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Edited Transcript of FBK earnings conference call or presentation 22-Oct-19 1:00pm GMT

Q3 2019 FB Financial Corp Earnings Call

Nashville Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of FB Financial Corp earnings conference call or presentation Tuesday, October 22, 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

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Conference Call Participants

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* Alex Lau

JP Morgan Chase & Co, Research Division - Research Analyst

* Andrew Terrell

Stephens Inc., Research Division - Research Associate

* Catherine Fitzhugh Summerson Mealor

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

* Kevin Patrick Fitzsimmons

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

* Peter Finley Ruiz

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

* Stephen Stone

SunTrust Robinson Humphrey, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the FB Financial Corporation's Third 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 factors 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 the 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 earnings release, supplementary 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 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.

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

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All right. Thank you, Molly, and thank you for joining us on this call to review our results for the third quarter of 2019. We appreciate your continued interest in FB Financial.

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

This quarter, our team produced stellar results with adjusted EPS of $0.77, adjusted return on average assets of 1.61% and adjusted return on average tangible common equity of 17.7%. On the bank side, we balanced growth and profitability during a quarter that included 2 Fed rate cuts in our newly restructured mortgage area. That team capitalized on a lower-rate environment by delivering strong interest rate lock volumes and profitability for our 2 remaining origination channels, retail and Consumer Direct.

On this call, I think it's important to walk through 3 topics. First though is our strong third quarter and our solid fundamental growth, our thoughts on near-term external factors and our most recent activities -- M&A activities and opportunities.

First, on our strong third quarter and our fundamentals, which we think are really solid. We're very pleased with how our team performed in the third quarter. We delivered annualized loan growth of 5.2% for the quarter and are at 12% organic growth year-over-year. As we said before, we think about business in terms of years, not quarters, so we don't get too excited if loan growth is 15% in 1 quarter, which it was in 1 recent quarter, or 5% in another. Our goal is long term, consistent, profitable and sound growth, and we're committed to staying disciplined, especially in what we believe is becoming an increasingly irrational credit market. More on that later.

We grew our customer deposits by 6.9% annualized for the quarter, and we're particularly proud of our growth in noninterest-bearing deposits of 36.6% annualized. Excluding mortgage-related deposits, noninterest-bearing grew 19.6% annualized for the quarter. The new treasury management platform implemented earlier this year continues to aid our relationship managers in delivering strong customer deposit growth, and we're very pleased with the results over the past couple of quarters.

The net interest margin, excluding the impact of accretion and nonaccrual recoveries, came in at 4.12% this quarter. As we said last quarter, we anticipate compression of 5 to 10 basis points for each 25 basis point cut in the Fed funds target rate. We had 2 rate cuts in the third quarter, 1 at the beginning of the quarter and 1 at the end. And our margin, excluding accretion and nonaccrual recoveries, was down 10 basis points from the second quarter. With additional rate cuts in the fourth quarter, we'd expect some additional compression. We also saw our deposit cost move lower each month during the quarter, and we expect that to continue.

Mortgage was a key driver of our earnings growth from the second to the third quarter, as total adjusted pretax contribution increased from $2.6 million to $5.4 million. With treasury yields down, there was significant increase in demand, both in purchase and refinance volume. We had a record month of pretax contribution from our mortgage team in August at $3.7 million, which is especially significant given that we completed the sale of our 2 wholesale origination channels in June and July. So the record month in profitability was on lower origination volumes in a less complex business, at least preliminarily validating our strategy. There's still some efficiency improvements that we're making, but on the whole, we like how we have our mortgage operations structured currently.

We have 2 strong customer-focused retail platforms now, in-store and online, that are able to take advantage of lower-rate environments, like we saw in the third quarter, but will provide us more predictability in rising rate environments like we had in 2018.

On the people side, we made a few key back-office hires that will continue to allow us to grow organically and through acquisition. We get closer to $10 billion, we'll continue to invest in our platform, both in the technology and people front, so that we can handle the scale that we anticipate over the coming years.

