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

Q3 2019 Reliant Bancorp Inc Earnings Call

SPRINGFIELD Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Reliant Bancorp Inc earnings conference call or presentation Wednesday, October 23, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* DeVan D. Ard

Reliant Bancorp, Inc. - Chairman, President & CEO

* James Daniel Dellinger

Reliant Bancorp, Inc. - Executive VP & CFO

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Conference Call Participants

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* Catherine Fitzhugh Summerson Mealor

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

* Feddie Justin Strickland

Janney Montgomery Scott LLC, Research Division - Associate

* Joseph Anthony Fenech

Hovde Group, LLC, Research Division - Managing Principal & Head of Research

* 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

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Presentation

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Operator [1]

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Good morning, and welcome to Reliant Bancorp's Third Quarter 2019 Earnings and Proposed Acquisition of First Advantage Bancorp and First Advantage Bank Conference Call. Hosting today's call is DeVan Ard, Reliant's Chairman, President and Chief Executive Officer. He's joined by these Reliant Bank Executives: Dan Dellinger, Chief Financial Officer; Louis Holloway, Chief Operating Officer; and Alan Mims, Chief Credit Officer, and these First Advantage Bank executives: Earl Bradley III, Chief Executive Officer, and Jerry Cooksey, Chief Financial Officer, who will be available during the question-and-answer session.

Please note, Reliant Bancorp's earnings release and supplemental financial information are available on the Investor Relations page of the company's website at www.reliantbank.com. Today's call is being recorded and will be available for replay on Reliant Bancorp's website for 12 months. (Operator Instructions)

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

Please carefully read the forward-looking statements language on the third quarter 2019 earnings presentation as well as the First Advantage Bancorp and First Advantage Bank acquisition presentation.

Additional factors, which could affect the forward-looking statements, can be found in Reliant Bancorp's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC. Reliant Bancorp disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.

In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G regarding Reliant Bancorp's third quarter 2019 earnings. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available on Reliant Bancorp's website at www.reliantbank.com.

I will now turn the presentation over to DeVan Ard, Reliant Bancorp's President and CEO.

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [2]

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Good morning, and thanks for joining us for this morning's call to review our third quarter 2019 results. We appreciate your continued interest in our company.

Before I turn the call over to our Chief Financial Officer, Dan Dellinger, to discuss our financial results in more detail, I want to mention a few highlights from a very successful quarter.

Net income attributable to common shareholders for the third quarter of 2019 was $4 million or $0.36 per diluted common share. When adjusted for approximately $300,000 of pre-tax merger-related expenses recognized during the quarter, net income attributable to common shareholders was $4.3 million or $0.38 per diluted common share.

Earnings were, again, primarily driven by loan growth as interest income rose to a record $20.2 million, a 2.6% increase over the second quarter of 2019 and a 15% increase over the third quarter 2018. Our team, again, delivered double-digit annualized loan growth, up 2.9% from the second quarter 2019 or 11.6% annualized and 13.1% year-over-year, the 17th consecutive quarter of growth.

Third quarter loan production exceeded $155 million at a weighted average coupon rate of 5%. The new production was generated across all our markets in loan segments and was all organic.

Core deposits were up $138 million or 11.6% from the second quarter 2019, 46.2% annualized, and $251.5 million or 23.2% from the third quarter of 2018. Noninterest-bearing deposits increased $12.5 million, or 5.6% from the second quarter 2019, 22.3% annualized, reflecting success with our company-wide focus on growing relationship deposits.

The core bank segment, which exclude results from the joint venture mortgage subsidiary, continued to generate strong earnings, up 1.5% over the second quarter when merger-related expenses are excluded and 10.2% on a pre-tax preprovision basis, merger expenses excluded. Core bank noninterest expense decreased for the second quarter in a row and the core bank efficiency ratio, excluding merger-related expenses, reached 60.7%, down from 64.3% in the second quarter.

Net interest margin declined 6 basis points quarter-over-quarter. Two drivers of that decline were a slight decline in yields on our loan portfolio and a shift in balances during the quarter between deposit categories driven by competition for core deposits. Dan will provide more detail during his presentation.

Credit quality remains a core strength of our franchise and our metrics remain superior for the third quarter 2019. Nonperforming loans accounted for 33 basis points of total loans held for investment at September 30, 2019. Our loan portfolio continues to perform very well and we expect credit quality will remain strong in the fourth quarter. Chief Credit Officer, Alan Mims, will be available for questions after we conclude our prepared remarks.

On September 16, we announced the definitive agreement to acquire Tennessee Community Bancorp, Inc., and its subsidiary, Community Bank and Trust, located in Ashland City, Tennessee. The transaction met all our criteria for an acquisition. It will be immediately accretive to earnings, provides us with a strong core deposit base and provides access to new growing markets contiguous to our Middle Tennessee footprint. We expect this transaction to close during the first quarter of 2020.

Finally, we declared a $0.09 dividend, a 12.5% increase over last year's third quarter dividend, on September 24, payable on October 18, marking the 18th consecutive quarter we paid a dividend to our shareholders.

Now I'd like to turn the call over to Dan Dellinger.

