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Edited Transcript of FBK earnings conference call or presentation 23-Jul-19 1:00pm GMT

Q2 2019 FB Financial Corp Earnings Call

Nashville Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of FB Financial Corp earnings conference call or presentation Tuesday, July 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher T. Holmes

FB Financial Corporation - President, CEO & Director

* James R. Gordon

FB Financial Corporation - CFO

* Wilburn J. Evans

FB Financial Corporation - Executive Officer

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Conference Call Participants

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* Alex Lau

JP Morgan Chase & Co, Research Division - Research Analyst

* Brocker Clinton Vandervliet

UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap

* Catherine Fitzhugh Summerson Mealor

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

* Daniel Edward Cardenas

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

* Jennifer Haskew Demba

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Peter Finley Ruiz

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

* Tyler Stafford

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to FB Financial Corporation's Second Quarter 2019 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 on the Securities and Exchange Commission's website at www.sec.gov.

Today's call is being recorded and will be available for replay on 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 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. 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 principles financial measures as defined by Securities and Exchange Commission, Regulation G. A presentation of the most directly comparable generally accepted accounting principles financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release, supplemental financial information and this morning's presentation, which are available on the Investors Relations Page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov.

I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO. Please go ahead, sir.

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

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Thank you, Audra. Good morning, and thank you for joining us on this call to review our results for the second quarter of 2019. We appreciate your interest in FB Financial.

On today's call, I'm going to review the highlights of our second 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, followed by your questions.

The theme of the quarter and the first half of the year is consistent execution, and I'm proud of the results our team has delivered. This performance included a core north -- net interest margin, excluding accretion and nonaccrual interest, of 4.22%; a return on average assets of 1.54%; return on average common equity of 17.0% and EPS of $0.70, all of those adjusted.

The important deliverables during the quarter were: first, the stellar financial results, which I just summarized; second, improved mortgage operations and repositioning of the mortgage from the sale of the 2 wholesale origination channels; third, the successful integration of our branch acquisition; and fourth, our continuing upgrades in systems and technology.

First, I'll expand on the bank's financial performance this quarter. At 13.5% organic loan growth, we delivered another quarter above our long-term outlook of 10% to 12%. We continue to see strong demand from creditworthy customers, and I'm proud of our relationship managers for this result. Our Nashville and Jackson markets led the way on loan growth this time, but we also saw sound production out of East Tennessee, Memphis and Huntsville. On a net basis, we didn't grow our deposits organically this quarter as we indicated could be the case. We utilized liquidity from the branch acquisition to reduce our dependence on higher-cost deposits, which kept our deposit cost flat at 1.14%.

With rate cuts expected in the near time -- in the near term, we did not push our relationship managers for interest-bearing deposits as much as we might have otherwise. We anticipate the growing funding over the second half of the year will be more profitable than it would have been in the second quarter. We were encouraged during the quarter that organic noninterest-bearing deposits, excluding mortgage escrow deposits, grew 13.7% annualized from the first to the second quarter. This growth was driven by our team's focus on selling treasury management services following the implementation of a new treasury management platform earlier this year, a key investment in technology for us.

The net interest margin, excluding the impact of accretion and nonaccrual recoveries, came in at 4.22% this quarter, holding firmly in the middle of our guidance range of 4.15% to 4.30%. Depending on the number and magnitude of rate cuts in the third and fourth quarters, the margin could be challenged as our variable rate loans will reprice, and we won't have an immediate corresponding reduction in our cost of funds.

Speaking briefly on credit, the environment remains benign, and we continue to experience very good credit quality. We don't see signs of softness in our portfolio yet, but we are very aware that at some point that will change. We continue to be vigilant about the quality of the loans that we make, and we will try to prune credit that we view as being weaker over the coming quarters to try to get ahead of any downturn. This pruning and some anticipated payoff will likely cause our loan growth to be towards the lower end of our long-term target over the next few quarters.

Moving to mortgage, profitability returned to a level closer to our expectation this quarter, with lower interest rates driving increased volumes and improving margins. This improved profitability included offsets of lower mortgage servicing revenues driven by the first quarter sale of a portion of our servicing rights and higher prepayments in our servicing portfolio. The sale of our third-party origination channel closed on June 7, and we intend to close the sale of our correspondent origination channel in early August.

