Q4 2019 Earnings Call - FB Financial Corp and Franklin Financial Network, Inc Merger Call
Good evening and welcome to the SB Financial Corporation's conference call regarding their fourth quarter 2019 earnings release their proposed merger.
Financial network incorporated.
Hosting the call today from financial it's Chris <unk>, President and Chief Executive Officer.
Joining by James Gordon Chief Financial Officer.
And we haven't president of the ventures as well as Meyer.
Jones, Chief Executive Officer Officer, and Chris Black Chief Financial Officer from Frankfurt Financial Network incorporated.
Please note financial press release.
Each of the each of this evening's presentation are available on the Investor Relations page on the company's website at H.T. cheap <unk> Dot Colin coal forward Slash Www Dot Firstbank online dot com.
Today's call is being recording will be available for replay or financials website approximately one hour. After the completion of this call.
At this time, all participants had been placed in listen only mode. So called the open for questions. After the presentation.
During his presentation SB financial me make comments, which constitute forward looking statements under the federal security laws. All forward looking statements are subject to risks and uncertainties and other factors that may cause actual results.
Performance or a cheap enough SB financial to differ materially for many results expressed or implied by such forward looking statements.
Many of such factors are beyond F., these financials ability to control or predict and listeners are cautioned not to put any undue reliance on such forward looking statements a more detailed description of these and other risks is contained in SB financial periodic and current reports filed with the Securities Exchange Commission, including it'd be funny.
<unk> most recent Form 10-K , as well as the press release announcing the transaction.
The company's most recent earnings release.
Except as required by law SB financial disclaims any obligation to update or revise any forward looking statements contained in this presentation, whether there's a lot of new information future events or otherwise.
There's some these remarks may include certain non generally accepted accounting principle financial measures as defined by Securities and Exchange Commission regulation G.
The presentation of the most directly comparable generally accepted accounting principle financial measures and reconciliation of the non-GAAP measures to come.
Comparable GAAP measures is available in the financial earnings release supplemental financial information. This evening's presentation, which are available on the Investor Relations page of the company's website at H. TTP, calling forward slash forward Slash Www Dot first bank online dot com.
On the Securities and exchange Commission's website at http, calling for Flashforward splash.
W.W. the FCC Dot Gov.
I would now like to turn the presentation over to Chris hopes up the financials President and CEO .
Thank you very much Keith.
Good evening and thank you for joining us on this call to hear about our fourth quarter earnings in the merger announcement with Franklin Financial Network. We appreciate your interest in both companies.
We have exciting news Tonight, and I know, we all want to hear about the first I will walk through the highlights for the year and let James briefly cover our earnings then I'll turn it over to Myers and Chris for a moment.
Before I share my thoughts on the merger with rent subsidiary.
Looking at 29 team, we feel that we delivered outstanding results are high priority is always going to be taking care of our of our customers.
The top initiative in our strategic brands. Thanks, just that.
When we finalize our strategic planning process 10 years ago that was the case and that's going to be the case for each of our future strategic plans under this leadership team the measures, but how we execute on that.
For our core growth and profitability metrics for the year, we delivered on those metrics adjusted EPS of $2.93 or 8.4% growth over 2018 with no share buybacks.
Resulted.
In an adjusted Aro return on average assets of 1.55% in a return on average tangible common equity 16.4%.
Excluding acquired balances, we grew loans by 10% customer deposits by 6.3% well non interest bearing deposits increased by 14.8%.
We're proud to those growth and profitability metrics and as a result, we call 2019, a successful financial year.
2015 was also an exciting year for us from a strategic standpoint.
We acquire 10 branches from Atlantic Capital Bank, increasing your market share in Chattanooga up from seven to bid and in law School from 11th Tonight that acquisition has performed better than expected so far and we look forward to continuing to build on our presence in those markets.
We also converted into our new Treasury platform, which is partially responsible for the for outstanding Korea like.
Outstanding organic non interest bearing deposit growth.
Thank you for said over the course of the year.
We reorganized our mortgage operations shedding our wholesale channels and aligning the division more directly with our customer relationship focused strategy. We feel that we're now properly position to accelerate the favorable environments, while avoiding a drag on earnings and seeing higher rate environments.
Yes, the bidding acquisition of farmers National Bank in Scott School, Kentucky.
Sure.
Where we will enter the bowling Green you might say ranked seventh in market share, including over 50% market share and Scott will Kentucky.
We anticipate closing that acquisition in mid February and look forward to officially welcome these associates and customers to our first bank fan.