Now to summarize this quarter's results, we're proud of the strong profitability and prudent growth that our team delivered, and we're pleased with the way our platform is continuing to develop for the long-term growth and value creation.

Next on some near-term external factors. While our team is performing very well, executing our plan and delivering outstanding results, there's near-term uncontrollables in the coming months that we're managing. Those being primarily some likely rate cuts in the fourth quarter, potentially slower economic growth and some irrational late-cycle behavior that we're seeing in the market.

So on the likely rate cuts, the whipsawing of rate increases and cuts that we've seen over the past 18 months has created a difficult mortgage outlook for community banks in 2020. Variable rate loans have and will continue to experience immediate decreases in rates, assuming the Fed has additional rate cuts. It will take longer to incrementally drop deposit rates to recoup the margin compression caused by the variable rate loan decreases, similar to the positive lag that we saw as rates were increasing, but in reverse. To combat these margin pressures on the asset side, we try to include rewards in every new and renewing variable rate loan. We continue to explore some hedging options, but so far, the benefits haven't outweighed the cost.

On the liability side, we continue to push noninterest-bearing growth and have seen some success, we also have over $400 million in indexed deposits that we'll try to retain through the following rate environment. We use excess liquidity that we've been keeping on the balance sheet to defend pricing, and we'll let some rate seekers walk. As always, we'll continue to weigh growth versus a margin that gives us an appropriate return on capital.

To the contrary, the declining rate environment has had a positive impact on our mortgage operations, yielding great financial results this quarter and acting as a countercyclical offset to dropping rates as we had planned. Assuming rates continue to fall, we expect additional good results. However, seasonally, the fourth and first quarters are generally low points for mortgage. As we said previously, we expect mortgage to be just a bit over breakeven in the next couple of quarters.

On just kind of slowing economic growth, one thing I'd like to mention is our organic loan and deposit growth. We're intent on staying disciplined in our credit process. We want to defend our capital and earnings stream when in credit terms become irrational. The best way for us to do that is to not sacrifice credit structure or pricing for the sake of short-term growth. We have our relationship managers out there pounding the pavement, looking for new business and seeking to expand existing relationships. However, we are content to walk away from some credits because competitors in the markets are willing to accept risk that we consider foolish. We saw several instances over the past couple of quarters of banks in the market taking structural rate and term risk, that we are just not willing to accept.

Some examples of those structures and rates were: guarantees on marginal credits fully releasing after 12 months, 100% financing with no guarantees, lower equity investments by borrow orders with lender focus on LTV and ignoring the loan-to-project cost and sub-4% rates on 10- to 20-year fixed-rate loans in higher-risk product categories. And that was just on the competition from banks. We're also seeing institutional market -- the institutional market competing against us more and more, and we're also seeing some larger credit unions going aggressively after C&I and CRE deals with both terms and rates that we just are not willing to match. We've offered some one-off pricing to good customers that we know, and we're comfortable with -- and that we're comfortable with in order to defend our relationships. But long-term cheap fixed-rate loans to unproven borrowers have a tendency to become credit issues when the cycle turns. When you start to see some weakness in the credit, one strategy is let that loan refi away to another institution. That's hard to do when the loan has a 3% fixed rate.

We've grown our loan portfolio organically at 11% in 3 quarters. Our long-term growth target has been 10% to 12% for the last few quarters -- the last few years actually. This quarter's organic growth was just over 5%. If the competitive environment persists in the face of a slowing economy, we'll likely be satisfied with growth in the 5% to 10% range over the next few quarters. Our plan is to grow our core deposit base to fund that growth, targeting our loan-to-deposit ratio in the 90% range.

Our provision expense continues to be very low by historical comparisons, and our loan portfolio continues to exhibit excellent credit metrics. With 5 basis points of net charge-offs so far this year and with each day closer to end of the credit cycle, this benign credit environment will change at some point. We hope that is in the very distant future, but we're prepared if it's sooner. Today, the loan metrics on our portfolio continue to be very good. Regardless of credit quality, we believe that the provision expense under CECL in 2020 will likely increase over what we'd exhibited in 2019.