For the past few months, we've been restructuring our back office, and we will be able to move that to completion this quarter once the divestiture is closed. Our goal, well, now that we have simplified the business is to be best-in-class operators in retail mortgage originations, both in traditional originations and online. We want to maximize both market penetration and efficiency of this segment while turning mortgage into a primary customer acquisition channel for the bank. As part of that customer acquisition strategy, we intend to hold servicing rights for retail originations but sell most of others, maintaining the MSR asset near current levels in the future.

Mortgage will always show seasonal swings between the second and third and the first and fourth quarters, but we are happy with how we've repositioned ourselves, and we hope to deliver consistent, repeatable results going forward. As we complete our restructuring, I want to personally thank the mortgage team, who have been working diligently to serve our customers during the sale of the TPO with correspondent origination channels. I also want to thank those former associates who have transitioned to other entities for their time and contributions here at FirstBank.

I'll now touch on the integration of our branch transaction. When I spoke to you in April, we had just closed the acquisition of our preliminary -- and our preliminary indications were that things were going well. Having worked with the new team now for several months, I cannot be more pleased with the quality of the people and the customers that we've added to our FirstBank family. Additionally, our competitor's merger activity and expense reduction has created turmoil across our footprint and good people and good customers are seeking out new banking relationships. Our increased presence in East Tennessee and North Georgia has made FirstBank an attractive landing spot for these customers and associates, so we're already realizing the -- that strategic aspect of the transaction.

We've also executed on the financial assumptions that we laid out when we announced the acquisition in November of last year. To touch on a few key items, the final loan mark was in line with the $9.9 million estimated at announcement, our after-tax deal charges to date have been $3.6 million as compared to the $4 million estimated at announcement. We estimate that our tangible book value dilution was around 8% as opposed to 9% estimated at announcement. And the run rate on noninterest expense, which is harder to track, which branches are consolidated, but we are in line to be slightly below the $10 million run rate of annual expenses, excluding the core deposit intangible amortization that we announced on the call.

I'm very proud of our team for their efforts on the transaction. But the outcomes of the branch transaction make me even more confident in our ability to further execute on meaningful M&A that's accretive to our business and our shareholders. Fortunately, our position to capitalize on acquisitions comes as we are seeing more opportunities than ever before. Opportunities are being created primarily from boards looking for solutions to manage the succession issues, rising regulatory and technology cost and shareholders searching for liquidity.

Valuation expectation for these banks are mixed. High-quality community banks, which we generally define as banks with high-quality deposit franchises, good credit quality and an absence of wholesale loans and deposits, have a good recognition of their value and they're able to realize it. Low-quality community banks, which are more plentiful, think that they should be valued like the high-quality peers and are finding that they can't sell the bank for what they think they are worth. We're actively speaking to a few of the aforementioned high-quality community banks, in hopes that we can reach an agreement with 1 or more of those in the second half of the year. With the competitive landscape and seller desire for cash, we may need to take some book dilution with a couple of years earnback to get a deal done, but we think our reputation, as the acquirer of choice for banks in our geography will help us to price transactions in a matter that will be attractive to our shareholders.

To summarize, we delivered a fundamentally sound quarter that resulted in strong profitability. Between our mortgage divestitures and branch acquisition, we feel that we have made strategic moves to position the company well for many more set of quarters to come.

With that overview, I want to turn the call over to James to review our financial results in more detail.

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

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Thanks, Chris, and good morning, everyone. Our adjusted diluted earnings per share were $0.70 for the second quarter 2019 with an adjusted return on average assets of 1.54% and an adjusted return on average tangible common equity of 17%. Growth, improved mortgage results, expense management and a benign credit environment drove our increase over our adjusted EPS of $0.66 last quarter.

Slide 4 illustrates the fundamental trends of the company's profitability and demonstrates our consistent performance. Our increase in our adjusted return on average assets over the years as well as our performance this quarter served to demonstrate the strength, durability and earnings power of our core franchise. This sustained level of profitability has been driven by balanced loan and deposit growth and margin that remains one of the highest among our peers, expense control and fundamentally sound credit quality.

Next Slide 5 represents the fundamental elements of our net interest margin, specifically loan yields and fees as we -- as well as deposit cost trends. As Chris mentioned, we landed in the middle of our target range this quarter, mostly due to controlling our cost of funds and deployment of some of the excess liquidity that we received in the branch acquisition, offset by lower loan fees of approximately $1 million as we lack some of the prepayment fees that bolstered our loan fee in the first quarter of 2019.