Also a very strong year and we're very proud of our associates for continue to execute and deliver these results I'll now turn it over to James to talk through our quarter results.
Thanks, Chris and good evening, everyone. Obviously this is an exciting time in the history of our company. The first let me share some thoughts on the fourth quarter in 2019 nerd and [noise].
We had another solid quarter results with adjusted EPS of 70 cents per diluted share just do the ROI.
Early a 1.42% an adjusted return on average tangible common equity a 15.2% we delivered annualized loan growth of 5.9% for the quarter, which is in line with their current guidance about 10% over the near term.
Tumor deposits were up slightly at 1.5% annualized growth for the quarter, excluding the 104.1 million dollar decline in mortgage and other deposits.
Overall deposits in our banking markets grew 10.5% annualized.
Our net interest margin felt the impact of September and October freight.
As we were 3.91% when excluding the 21 basis points.
Impact of accretion in non accruals within our expected range of 3.85%.
4.15% has a current guidepost for the month of December our contractual yield on loans was booked 5.19% our Gulf to total deposits was 99 basis points that our net interest margin excluding accretion in nonaccrual interest collections was 3.86 person, we believe that we've seen a fault.
Going downward pressure loan yields than we are actively managing our deposit cost down we may have a slight dip in the first quarter margin from the fourth quarter margin, given where December was compared to the quarter, but we believe that we have an opportunity to improve on that it was the second half the year.
Mortgage delivered better than anticipated results as volumes and margins remained higher than expected in November and December resulting in a total mortgage pretax contribution.
$3 million for 2020, we hope to deliver total mortgage pretax contribution results there would be flat to slightly down from 2000 Tonight things adjusted contribution of 11.7 billion that target will be largely dependent upon the overall rate environment.
On credit you saw net charge offs in provision expense increase this quarter as we had a single loan that accounted for 2.6 million of our charge offs are 24.
Basis points of our 30 basis points of net charge offs for the quarter. The remaining balance of their credit is 1.6 million and accounted for the majority of our increase in nonaccrual loans. This quarter. The credit references on an isolated occurrence related to specific events with a single borrower the underlying trends of our loan portfolio remain solid and weve.
Tended to see overall strength in our markets.
With that summary of the quarter I will turn it over to Chris glad to speak about Franklin financials quarter.
Thanks James.
Good evening, everyone. We had a strong quarter at Franklin financial we delivered core EPS of 68 cents per quarter up 11, and a half for sat for the fourth quarter 2018.
You tend to see progress our balance sheet rotation optimization introduction of noncore banking activities.
Our snake portfolio is $112 million smaller than it was in the fourth quarter of 2018 and is down to just 4.9% of the total portfolio.
Our securities portfolio is 500 million dollar smaller than it was in the fourth quarter of 2018 down to 16.7% total assets from 27.1% a year ago.
We've also significantly decreased our non core funding down $379 million over the course of 2019.
As a result profitability metrics have improved with our net interest margin up 14 basis points last quarter.
43 basis points for the fourth quarter of 2018.
We're excited to join forces would that be financial going forward and build upon a very strong core community bank.
I'll now turn admired share his thoughts on our merger.
Thanks, Chris Hello, everyone. We're here dennard celebrate a momentous occasion.
Pairing with first by the beginning of a great partnership.
Together, we believe that we have the opportunity to be Tennessee's Premier community Bank.
It became clear over the course of diligence in negotiation that each of our customer center cultures would be very compatible I truly believe that we will be better together and our ability to serve our customers and our communities will be stronger than ever.
I wanted to thank all of our Franklin synergy associates for getting us to this point.
I think that we should all be excited about this next chapter and our potential together with personnel.
With that I'll turn the call back over to Chris homes for his comments our merger.
Thank you merging Chris we're excited to be sitting here at the table with you Tonight.
And there are three driving reasons for this combination first.
Expanding the presence and deepening the penetration of the combined bank in the National MSC second combining the talent base of first bank with Frankfurt synergy strong community bankers and third the opportunity to meaning he meaningfully improve our earnings per share, while taking a protective approach to our balance sheet and tangible book.
Value per share.
Well the first item.
Well at eight branches to distribution network across the entire say all and highly attractive locations. As we said time and again, we believe that density in scale in a banking in a market provides tremendous value that brand recognition pricing power and ability to accelerate growth that is growth in profitability.
Two objectives that we preach everyday.
With this merger we achieved the density in scale that we've been building towards a national since 2012.
And it and we believe is going to prepare for propel our growth and profitability.