On M&A, we believe that there continues to be M&A opportunities that will be available over the near term. We announced next -- an acquisition that we really like in September. For a refresher on that pending acquisition with Farmers National Bank of Scottsville, the bank is almost 100 years old. It's in the attractive Bowling Green MSA, which is adjacent to the Nashville MSA. It has 28% noninterest-bearing deposits, and it's on the same core processing system that our bank is on, which should diminish our execution risk.

We also continue to look for similar transactions. We continue to have numerous discussions and meetings with other management teams, and we're hopeful to continue to execute on M&A that strategically expands and deepens our presence in and around our footprint. We'll stay disciplined on that as well, but with everything that we've been hearing about that's coming available, we'd be disappointed if we weren't able to execute on at least a transaction or 2 in 2020.

So to summarize, we delivered a fundamentally sound quarter that resulted in strong profitability. We're excited about the acquisition that we've announced recently, and we feel we've positioned ourselves well for future growth and value creation.

With that overview, I will 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 $0.77 for the third quarter of 2019 with an adjusted return on average assets of 1.61% and an adjusted return on average tangible common equity of 17.7%. Growth and improved mortgage results drove our increase over our adjusted EPS of $0.70 last quarter and have provided a 13.2% year-over-year growth in EPS.

Slide 4 illustrates the underlying fundamental trends of the company's profitability and demonstrates our consistent performance. Our increase in 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, a margin that remains one of the highest among our peers, expense control and fundamentally sound credit quality.

Next on Slide 5, which presents the fundamental elements of our net interest margin, specifically loan yields and fees as well as deposit cost trends. Our prior guidance range had been 4.15% to 4.30%, excluding accretion and nonaccrual interest, with a decline of 5 to 10 basis points per 25 basis point rate cut in the near term. With the July and September rate cuts, it leaves us with a current range of 3.95% to 4.20%, so 4.12% this quarter falls squarely in that range. The average contractual loan yield for the quarter declined by 7 basis points as compared to the second quarter. We faced additional margin pressure as our largely fixed-rate securities portfolio experienced significant payoffs early in the quarter given the declining mortgage rates and a lower reinvestment rate. The lower rates that drove our significant mortgage volumes for the quarter impacted our yield on the loans held-for-sale portfolio with those rates down 69 basis points from the second to the third quarter.

Additionally, the mix of our earning assets changed as we carried excess liquidity on the balance sheet in the form of fed funds sold and interest-bearing deposits with other banks. This $107 million increase in average balances quarter-over-quarter contributed approximately half of the 10 basis point decline in core margin this quarter due to lower spreads on those balances.

On the liability side, we were able to control deposit costs with a large increase in our noninterest-bearing deposit balances and a 3-point decline in the cost of our money market accounts. The average cost of our customer time deposits remained flat quarter-to-quarter despite the repricing of $87 million of our CDs from last year's campaign at an average rate of 2.1% to 2.53%. We continually brought that rate down over the course of the quarter, and the cost of customer time deposits had a decrease -- had decreased to 2.1% at the end of September. We expect to see that cost decline in the fourth quarter from the average of 2.13% in the third quarter as we continue to reprice those campaign deposits down to have more of a full quarter impact of the repricing that had occurred over the course of the third quarter.

For the fourth quarter, we have an additional $64 million in deposits from last year's deposit campaign, maturing with an average cost of 2.4%, and our current rate on that product is now at 1.55%.

For additional current data, as we look into the fourth quarter and beyond, we had a NIM excluding accretion and nonaccrual recoveries of 4.04% for the month of September with a 5.42% contractual yield on loans and a 1.08% cost of total deposits as opposed to 5.5% and 1.11%, respectively, for the whole of the third quarter.

The spot rate on our variable-rate loan portfolio as of September 30 was 5.3% -- 5.37%, sorry, which was down 36 basis points from the spot rate at June 30. The spot rate on our fixed-rate portfolio remained roughly flat at around 5.4%. We currently have around $230 million in floating-rate loans at their floors. With another 50 basis points of cuts, we'd have an additional $55 million at their floors. With 75 basis of cuts, we'd have an additional $175 million at their floors or roughly $400 million in total.