In the absence of rate cuts, we anticipate being in the 4.15% to 4.30% range for the remainder of 2019. For each 25 basis point rate cut, we anticipate the margin declining 5 to 10 basis points for each full quarter in the near term as it will take time for our liabilities to reprice downwards.

Roughly 50% of our loan portfolio is variable rate with approximately $1 billion tied to LIBOR and $1 billion tied to prime.

We will see an immediate repricing of our variable rate loan portfolios down if a rate cut is announced next week, and LIBOR has already decreased approximately 20 basis points or so at this point. Although our investment portfolio is nearly 100% fixed rate, we may see a few basis points decline in yield related to accelerated prepayments on mortgage-backed securities. While the asset yields may decrease, we also have an opportunity to lower our liability cost over the next few quarters assuming rates decline.

We have approximately $140 million of CD priced around 2.55% coming due this quarter with another $60 million coming due in the fourth quarter. We hope to be able to retain as much as possible at a lower rate. We anticipate that our overall CD balance may decline in coming quarters as we allow some highly rate-sensitive money to leave the bank.

Since quarter end, we've also taken other actions to impact the margin by obtaining $150 million at Federal Home Loan Bank borrowings with an average cost of 1.28% and extended stated maturities. Those Federal Home Loan Bank borrowings are callable beginning next year but offer a buffer to falling rates over the next year, while providing additional liquidity.

To summarize, we continue to feel good about the relative long-term strength of our margin, we're managing our overall funding cost with the excess funding from the branch deal and expect deposit rates to moderate as rates decline depending upon customer reactions and the competitive landscape.

Moving to Slide 6, and as Chris mentioned previously, we produced another quarter of solid loan growth. Our objective remains consistent, profitable and relationship growth, not really focusing on hitting the quarterly target, especially given higher deposit growth and cost considerations. We have also stayed comfortably within the regulatory thresholds in construction and development and CRE concentration ratios. Despite our use of capital in the branch transaction, our C&D concentration stayed roughly flat due to the decline in CD -- C&D outstanding as a percentage of our loan portfolio.

Next, moving to Slide 7, our customer deposits were up related to the branch acquisition, but down slightly on an organic basis. We let some higher-cost funding leave the bank and so our loan-to-deposit ratio increased slightly in order to gain the immediate benefit of the excess liquidity from the branch deal. In the event that we do not retain as much in returning CD that's expected, or if we struggle to add nontime customer deposits, we should be able to replace the funds at lower cost given the likelihood of a lower rate environment over the course of the second half of the year.

Next, looking at mortgage on Slide 8. In the second quarter, our total mortgage operations had an adjusted pretax contribution of $2.6 million when our retail footprint is included. For the quarter, our adjusted total mortgage contribution was approximately 8.7% of the company's adjusted pretax income, which is down from 10.4% in the second quarter of 2018.

Our interest rate lock volume was up significantly over the first quarter at $1.8 billion and down from $2.0 billion in the second quarter of 2018. Lower rates grew higher lock volumes, which improved our overall profitability. However, some of that increase was offset by lower net servicing revenue of $2.6 million due to the sale of a portion of our servicing portfolio in the first quarter and higher payoffs from loans in our servicing portfolios.

The 2 wholesale channels that we are divesting contributed approximately $5.8 million in mortgage banking revenue in the first half of the year with approximately $500,000 of pretax income before allocated cost. With our cost reductions and exit of wholesale businesses, we have not changed our goal of exceeding 2018 full year performance of $5 million in pretax contribution. The remainder of 2019's contribution will primarily come in the third quarter while likely being slightly above breakeven in the fourth quarter given normal seasonal patterns.

We expect Banking segment noninterest expenses, excluding mortgage-related expenses, to continue to grow in the mid-single-digit range, reflective of growth and additional investments in revenue producers and technology. Excluding our mortgage retail footprint, an estimated increase related to Atlantic Capital bank level noninterest expense has increased approximately 5% in the second quarter, reflecting normal compensation increases and continued investments in people and infrastructure. Our effective tax rate was 25.3% for the second quarter. For the remainder of 2019, we expect our effective tax rate to be in the 23.5% range due to projected equity compensation benefits in Q3 and Q4.