Following the close the transaction will re burst in Williamson County, second they'd rather county, and pants in Davidson County in terms of deposit market share in the Barnett Slimmer say, we'll move from 12 up to six was $4 billion in deposits.
The demographic standpoint, we intend to Rutherford counties are driving forces behind the national M.S.A. being as attractive as it is Williamson is a wealthiest counting in Tennessee, while referred is a third wealthiest from two from 2010 to 2020 Williamson and rather for counties.
Where the two fastest growing markets in the state when you exclude counties with less than 15000 residents over the next five years, we've said that expected to be the fastest growing county in Tennessee, and rather for the third fastest again, excluding the small accounting.
Well first thing well first bank has had a presence in Franklin for a number of years, we've been largely irrelevant there with the exception of the Fairview community our lack of progress in the market had been partially due to Franklin synergies Dom.
We've been we've been doing our best to compete within Williamson County, we've been largely unable to do so due to Franklin deep relationships in the community. It feels great to stop beating your head against the wall and beyond the same team going forward.
Bradford County has been a steady market for first bank since we expanded their be acquisition in 2007, but we've not had good distribution network in scale, we've needed to fully take advantage of the growth that run for county has experienced a period, where franklin synergy and become the second largest market share banking that county, we're excited about our future.
Let me.
No reason number two for party with Frank Dyssynergy their bankers are the best in their markets.
What we found during diligence with a powerful team of community bankers that had built a very strong core asset and we believe that core asset has been less recognized by the public markets in the past.
Due to the noise in risk around the non core assets and the funding issues.
If you look at our assumptions, we've modeled 30% cost saves our risk transaction.
This relatively low rate of cost savings and despite our plan to consolidate seven branches in our combined footprint for almost half of the 15 branches that get added in this merger and not all of those closures will be broken synergy branches will keep the best of what our two banks offer.
If I were a bank analysts or investors on Madison, we were sandbagging when that 30% number we're not.
We've entered into employment agreements with key members of Franklin Senior leadership, we value. This team of bankers and we're making their transition our highest priority. Some of the management cost savings that you get for most bank M&A or not present for desired in this transaction.
At the core Frank from synergy is an incredibly strong group and relationship managers. They have pit amount as our definition of everything that comedians anchor should be.
They live in interactive in their communities they bank their friends and neighbors. They have a travel club to their customers. They serve our boards and hope civic leadership positions and they dominate in their markets in fact, they remind us of ourselves and our community markets in Nashville first bags first bank has a very strong.
From bank, but we've never been able to transition into the strong community bank that we have we desire to be the Franklin team is exactly that.
We're very excited to pair with this exceptional team and hopefully provide them with additional resources to enable them to go out and win even move them they already do.
One other compelling part of the union between the two companies is that for some time first bank has been can considering bringing several pieces of this operations.
The operations part of the company together in a centralized operations center.
Following the closing this transaction, we plan to keep Franklin synergies headquarters location in downtown Franklin, while we maintain some of the functions in Lexington, Tennessee, we will be turning back cluster of buildings into index have Franklin into our primary operation Center.
We want to come we want the combined company to be a cornerstone of the we have some county community and we want our impact there to grow at our company continues to mature into the southeast leaving community Bank franchise.
Whereas we highly value the core bank, it's associates their customers and they're tied to the community and we want to support them as a combined is that continued to dominate the markets.
Moving to the third point the financial results of the transaction. We think the we think this check the boxes that enables that make the investment.
We are tangible book value neutral, we're picking up roughly 10% in EPS accretion and we do that while protecting our balance sheet more than in the second.
And paying to cross the 10 billion dollar asset threshold, we achieve all that while obtaining true math and our most vibrant market personally I believe this creates significant franchise value for the company in value for our shareholders.
I also want to touch on the risk of the transaction and how we dealt with those.
Heading into diligence, we felt that we needed to be comfortable with four things the credit culture.
The construction and commercial real estate concentration the funding profile and the healthcare snack and leverage lending portfolios.
Following a thorough review of the portfolio credit culture underwriting practices credit monitoring we're comfortable with the credit culture and understand the construction in theory portfolios that are meeting with Branca series management team over the course of deleverage. The negotiations. They described himself time after time as the leading middle Tennessee.
Real estate franchise, and we agree with their assessment.
We will implement some of the residential construction credit monitoring practices that they put in place over the past few years their credit officer will take a senior role with the combined company continuing to serve private synergies existing relationship managers, while picking up responsibility.
For our refer to Williamson County, bankers, Eddie will work closely.