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James Daniel Dellinger, Reliant Bancorp, Inc. - Executive VP & CFO [3]

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Thanks, DeVan, and good morning, everyone. I want to begin my comments with a discussion of our net interest margin. As DeVan noted, we experienced a decline of 6 basis points on a reported basis between the second and third quarters. On an adjusted basis though, we experienced a decline of only 4 basis points. There were a few factors that contributed to the decline.

Turning to Page 4 of the deck, you'll note that coupons and fees on loans declined 2 basis points to the second quarter, and we experienced a slight reduction in overall yields from lower purchase accounting accretion and lower impact from tax credits. The increase in the size of our loan portfolio will continue to reduce the relative impact of tax credits and purchase discount accretion.

Let's turn to Page 3 of the deck and talk about deposits. You'll note that the mix of deposits remained consistent between the 2 quarters, but the cost of deposits moved up by 5 basis points. Then, as can be seen on the purchase funds graph, we elected to move more of our wholesale funding from the state of Tennessee to brokered deposits and expansion overall improvement in the cost of those deposits by 23 basis points. From the yield table in our release, however, you will note that the average volumes in savings in money market categories and retail time deposits were lower than the second quarter.

We finished the quarter on a high note as core deposits grew 11.6% on a linked-quarter basis, 46.2% annualized, but the impact of the shifts and the mix during the quarter contributed to the increase in the cost of deposits.

Turning back to Page 4. Loan growth continued to be strong during the quarter. Loans held for investment increased by nearly $38 million quarter-over-quarter or 11.6% annualized, and $156.6 million or 13.1% year-over-year. As DeVan mentioned, this is all organic growth.

Third quarter loan production totaled nearly $156 million at a 5% average rate with 35% coming from land acquisition and development loans, 14% from C&I loans and 22% from construction loans.

On the earning asset side, we continued to make incremental progress towards improving our mix as loans held for investment accounted for 78.6% of average earning assets as of September 30, up from 76.1% of average earning assets at September 30, 2018. While positive, the migration from bonds at a 3.45% weighted average rate to loans held for investment at a 5.38% weighted average rate did not occur fast enough to outpace the rising cost of funds.

Turning to Page 5 of our deck. The loan loss reserve as a percentage of loans held for investment increased to 91 basis points based on the provision of $606,000. When unamortized purchase discounts are added, the adjusted allowance for loan loss is 1.16%.

Let's turn now to Page 7 and discuss the financial performance of our core bank segment. Our team's ability to grow the loan portfolio has been a critical element of our success. During the third quarter, core bank loan interest and fee income reached $17.5 million, a 3.2% increase from the second quarter of 2019 and a 17.7% increase from the third quarter of 2018.

Total loan yield decreased by 5 basis points quarter-over-quarter to 5.38%. Core yield declined by 2 basis points, primarily due to the rate decreases announced by the FOMC. The remainder of this decline can be attributed to the reduction of purchase accounting accretion in the third quarter as compared to the second quarter and first quarters of this year. You can refer to Page 4 of the deck for a complete breakdown of third quarter loan yield.

Core bank noninterest income decreased by 6.7% to $1.4 million, primarily due to no gains being realized on sales of new investment portfolio during the quarter. On a consolidated basis, noninterest income was up 2.3% quarter-over-quarter to $2.8 million, primarily due to a $160,000 increase in gains on sale of mortgages. As I've mentioned in prior quarters, revenues and expenses from the joint venture mortgage subsidiary are combined with the bank and holding company and then netted out as noncontrolling interest of the subsidiary. For the third quarter of 2019, the joint venture mortgage subsidiary generated a net loss of $1.4 million, slightly better than the first 2 quarters of 2019. Our joint venture partner is solely responsible for funding office in the mortgage operation and those losses do not impact the bottom line of the company.

I want to conclude my remarks this morning by touting the shareholder value our company has created through the first 3 quarters of 2019. Year-to-date book value per share has increased $1.55 or 8.6%. Tangible book value per share has increased $1.47 or 10.8%. Additionally, we have paid out $0.36 per share in dividends and returned $8.3 million to our shareholders via our share repurchase program.

Now I'd like to turn the call back over to DeVan.

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [4]

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Thanks, Dan. Before I open the call for questions, I want to talk about the progress we've made in executing on our strategic objectives during the first 3 quarters of 2019. The Chattanooga and Murfreesboro markets continued to show solid growth with loans up 14% and deposits up 15% quarter-over-quarter on a combined basis. We're beginning the fourth quarter with a strong loan pipeline and remain on track for another year of double-digit organic loan growth, and core deposit growth accelerated during the third quarter.

On the M&A front, we announced an agreement to acquire Tennessee Community Bank Holdings on September 16. Headquartered in Cheatham County, the acquisition will give us additional scale in the Nashville MSA. We continue to evaluate other attractive opportunities throughout Middle Tennessee and Chattanooga.

Credit quality remains outstanding with nonperforming assets, pass-through loans and net charge-offs near cycle lows. We believe our philosophy of making loans to customers in our market that we can build a full relationship with will sustain strong asset quality, even when the economy slows.