As shown on Slide 10, our asset quality remains sound and provides a strong foundation for our company. Nonperforming assets to total assets increased slightly for the quarter, but on the whole, our loan portfolio remains in solid shape. We had lower-than-expected provision expense this quarter on the back of that sound credit quality, but it -- would expect those costs to increase slightly over the remainder of the year as net charge-offs normalize.

Slide 11 shows our strong capital position. In this quarter, we estimate that our tangible book value per share was diluted approximately $1.48 by the branch acquisition. Since the first quarter, following our IPO, our tangible book value per share has increased by $5.62 or 48.6% to $17.18. Our excess capital was utilized on the branch acquisition this quarter in a 9.2% tangible common equity and 11.6% of total capital, we're slightly above where we had forecast. We believe that we are well positioned to continue to grow organically, support our dividend and execute on future M&A.

With that overview, I want to turn the call back over to Chris for closing comments, and then we'll open the call to your questions.

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

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Thank you, James. And once again, we appreciate your interest and investment in FB Financial. Operator, that concludes our remarks on this morning's call. We'd now like to open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Jennifer Demba at SunTrust.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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Can you hear me?

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

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Jennifer, we can hear you.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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Well, great. You mentioned obviously credit quality is still excellent, but you want to prune some weaker credit over the next few quarters. Any idea what amount of credit you're looking to prune at this point? And would they be in any particular category?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [5]

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No. There's not anything specific there, but I'll explain that this way. We are undergoing, right now, an annual credit review process that we do annually. And it's a process where we go through and we look at all of our credits over a certain balance, and then we look at some others randomly. And we do that by market, we do it with each market and we do it with our credit team, and we challenge the quality of the credit and talk about the quality of the overall portfolio. And as that process is underway, one of the things that I have challenged that team to do is to look more critically at that portfolio than perhaps we have in the past to do exactly -- we used the word prune, you used the word prune. And for those credits that are weaker and could be even further negatively impacting the downturn to -- let's look at how we take actions to either improve those or remove those from the bank, because as we all know, once you're in the throes of a downturn, you don't -- it's hard to move anything, especially if it's not of high quality.

And so that's a proactive process on our part, and it's going to be more rigorous than it's been in the past in anticipation that, at some point, that the economy is not as rosy yet as it is today. So that's what that's in reference to. And so -- and you would -- as you would expect in terms of what would be -- we're always -- we're going to continue to look at the hospitality segment, at the multifamily segment, at the -- at some other smaller concentrations that we particularly monitor that are specific to either a market or footprint or some niche that we have. And so they'll look at all those, but not with any specific targets, other than the internal targets that we already have.

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Operator [6]

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We'll go next to Catherine Mealor at KBW.

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

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James, I wanted to follow up on your expense guide. So you're saying that core bank level expenses from today should increase at kind of mid-single-digit growth rate. Is there anything in this past quarter, I guess, [anything to select,] the way we should think about ACBI, is this a full quarter with ACBI? Or are there any savings that we should see from that run rate that we had in this quarter? Or is -- and so off of that, I guess, the bank level expenses were a little high so just trying to figure out if there's any kind of savings in there before we then grow it at that mid-single-digit rate?

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

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Not a whole lot of savings allowed because remember we closed and converted and closed all of the branches on the same day as closing the transaction. So not a lot of saving, probably a little bit on the edge, but nothing -- anything material on that front. I would say, a big contributor, and I mentioned it in my comments, was -- this was the quarter where we get the full effect of our normal annual merit raises and equity grants and other things. So that should be at the same level. So it shouldn't go up in absolute dollars the same, but we'll continue, in particular, as we focus on hiring new revenue producers and making continued needs in the infrastructure and technology. We did close the branch transaction on April the 5th. And so it is in for most of the quarter, practically all of the quarter.

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

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Okay. Got it. And then on the mortgage side, what's the -- is there a way to think about mortgage expenses when we -- once we see the full impact of the sale of the third party and the correspondent?

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

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Well, I think there's obviously a big component that's variable that's based on the revenue produced like we saw this quarter. We did talk a little bit about the contributions of the 2 units that are -- have been sold or will be sold, that had a roughly $2 million in the first half of the year with $2.5 million of revenues for about $500,000 direct contribution. Then, I would -- then we're continuing to cut on the back office size. I would say, somewhere in the $500,000 to $1 million of expense cuts that we're looking at over the coming month or so as we finalize the sale -- the sale of the correspondent that's not in those direct units.