First thanks, Chief Credit Officer.
Construction and development balances will move over the 100% risk based capital threshold at the close of this transaction. However, we do think managing the concentration in there for four portfolio to near 100% of risk based capital is good policy and our goal is to gradually.
Through the growth of our risk based capital and controlling exposures managed to that go over the four quarters that following the close.
And operate at that level.
[noise] from a third concern.
We will have an initial core funding holes.
I'll close that we'll have to grow out of both organically and potentially through acquisition the culture Frank from Saturday Prior to 2019 had not been to concentrate on the liability side of the balance sheet. Their strategy was less than to let the treasury function provide the funding and that was done with extensive.
Views of wholesale liabilities and brokered deposits over the past year Franklin series management team has been the process of adding more deposit relationships.
To the objectives for their bankers and they started to see some results over the past couple of quarters, we look forward to fostering that progress with our Treasury management services in retail products will work with work together to continue the trend ongoing customer deposits.
On the last concern.
We've decided to wholly divest of Frank was shared national credits healthcare in quarter, four folios totaling 430 million.
We've assumed demarco these portfolios reflected reflective of liquidation value and if not wholly divested on day two after the close we plan to be fully exited in the first quarter. Following the close the transaction I'll, let James walk through the financial impact that we've assumed from exiting this business.
All that to say.
We're thrilled with the strategic nature of this deal and we were also a late in the financial impact and think rule that we think we're going to see.
We can't wait to welcome fragrance anything MIM team members and customers into our first thanks, Sam with that overview I want to turn call over to James to talk about the transaction in the more financial detail.
Thanks, Chris first I just want to emphasize how excited we are about this merger we believe that Franklin synergy is when the strongest community banking franchise in the Middle Tennessee, and we are thrilled to be able to add their associates to the first thing family. Our team obvious is still the same way and they have been working tirelessly over the course of.
This process to make this a reality.
Moving on I won't go slow, but slow, but I do want to provide color on a few of our key financial assumptions for this transaction looking first to their credit assumptions, we underwent a thorough review of the portfolio. We heard a big four from on the loan review side, and we evaluated 66% of the non owner occupied CRT portfolio, 41%.
On the construction and development portfolio and 46% of the core seen in our portfolio, including owner occupied CRD supplemented by additional deeper discussions of the construction development CRT as well as the shared national credit health care corporate portfolios. We also.
The extensive discussions with senior management on credit philosophy monitoring and current portfolio.
Ultimately we developed a view that there are two distinct portfolios at the bank. The core community banking book of business, which is approximately 2.4 billion in the 430 million corporate SMIC healthcare leverage lending book.
We feel good about the core community banking book, we think that it looks like.
It looks and feels like loans, we would be making in those markets. If we had their presence there and we're excited to continue growing that portfolio.
The corporate book does not aligned with our philosophy as it does not generally involve local customers or financial sponsors, we will not be putting that on to our balance sheet. We have assumed the discount on the portfolio to predict tangible book value is that portfolio is excellent we have loved that number into our PCB Mark assumption for this presentation.
And we'll treat any of those loans that come over to our balance sheet at close as held for sale.
We have assumed roughly $10 million and loss net in net income as a result of divesting that 430 million of loans.
And that will decrease their wholesale funding on a roughly matching basis.
Through that review, we have ultimately assume non accretable credit marks of 2.7% that will handle any losses in the exit of the non strategic portfolio and a seasonal based allowance for credit loss reserve for the core portfolio. We have also assumed and accretable mark of 1.3% on the portfolio right.
Equally split between fair value credit and interest rate March this will come back in through income over the lives of the loans also that is approximately 110 million of initial combined gross credit.
In rate marks on Franklin synergies loan portfolio or approximately 3.9%.
We have assumed 30% cost savings to Franco synergy Standalone noninterest expense with 50% phased in over.
2020, and 100% they've been in 2021, we have assumed lost interchange revenue due to the Durbin amendment of roughly $4.5 million after tax when fully phased in during 2022. If we are closed as possible, we could treaters choose to try to stay under the 10 billion in assets.
December 30, Onest 2020, but we have modeled that income loss beginning on June 32021 to be safe.
We have assumed that we are taking advantage of Franco synergies re subsidiary ending.
Visibly two and a half million dollars in state tax benefit annually going forward.
Those adjustment in Franklin Standalone earnings by our when we estimate it will achieve roughly 10% EPS accretion through this transaction, while staying tangible book value neutral as is typical of we assume no revenue synergies in their modeling, but we do believe that there are plenty of opportunities to grow revenues easily identifiable items, including improving Franklin.
