FB Financial Corp
NYSE:FBK
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FB Financial Corp
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Good morning, and welcome to the FB Financial Corporation's Third Quarter 2019 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by James Gordon, Chief Financial Officer, and Wib Evans, President of FB Ventures, who will be available during the question-and-answer session.
Please note, FB Financial's earnings release, supplemental financial information, and this morning's presentation are available on the Investor Relations page of the Company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. This call will be open for questions after the presentation.
During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal security laws. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements.
Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned to not put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in FB Financial's periodic and current reports filed with the Securities and Exchange Commission, including FB Financial's most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation whether as a result of new information, future events or otherwise.
In addition, these remarks may include certain non-Generally Accepted Accounting Principle financial measures as defined by Securities and Exchange Commission Regulation G. A presentation of the most directly comparable Generally Accepted Accounting Principle financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in the FB Financial's earnings release, supplemental financial information, and this morning's presentation which are available on the Investor Relations page of the Company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov.
I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO. Please go ahead sir.
All right, thank you, Molly, and thank you for joining us on this call to review our results for the third quarter of 2019. We appreciate your continued interest in FB Financial. On today's call, our review of the highlights of our third quarter and then turn the call over to James Gordon, our Chief Financial Officer, and he'll provide additional analysis on our financial results, followed by your questions.
This quarter, our team produced solid results with adjusted EPS of $0.77, adjusted return on average assets of 1.61%, and adjusted return on average tangible common equity of 17.7%. On the bank side, we balanced growth and profitability during the quarter that included two Fed rate cuts. In our newly restructured mortgage area that team capitalized on the lower rates environment and by delivering strong interest rate lock volumes and profitability for our two remaining origination channels retail and Consumer Direct.
On this call, I think it's important for walk through three topics. First those are our strong third quarter and our solid fundamental growth. Our thoughts on near-term external factors and our most recent activities, M&A activity, and opportunities. First, on our strong third quarter and our fundamentals, which we think are really solid. We're very pleased with how our team performed in the third quarter.
We've delivered annualized loan growth a 5.2% for the quarter and indirect 12% organic growth year-over-year. As we said before, we think of our business in terms of years, not quarters, so we don't get to excited that loan growth is 15% in one quarter, which it was in one recent quarter or 5% in another.
Our goal is long-term consistent, profitable and sound growth, and we're committed to staying disciplined, especially and what we believe is becoming increasingly irrational credit markets, more on that later. We grew our customer deposits about 6.9% annualized for the quarter, and we're particularly proud of our growth in non-interest bearing deposits of 36.6% annualized. Excluding mortgage related deposits, non-interest bearing grew 19.6% annualized for the quarter.
The new treasury management platform implemented earlier this year continues to aid our relationship managers and delivering strong customer deposit growth, and we're very pleased with the results over the past couple of quarters. The net interest margin excluding the impact of accretion and non-accrual recoveries came in at 4.12% this quarter. As we said last quarter, we anticipate compression of 5 to 10 basis points for each 25 basis point cut in the Fed funds target rate.
We had two rate cuts in the third quarter, one at the beginning at the quarter and one at the end. And our margin excluding accretion and non-accrual recoveries was down 10 basis points from the second quarter. We did additional rate cuts in the fourth quarter. We'd expect some additional compression. We also saw our deposit costs move lower each month during the quarter and we expect that to continue.
Mortgage was a key driver of our earnings growth from the second to the third quarter, as total adjusted pre-tax contribution increased from 2.6 million to 5.4 million. With treasury yields down, there was significant increase in demand both in purchase and refinance volume. We had a record month of pre-tax contribution from our mortgage team in August at 3.7 million, which is especially significant given that we completed the sale of our 200 origination channels in June and July.
So, the record month and profitability was on lower origination volumes in a less complex business, at least preliminary validating our strategy. There is still some efficiency improvements that we're making, but on the whole, we like how we have our mortgage operation structured currently. We have two strong customer focused retail platforms now in-store and online that are able to take advantage of lower rate environments like we saw in the third quarter, but will provide us more predictability in rising rate environments like we had in 2018.
On the people's side, we made a key back office higher that will continue to allow us to grow organically and through acquisition. We -- closer to 10 billion and we will continue to invest our platform both in the technology and people front, so that we can handle the scale that we anticipate over coming years. Now to summarize this quarter's results, we were proud of the strong profitability and prudent growth that our team delivered, and we're pleased with the way our platform is continuing to develop for the long-term growth and value creation.
Next on some near-term external factors while our team is performing very well, executing our plan and delivering outstanding results. So, it's near-term uncontrollable in the coming months that we're managing. That's being primarily some likely rate cuts in the fourth quarter, potentially slower economic growth and some irrational life cycle behavior that we're seeing in the market. So, on the likely rate cuts, which sign of rate increases and cuts that we've seen over the past 18 months has created a difficult margin outlook for community banks in 2020.
