all from that transaction.

Our board previously authorized our $50 million share repurchase program. However, with the pending branch deal, we don't anticipate exercising much of that plan in the near future, maybe $5 million to $10 million.

With that overview, let's turn the call back over to Chris for closing comments, and then we'll open the call to your question.

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [4]

--------------------------------------------------------------------------------

All right, thank you very much, James. We appreciate your interest. We appreciate your investment in FB Financial and look forward to your questions and updating you on the next quarter of our expectations and our continued growth.

Operator, this completes my remarks for this morning's call, and we would now like to open it up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We will take the first question from Catherine Mealor from KBW.

--------------------------------------------------------------------------------

Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [2]

--------------------------------------------------------------------------------

I wanted to start on the margin and just who built up the cost of deposits. It feels like before -- let's just kind of talk about FBK before the ACBI branch deal comes online. It feels like -- what I'm hearing from some of your forward-looking comments, that you believe that the pressure of deposit costs should moderate in the beginning part of this year just given that maybe some of the either promotional rates on some of your CDs have come down since third quarter. Is that a fair assessment? And how does that -- and how do your expected rate hikes kind of factor into that guidance?

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [3]

--------------------------------------------------------------------------------

Yes, Catherine, I think that's a fair assessment in that we do expect some moderation. We've even, I guess, seen some moderation near the end of the quarter and into this quarter. And we ran pretty hard on a promotional campaign and brought in -- approximately $250 million of funding at relatively high rates, but we thought was a good move for us from a balance sheet management perspective. We knew there was going to be a cost associated with it, and there was. And we continue to bring in some funding at a higher incremental cost because we continue to grow at a pretty high rate. But we do think that, that moderates some as we're into 2019. And partially, what allows that to moderate, so that said, you haven't said pre-ACBI branch acquisition. Possibly what allows that to moderate though is the fact that we -- and this was calculated when we did the transaction. When we bring in the ACBI branches, I mean, that's over $200 million more in deposits than loans. And so that -- again that's something that's important to us and some -- one of the reasons that we reached out and did that transaction.

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [4]

--------------------------------------------------------------------------------

Yes, I think overall, Catherine, we've seen the rates seem to abate somewhat, although at higher level, I think the -- if the fed continues to raise, what does that do to the customer mentality? I think for the most part, though, the cumulative catch-up has been baked in by our customers in the rate environment. And so, yes, I think we can better control that. Plus we have -- we raised the additional funding where we could take some pressure off on absolute funding growth as we continue to grow the balance sheet in that 10% to 12% range on the loan side.

--------------------------------------------------------------------------------

Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [5]

--------------------------------------------------------------------------------

Got it. And so then as we think about your NIM guided range of 4.25% to 4.50%, how -- it's a big range, so how are you thinking about that range with ACBI for the year?

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [6]

--------------------------------------------------------------------------------

Yes, so I think as we look at next quarter first, we're thinking lower half of that range, so we were saying in that 4.25% to 4.35%. And then as we bring on ACBI probably immediately -- if you remember, we adjusted the range up when we did the Clayton acquisition. If you look at what's coming off from ACBI, their loan yields are actually less than our loan yields, their deposit costs less than our deposit cost, but their net spread's less than ours. So it'll decrease our margin immediately. We're past the meeting in the 5 to 10 basis point range. That's an -- that's our estimate today. Keep in mind, things can move around a little bit between announcement and close. That's not -- we just don't know what that'll ultimately look like, so we're saying 5 to 10 is our estimate today on what would happen when that came in. And as I've said, we've kind to planned to use that excess funding to give us some flexibility, maybe immediately, on lowering some cost on the funding side, and then, it gets us more -- and some longer-term flexibility. So...

--------------------------------------------------------------------------------

Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [7]

--------------------------------------------------------------------------------

Okay. That's really helpful.

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [8]

--------------------------------------------------------------------------------

We talked about...

--------------------------------------------------------------------------------

Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [9]

--------------------------------------------------------------------------------

Go ahead.

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [10]

--------------------------------------------------------------------------------

I was going to say, about half of that's about $100 billion or so of that CD production was in 11 months, so we'll start seeing some of the maturities early in the third quarter start coming through on that. With that flexibility, we can probably have more flexibility to manage that cost of those renewals down in the latter half of the year.