Funding base, the hiring additional bankers and wealth managers and middle Tennessee due to increased brand strength in Burbank across Nashville.
In summary, we created a transaction that protects our balance sheet intangible book value per share, while providing for earnings per share accretion in growth, which creates value for all of our stakeholders.
To answer any additional questions that you all might have on the modeling and due diligence process in the question and answer session.
Going back over to Chris Thank you James.
We want to welcome Myers, and Chris and the entire Franklin synergy came into the first thing family.
The welcome has to remain unofficial until we close but it's already heartfelt.
We think that together.
We will be very well positioned to serve our customer base better than ever.
Thrilled with the financial metrics and most importantly, we believe that this combination creates the premier community banking franchise in Middle Tennessee.
Operator that completes my remarks on this evenings call and we would now like to open it up for questions.
Thank you, ladies and gentlemen, if he would like to ask a question I signaled by pressing star one on your telephone keypad using a speaker phone. Please make sure you're my assumption is turned off to like your cylinder each are quite yet.
I can start one for questions, we'll pause a moment to similar Q.
We'll take our first question from Jennifer Demba with Suntrust. Please go ahead.
Thank you good evening.
[noise] can you just talked about the background that the deal how long you guys have been talking and.
How everything came together.
Yeah. So.
First off we.
You know we're sitting at.
I guess to box.
Bob a branch to box from the French synergy headquarters and so we know each other at our headquarters office in downtown Nashville, There's downtime frac them, but we do compete we know each other and we see each other.
Socially and then we go to football games and things like that so we know the folks.
This.
Conversation really started I guess.
The last quarter and of the year and with it sort of picked up steam near the end of that net quarter.
And.
Led to the announcement so we.
We also.
Oh, yes, two we've known several folks there Chris Black and fitness table was has been an employee both organizations he.
Let me first bank to go to become the CFO at.
And frankly synergy left with a with good.
Let them good terms and so.
Good thing for him [laughter], but and so that was that's out there and he didn't have anything when they come together other than the fact he was he did the CFO , but but it could have there was a comfort level as.
With some of their financial information because.
We sort of talk to say language there.
Okay.
Thank you.
Sure.
Well take our next question from Stephen Scouten with Piper Sandler.
Hi, everyone getting them.
Good afternoon.
So congrats on the deal I think it's a pretty exciting it's exciting to see all focusing on the Nashville MSS.
I guess first of all is it fair to assume that this will.
The what you focus on for 2020 or would you still think about looking at other incremental deals if they came.
This came about came to you and other in other markets.
Yeah. This this can be what we what we focus on a per 2020 and in a so we're going to be.
It's going to take all of our attention.
Totally focused on execution.
Okay.
This deal.
You know.
Little like I was talking about seeing these guys enough seeing each other.
We'll continue to see bankers that fit conferences and things like that and I'm sure.
There will be casual dialogue as as you know Stephen you know you though.
But but we're going to be focused on this and really solely this during 2012.
Right and you put a lot in the presentation of spoke to hear about retention talent retention of management when you're talking about the assumed retention of all the revenue producers are those folks that you've looked at put under retention agreements currently or or will that be transpire. What are the you know targets or goals around retaining all those people.
Yeah, our target is to retain 100%.
So thats I can.
We want to retain all of them a there there are some really good bankers on both side, but but but certainly.
In terms of Williamson and rather for counties.
The the bulk of the key revenue producers the vast majority.
ER with Franklin Saturday, So we will work through the retention tool that we have things like.
Well the retention tool that you would have that you would apply will be the types of things will be using to to try to hang onto those folks and.
I'll add this went into we when we talk about what makes our company success. The first thing we the first thing on that list as being a great place to work second one is being an elite financial performer in the third what is being a great community bank.
This is going to.
Move our asset size up to a close to 10 billion, but we're still a community bank because we think it's about how you do it not not the size of the bank.
And so but the first of those as being a great place to work and that's the real way that you retain folks is having a great culture and great environment in both companies do that so when we think we bring it together, we think that school keep Lucy.
That's great and then obviously.
Franklin has a much lower than.
And you guys do on a standalone basis, and then you're doing some some balance sheet restructuring here and other things can you talk little bit about where you think that pro forma NIM will shake out roughly or what the.
The impact of that will be if you have any preliminary numbers there.
Yeah, and bullet that James talked about but you're right. There's a difference in the near term and we've we've modeled that in and we haven't been.