We remain optimistic as we head into the fourth quarter of 2019. We know we're fortunate to be located in one of the best markets in our country and the growth of Nashville is a big part of our story. The economy remains robust and continues to be fueled by new jobs. Among large MSAs in the United States, Nashville had the highest growth in employed workers over the past 12 months.

Regardless of our markets, we could not continue our growth and success without an excellent dedicated team of bankers, and I'd like to thank my entire team for their work and contributions to our success.

Operator, that completes my remarks for this morning's call. We'll now switch gears and begin our discussion of our agreement to acquire First Advantage Bancorp, which we announced yesterday.

So we're very excited to announce the proposed acquisition of First Advantage Bancorp, the parent company for First Advantage Bank located in Clarksville, Tennessee, and welcome the First Advantage team to Reliant. Announcing 2 strategically and financially attractive acquisitions in under 5 weeks' time is a testament to the fantastic work by our team and I believe highlights the depth and quality of the management and infrastructure we put in place over the past 3 years at Reliant. These anticipated highly accretive acquisitions coupled with organic asset growth of 13% annualized in the third quarter reflect our commitment to disciplined, profitable growth.

The proposed acquisition of First Advantage exceeds all of our requirements for a successful acquisition. First, the acquisition extends our franchise into the demographically attractive Clarksville MSA and provides for enhanced scale and efficiency in the Nashville MSA. Second, the acquisition is expected to produce significant double-digit earnings per share accretion in 2020 and 2021 and should materially improve our core return on assets and return on tangible common equity ratios, assuming the transaction closes in the second quarter of 2020 and cost synergies are fully realized in 2021. Third, similar to Reliant Bank, First Advantage Bank has demonstrated strong annual growth and deposit growth and the loan and deposit growth of approximately 12% and 14% respectively since 2015, including growth in loans of 13% and deposits of 24% in the third quarter this year.

Importantly, First Advantage has achieved strong growth while maintained very good asset quality, which is reflected by a net charge-off ratio of less than 20 basis points in each of the past 5 years including 13 basis points annualized on the year-to-date basis for third quarter of 2019. We expect the First Advantage acquisition will be accretive to our 2020 estimated earnings per share by approximately 18% and have a tangible book value per share earn back of approximately 3 years. Simply put, we think this is a solid deal financially and strategically. We're excited to enter the Clarksville MSA, which is a demographically attractive market and a natural expansion for our franchise. The First Advantage will enjoy the #3 deposit market share position in the Clarksville MSA including #2 deposit market share in the most attractive portion of the Clarksville MSA, Montgomery County.

We're picking up 8 branches in great locations including 5 in Clarksville, 1 in Nashville and 2 in Williamson County. We continue to be very optimistic about the Middle Tennessee market long term, and this combination puts us in a stronger competitive position.

After our pending Tennessee Community Bank Holdings transaction and the First Advantage transaction are both consummated, we'll have approximately $3 billion in assets and operate 30 branches throughout our expanded footprint. First Advantage has a long history of commercial mortgage lending in its footprint, and we're excited to add these asset-generating capabilities to our already strong platform.

You'll see that First Advantage has a healthy mix of consumer loans compared to most banks. Most of these loans consist of loans made to consumers who have purchased manufactured homes. Although manufactured homes represented about 28% of their loan portfolio, on a combined basis, it will be a very manageable 8% of our pro forma loan portfolio. These loans have very attractive yields and have been originated by an incredibly experienced team of bankers that have been through downturns in the economy. We conducted extensive due diligence on the portfolio and on the First Advantage team, and we're excited to add this capability to our company.

As with all of our strategic activities, cultural fit is the most important aspect of the deal. We work closely with Earl Bradley, Jerry Cooksey, and the other members of the First Advantage executive team, and feel strongly that we share similar values including our unwavering commitment to our employees, customers and the communities we serve.

The proposed acquisition has been unanimously approved by the Boards of Directors of both sets of holding companies and banks. Closing will be subject to First Advantage and Reliant shareholder approval, required regulatory approvals and other customary closing conditions. We currently expect to consummate the transaction in the second quarter of 2020 and will keep you updated on our timetable and the immediate effects of the transaction on financial results as we get closer to closing.

Taken together, the acquisitions of First Advantage and TCB Holdings are really transformative to our company. From the numbers perspective, our projected pro forma 2021 earnings per share is expected to increase by nearly $0.60 per share compared to the consensus expectation of $1.86 that existed on a -- that existed on stand-alone basis in August of this year. Meanwhile, our pro forma ROA is projected to improve by 25 basis points in 2021 compared to our adjusted ROA of 95 basis points in the third quarter of 2019. Of course, this assumes that cost synergies will be fully phased in, in 2021.

Qualitatively, we really like the addition of strong market share positions in Cheatham County and Montgomery County. These Middle Tennessee markets are very attractive and provide diversity to our core base just as our organic efforts in Murfreesboro and Chattanooga has. As the 6th largest Tennessee headquartered bank and the 10th largest bank overall in the state of Tennessee by deposits, we believe we will be better positioned to gain scale in our legacy and middle markets, both organically and as a strategic partner when attractive opportunities arise. Coupled with our organic growth efforts, we believe that we'll be able to demonstrate balance sheet growth in the high-single to low-double digit range while we're focused on integrating Community Bank and Trust and First Advantage Bank in 2020.