We do not see many tailwinds as to why the margin would creep higher than the 4.04% in the fourth and the first quarters, instead, we expect that to continue to decline over the near term given forecasted rate cuts before we are able to more fully reprice our funding costs down and start to gain back run in the -- hopefully in the second half of next year.

To summarize, we will face near-term headwinds with further rate cuts but are confident in the long-term strength of our customer-focused balance sheet. As we get a pause in the rate cuts, we hope to be able to drive down our deposit cost to regain some of what we are losing in our earning asset yields.

On Slide 6 now and as Chris previously mentioned, we produced lower loan growth this quarter than we've seen recently, but year-over-year remain solid at 12% organic loan growth. Our objective remains consistent, profitable and relationship-driven growth, not merely focusing on hitting a quarterly target, especially given some of the credit terms and rates that we're competing against right now.

We've also stayed comfortably within the regulatory thresholds on the construction and development and CRE concentration ratios, which came down in Q3 as compared to Q2.

Now moving to Slide 7, our customer deposits were up 6.9% annualized from the third quarter. We have kept our loan-to-deposit ratio roughly flat in the 88% range for the past 3 quarters and are not afraid to let that tick up a bit in the near term as we keep managing the margin and moving deposit cost down with the rate cuts. We are particularly happy with the growth in the noninterest-bearing deposit category that we've achieved over the last couple of quarters. Some of that will go away as our mortgage escrow deposits come back to more normal levels in the fourth quarter of 2019 and first quarter of 2020. But on an annualized basis, we grew non-escrow -- noninterest-bearing deposits by 13.7% in the second quarter and 19.6% in the third quarter and continue to see success on our treasury management sales efforts.

Looking at mortgage on Slide 8. In the third quarter, our total mortgage operations had an adjusted pretax contribution of $5.4 million when our retail footprint is included. Our interest rate lock volume for the quarter was $1.6 billion. There was a flood of refinance demand with the lower rates, and August was a record-breaking month for our total mortgage operations with an adjusted pretax contribution of $3.7 million.

Payoffs in our MSR portfolio were also significantly increased, resulting in a $1.7 million increase in the write-off of MSRs this quarter over the already high levels in the second quarter of 2019. With lower seasonal volumes anticipated for the next 2 quarters, we expect to operate slightly better than breakeven in mortgage.

Looking at our operating leverage and efficiency ratios, when you exclude the mortgage retail footprint, we grew core Banking segment noninterest expenses by 3.3% over the second quarter as we continue to make investments in the back-office infrastructure built to support our organic and acquisitive growth. Over the last 2 quarters, noninterest expenses have increased primarily due to the ACBI acquisition, higher incentive compensation, seasonal and fulmination expenses and continual investments in people throughout the company. As we face revenue headwinds into 2020, we will attempt to control that growth in the low single digits, but will not sacrifice the investments needed to prepare ourselves for future growth.

Our effective tax rate was 24.4% for the third quarter. For the remainder of 2019, we expect our effective tax rate to be in the 23.5% due to projected equity compensation benefits in Q4 and back in the 24.5% range for 2020, being slightly higher in Q2 and Q4 and lower in Q1 and Q3.

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. Provision expense increased as compared to the second quarter as we're prepared for a declining credit environment. We are still figuring out the impact of CECL, but anticipate higher overall provision expenses in 2020 than in 2019.

On capital, since the first quarter following our IPO, our tangible book value per share has increased by $6.47 or 56% to $18.03 at the end of the third quarter. Our excess capital was utilized on the branch acquisition in the second quarter, which helped drive our adjusted return on average tangible common equity to 17.7% this quarter. We anticipate our pending acquisition to be roughly neutral at close of the transaction. We believe that we are well positioned to continue growth organically, support our dividend and execute on future M&A as well as support our share repurchase plan if needed.

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

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

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All right. Thank you, James. Appreciate your comments. We -- again, we're pleased with results of the quarter and excited about the foundation that we have headed into the last quarters and the rest of -- in 2020.