--------------------------------------------------------------------------------

Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [11]

--------------------------------------------------------------------------------

Okay, that's great. And then, if -- you have still really low levels but nonperformers increased just a little bit as you got that $5 million linked quarter. Anything -- any commentary there?

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [12]

--------------------------------------------------------------------------------

Yes. Yes, I'm glad you asked, plenty of commentary. Yes, we had 1 loan actually that we put on nonaccrual, and so it's 1 loan, about $5.7 million. Just some quick characteristics. Been in our portfolio longer than I've been in our portfolio. Frankly, it's been around for a long time. And it has been a marginal performer. We went back and got some additional collateral on it a couple of years back. So we feel actually quite good about not having any material loss position, if any. Frankly, we feel good about not having any loss position, but the entity sort of stopped operating, and so we put them nonaccrual until we get worked through the disposition.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

(Operator Instructions) We will take the next question from Peter Ruiz from Sandler O'Neill.

--------------------------------------------------------------------------------

Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [14]

--------------------------------------------------------------------------------

Most of my questions been answered but just kind of wanted to hear your commentary. It still sounds like you're still bullish on the pipeline heading into 2019 but just any color or moving parts there, what you're seeing in the markets. How is competition shaking out? And are you seeing any kind of market-wide slowdown at all?

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [15]

--------------------------------------------------------------------------------

Yes, Peter, some commentary. I guess, a couple of keynotes that pop to mind. We're actually continuously -- robust demand. We're actually continuing to see strong demand. And so customers seem to be optimistic. Customers seem to have good liquidity, customers seem to be positive. The -- and so all that's good, and I'd say that's pretty much across our markets. So I think it's -- that pretty much goes across our markets. One term I used when I said -- when I was talking about 2019 was that we would be managed growth in that 10% to 12% range. Notice last year, we were almost 16% on the loan growth side. We were almost 14% on the deposit growth side. That 10% to 12% in current environment with a lot of robust demand, we're not sure where we are in the cycle. We think 2019 looks to be a great year economically and hopefully 2020 as well. But we're certainly later in the cycle. So there's more caution on our part. Like I said, everything is flashing green but just trying to be wise about how we manage our balance sheet going forward. We think that 10% to 12% is probably a prudent range going forward. That's a strong -- still a strong growth rate, allows us to really focus on both sides of the balance sheet and margin. And so that's really how we feel as we go forward. So importantly, I'd say -- as I say that, I want to reemphasize, we're not seeing any problems in our portfolio or problems in the market, then I'll say -- make one last comment, we do see just things get more and more competitive, and we see some things that we wouldn't do and don't do, and that's why I say, I think the managed growth is appropriate as we head into 2019. We'll still, we think, hit our targets with no problems, but we want to manage in that range.

--------------------------------------------------------------------------------

Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [16]

--------------------------------------------------------------------------------

Great. And maybe just on mortgage, just assuming that there isn't another leg down -- a material shift in leg down in terms of volumes and anything like that. Are you guys mostly done with the restructuring efforts there? Are there any additional changes that maybe need to happen in this first quarter? Or are you guys kind of hoping to kind of keep things where they are?

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [17]

--------------------------------------------------------------------------------

Yes, a couple of things there. One, we're not happy with where we are from a profitably standpoint, and so we're never done -- and I'd say, we are never done. And so we'll continue to look and challenge ourselves on the operations, and so we'll continue looking and challenging, certainly into the fourth quarter -- I'm sorry, into the first quarter. So we'll be -- so we'll continue looking. We will continue challenging. We are -- mortgage appear, for you -- for all of us is a difficult -- it's difficult to predict volumes because basically, they're going to be tied closely to interest rates and maybe -- heavily to interest rates, less so to a couple of other factors, but it's difficult to predict. And so we're staying away from making too bold of a prediction there. I will say, we certainly hope that this quarter, when you look going forward, we don't expect $1.8 million losses in the mortgage business as we move into the 4 quarters of 2019.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

(Operator Instructions) We will now take the next question from Jennifer Demba from SunTrust.

--------------------------------------------------------------------------------

Stephen Stone, SunTrust Robinson Humphrey, Inc., Research Division - Associate [19]

--------------------------------------------------------------------------------

It's actually Steve on for Jennifer. First off, first question, I just need a clarification. The margin guide that you guys gave, the 4.25%, to 4.35%, was that for the year or the quarter?