Now I'd like to turn the call over to Dan to provide more information on the deal's metrics.

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James Daniel Dellinger, Reliant Bancorp, Inc. - Executive VP & CFO [5]

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Thank you, DeVan. I'd like, again, to welcome everyone for joining us on this morning's call. As DeVan stated, we're excited about the proposed acquisition, which we expect to be immediately accretive to our earnings in 2020 and 2021. The deal was structured with approximately 90% stocks and 10% cash that is valued at approximately $124.3 million based on yesterday's closing price of $23.65.

Under the terms of the agreement, First Advantage shareholders will receive 1.17 shares of Reliant stock and $3 in cash for each share of First Advantage stock. In addition, we will cash out options for approximately $30 per option. We expect the transaction to be about 20% accretive to Reliant's earnings per share in 2020 and approximately 18% accretive to our 2021 earnings. Coupled with tangible book value dilution of approximately 7% at closing, we expect an earn back period of 3 years or less.

Turning to Page 3 of the deck, you'll see the complementary branch footprint, the pro forma balance sheet statistics. Just as TCB Holdings supply the incremental core deposits, First Advantage will add asset-generation capacity to our franchise. Specifically, First Advantage has generated a compounded annual growth rate in loans of 12% since the end of 2014.

I'll highlight that our pro forma earnings per share is expected to improve meaningfully to $3.45 in 2021, which represents a 32% increase compared to the estimate of $1.86 that existed prior to the announcement of the TCB Holdings acquisition. DeVan covered the strategic aspects well in his remarks. Financially, the transaction is very attractive. I would note that our 5-year internal rate of return is expected to be approximately 25% on this transaction. We expect significant improvement in our 2021 pro forma return on average assets to 1.2% or higher and pro forma return on average tangible common equity to more than 15% in 2021. This reflects cost synergies of approximately 35% of First Advantage's expense base and will be fully phased in, in 2021.

On Page 5, we have highlighted a general market description of some of the largest employers in Clarksville. Notably, Fort Campbell which is home to the 101st Airborne Division, the 160th Special Operations Aviation Regiment and the 5th Special Forces Group has a military employment of nearly 27,000. Some 17,000 or 90% of the military personnel that do not live on the base live in nearby Tennessee communities. The annual economic impact of Fort Campbell is estimated to be $10 billion. Clarksville is a university town also, as Austin Peay has 10,000 students and faculty on its campus.

As shown on Page 6 [of] our pro forma demographic profile is enhanced by the addition of First Advantage's deposit base in Montgomery County and Williamson County. Specifically, Montgomery County will become our second largest market, representing 18% of our deposit base. Montgomery County, which is home to about 2/3 of the population in the Clarksville MSA, is projected to grow much faster than the overall Clarksville MSA. As a reminder, we will enjoy the #2 share position in Montgomery County.

Turning to Page 7. We will move up to #5 share position in Williamson County. Tennessee's most vibrant market will remain our largest market, representing 38% of our pro forma deposit base.

Our pro forma deposit bases can be seen on Page 8. Although this cost of deposits will increase by approximately 7 basis points as a result of FAB acquisition, our mix of CDs and brokered deposits will decline.

Flipping to Page 9, you can see that this increase in our cost of deposits is more than offset by an 18 basis point increase in our loan yield of 5.56% on a pro forma basis. The higher yield on First Advantage's portfolio is attributable to mix of higher yielding manufactured home loans. As DeVan previously noted, this portfolio will represent about 8% of our total loans, providing an attractive risk-adjusted profile for our overall portfolio.

Pages 10 and 11 provide a summary of the transaction terms and key assumptions. Based on last night's closing price for Reliant's common stock, the total deal value represents 152% of tangible book value, 15.3 expected to be -- times expected 2020 earnings, and 8.6x 2020 earnings including cost synergies on a fully phased-in basis.

Given system's conversion date in May of 2020, we believe cost savings of 35% of FABK's expense base will be achieved in 2021 and possibly evident in the fourth quarter of next year. Merger-related charges are expected -- estimated to be $14.2 million. The gross loan mark of $14.1 million represents about 2.3% of First Advantage's loan portfolio.

On -- our pro forma capital and liquidity ratios remain strong, and while our rate [isn't contemplated to] this point, we will opportunistically evaluate the capital markets on an ongoing basis.

With that, I will turn the call back over to DeVan.

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [6]

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Thanks, Dan. The proposed acquisition of First Advantage is a tremendous opportunity for our company. In a methodical and disciplined way, we're expanding our geographic reach and our product capabilities while providing strong expected returns to our shareholders. We're very excited about the opportunities that are in front of us and the improved performance that we believe will be delivered by our team as a result of this partnership.

Operator, I'd like to now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Catherine Mealor, KBW.

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

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Congrats. Exciting morning for you all.

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [3]

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Yes.

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James Daniel Dellinger, Reliant Bancorp, Inc. - Executive VP & CFO [4]

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Thank you.