So with that, Molly, we will -- we'll take some questions.

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Questions and Answers

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Operator [1]

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

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

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You gave a lot of information, which was really helpful, particularly everything on the margin. And the one thing I think I missed is, where -- what did you say, James, was the rate of loans for the month of September?

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

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Let me get that back and make sure I give you the right number. All right here. The -- let me make sure I give you the right number. For the month of September, our contractual rate was 5.42%.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [4]

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Got it. Okay. And that compares -- if we just get back to the quarter...

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James R. Gordon, FB Financial Corporation - CFO [5]

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It was roughly 5.5% for that third quarter on the contractual rate.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [6]

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Okay. That makes sense. And on the deposit side, I mean, how -- the margin guide is super helpful and 5 to 10 bps per rate cut totally makes sense. How do you think about how quickly you'll be able to push down your deposit cost? I mean the CDs maturing makes sense as that $64 million reprice is down. But as you think about kind of core deposits and negotiated rates, how much traction have you been getting on these deposits in bringing deposit cost down so far?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [7]

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Yes. So Catherine, we think about it as going as quickly as possible is how we think about it. And we -- so -- and we did see declines of 3 to 4 basis points each month in the quarter; July, August and September and so that's the way we continue to think about it. As it's become more -- this is a little more qualitative than quantitative, but as it's become more apparent that rates are going to -- are certainly decreasing then it seems to be that the market is -- has picked up some. And so we've got some optimism there as we -- so not as much in the fourth quarter as we do probably going into next year that rates, hopefully, will begin to pick up and accelerate in terms of deposit pricing. Haven't seen that in our numbers yet, so that's what we saw in the last 3 months. But we are optimistic that, that could be the case and so that's how we're thinking about it.

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

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And we have additional liquidity, I think, to defend any deposit pricing that we need to be more rational that may cost us a little bit in growth for the near term. So I think we can manage that fairly effective. We've taken -- with each of the cuts and even since the last cut, we've taken a pretty aggressive cut, particularly in our certificate of deposit rates, particularly on those that will be renewing. So we're optimistic, but it's still a tough battle ahead on that front.

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

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And then as you think about the higher liquidity of $107 million we saw this quarter, is your -- as you think about next quarter, do you feel like you'll maintain the same level of liquidity? Or do you feel like bringing that down to your -- as a way to kind of manage the margin helps some of this NIM compression. I guess -- how should we have to model those?

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

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Yes. I think we would keep it relatively flat to down, and that would be dependent on loan growth and deposit growth to offset that. Like I said, we'll -- we can defend deposit growth because we have built up that excess liquidity coming into the quarter. So we'll have flexibility to do either or whichever one is more profitable at the end of the day. It may impact the margin a little bit, but I think as some noted including yourself, it actually helps on the dollars, right, not so much on the rate this quarter, which accounted for about half of our decline in the margin, but it helped our dollars actually be up in net interest income.

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

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Great. And then on buybacks, I mean, you announced a small acquisition this quarter, and your commentary clearly suggests that you're still actually looking another small deals. Are you interested in buybacks? Or is it really M&A preferred method of capital deployment right now?

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

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Yes. M&A is preferred right now and so we're not actively in the market right now.

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

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Okay. That makes sense.

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

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But also, remember that deal we announced, and we try not to take any tangible book value dilution, so we're really not leveraging capital now. If we get to something else, then we decide to do that, that would be a different deployment option for the capital.

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Operator [15]

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

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

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Maybe just looking at mortgage. Obviously, really nice quarter here and you guys essentially matched your full year guidance just in this quarter alone. And I appreciate the color on kind of the slightly above breakeven in the fourth quarter and maybe in the first quarter as well. But can you kind of talk about the dynamics there? I mean your margin was up pretty significantly, I think, 62 basis points in the quarter. So maybe kind of what drove the higher margin this quarter and how much of that is sustainable and those puts and takes there?