Variable rate loans have and will continue to experience immediate decreases in rates, assuming the Fed has additional rate cuts. It will take longer to incrementally drop deposit rates to recruit the margin compression followed by the variable rate loan decreases similar to the positive lag that we saw that rates were increasing that in reverse. To combat things margin pressure on the asset side, we try to include forwards in every year and renewing variable rate loans. We continue to explore some hedging options, but so far, the benefit of haven't outweighed the costs.
On the liability side, we continue to push non-interest bearing growth and have seen some success. We also have over $400 million in index deposits and we'll try to retain through the following rate environment. We used excess liquidity that we've been keeping on the balance sheet to defend pricing and we'll have some rates seeker as well. As always, we will continue to weigh growth versus a margin that gives us an appropriate return on capital.
To the contrary, the declining rate environment has had a positive impact on our mortgage operations, yielding great financial results of this quarter and acting as a counter cyclical offset dropping rates that we've planned. Assuming, rate continue to fall, we expect additional good results. However, seasonally, the fourth and first quarters are generally low points for mortgage. As we said previously, we expect mortgage to be just a bit over breakeven in the next couple of quarters.
On just kind of slowing economic growth, one thing I'd like to mention is our organic loan and deposit growth. We're intent on staying disciplined in our credit process. We want to defend our capital and earnings stream when in credit terms become irrational. The best way for us to do that is to not sacrifice credit structure old pricing for the sake of short-term growth. We have our relationship managers out there pounding the pavement, looking for new business and seeking to expand existing relationships.
However, we are content to walk away from some credits because competitors in the markets are willing to accept risk that we consider foolish. We saw several instances over the past couple of quarters of banks in the market, taking structural rate and term risk that we're just not willing to accept.
Some examples of those structures and rates were, guarantees on marginal credits fully releasing after 12 months, 100% financing with no guarantees, lower equity investments by borrowers with lender focus on the LTV and ignoring the loan deposit costs, and sub 4% rates on 10 to 20 year fixed rate loans and higher risk product categories. And that would just on the competition for banks. We're also seeing institutional market, the institutional market competing against us more and more.
And we're also seeing some larger credit union going aggressively after C&I and CRE deals with both terms and rates that we just are not willing to match. We've offered some one-off pricing to good customers that we know and we're comfortable with -- and that we're comfortable with in order to defend our relationships. But long-term, cheap fix rate loans to unproven borrowers have a tendency to become credit issues when the cycle turns. When you start to see some weakness in a credit, one strategy is let that loan refi away into another institution. That's hard to do when the loan has a 3% fixed rate.
We've grown our loan portfolio organically at 11% through three quarters. Our long-term growth targets have been 10% to 12% for the last few quarters, the last few years actually. This quarter's organic growth is just over 5%, if the competitive environment persists in the face of a slowing economy, we likely to be satisfied with growth in the 5% to 10% range in the next few quarters.
Our plan is to grow our core deposit base to fund that growth targeting to our loan deposit ratio in the 90% range. Our provision expense continued to be very low by historical comparisons and our loan portfolio continues to exhibit excellent credit metrics. With 5 basis points of net charge off so far this year and with each day, closer to the end of the credit cycle, this benign credit environment will change at some point. We hope that is in the very distant future, but we're prepared if it's sooner.
Today, the loan metrics on our portfolio continued to be very good. Regardless of credit quality, we believe that the provision expense under CECL in 2020 will likely increase of what we exhibited in 2019. On M&A, we believe that there continues to be M&A opportunities that will be available over the near-term. We announced next, an acquisition that we really like in September. For a refresher on that pending acquisition with Farmers National Bank of Scottsville, the bank is almost 100 years old. It's in the attractive Bowling Green MSA, which is adjacent to the Nashville MSA.
It has 28% non-interest bearing deposits, and it's on the same core processing system that our bank is own, which should diminish our execution risk. We also continue to look for similar transactions. We continue to have numerous discussions and meetings with other management teams, and we're hopeful to continue to execute on M&A that strategically expands and deepens our presence in and around our footprint.
We'll stay disciplined on that as well, but with everything that we've been hearing about that's coming available, we'd be disappointed, if we weren't able to execute on at least a transaction or two in 2020. So to summarize, we delivered a fundamentally sound quarter that resulted in strong profitability. We're excited about the acquisition that we've announced recently, and we feel we positioned ourselves well for future growth and value creation.
With that overview, I will turn the call over to James to review our financial results in more detail.
Thanks, Chris and good morning, everyone. Our adjusted diluted earnings per share were $0.77 for the third quarter of 2019 with an adjusted return on average assets of 1.61% and adjusted return on average tangible common equity of 17.7%. Growth and improved mortgage results drove our increase over our adjusted EPS of $0.70 last quarter, and it provided a 13.2% year-over-year growth and EPS.
Slide 4 illustrates the underlying fundamental trends of the Company's profitability and demonstrates our consistent performance. Our increase and adjusted return on average assets over the years as well as our performance this quarter serve to demonstrate the strength, durability and earnings power of our core franchise. The sustain level of profitability has been driven by balance loan and deposit growth, and margin that remains one of the highest among our peers, expense control and fundamentally sound credit quality.