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

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I thought I'd start with the quarter and then I've got to move to those questions on the deals, but maybe first on the quarter, you noted in your press release some really big growth in your core deposit base, I think up $138 million. Can you talk a little bit about what drove that growth and were there any one-time larger relationships in there that may not be permanent or just kind of give us some color around that move there?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [6]

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Yes. There really weren't any one-time large increases or new accounts, Catherine. I think there's probably a little seasonality in the third quarter, but I'm going to attribute most of it to a company-wide deposit campaign that we started in the third quarter. Originally intended for it to be a 1-quarter campaign. We've kind of extended it on through the end of the year. And it's just really focused everybody's attention on growing relationship deposits. So we've taken our -- kind of taken our focus off time deposits and we've set goals for every branch, every commercial team, back office, even the Board of Directors for deposit referrals and it really seemed to kind of transform the conversation at the company from just a straight focus on loans and asset growth to deposits. And I think it's something that everybody's talking about now. And so I think that's been a big contributor to the lift we saw in the third quarter.

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

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What was the average cost of that new funding on average?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [8]

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I don't know that I can break it out by the new funding, but, I mean, most of it is going to be in the money market, noninterest-bearing. Of course, noninterest-bearing would basically be at 0%. Money market rates have been, for us, in -- somewhere in the 1% to 1.5% range on average. And we've been competitive with money market accounts. It's something that is -- we're still seeing relatively higher rates in our market for money market accounts, but the new funding came on in money market, interest-bearing checking and noninterest-bearing, basically, at the rates we have posted out there.

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

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Okay. And big picture, how are you thinking...

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James Daniel Dellinger, Reliant Bancorp, Inc. - Executive VP & CFO [10]

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Yes, Catherine..

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

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Go ahead, Dan.

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James Daniel Dellinger, Reliant Bancorp, Inc. - Executive VP & CFO [12]

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Yes. I was just going to say just to kind of amplify a little bit, our average yield on money markets was 1.1% during the quarter. We didn't really make any exception pricing for those deposits that came on, and there were really no specials that were being run either. So as DeVan noted, most were coming in at the rate that we have posted.

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

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Okay. That's great. And then your margin held in really nicely this quarter. You can talk a little bit about what your outlook is for the margin, maybe before we layer on these 2 deals, just given our outlook for rate cuts.

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James Daniel Dellinger, Reliant Bancorp, Inc. - Executive VP & CFO [14]

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Yes. I'll address that, Catherine. We have none. As you just said, did some substantial work in the fourth quarter. We're going ahead and baking in another 25 basis point reduction by the FOMC at the end of this month. As a result of that, obviously, we're going to see some reduction in our loan yields, primarily on our variable rate portfolio, but we're still feeling pressure on the fixed rate portfolio too.

On the deposit side though, as you know, we have a lot of wholesale deposits that are set up as short duration or short maturities, and as a result, we're going to continue to experience declines in those rates. We are seeing more rational pricing in our market and, hopefully, we are going to be able to continue to adjust some rates for our CD -- our retail CD portfolio as well as looking at some, maybe, exception price to money markets and other type of interest-bearing transaction account. All that to say, we expect our margin for the fourth quarter to be flat to the third quarter.

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

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That's great. I was going to suggest is it possible for the margin to go up just given you've got the wholesale funding coming down and then there's really strong core deposit growth replacing that? I was wondering if you're going to say up, but I guess the loan yield there was keeping that core margins down?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [16]

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Yes.

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James Daniel Dellinger, Reliant Bancorp, Inc. - Executive VP & CFO [17]

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I'm going to hedge my bets...

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [18]

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That's the lesson I learned in the third quarter, Catherine, because I thought we're going to go up in the third quarter. So there is still a possibility for -- there is a possibility for that, deposit rates, especially with money market rates in this market have just kind of been stubborn to decrease. And so where we are seeing some real lift on the deposit side is in wholesale funding, but most banks that are in the Nashville area have just been a little hesitant to lower their money market rate. So I think a good forecast for us would be stable in the third quarter.

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

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Okay. Great. And then maybe turning over to the acquisitions, really exciting deals for you all and the profitability improvement from these 2 deals combined is really significant. Maybe just one kind of big picture question on First Advantage and the manufacturer housing book that they have is -- I'm assuming that's what's driven a lot of their higher profitabilities just given the yields on those credits are so high. So do you -- is there a kind of level as a percentage of loans that you would -- now to be at only 8% for your pro forma. So is that -- you intend to grow that portfolio significantly or kind of keep it around this level as a percentage of your portfolio?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [20]

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Yes. That's a good question and I'll just say too, the profitability at First Advantage certainly has been aided by what they've done with manufactured housing lending, but they have had a very profitable operation even outside of that. This is a growing bank with a really good franchise in markets that we find very attractive. So it's not really a story that's all about manufactured housing. Catherine, I don't know that we really know yet whether 8% is the right amount. I'm very comfortable with that level. We could actually see that part of the portfolio expand a little bit and still be comfortable with it, but we just haven't gotten to the point yet where we've set expectations for a dollar amount or a percent of the portfolio that we want to see in manufactured housing. It's certainly a very attractive lending avenue for us, and we think First Advantage has got it exactly right. They're just spot on with the way they handle it. I think it would be kind of foolish for us to try to tinker with it too much, but we certainly realize that portfolio management is important, so it's something we'll be evaluating going forward.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [21]

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Got it. And is this portfolio -- I'm sorry, I don't know much about First Advantage specific business, and is this more to the individuals or to the operators of manufactured housing communities?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [22]

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Yes. This is -- it's actually kind of called a specialized consumer lending division. So this is to -- almost entirely to consumers...