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James R. Gordon, FB Financial Corporation - CFO [17]

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Yes. I think there's a couple of -- and I'll try to answer. If I don't, come back to me. But I think on your first point about that we've seen some increase in the last several weeks in the 10-year -- in mortgage rates with a 10-year, high 1.70%s, 1.80% range. So that'll slow down some of the refi activity plus the seasonal nature of the purchase money. So we're optimistic, but we want to be realistic at the same time.

On the margin going up, I think that was really twofold. One was taking out the lower margin businesses from the wholesale channels that we sold to TPO and correspondent as well as a lot of capacity and the -- or the lack of capacity allowed us to get better margin, even on the production levels. So it was somewhat the environment and it was somewhat the change in the mix of our business structure. That margin was probably on the higher end because of the environment, but it should be up and much higher than it was previously because of the change in the mix.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [18]

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Okay. Maybe just one more for me on expenses. Taking out mortgage kind of the impacts there, you're still thinking mid-single digit for the Banking segment here in the near term?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [19]

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Yes. That's kind of what we're thinking in the near term. We'll continue to evaluate it in 2020, but that's what we're thinking in the near term. As we continue to grow the whole company, we're trying to make sure; one, we're prepared with the right people and infrastructure; but two, that we're controlling that at the right pace. And so that's a good estimate, and we will -- but we'll be evaluating it depending on the environment in 2020.

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Operator [20]

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

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Andrew Terrell, Stephens Inc., Research Division - Research Associate [21]

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This is actually Andrew Terrell on for Tyler this morning. Chris, I think in your prepared remarks, you mentioned deposit costs moved lower each month throughout the quarter. Do you have the breakdown of just what the total deposit costs were at for each month in the quarter? And just where they ended September 30 at?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [22]

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Yes, I do. Give me 1 second.

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James R. Gordon, FB Financial Corporation - CFO [23]

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I've actually got them, and I'll give you that. So starting in July, they were at 1.15% and then 1.11% in August and 1.08% in September.

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Andrew Terrell, Stephens Inc., Research Division - Research Associate [24]

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Got it. Okay. Maybe just move over to -- back to mortgage now. So you guys had $1.2 billion in sales during the quarter. I think 23% of this still came from third-party and correspondent. So just to be clear, there are no more sales expected from third-party or correspondent moving forward. That's kind of all-out now, right?

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James R. Gordon, FB Financial Corporation - CFO [25]

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Right. We closed out the closed inventory. We actually transferred the locks to them -- there may be 1 or 2 in loans, but nothing of any significance.

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [26]

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Yes.

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Andrew Terrell, Stephens Inc., Research Division - Research Associate [27]

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Understood. And just trying to figure out how kind of the exit of those 2 channels affected the gain on sale margin in the quarter? Do you have what the sales for the third-party and correspondent were from a gain on sale perspective?

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

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Not -- well, the sales happened -- remember, we book all the income with the locks, and we didn't really lock much activity, none in the TPO because we sold this by June 30, and there's only a minimal amount of locks on that. So very little impact from those 2 on the gain on sale margin during the quarter.

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Operator [29]

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(Operator Instructions) We will take our next question from Kevin Fitzsimmons of D.A. Davidson.

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Kevin Patrick Fitzsimmons, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [30]

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Just -- Chris, appreciate your comments on M&A, and just maybe a follow-up in terms of -- if you are interested in other opportunities and you're having conversations, what's higher on your priority list in terms of appetite in terms of where and what that balance sheet would look like?

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

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Yes. So in terms of where, we love existing geography first. And so we love existing geography and continuous markets first. It's really what we love. And thinking -- our thinking there is operating leverage and trying to gain some more density in places where we are and then create some operating leverage for us. So that would be the highest on our list. And then right behind that is going to be liquidity. And so we're going to look at the deposit side of balance sheet. We want good, solid deposit relationships, preferably those that have a cost to deposit lower than ours are things that we look at. So the quality of deposit -- the deposit side of balance sheet would be the second thing. And then we're going to look at the financial metrics. And so -- and I think the acquisition you saw us announce in September is a good example of what we look for. That -- we didn't take any tangible book value dilution on that. As James made reference when he was going through capital, it doesn't cost us any capital in that case, and so -- and we get some earnings accretion. In this case, it was pretty small relative size, very small transaction. And so we didn't get a lot of EPS accretion, but we did get some. And if we -- if you think about that, if we can do 2 or 3 of those, those numbers really begin to add up. And so we'd like to look for some others.