Terribly aggressive going forward, because we don't think thats, probably the wild way to do it but James you want to comment further on the NIM. Yeah. You know I think as we pick off some of the wholesale funding of the sale of the 400 million dollar portfolio that that will help and I think as we.
Focus going forward on growing the deposits will be the opportunity.
To bring the margin back into two our levels over overtime.
With that soon though immediately it will you know it will bring our margin down and in the 360 kind of range, but then we expect to rebuild that overtime as we as we work on the funding side of the balance sheet.
Okay. That's helpful and maybe just one last thing on the on kind of at became a standalone. It looked like loan growth was pretty much in line with kind of where you guys had been guiding but just kind of curious what you're seeing in terms of are kinda overall customer demand in some of the late cycle.
Type of activities are lending structures that you were talking about a little bit last quarter.
Yeah. So.
During the quarter, Yes, we were it come around up were 597, I think it turned out only rocanville say, 6%.
For the quarter, 10% for the year and so we like those numbers.
We still.
And if I think specifically on the quarter you know we've seen a few things on the pricing front that had been.
Little bit crazy to us.
Especially when he's on the fixed rate side, we'll see some fixed rate things that go out for longer terms, but but but.
I would have to say not quite as much as we.
I'd seen in the middle part of the year.
In terms of things that just made us wonder what was happening in the market.
And then we haven't seen much change in demand.
It's still.
Relatively strong so we haven't seen a lot of change in the market.
Oh, particularly national continues to be.
Strong, but we ceased still see pretty good.
Momentum in.
Places like Knox floor or chat in that.
Or Memphis.
We probably see.
Some elevated.
Early pay offs and.
Expect that the continue to keep us in that range over the near term as well.
Good point agenda, we did see more pay offs actually in fourth and and.
We'll have some in the first.
Than weve seen a.
Earlier in the early part of the or.
Great all right well, thanks, again, guys and congrats on a two really solid quarters and a great deal.
Great. Thanks, David.
Well take our next question from Catholic Nilar with KBW.
Thanks, Good evening.
You never cap.
Scott dig into that expense savings a little bit.
You were clear credits that you're not.
Not being too conservative on the 30% of given their attention as of people that frankly, but how should we think about that 30% cost saving number and maybe expense growth into the next couple of years as you prepare for the $10 billion crop and how much of those assumptions are baked into your estimate.
Suit. So Catherine isn't this is James Oh answer that I think those two things. We we've started about 18 months ago Foodstar delaying the infrastructure in knowing that 10 billion was out there Sunday, we didn't know that they would be sooner or later, so we've been laying that in and that's one reason there.
Our expense grew there's been a little bit higher than I would say historically over the last 18 months.
Then you know as part of the 30% I think some things that.
Look at if you looked at it would say would be hard as Chris said, the the branch consolidations that I think offsetting that are keeping a lot of people a two to maintain that balance sheet and the customers that they were bringing over.
Built into that as well as building in some incremental.
Cost to keep positions and and increase our overall infrastructure to meet the demands of passing the 10 billion dollar level from particularly from a regulatory but we think we're well positioned for that a lot of its in our run rate going at a lot of anywhere where weve kept through.
Being a very achievable.
30% cost saving rate.
Hey, guys doing it at two things there just to bring for sure but.
The commentary and clarity first.
We did mention the operation Center, we will be.
Having some.
Some expense related to the operations Center.
Frank whether that will be.
That will be having there that will be establishing there.
And so there's a little bit of of.
The expense that doesn't get eliminated and then the other thing.
Theres not expense say, but we do have durbin.
The Durbin amendment, we take that into account that income it until the second and 21.
But we do.
Allow for further revenue reduction related to that the government.
And then or.
Picture, how do you think about.
And they take care profitability with a combination of these two companies I know that will bring the margin down originally and then she can I get to that back as your core deposit, but just generally you mentioned that it's accretive to the RFP, but how should we think about the pro forma effect on the island.
Yeah, I'm going to comment on Big picture, what James comment on the pro forma effect on the.
Our away.
You know from a big picture standpoint.
When you think about the.
A profitability moving forward and we modeled in it it's slightly accretive to our our away.
And slightly accretive to our return on.
Average tangible common.
But I guess the exciting part there is.
Yeah, we haven't built.
We haven't built in.
What we're all excited about the on the deposit side on the balance sheet, you know deposit side. It's been a then something that we are reasonably perficient at and so we haven't built really much in there and so to.
Excited about the opportunities that it gives us.
Particularly I I'd say there and.
The other thing I'd say that I I'm excited about is you know were.