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

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Okay. So it's directly to the consumers?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [24]

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Manufactured homes, yes.

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Operator [25]

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Moving on, we'll go to Kevin Fitzsimmons with D.A. Davidson.

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Kevin Patrick Fitzsimmons, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [26]

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Just one quick question to clarify on the margin outlook and I appreciate that. Dan, I know each quarter we kind of slice and dice this where I think, if I calculate right, your adjusted margin, I guess my version of it, including accretion, but excluding the tax credits because that's flowing through the tax line, which we would use to forecast NII is about 3.44. So is that -- when you say stable, is that kind of what the bar we should be using in terms of trying to calculate core banking NII?

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James Daniel Dellinger, Reliant Bancorp, Inc. - Executive VP & CFO [27]

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Yes. Kevin, there shouldn't be any changes in the accretion numbers in the fourth quarter. As I said in my remarks, the impact of those could possibly be reduced somewhat as a result of the increase in the interest income that we experienced as our loan portfolio grows, but otherwise, the accretion that we've got noted in our release should be consistent.

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Kevin Patrick Fitzsimmons, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [28]

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Okay. Great. And then on the deal, if -- DeVan, if you can just give a little bit of color on how and why this deal came to be? Was this a specific market you guys were targeting? Or was it more just the natural lifespan time to sell for the seller? And then if you're looking out with 2 deals pending, I know your -- you said you are continuing to assess, but do you feel like you're going to sit for a while and get these closed before looking and if there's any other specific markets that you'd want to fill?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [29]

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I think that was more than one question, Kevin, but I'll try to get to the 4 or 5 that you've asked us. That's okay. It's not a problem. So I guess first of all, First Advantage is headquartered in Middle Tennessee, and we've said all along that from a geographic standpoint, M&A opportunities for us need to be in our geography. So that today includes Middle Tennessee and then the areas around Chattanooga. The -- this is a bank that I've followed at least at a distance for a while. I know the CEO very well, Earl Bradley. I've known Earl for a number of years. We've been in various things together with the TBA and run into conferences and we always had a chance to talk. And I think it was -- timing wise, it was probably really good for them and for us to enter into these negotiations. They're getting liquidity that they don't have today in their stock and also getting the ability on a pro forma and a combined basis to grow at a level that they probably couldn't have sustained going forward. So it was a really good strategic fit for both of us. I don't want to -- we've mentioned a little bit earlier in my comments, don't want to downplay the cultural fit too. I've kind of learned over the years that if you don't partner up with somebody that treats its employees, its customers, its community the same way we do, it's just not going to work. And so as I've watched First Advantage and watch how they've grown their company and it's been in a very intentional way, they've moved into Nashville in the last few years and have kind of established a nice foothold here. It was just a really good fit for us. And -- so we started talking a few months back and it looked like it was one of those things that was good for everybody. And that's what brought us to the table.

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Operator [30]

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Moving on, we'll go to Stephen Scouten with Sandler O'Neill.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [31]

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It's actually Peter Ruiz on for Stephen. So appreciate all the color you guys have given on the margin. Just wondering maybe if we're thinking about a year out pro forma with the 2 deals, what does the asset sensitivity of the bank look like? I think typically you would screen assets as liability sensitive, but maybe some of the competitive forces in Middle Tennessee kind of outweighs that? What's the modeling, say, pro forma for the liabilities or asset sensitivity of the bank?

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James Daniel Dellinger, Reliant Bancorp, Inc. - Executive VP & CFO [32]

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Peter, there's still a little bit of preliminary things in play there. For instance, we don't have the TCB Holdings asset liability management reports for the third quarter nor do we have FABK's for the third quarter, but based on the preliminary assessment that we did at 6 30, Reliant, in general, has been very neutral to slightly liability sensitive. TCB Holdings was also neutral. When we combine the 2 together, obviously, with the size of that company, we remain relatively neutral.

I think with FABK, we'll be a little bit more liability sensitive. However, as I've noted in my remarks, with the change in the mix of deposits, lower brokerage deposits or core deposits, we may be able to stabilize that just a little bit better. So I expect that in 2020 that we'll -- and moving on into 2021, assuming that our mix of asset stays the same, earning asset stays the same and that our mixed deposits shift more towards stable deposits, then we'll see a -- just a continued neutral position.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [33]

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Okay. And maybe could you give a little bit of color on what the spot rates for deposits maybe on the time and maybe money market were at quarter end for the third quarter?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [34]

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Did you ask about spot rates? Do you mean market rates for those deposits?