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

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Got it. Okay. And that's on a quarterly basis?

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James R. Gordon, FB Financial Corporation - CFO [12]

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Annual basis.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [13]

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$500,000 to $1 million annually?

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James R. Gordon, FB Financial Corporation - CFO [14]

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Yes.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [15]

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Got it, okay.

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James R. Gordon, FB Financial Corporation - CFO [16]

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There have been -- Catherine, when you said is there a way for you to think of those expenses, those 2 dispositions and I'd just say, yes, lower.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [17]

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I assumed that, I assumed that. But and then -- and just to make sure I'm on the same page, the $2.5 million revenue that is a first -- what is that time period?

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James R. Gordon, FB Financial Corporation - CFO [18]

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The first half of the year.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [19]

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Okay. So those 2 units were $2.5 million in revenue and $500,000 direct bottom line contribution for the first half of '19?

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

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Yes. Actually I think that may be -- let me double check that.

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Wilburn J. Evans, FB Financial Corporation - Executive Officer [21]

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Yes. I think it's [$5 million].

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

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Yes. You have $5 million, with the $0.5 million of net direct contribution, I'm sorry. Yes, that's $2.5 million a quarter, sorry. With the tier...

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [23]

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Okay. Can you say that again?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [24]

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Wib is here also and he was chiming in there so about $5 million, and $500,000.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [25]

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Got it. $5 million in the first half and then $500,000 also in the first half?

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James R. Gordon, FB Financial Corporation - CFO [26]

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Yes.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [27]

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Got it. Great. And then whether on the margin -- so I mean I appreciate the 5 to 10 bps cut or guidance for lower margin per cut, and I mean -- and it feels high, but is that really just high because you are really not giving any benefit to lower funding costs? And does that guide also include any kind of deployment of excess liquidity from what you gained in the ACBI acquisition?

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

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We deployed most of that this quarter that there is a little bit left and then we added the additional liquidity through the Federal Home Loan Bank advances that I talked about. I would say, bringing deposit costs down would get us at the 5; if we're not able to do that, it's closer to the 10. If you think about roughly half of our portfolio is variable rate, if you get a 25 basis point cut, that's roughly 12 basis points on the yield just right off the top on the loan yields, which is the majority of our earning assets. So that's where the 10 comes from, and then the 5 would be, if we're able to cut and control cost along with repositioning some of our wholesale liabilities, like we've done since the quarter has ended.

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Operator [29]

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Next we'll move to Peter Ruiz at Sandler O'Neill.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [30]

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Most of my questions have been answered, but maybe if you could just give a little color. I know you guys have been pretty transparent on the CD specials and whatnot, that are going to be running off here in the coming quarters, but could you give maybe some color on what -- any potential specials running right now? What they look like? And maybe what competitors are doing on the deposit side?

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James R. Gordon, FB Financial Corporation - CFO [31]

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Yes. I'll -- go ahead, go ahead.

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [32]

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A comment on competitors. You continue to see some deposit specials in the market. And it's been -- sort of, the competitors are fairly consistent, those that are really -- have an organic growth pattern and are -- and constantly growing their loan portfolio, need funding, and so we see constant specials from them. It's kind of the pattern. Some others that aren't growing, we don't -- are kind of quiet in the marketplace and -- because they don't need the funding. And so -- and it continues to be mostly driven by 2 things, time deposits and targeted on -- a little more targeted on money-market-type products.

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James R. Gordon, FB Financial Corporation - CFO [33]

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Yes. I would say, that's all true. We've seen a little bit of abatement of that over the last several weeks as I think everyone appreciated that there's likely a rate cut coming some time -- when may be unclear. So we've seen some abatement in the competitive nature of that. Our current specials are really targeted at that money that is rolling out of that 2.55% [rate] on 11-month product that we did in the third quarter of last year, and we've spread out the maturities in the low 2s that they can map over to replace their maturing money at this point.

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Operator [34]

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We'll go next to Tyler Stafford at Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [35]

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I wanted to go back to Catherine's earlier question, just make sure I'm clear on the mortgage expectations. So in the first half of the year, the TPO and correspondent channels were -- they contributed $5 million of revenue with, I guess, $4.5 million of expenses for the net of $5 million, pre-tax, is this...

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [36]

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Yes.