You know we're in a lot of our communities, where the community Bank were 30, 40, 50% market share and a lot of smart communities in Nashville, We've never been that Weve never been met community Bank that really is is news the customer with a lot of death.
And so.
We've been more up we've been successful, but we're not more of a commercial success in Nashville, and so this does give us that and so again there because these revenue revenue from that but we don't do that that's of course not built into models, but we're excited about that opportunity.
And so as specifics I know we it was it was so I don't know.
Exactly how many basis points it wasn't more away and and ROTC. It was yeah ROTC I think you know to our consensus number that's out there that's a little over 14 at what that a little over 100 basis points back on that nothing Thats before.
I think consensus generally doesn't pick and you know capital capital planning on that we would end up with a lot of excess capital at that point to deploy to a two to help increase that as well then I think the other big opportunity.
We talk about this a lot scale density in markets creates a lot of operating efficiency irregardless of the 30% cost savings that's still on a.
You know they operate with a fairly strong you know efficiency ratio already.
Adding that together along with that.
Will help our our overall efficiency.
Did you know it lessens the impact on the efficiency from for mortgages that becomes.
Smaller to the overall, but still a large bids the smaller to the overall filed on that too you know our goal is to you know biannually financial performer, we think over time, we we will continue with that after this transaction.
Yes.
Great and one lessons I noticed on growth will be over 10 billion out that perform or how do you think about your pro forma growth rate.
Yeah.
We've we've kept things steady.
What we modeled in Dave.
For more growth rate on our balance sheet, yeah, we monitored for the first couple of years the consensus number and then about 8%.
Going forward after that.
Lets say, we will lab, but taking off the non strategic assets in in focusing on deposits. I think we will have a big opportunity to add producers in that I'll call. It the middle markets in a business that will help us both in deposits and help replace some of that we did not model that into two our numbers.
I think that will continue to help us to have.
Fairly solid.
Loan growth going forward as well as deposit growth.
Great. Thank you Tim I can congrats.
They did Heather.
Well take our next question from Tyler Stafford with Stephens.
Hey, good evening guys.
Hi, David.
Hi, good thanks, and congratulations on the deals guys.
Maybe Chris homes first just to start on on legacy of Teekay, <unk>, the quarter and kind of outlook.
This point.
Could you give us any clarity or do you have any clarity yet about how you're feeling that the mortgage business for 2020.
Yeah as where.
What we.
Why do you view at this point, we think 2020 is going to be similar to 29 team in terms of of our.
Production in terms of our profitability.
And it did you know Cooper said, it's all dependent on the rate cycle it could be down just slightly but we're.
Thinking of it today is being.
Flattened.
Could be slightly down is the way we're thinking of it okay. Thanks.
And then James just just going back to one of the comments in the earnings release Tonight about just the margin trajectory for 2020.
And he kind of.
Stabilized so in the first half and then some opportunities for expansion the back half just and you see the margin on a standalone basis, just 2020, what what does it kind of puts and takes that you see impacting that data that you.
Yes, I think you noted on the second half we'd have a lot of opportunity if you'll remember back to the third and fourth quarters of 2018, we did a lot of promo CD campaigns.
That was one of those products was 11 month, we've we've kinda going through the first renewal cycle of that in 19 itself does.
Then we also did a 30 month product I'm, sorry, 2025 months product that was a 3% that will start.
Turing, there's around 200 million of that.
That starts in the third quarter and carries through the fourth quarter, but we think today that rate would be 165, one when 70.
As rates go today, and we continue to balance that we've had a good good success rate on capturing that 11 month around 70% of a rollover rate at the at the new raised so you factor that in there and kind of kept the balance flat. So we were also still rolling.
No no and keeping that balance flat in the time deposits I think it's a big opportunity.
For us in a in particularly in the second half of the year, there's a little bit in the second quarter, but I think most of that come to the third in the fourth quarter.
Okay.
That's helpful. Thanks.
Just shifting over to that the Franklin deal can you just just to confirm to six nine pre tax a durbin that doesn't include both SDK and frankly, that's impacts not just SDK.
Yes, it yes, okay.
Primarily hours, but does that.
Friday, primarily first bank, we must have it relates to have it became we've got a better retail retail yep redevelopment yep.
Alright. Thanks, Thanks for clarifying that on the 50 million of merger costs I was it.
A little bit surprised.
Going to that as you can you can you give us any color about what's what's baked into that 50 million.
Yeah, I would say you know in round numbers about.
About a third of that as I'll call them employment in related items.