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [35]

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Yes, exactly. Just trying to look at the path of maybe where they started at the beginning of the quarter versus where they kind of ended and what it -- what the path looks like going into the fourth quarter?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [36]

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Sure. Okay. So Peter, in our market, we've seen -- we've probably seen a little bit of reduction in money market rates. I'd say the biggest plus for us in money markets is we've just had a lot of high rate offers that have kind of moved out of the market. So nonbank competitors that have been flooding the market with higher rate offers that a quarter ago were in the 2.25% to 2.50% range, those are really gone. So we don't find ourselves having to do exception pricing on money markets like we did a quarter ago. We've started to ease our rates down a little bit, but you're still going to see -- we're going to protect business that we have, then if we have -- if we have to meet the competitor's rate for money market account, we'll do it. I probably wouldn't have to go as high as I did a quarter ago, but money market rates have been a little bit stubborn and coming down. So what you see in our overall money market rate bucket today is probably where it's going to be in the fourth quarter. It may be off somewhere around 5 basis points or so, but not much.

Time deposits is really another story. And as kind of early as late second quarter, maybe even end of the first month or 2 of the third quarter, we still had some promotional time deposit rates out there. So even at 12 months, which is the most popular rate bucket, we were probably in -- somewhere in the 2% range. And so I have seen time deposit rates for 12 months, especially as it kind of relates to what the Fed has been doing. It's come down a little bit more dramatically. So we don't have any posted time deposit rates in the 12-month bucket that are more than about 1.5%, maybe a little bit less than that. And I've seen competitors have lowered their time deposit rates as well, and then probably more dramatically for us is our wholesale funding, whether it's a home loan bank or state of Tennessee brokered deposit rates, much more in line with what the Fed has been doing. So we've seen those rates off 25 to 40 basis points in some of those buckets. And those are short-term deposits too, so we don't really have anything in the wholesale rate bucket that's going to be more than 6 months today. We'll have opportunities as those roll off in the fourth quarter to replace those. Our big hope in deposit cost in the fourth quarter is we will finally start to see some relief in money market rates, and we get another cut by the Fed, I'm optimistic that we will start to see a little bit more realism with how money market rates are priced. Hope that answered your question.

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Peter Finley Ruiz, Sandler O'Neill + Partners, L.P., Research Division - Director [37]

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Yes, that was perfect.

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Operator [38]

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(Operator Instructions) Moving on, we'll go to Joe Fenech with Hovde Group.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [39]

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Most of my questions are answered, guys. But on M&A, I know that you reiterated, DeVan, Middle Tennessee is your area of focus. Does the new map with these 2 deals those stretch the geographic area even a little bit in terms of what you'd think about doing? In other words, maybe a deal that you didn't want to do before as it would involve hopscotch in terms of geography now becomes more attractive to you? Or is the geographic area considered still pretty much exactly the same as before?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [40]

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No, it's the same, Joe. We don't really feel like we need to expand our geography, and I continue to see other opportunities that are in, what I would call, the expanded Middle Tennessee market that would include Southern Kentucky and North Alabama. And I think because the ones we've done have all been in that geography and -- give us the ability to integrate them easier. I mean, we know the people, the customers, we know the geography, and as long as we've got good opportunities to continue to build our franchise in the Nashville MSA or Middle Tennessee we will continue to do that. And I'd say -- and I mentioned Chattanooga -- our Chattanooga operation is just really doing well. We've just got the right team down there. We've got the right market leader. And if bolt-on acquisition opportunities came up in the Chattanooga MSA, which would include North Georgia, we would certainly consider those too. I just realized too, Joe, I forgot to answer one of Kevin's questions a little while ago. And I think he asked me about does this cause us to have to sit on the sidelines for a while since we've announced 2 deals in the last 5 weeks. And I would say probably yes, at least until we get First Advantage closed and integrated and that's probably mid-year with the planned conversion in May. So we've got a relatively full plate right now. We're real happy and real excited about the 2 partnerships that we've got working, and I think that's enough for us to do for at least the next 6 months.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [41]

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Okay. And then when you look out a few years, DeVan, let's assume everything goes the way you want to fundamentally, you get the deals you've got your eye on that you haven't done yet, what's the ideal scenario of what you look like? For instance, is it like a $5 billion or so Middle Tennessee franchise with X and Y performance metrics or something -- give us a sense for what that ideal scenario for what Reliant looks like a couple of years out, if you don't mind?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [42]

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Sure. And -- you remember a quarter or 2 ago, I would've said $3 billion is what we want to look like in 5 years. I do think that, as you look at the different buckets, there is one that's under $3 billion or let's say $1 billion to $3 billion and then there is one that's $5 billion to $10 billion. I do think that $5 billion to $10 billion franchise size is ideal and it's certainly attainable for us as we look out the next 3 to 5 years. Can't really get there strictly through organic growth although organic is going to continue to be kind of a hallmark of our strength and our strategy going forward. But I would say the $5 billion to $10 billion range would be good for us, Joe, and I think realistic in -- as we've said before on the ROA, and I think we're really close to our ROA target on a pro forma basis anyway, but I think 1.25% ROA, 15 -- north of 15% return on tangible common equity. Those are some kind of guiding principles for us and we definitely think they are achievable. Sub-60% efficiency ratio at least at the bank level. So we think a franchise that looks like that that's headquartered in the Nashville MSA is very attractive. We think it's attractive to our customers. We think it's attractive to our employees, and we're going to continue to be a big part of the communities that we live in.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [43]