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Tyler Stafford, Stephens Inc., Research Division - MD [37]

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Okay. Okay. Got it. So with the exit of those 2 channels, can you frame up just, I guess, the -- looking at it a different way, the new expected gain on sale margin with the absence of those 2 channels?

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

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It should move higher, but given the lack of the -- and both of those have higher margins, just historically, it will move up, but not dramatically from where it's been because the lack of the production from those 2 channels as we announced the shutdowns over the last quarter or 2. So -- but it will move higher so.

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Tyler Stafford, Stephens Inc., Research Division - MD [39]

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Okay. With rates where they're at backing up and just the added strengths of the mortgage market, do you see upside to -- upside potential to $5 million pretax, I guess, guide that you've given previously with lower rates and under the rate-cut scenario? Is there a potential for that to move higher in the back half of the year and on a run-rate basis and into 2020?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [40]

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Tyler, there's a reluctant yes, that there could be some -- we have -- as you know, we stay away from trying to guide on mortgage. We -- and I think, I said it last quarter, we've given up on being good forecasters or predictors when it comes to rates and mortgage volumes, which are closely tied together. We certainly didn't expect the -- when we were talking in the first quarter, we didn't expect the volume to be where it was in the second quarter. And so if rates continue, it's been good for volumes, it's been good for margins. We hope that, that is the -- that, that continues and that, that's the case, and it leads to some outperformance there. So we think, it -- so that's what -- I don't know -- I think that answers your question is that, is there's a reluctant yes there.

But -- and I'll just throw this in. We try to run a balanced mortgage business. You also heard me say, [okay,] we like consistent, we like repeatable, we like predictable. And so we saw some balancing of that with mortgage servicing rights, the decay in mortgage servicing rights that were negative for the quarter that balanced the production in. So that's a little bit hard to forecast as well. So all things considered, sure, there's some upside there, but we're reluctant to go out and say and rely on that.

It really comes down to whether the rate environment cancels out the seasonal decline that you have heading into the fourth quarter and that's an unknown. It obviously has happened in the past, but it's not always an indicator of the future, but that would be the biggest opportunity.

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Tyler Stafford, Stephens Inc., Research Division - MD [41]

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Sure. Understood. And I may -- I think, I did miss some of the asset -- earning assets repricing details you gave in the prepared comments. Can you just, I guess, go over, again, kind of, the fixed versus floating dynamics of the loan portfolio today and if you guys have any floors on the floating portfolio? And then just thinking about the $140 million of CDs that are maturing in the third, fourth quarter, just, I guess, kind of, new cost for the CD rate right now. If you could elaborate on that, I'd appreciate it.

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James R. Gordon, FB Financial Corporation - CFO [42]

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Okay. On the asset side, so all of our investments or 99% of them are fixed rate so nothing much coming there may be 1 basis point or 2 from accelerated repayments on the mortgage backs. On the loan portfolio, we have about a little over $2 billion that is variable rate to roughly half. That's pretty easily split between about $1 billion in LIBOR and a $1 billion in prime. So the LIBOR is obviously already kind of ahead of any cuts in the prime rate at this point. So that's pretty much the asset repricing side.

On the deposit side, we have $140 million at 2.55% that is renewing this quarter, in the third quarter. We would think that would -- could come down into the low 2s based on the specials that we're running to target those customers and what they would roll over into. Then we have another roughly $60 million of that same product in the fourth quarter. It is not -- we have started lowering those rates. And it's about 2.40%-ish actually 2.43%, and so we would hope that could even be lower, very similar to what we do this quarter. Now with that said, depending on competition and other things, some of that money may leave, but we think we can replace that with short-term wholesale money and probably we'll take that route and continue to deploy some of the excess liquidity that should help us manage that cost somewhat immediately, but then, over time, to return the margin to where we're operating today but that it will -- I think, the deposit pricing will lag some of that immediate asset repricing.

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

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And, Tyler, our shortest term -- we intend to -- it's priced at 2%. Our longest term is priced at about 2.30%. So it's fairly tight there that long term being 25 months. So...

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Tyler Stafford, Stephens Inc., Research Division - MD [44]

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Got it. Okay. That's helpful. And then just lastly...

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Wilburn J. Evans, FB Financial Corporation - Executive Officer [45]

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(inaudible) your deposit if you're looking for a place.