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [20]

--------------------------------------------------------------------------------

Quarter.

--------------------------------------------------------------------------------

Stephen Stone, SunTrust Robinson Humphrey, Inc., Research Division - Associate [21]

--------------------------------------------------------------------------------

Okay. And your kind of commentary on margin as we move forward, did that include any rate hikes? Does that change how you guys think about deposits through the year? Is there still a catch-up we'll see?

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [22]

--------------------------------------------------------------------------------

We don't think the rate environments will drastically impact, because we think that the catch-up is in there. I mean, obviously, there is some repricing, but we have 50% of our loans at -- are also variable. So those should kind of weight out the unknown factor. It was -- is it accumulative done in the customer's minds, we think -- we've seen some abatement of that, offering rates, brokerage CD rates, some of those things have somewhat abated even with the latest couple of rate hikes in the latter half of the year. So we're pretty optimistic that the rate hikes won't have a significant impact going forward on that. But again, cautious because of customer behavior and I would say the competitor behavior as well.

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [23]

--------------------------------------------------------------------------------

Yes, I'll just say this, practically speaking, we think we're probably close to neutral there. And our cumulative beta, our beta was very low. We get -- in more recent quarters, it's certainly been much higher, but our cumulative beta is still quite reasonable, and when James says less catch-up, it kind of saying as though rates have caught up with kind of customer expectation. And we've seen, at least over the last few weeks, a little, I'd say, maybe abatement there in terms of customer expectations. So we're hopeful that, that will carry on into the 4, and as rate hikes come, perhaps it's not quite as impactful from a beta standpoint.

--------------------------------------------------------------------------------

Stephen Stone, SunTrust Robinson Humphrey, Inc., Research Division - Associate [24]

--------------------------------------------------------------------------------

Perfect. Looking kind of at your compensation practices, you guys changing anything in 2019, targeting deposits more? Any kind of certain types of deposits?

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [25]

--------------------------------------------------------------------------------

Yes. We -- I'd say our loan growth has been robust, and it's -- and I will be careful how I say this because we got all our employees and everybody else on the line, but it hasn't been -- it's never easy, and I don't want to say that it's ever easy, but at the same time, it's not required just the ultimate intensity over the last few quarters, because we're in great markets. We've been -- we haven't had to take every deal to make our goals. And so we've been -- we feel like we've been prudent there. But we also haven't had as much intensity on the deposit side because we've had excess funding. And so if there's a change, it's in increasing the intensity on that deposit side through our execution and through what we do and what we talk about every day. That's what good operators and good executors do, and so that's what we will be doing, and so if there's a change, it's really around the intensity with how we manage deposit generation. And I'd say that's not a transformational change. That's an incremental or an evolutionary change. It's not a -- it's not something that's -- where we're having to totally change our model or anything like that.

--------------------------------------------------------------------------------

Stephen Stone, SunTrust Robinson Humphrey, Inc., Research Division - Associate [26]

--------------------------------------------------------------------------------

Okay, perfect. And then just, I guess, one more question. You guys brought up M&A a little bit. Just wanted to see what's kind of the time line you think for this. Would you have to wait for the ACBI integration to be well underway? Or do you have capacity today to take on another acquisition?

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [27]

--------------------------------------------------------------------------------

Yes, we -- if you look at our acquisition -- so if you look at our acquisition history, we're thoughtful and prudent about that. So we did one in late 2015. We did one in 2017, and we did one in late 2018 that will close in 2019, and so we typically haven't had a history of backing up deals, and I don't -- wouldn't expect that to change for a couple reasons. One, what we're looking for is not just on every deal. I reference important part of our criteria is deposit side of the balance sheet that we bring on, and so we get contacted constantly, taking a look at banks and so -- but frankly, most of them don't meet that criteria from a deposit standpoint. And then secondly, we think of ourselves as operators and integrating those and then, operating at a high level is not easy. And so we'll continue to look. We'll continue to do some things, but it'll be in a measured and disciplined way. And the third part of that is, man, we see pricing that -- we see some pricing on some deals that is not valuable for shareholders. It dilutes as opposed to create value for shareholders, both in the short term and the long term, and we just don't do that. We get -- if you could see us in the conference room right here, we probably got close to 50% of our shares sitting around the table. And so we don't go out and do bad deals because -- over ego. And so that's a moderating factor for us as well.