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James R. Gordon, FB Financial Corporation - CFO [32]

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I think another thing on the balance sheet structure. On the loan side, we would like a loan book that's more granular and very customer-focused, not a lot of wholesale, purchased, participations next or any of those kind of things, which the smaller guys tend not to have.

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Kevin Patrick Fitzsimmons, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [33]

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Right. Right. That makes a lot of sense. Just one follow-up on margin. So as -- I just want to clarify, so what you're saying is 5 to 10 basis points or so per Fed rate cut. So just from the 1 we got in September, that would imply 5 to 10. And I would think that -- is it reasonable to think that it would be toward the higher end because deposit repricing hasn't really caught up yet, but that would diminish going forward? And then separately, if we got another cut this month and that would be on top of the 5 to 10 basis points we're already talking about.

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James R. Gordon, FB Financial Corporation - CFO [34]

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Yes. So some of the September cut is already in the numbers since LIBOR is kind of -- as I call it, as front run dropping the Fed as we're seeing right today. LIBOR is already coming down in advance of the cuts. So some of that is in there. So I'd say, if you took away the liquidity hit, so we've basically had a full quarter of a rate cut. When you kind of balance out the 2 cuts in the third quarter, we were at 10, but roughly half of that was the build in the liquidity just on the margin didn't impact the dollar that much. So -- but yes, we'll have some continuing impact of the September cut and then another cut may come next week and then maybe even another one in December, so I think it would be on the higher side of the 5 to 10 when you combine all of those together in the fourth quarter.

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Operator [35]

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We will take our next question from Jennifer Demba of SunTrust.

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Stephen Stone, SunTrust Robinson Humphrey, Inc., Research Division - Associate [36]

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It's actually Steve on for Jennifer. Two kind of quick questions here. You guys talked about margin potentially increase in the back half of next year. Does that include any potential future rate cuts? Or does that kind restabilize from here?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [37]

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That'd be more restabilized from here. We wouldn't be thinking about any rate cuts beyond the fourth quarter.

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

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It was really the rate cuts that may happen in the fourth quarter, early first quarter depending which day you look at when they expect rate cuts. But -- and then 3 to 6-month lag before you can fully get deposits caught back up with the compression in your variable-rate loans. So...

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Stephen Stone, SunTrust Robinson Humphrey, Inc., Research Division - Associate [39]

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So if we got a cut in October, say, and do you guys think the second half of next year, you could start to see the deposit costs kind of caught up and margin increasing?

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

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Yes. I think that's a reasonable assumption.

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James R. Gordon, FB Financial Corporation - CFO [41]

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Yes.

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Stephen Stone, SunTrust Robinson Humphrey, Inc., Research Division - Associate [42]

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Okay. And then on provision, you guys said the increase was due to just kind of conservatism on the credit rate environment maybe worsening a little bit. Are you seeing something that made you do that? Or are you just being a little more conservative out there?

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

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Yes. I'm really glad you asked that question. No, we're not seeing anything in our portfolio that's making us think that. So I'll be clear. Good question, glad you asked it. And we're not seeing anything in our portfolio. We are seeing things in the market, in competitive pressures that just make us shake our head. And that is not a -- I want to make -- that has also -- that is not a quantitative leading indicator, it's purely qualitative. But we see some things in the market, and we're just going, man, this -- some folks have lost -- like I said, it's foolish behavior. And so when we see that, we begin to think back to times past and what's come right after that and usually it's some credit issues. And so that's just anecdotal qualitative, but that's what -- that's the reason. So I want to make sure, we're not seeing anything in our portfolio that's causing us any concern.

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Stephen Stone, SunTrust Robinson Humphrey, Inc., Research Division - Associate [44]

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Okay. So it's more the rate structure of things, as you guys were talking about than any kind of economic changes?