Then about another third of that is related to contract buyouts.
Data processing, those kind of contracts and conversion cost, which will be fairly down a deal that that size and then roughly the other third is kind of split between a branch closing cost and and then the transaction.
You know deal fees to.
Investment bankers lawyers and other professional that will either through the process.
Okay got it.
I may Miss this in the deck, but the.
Page five I guess talks about how their or their key Franklin executives to enter.
And then agreements, but I didn't see any.
Exact roles for each admires or Chris or the others. That's something that you can share about what at this point what do you expect any expectation is for their involvement.
The combined company going forward.
Yeah. We can hear this are they going to be involved there and they look forward to be in ER involved, but all those be goes or worked out and so I'd say I say, they yet and be in general.
Because all those details on it worked out into a at this point, we will share any deeper than that we will just not yet not yet.
And then just lastly from me following up on Steve's earlier question just around the.
Core margin impacts.
I think a couple of quarters ago, and just maybe more of a question for Chris block, but I think a couple of quarters ago, you guys talked about that Franklin that the syndicated Buck was around whiteboard to 20.
So do you guys just kind of have ballpark, what the $430 million yield is that you're running off and just kind of think about the margin picked up once you do exit those.
230 rate FHLB.
The lower yielding.
Yes.
Assets that you are running off.
Sure. So I think on that for can probably in the five and a half ballpark on on loan yield and too, but a little bit akin to what James said in terms of Standalone SDK and some of the repricing.
We see that similarly, situated on on the horizon as well so both inside a with.
Wholesale.
And across the across the footprint, but specifically on the on the loans about private now.
We have signed about a three to 25 spread on that portfolio. That's roughly I came up at the 10 million after tax.
That's what I'm looking for thanks, guys I appreciate it.
Alright, thank you thanks.
Well take our next question from Daniel Cardenas with Raymond James.
Good afternoon guys.
But I didn't.
Congrats on the deals.
Just a couple of quick follow up questions kind of going back to the legacy margins for first bank.
Yeah.
I guess question one here just as I look at the accretion contribution.
In Q4 seems to be a little bit more accelerated than in previous quarters. I mean, what's kind of a good run rate at least for the first half of 2020 that to think about in terms of accretion contribution.
Yeah. So it was a little bit higher and that really is just generally generated by.
Awesome on some of those credits that.
Different from the marks that you have.
I would say, we're going to run somewhere in the million to 10 million you know five range on a go forward basis.
But before this transaction just on a on a standalone basis, maybe slightly higher than that when you have no pay offs.
On that so.
Okay.
And the three six range that you gave on a pro forma basis. That's that's core is that a core number or is that.
Is that all in.
That's that's more core yes.
Excellent and then just quickly jumping back to two mortgages in terms of expenses for the mortgage division how should we be thinking about that 2020 is there room for further.
For additional improvement there.
We hope so there's there's always room for improvement and.
In the again.
It's responsible for mortgage we hope so it's gotten more.
A fish should with our.
With the downsizing and we hope it continues to improve inefficiency.
Seats and adjusting for the seasonality of the business.
Yeah, there the other thing I would say on that that that distorted what one is because of the they the size of last quarter say versus this quarter. The other thing this distorted distorts. It somewhat is only the way you do the presentation, though of the.
The mortgage servicing rights, a income or the mortgage servicing income and you take the fair value against the revenue so with in that that's actually been a law. So that's in the revenue against the revenue number at least for the last two or three quarters, we hope that slows down over the course of next year.
You know as well and so if you take that out the the efficiency ratio for for mortgage <unk> looks a little better, but that's still opportunities. There you know over the course of time to do to work through that.
Okay, Great and then I guess given the deal.
As announced in the pending.
Transaction in Kentucky should is it safe to assume that maybe buyback stick a go to the back burner here.
Yeah, Okay. It's a it's safe to assume at least in the near term yeah. I mean, I think even from a legal standpoint, we stood up with authorization, but not the the ability to use it at this point that based on the structure.
Oh really both deals so.
Okay, Great Oh, my other questions have been asked and answered a again congrats on the transaction.
Thanks, Dan.
At this time, we have no further questions in the Q.
Let's turn the conference back to Chris homes for any additional or closing remarks.
Okay. Thank you very much a once again, we appreciate you stay with US a into the evening and when we're excited about.
I'm excited about moving forward with a is partnered with Freckmann between [noise].
Became Franklin Sue Oh, Thank you all and have getting.
Ladies and gentlemen, this concludes todays conference. We appreciate your participation you may disconnect at this time.
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