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [28]

--------------------------------------------------------------------------------

And one other thing, Steve, I would just point out, on a branch deal, the closing and the conversion will be simultaneous, and so the integration will be much further along than a normal M&A transaction, where you might close and not convert for 3, 4, 5 months, whatever it happens to be. So once we close and shortly after that, that one will be -- down to more business integration, which our markets will handle. So it would free up some of those resources if a deal were to come along that makes sense, like Chris said.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

We'll now take the next question from Tyler Stafford from Stephens Inc.

--------------------------------------------------------------------------------

Tyler Stafford, Stephens Inc., Research Division - MD [30]

--------------------------------------------------------------------------------

I wanted to just start on some of the loan growth commentary you made earlier. It's evident you guys have the growth engine that could produce kind of that mid-teens growth range from here. But I know you're talking about kind of managing that down back towards that 10% -- 10% to 12% range, and I understand there's some competitive dynamics that's going to manage that down and prevent some of that stronger growth. But I'm just trying to understand, if there are certain portfolios you feel less comfortable more rapidly growing at this point that you're going to be kind of deemphasizing? And then what portfolios, as you kind of look out towards that 10% to 12% growth that you still, at this point in the cycle, feel comfortable growing?

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [31]

--------------------------------------------------------------------------------

Yes, Tyler. Yes, I think you described all that appropriately. We have shown the ability to grow pretty -- relatively -- well, we certainly have the ability to grow at a very attractive rate. And when we think about those portfolios, yes, there are things that we are -- that we're staying -- we're measuring carefully before we go in. Always like to remind everybody, we are a community bank, that we operate as a community bank. And so we're not sort of red liners on products or asset types, where we go, you know what, we're getting out of this, and we go out to our customers and say, hey, we need you to pay us off because we're getting out of here -- your asset class. We don't do that. We're relationship based. We know people. We've dealt with them for a long time. And so if we get somebody in the hospitality industry, we are accustomed to dealing with them. We know what they do. They know us. And so we typically will continue to deal with them, same way in other asset classes, like multifamily or others. That being said, construction -- we are careful on construction these days. That's not -- actually, that's not saying we don't do it. We're just careful on it. Land, we've seen increasing opportunities to do larger and larger land deals. We're very careful on those. It's got to be folks that we know and land that we are familiar with every square inch of. Yes, multifamily is something that we've been being careful on for a while now. Hospitality is something that we've been careful on for a while now. And so those would be the things that we have an extra measure of caution on. And then the other thing that we do, Tyler, and we use to manage our portfolios is, we -- given the size, we're capable of generating and holding some large credits. And so we are careful to sell those down, again, just as a risk mitigation factor. And so we get into some interesting conversations around here with our star RMs who may be generating a $50 million deal that is solid as solid could be, but we just don't want to hold that much of a single credit, and so we'll end up selling that down, and so we consistently do that, and we've got, frankly, community bank partners out are that are clamoring, saying, hey, you have something for me? Can you sell me something? And so we have done that, and we'll continue to do quite a bit of that, maybe even some more of that on these types of deals, just making sure that we're mitigating our risk there. The one thing I didn't mention was our C&I. We continue to grow the C&I portfolio. We want to continue to grow the C&I portfolio because, obviously, that brings with it -- those are operating companies that bring deposits with them, and we like those. They are always competitive, but we like those, and we're going to be competitive with everybody else. In some cases, we're going to be -- we're going to outcompete folks for those deals because we like both sides of the balance sheet they bring.

--------------------------------------------------------------------------------

Tyler Stafford, Stephens Inc., Research Division - MD [32]

--------------------------------------------------------------------------------

That was very helpful. And just last one from me on mortgage. I just want to be clear on what the expectation is. So with the structural and operational changes in the mortgage group that you guys kind of talked about or handed out in the press release, so those changes should produce slightly better pretax mortgage contribution in '19 relative to '18. Is that the expectation?