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Last one for me, DeVan. Is this the type of M&A formula in terms of the relative size of the last 2 deals that we should expect to see going forward? Are there larger opportunities that you would consider? And if there are larger opportunities, what are some of the considerations that might lead you to think about more of a transformative type deal or is that just not on the table?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [44]

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Well, at least size wise, anyway, Joe, the 2 that we have announced are a little bit different, as you can tell, one is about $250 million and the other is almost $800 million. So ideally, we would like to be north of $500 million. The Community Bank transaction was just a great fit for us, as I've already talked about, because of where it's located, good core deposit base, #1 market share in their market. But especially as we get out of the core of Middle Tennessee, which would be Nashville and surrounding counties, I think we have to be looking at something a little bit larger. So $500 million and above would be a better target for us. Transformative to me almost sounds like MOE, and I just think we'd have to be really certain, really sure that it's just right, that it's perfect, that it's in a market that is great that has good talent, good performance and that we can get the right cost saves out of it to justify it. Culture has to come into play too. You've just got to have just the right fit. So certainly, I think there are some opportunities out there and we would consider it, but I think it's got to be something that we're all convinced is going to work.

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Operator [45]

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(Operator Instructions) Next, we'll go to Feddie Strickland with Janney Montgomery Scott.

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Feddie Justin Strickland, Janney Montgomery Scott LLC, Research Division - Associate [46]

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Just a quick follow-up on the margin. I know you guys said it should be relatively flat with 1 cut to maybe liability sensitive. If there was a second cut in December, would you guys still see margin flat or down slightly? What do you think you would see there?

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James Daniel Dellinger, Reliant Bancorp, Inc. - Executive VP & CFO [47]

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Feddie, this is Dan. A lot of it is going to have to do with pricing in our market. On the CD front, as DeVan mentioned, we have a good slug of not only -- I mean, not only wholesale CDs, but also retail CDs that are maturing in the fourth quarter. Certainly, if we see a 25 basis point reduction this month and another one in December, those will reprice almost immediately. But again, on the core deposits, the money market savings accounts, interest-bearing transaction accounts, we are looking at those on a regular basis and as we see opportunities, we will continue to -- we will build in some price -- build in some reductions in those rates. But hard to tell at this point if that's going to be the case. We think it will be. We are seeing more rational pricing in the market now.

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [48]

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So, Feddie, let me just add real quick to the -- you guys know what's going on in Nashville, and earning asset growth, especially loan growth, is being seen by everybody that's operating here. So I think, unfortunately, what that does is that continues to keep pressure on deposit rates because we all want the kind of deposits we're talking about, noninterest bearing, interest-bearing checking and money markets. And I'd say unless the economy starts to slow a little bit, maybe loan growth -- the pace of loan growth slackens, we're still going to see, I think, some stubborn -- stubbornly high rates in the money market and interest checking. I think banks are just a little bit slow to do anything for fear of losing good core deposit. So I'm still optimistic even with another rate cut that we'd see kind of a flat margin in the fourth quarter. It will come so late in the quarter, probably wouldn't impact as much anyway, but I'm hopeful, but I think as long as the economy remains strong, deposit pricing in Nashville is going to be a challenge for everybody.

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Feddie Justin Strickland, Janney Montgomery Scott LLC, Research Division - Associate [49]

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Got you. I appreciate the color there. And kind of on that same vein, could you talk a little bit more on the deposit competition. Is it larger players based on the market? Is it local competition? Who is really going out there? Or is it just everybody? Who is really going out there and kind of really pushing up rate?

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [50]

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Well, I don't think anybody is really pushing them up right now. It's probably better to say they're holding them up. But I don't really see -- I don't see it segmented. We compete against the bigger banks and I would certainly include Pinnacle in that group now, all the way down to the smaller community banks, and everybody is kind of faced with the same challenge. So I don't really see 1 or 2 banks that I would say they are the ones that are holding rates up. I think it's pretty much everybody. In fact, it may be more of the smaller banks where you've got a [Regions] or a SunTrust or Bank of America, who still holds significant market share here. They are probably -- because they are so diverse in where their deposits come from, they're probably not quite as competitive on rates, as the banks that are headquartered in Nashville and have virtually all their franchise here.

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Operator [51]

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I'll turn it back...

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [52]

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Operator, I think that's...

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Operator [53]

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For any closing comments.

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DeVan D. Ard, Reliant Bancorp, Inc. - Chairman, President & CEO [54]

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Thank you operator. I don't really have any closing comments. I just want to thank everybody for being on the call today. I know it was a little long, but there is a lot of exciting news to report, and now we've just got to go deliver. So appreciate your support and look forward to seeing all of you soon.

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Operator [55]

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Thank you. And that does conclude today's conference. We would like to thank everyone for their participation. You may now disconnect.