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

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Right. It's more of a qualitative factors than quantitative factor.

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [46]

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Rate structure, but we're also seeing some compromise on some credit structure as well. So it's not only rate, it's -- there's some credit things as well. So -- which we're continually walking away from. And so we just -- we're not going to play that.

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Stephen Stone, SunTrust Robinson Humphrey, Inc., Research Division - Associate [47]

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Okay. And then just one final thing on mortgage actually. You guys kind of seem to think that 4Q is going to be more of a normalized seasonally 4Q. There is not really any holdover from this quarter being so strong in mortgage?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [48]

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Not really. We've seen it kind of adjust back. And it looks pretty normal to us as -- so far for this quarter, and we would anticipate that it would continue to be normal.

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Operator [49]

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We will take our last question from Alex Lau of JPMorgan.

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Alex Lau, JP Morgan Chase & Co, Research Division - Research Analyst [50]

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My first question is on CECL. I know you're still working through the impacts. But from your initial thoughts, does CECL impact your approach to M&A in any way or the types of deals that you would consider?

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

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I think we -- if you saw on the last deal that we announced, we actually included the impact of CECL in there and still have no tangible book value dilution. What we're finding is that a mere tangible book value either way, it doesn't really change anything because of the additional accretion pickup. You earn it back fairly quickly. But yes, we -- I think it's just another thing to consider when you're doing M&A and looking at that. And so we'll consider it and make the judgment on what the right price is kind of with and without having what the impacts of it are. So it just one of the things we have to deal with now as one has to adopt CECL and others that do not have to adopt CECL now.

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Alex Lau, JP Morgan Chase & Co, Research Division - Research Analyst [52]

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Got it. And just moving on to credit. I think last quarter, you mentioned you're in the process of doing an annual credit review. Is -- one, was there any findings from that? Is this what led to your comments around the irrational behavior in the market?

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

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So yes. We did comment on that last quarter. I'd tell you that process, we complete -- we do it annually, we completed it. It has gone well. And one of the benefits of that process is that it gives us the opportunity to have some really direct communication with all of our relationship managers about credit and especially larger credits and gives us the opportunity to evaluate those based on a changing set of economic dynamics. And so we did challenge more -- with a little more vigor than we sometimes would in the face of potentially slowing economy. And so that will -- that leads to some pruning of the portfolio, not a massive amount, to be honest with you, but we challenged harder than we have in the last, say, 5 years and that does lead to some pruning. That's not what really leads to my comments on what we're -- what's leading to my comments in -- on some things that we don't -- we're not going to participate in that we're seeing in the marketplace as really just market activity and watching deals come in, especially, like I said, some credit terms where we're not -- that we're not willing to do, but -- and more than that, some pricing terms which we're not willing to do. We see -- we've seen -- in all of our markets, we've seen 10 to 20-year fixed-rate deals anywhere from 3.25% to 3.95% and we're not talking about -- and we're talking about product types that just don't deserve that type of -- those type of terms. And so we've consistently just said -- even on really strong credits, we've just said, hey, we're not going to do that. And so that's really what's leading to those comments more than those reviews.

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Alex Lau, JP Morgan Chase & Co, Research Division - Research Analyst [54]

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Got it. And really appreciate your comments around that -- the color on that behavior. Just on the specifics of that. Are there any industries or markets that you're seeing? Or is this generally broad-based in your markets?

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Christopher T. Holmes, FB Financial Corporation - President, CEO & Director [55]

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Yes. We've actually seen it fairly broad-based. I'm sorry to say, and it's because it -- and sometimes we could pinpoint and go, you know what, it's 1 or 2 small banks or it's 1 particular. In this case, it's not. It's -- there are -- there's more than 1 offender in our case. And some of them are large enough that they stretch across multiple of our markets. And so again, they see something that we don't see.

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Operator [56]

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

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

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Okay. Thank you, Molly. That concludes our remarks. Really appreciate everybody's attendance on the call and the questions from the analysts. We appreciate your interest in FBK. We appreciate your support, and everybody have a great day. Thank you.

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Operator [58]

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