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [33]

--------------------------------------------------------------------------------

Yes. Yes. And you detect the tentative nature of my yes, that's -- we look at 2019. We think the year for mortgage is going to be similar to last half of 2018, which wasn't great. And if you look at our pretax last year of mortgage about $5 million. And so we look out this year, we hope to beat that. And whether that's $5 million in one or $10 million, is where we're backing off. So we see the year as being similar to last year, and that's really where we're holding in terms of given much additional color on mortgage at this point. I will say this -- and I'll just reemphasize this because, while we got a lot of competitors that would absolutely kill for a 1.35% ROA, we had a 1.35% ROA in the quarter with a $1.8 million loss pretax in mortgage, a decline in the margin and a normalized provision. And so if you just take that pretax loss, even if you just turned it into a breakeven, the quarter's substantially better. You can turn it into a profit, then it's substantially better that much more. And so that's where we are optimistic -- and then we begin to add some of the funding things we've done to create some -- reposition the balance sheet for us in terms of being looking into '19 and trying to produce consistently improving results. We feel pretty good about some of the things we've made in the last 3 or 4 months.

--------------------------------------------------------------------------------

Tyler Stafford, Stephens Inc., Research Division - MD [34]

--------------------------------------------------------------------------------

That's helpful, and I can appreciate the difficulty forecasting the mortgage expectation. I just wanted to make sure that the '19 commentary you're sharing was relative to the full year '18, not the back half of the slight loss that you saw -- back half '18 slight loss that you saw, so that's helpful.

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [35]

--------------------------------------------------------------------------------

Okay, yes, and that is right. You got that right when you restated it.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

We will now take the next question from Alex Lau from JPMorgan.

--------------------------------------------------------------------------------

Alex Lau, JP Morgan Chase & Co, Research Division - Research Analyst [37]

--------------------------------------------------------------------------------

Right, so just a quick question on your CD campaign. Want to get a sense of how much of it is new money versus are you seeing some of it come from existing balances like from interest checking accounts?

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [38]

--------------------------------------------------------------------------------

With what we -- obviously, it was targeted to either expand relationships or get new relationships, of which the bulk of it was -- based on our best guess, somewhere around $50 million of it moved from other buckets, probably more from money market than anywhere else, but that was our best quantification of it. And that was during the third quarter part of the campaign. The campaign ended on September 30. We've kept the products out and lowered the rates down by 25 to 30 basis points since that point in time.

--------------------------------------------------------------------------------

Alex Lau, JP Morgan Chase & Co, Research Division - Research Analyst [39]

--------------------------------------------------------------------------------

Got it. That's helpful. And then just on NIM, so you should see a benefit on the loan yields in 1Q from the December rate hike? And you've also given the guide for 4.25% fourth quarter, 4.35% for the first quarter. Now assuming the fed pauses on rate hikes from here on out, where do you think margin will progress after the first quarter?

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [40]

--------------------------------------------------------------------------------

Yes. I think the first thing after the first quarter, you're going to have the impact of the Atlantic Capital. They'll probably bring it down, as we said, 5 to 10 basis points depending on how we ultimately deploy it and take off. I think once it steps down, I think that level, it'll remain relatively constant for the remainder of '19, somewhat depending on slight benefits from rate hikes potentially later in the year. But it's going to kind of level out and settle in, in that range. That range now is much tighter than it had been previously, where we had a 4.25% to 4.50% range. We tightened in that range, believing it'll stabilize within that range after we deploy the excess liquidity. And then it should start, if we then turn some of that liquidity back into loans over future periods, probably beyond '19, that could begin to grow again.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

We'll now take the next question from Christopher Marinac from FIG Partners.

--------------------------------------------------------------------------------

Christopher William Marinac, FIG Partners, LLC, Research Division - Director of Research & Partner [42]

--------------------------------------------------------------------------------

Wanted to ask a further question on deposits and as it relates to kind of the comparison of what it takes customers to move to you on interest checking versus the straight DDAs? How is that comparison today? And how do you see it evolving?

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [43]

--------------------------------------------------------------------------------

Yes. And so when a customer is moving, it -- when it joins -- takes a relationship today, and so I'd say that's a test of the most important, and that's what we deploy. And so it's not easy to get folks to move their checking account. Second thing is, we do have an attractive checking product with a savings combination. We got 5 special awards that's got a preferred interest rate on it, and it is -- it does have some requirements attached to it, but frankly just about all of our -- most -- vast majority of our customers qualify for today. It Involves a debit card. It involves a certain number of transactions. And so it's -- it continues to be -- it's always been hard, continues to be hard. But when you look at our proposition in terms of attractiveness of the product, the convenience of the branch network, the mobile offerings in the brand, which I think are all important things, those are things which are actually quite good. All of those are quite good and a lot of our markets, the brand is not as developed as we'd like for it to be in some of our markets because we're a little more recent than some banks that have been there for decades and decades, but those are things it takes to move. We've got those, and so generally, we're calling on folks with relationships.