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Tyler Stafford, Stephens Inc., Research Division - MD [46]

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I think you're barking up the wrong tree there. Just lastly for me, just given your M&A comments earlier, is it fair to assume that the buyback activity will remain, I guess, absent at this point?

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James R. Gordon, FB Financial Corporation - CFO [47]

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Yes. We haven't bought back any share to this point. We do have the authorization in place, and we certainly could, but it looks unlikely right now.

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Operator [48]

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(Operator Instructions) We'll go next to Alex Lau at JPMorgan.

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Alex Lau, JP Morgan Chase & Co, Research Division - Research Analyst [49]

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Can you touch on the organic balance sheet growth during the quarter, which excludes the acquisition? Which loan segments or industry do you see drive the loan growth? And also on the deposit side, did you see anything seasonal like with public fund?

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Wilburn J. Evans, FB Financial Corporation - Executive Officer [50]

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Yes. I'd say, on the loan side, it hasn't been driven by any particular segment or product type. It's pretty much been spread, and that's actually been pretty consistent over the last several quarters. And so it's come in, in all forms, some C&Is, some CRE, some -- maybe even a slight bit of -- some slight bit of retail will continue to have some growth in our specialty lending portfolio. So it's not specific to any product type, and we do -- we actually include a graph in there where we try to keep track of that and publicize where that -- where the growth is coming. And so it's been fairly consistent on the loan side.

And on the deposit side, with public funds, probably a little more seasonality in the first quarter than the second quarter. And so most of that was out of the balances in terms of seasonality by the end of the second quarter.

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Alex Lau, JP Morgan Chase & Co, Research Division - Research Analyst [51]

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Got it. And good to see noninterest-bearing deposit growth in quarter. You mentioned the new treasury management platform, what does the pipeline or opportunity look like for this new platform for bringing on more noninterest-bearing deposits?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [52]

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Yes. So we're actually excited about that opportunity. If you look over, say, the last 7 or 8 quarters, even go back further than that, we've got -- have good experience in growing our noninterest-bearing and that's primarily been driven by treasury management. That was not nearly as robust in the last 4 to 6 quarters. And as -- I mentioned investments in technology and part of what you get [set with] is sometimes your systems -- most of us are tied to a pretty small world of vendors out there, sometimes your systems can be sunset, which took place with our treasury management system, so we go had to go do the process of a conversion. Our folks -- and that probably weighed on us just a little bit during, say, the last, say -- I'll say, 4 to 6 quarters. We saw some growth this quarter because we have converted to the new system, our folks are excited about it. And so we're hopeful about that moving forward.

I'd say we have 13%, almost 14% growth in noninterest-bearing this quarter on an organic basis. When you take out the acquisition, that's, I think, really strong. And so that's something that is a point of emphasis for us. And Alex, I'm glad you picked up on it. That's something we are excited about. I want to add to that, with the disruption in the market between the merger between SunTrust and BB&T, some other turmoil -- I don't know if turmoil is the right word but some other movement in the market, we see opportunities there, and we see opportunities for, frankly, some fairly large accounts that don't move very often like maybe once in my career. And so we're trying to zero in on some of those, and we're hopeful that we'll be able to -- we have gotten a shot at a few of those, we have won a few of those, and we want to continue to focus on that.

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Alex Lau, JP Morgan Chase & Co, Research Division - Research Analyst [53]

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Great. Thanks for that color. And then just the last point, you -- on the technology and system upgrade, there's a treasury management platform. Is there anything else that you want to highlight?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [54]

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Yes. Our [online] on both retail and commercial is something that -- are areas that we are -- have targeted for some upgrades and are doing some -- and we'll see some improvements there and some investment there on our part. Going back to 2016, we did a core systems conversion. And so when we did that, we were taking a long-term view of systematically continuing to rotate some enhancements on all of our customer-facing technology. So that one looks as this treasury system was first, and you'll see those online systems come next. And then again, it's a consistent process over the next -- actually, we've got a 3-year plan there, where that will -- we'll consistently upgrade those.