--------------------------------------------------------------------------------

Christopher William Marinac, FIG Partners, LLC, Research Division - Director of Research & Partner [44]

--------------------------------------------------------------------------------

That sounds good, Chris. Just a quick follow-up on a separate topic, which is CECIL. How do you see that playing out this year, both for yourselves internally but also, more importantly, kind of how -- is that a catalyst for merger discussions as this year unfolds?

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [45]

--------------------------------------------------------------------------------

I don't think, Chris, that it's going to be a huge catalyst for M&A. I think it would be -- it's obviously a large amount of work and a lot of discussion going on around it. But I don't think it'll lead to changing the M&A. The credit will be credit, the numbers. As you head into it, the debate will be, have you considered -- if you're announcing a deal late in the year, how do you consider that knowing that the traditional fair value versus the CECIL additional impact and what that does to you to the initial day 1. The dilution on a deal will probably be the biggest play, may impact from timing I think more so than absolute discussions as we move forward.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [47]

--------------------------------------------------------------------------------

Just a couple quick questions. Just on the margin guidance you provided, that was core margin, correct.

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [48]

--------------------------------------------------------------------------------

That's right, that's right.

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [49]

--------------------------------------------------------------------------------

Yes. Yes.

--------------------------------------------------------------------------------

Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [50]

--------------------------------------------------------------------------------

And then, so how should we be thinking about yield accretion impact in 2019?

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [51]

--------------------------------------------------------------------------------

Last year, we had, I think it was about $7.5 million in total accretion from the 2 prior acquisitions, Clayton and Northwest Georgia. I think on those, it's about $5 million to $6 million for next year coming through. And then, we'll likely have a fair amount of accretion coming from Atlantic Capital because the rate mark on that one with the rising rate environment that we're in will be fairly significant. That'll kind of influx until we close, for that mark happens at close but will be, relative to that deal, fairly significant going over the next couple years.

--------------------------------------------------------------------------------

Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [52]

--------------------------------------------------------------------------------

Right, good. And then on the provision side, I mean, we saw a $2.2 million number this quarter, and the numbers kind of bumped all over the place, but how should we be thinking about provision on a go-forward basis? Is it primarily just for growth in renewals? Or what do you guys see on the credit front? What's your outlook on credit quality going forward? Are we at a tipping point? Or not in (inaudible)

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [53]

--------------------------------------------------------------------------------

The growth in renewals on the credit side -- generally, on the quality of the credit and portfolio, we're not seeing anything that causes us concern, and so I think it's primarily going to be a growth in renewals. I would expect it kind of in that range, it can be a little plus or minus, but I'd kind of expect it in that range as we are pushing forward.

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [54]

--------------------------------------------------------------------------------

I mean -- and part of that renewal part is the loans coming out of the purchase accounting model over into to the regular provisioning model for that -- it's been a fairly large flow over the last year as we got to the 1 -- past the 1-year mark of the acquisition in July. So that has impacted, as Chris said, it should remain in that relative level somewhat dependent on loan growth and the other factors.

--------------------------------------------------------------------------------

Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [55]

--------------------------------------------------------------------------------

Right, great. And, James, I think I missed your comments on your expectations for operating expense growth in '19?

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [56]

--------------------------------------------------------------------------------

Yes, so I said in my comments that it would be kind of over 2019 with our investments in new producers. For a full year, we've added a 15-plus over the second half of the year throughout the full impact of that plus hopefully additional ones coming onboard plus investments in technology and other things. They'll be in that mid-single digits throughout '19.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

That concludes today's question-and-answer session. Mr. Holmes, I would like to turn the conference back to you for any additional remarks.

--------------------------------------------------------------------------------

Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [58]

--------------------------------------------------------------------------------

All right. Thank you all very much for joining us this morning. We appreciate your interest. We appreciate your investment support, and we look forward to talking to many of you throughout the quarter and then joining us again next quarter. Thank you.

--------------------------------------------------------------------------------

James R. Gordon, FB Financial Corporation - CFO [59]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

This concludes today's call. Thank you for your participation. You may now disconnect.