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Operator [55]

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We'll go next to Brocker Vandervliet with UBS.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [56]

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It's -- so just in terms of the balance sheet shape, now with rates looking lower, not higher anymore, would you consider raising the loan-to-deposit ratio closer to 100%? Or do you kind of like where it's running here?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [57]

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Yes. We like where it's running now. Again, we're not -- we don't consider ourselves great at predicting the future there, and so we want to stay less than 100%. And we like where it is today. It's in the high 80s on a loan -- on a held for investment portfolio, and we like that. It could go a little higher than where it is today, but keep in mind, we've got that held-for-sale portfolio that will add another 5% or 6% on that. So we're running -- when you add the held for sale portfolio, we run at about 95%, and that's where we would like to be.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [58]

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Okay. Got it. And you mentioned in the opening remarks, looking to prune some loans, keeping things tight, anticipating slowing at some point. How -- could you just kind of frame that out a little more how deep do you think you're going to cut there and what characteristics are you looking for?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [59]

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Yes. And so -- and we don't have any certain target that we're going, well, we want to cut this much out. We do have -- I guess, I would make the old Jack Welch analogy that they used to do in GE, they used to prune a certain amount of folks every year to try to always keep high performers. And we don't have a certain target. It's just -- as we review the portfolios, it's -- think about those that are maybe struggling today. Everything's current, everything's working, but we know the customers maybe had some challenge in keeping up in good times. And when that's the case, during bad times, bring really bad consequences. And so -- also we will say, if you look at the first half of the year, year-to-date, we're at nearly 14% loan growth -- over 13%, on an annualized basis, loan growth. And we like to grow in that 10% to 12% range, so we are over that. And so we're not talking about anything drastic in terms of the reduction in our portfolio or in our growth rate, but we grow 10% to 12% on an annualized basis, we can already grow at 8% and still be in the middle of that range, right? And so it's -- I think it's just a good opportunity to try to get ahead of any particular downturn. And so we don't have any -- we're not out there going, well, we want to reduce by x dollar amount. We just say, let's take this opportunity while we continue to have strong growth opportunities to try to make sure our portfolio is as strong as it can possibly be in the face of any downturn.

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Operator [60]

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Next we'll go to Daniel Cardenas at Raymond James.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [61]

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So just quickly, as it kind of goes to your comments on M&A, sounds like you're talking to a number of folks, but are there any specific markets that, perhaps, hold of more interest for you than others? And then if you could remind us, what kind of earn-back period would you be looking for in a transaction?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [62]

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Sure, Dan. Yes, so first, on markets. We love in-footprint first for a number of reasons. It's, one, operating leverage, we've got some markets where we like to have more density to give us more operating leverage; second, they tend to be lower risk because you tend to know the people and know the customers and know the markets and know the cultures and so we always like in-market first. And then we all -- and then beyond that, we like contiguous markets and people we know and things that we know.

And so -- and then I'd say, those are where probably most of our more immediate -- there's enough opportunities. We do have some ambitions that go beyond our current markets, but we probably have enough opportunities today that are in those first 2 categories that we wouldn't have to go with a third to be able to jump to markets like Birmingham or Atlanta or places like that today. And so those are the -- that's the geography and the types of opportunities we really like.

As I mentioned, we like banks with strong deposit portfolios, we like good credit quality and then we like good, solid customer relationship banks. And I contrast that with wholesale banks. We see some banks that are -- have a lot of wholesale loans and deposits, and we can do that on our own. We don't need to -- we don't pay premium for that.

And then when we think of the financial metrics, of course, we'll be looking to get some EPS accretion, and then we're going to manage any dilution -- tangible book value dilution carefully. We don't like any, and depending on the type of deal, we may not be willing to take any. There are some that are quite attractive banks, could be quite attractive and could be meaningful to us, again, especially if they're in certain markets where we need more than we already have. And on those, we would take some tangible book value dilution. That gets complicated also because, today, some sellers, particularly if it's a privately owned company, they may desire more cash. And so that can lead to a little more tangible book value dilution. And so we may take some tangible book value dilution, but we, again, watch that closely, and we want to manage that earn back closely. And we generally are going to keep that under 3 years whenever we are looking at the earn back. We're generally going to try to keep that under that 3-year mark on a transaction that's particularly important -- even on a transaction that's particularly important to us.

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Operator [63]

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And that does conclude the question-and-answer session. At this time I'll turn the conference back over to Chris Holmes, for any closing remarks.

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [64]

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Okay. Thank all very much for your time. And thank you, again, for your interest in FB Financial. We look forward to talking to you next quarter.

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Operator [65]

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And that does conclude today's conference. Again, thank you for your participation.

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [66]

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Audra, thank you very much.