Next on Slide 5 which presents the fundamental elements of our net interest margin, specifically loan yields and fees as well as deposit cost trends. Our prior guidance range had been 4.15 to 4.30 excluding accretion and non-accrual interest for the decline of 5 to 10 basis points for 25 basis point rate code in the near term. With the July and September rate cuts, they leave us with a current range of 395 to 420. It's a 4.12% this quarter, falls squarely in that range.
The average contractual loan yield for the quarter declined by 7 basis points, as compared to the second quarter, we faced additional margin pressures as our largely fixed rate securities portfolio experienced significant payouts early in the quarter, given the declining mortgage rates and a lower reinvestment rate. The lower rates that drove our significant mortgage volumes for the quarter impacted our yield on the loan held-for-sale portfolio with those rates down 69 basis points from the second to the third quarter.
Additionally, the mix of earning assets changed as we carry excess liquidity on the balance sheet in form of Fed fund sold and interest bearing deposits with other bank. This $107 million increase in average balances quarter-over-quarter contributed approximately half of the 10 basis points decline in core margin this quarter due the lower spreads on those balances.
On the liability side, we were able to control deposit costs with a large increase in our non-interest bearing deposit balances and a 3 point decline in the cost of our money market account. The average cost of our customer time deposits remaining flat quarter-to-quarter despite the re-pricing of $87 million of CDs from last year's campaign at an average rate of a 3.1% to 2.53%.
We continually brought that rate down over the course of the quarter. And the cost of customers time deposits had a decrease -- had decrease to 2.1% at the end of September, we expect to see that cost decline in the fourth quarter from the average of 2.13% in the third quarter as we continue to reprise this campaign deposits down that had a more of a full quarter impact of the re-pricing that occurred over the course of the third quarter.
For the fourth quarter, we have an additional $64 million of deposits from last year's deposit campaign maturing with an average cost of 2.4% and our current rate on that product is now at 1.55%. For additional current data as we look into the fourth quarter and beyond, we had a NIM excluding accretion of non-accrual recovery of 4.4% for the month of September with a 5.42% contractual yield on loans in a 1.08% cost of total deposits, as opposed to 5.5% and 1.11% respectively, for the whole of the third quarter.
The spot rate on our variable rate loan portfolio as of September 30th was 5.3% -- 5.37% sorry, which was down 36 basis points from the spot rate in June 30th. The spot rate on our fixed rate portfolio remained roughly flat at around 5.4%. We currently have around $230 million of floating-rate loans at their floors with another 50 basis points of cuts without an additional $55 million at their floors with 75 basis of cash we have an additional $175 million at their floors are roughly $400 million in total.
We do not see many tailwinds as to why the margin would peak higher than the 4.04% of the fourth and the first quarter, instead we expect that to continue to decline over the near-term given forecasted rate cuts before we are able to more fully re-price our funding costs down and start to getting back and the hopefully in the second half of next year.
To summarize, we will face near-term headwinds with further rate cuts and are confident in the long-term street of our customer focused balance sheet. As we get a pause in the rate cuts, we have to be able to drive down our deposit costs to regain some of what we are losing in our earning asset yields.
On Slide 6 now, and as Chris previously mentioned, we produced lower loan growth this quarter than we've seen recently, but year-over-year remain solid at 12% organic loan growth. Our objective remains consistent, profitable and relationship-driven growth, not really focusing on hitting a quarterly target, especially given some of the credit terms of rates that we're competing against right now. We've also stayed comfortably within the regulatory threshold on the construction and development and CRE concentration ratios, which came down in Q3 as compared to Q3.
Now moving to Slide 7, our customer deposits were up 6.9% annualized from the third quarter. We have kept our loan to deposit ratio roughly flat in the 88% range for the past three quarters. And I'm not afraid to let that tick up a bit in the near-term as we keep managing the margin and moving deposit costs down with a rate cuts.
We are particularly happy with the growth and non-interesting bearing deposit categories that we've achieved over the last couple of quarters. Some of that will go away with our mortgage escrow deposits come back to more normal levels in the fourth quarter of 2019, the first quarter 2020. But on an annualized basis, we grew non-escrow, non-interest bearing deposit by 13.7% of the second quarter and 19.6% in the third quarter. We continue to see success on our treasury management sales efforts.
Looking at mortgage on Slide 8, in the third quarter, our total mortgage operations had an adjusted free tax contribution of 5.4 million, when our retail footprint is included. Our interest rate lock volume for the quarter was 1.6 billion. There was a flat of refinance demand with the lower rates and August was a record breaking month for the mortgage operations with an adjusted pre-tax contribution of 3.7 million.
Payoffs in our MSR portfolio also significantly increased, resulting in a 1.7 million net increase in the write-off of MSR this quarter, over the already high levels in the second quarter of 2019. With the lower fees and volumes anticipated for the next three quarters, we expect to operate slightly better than breakeven in mortgage.
Looking at our operating leverage and efficiency ratios, when you exclude the mortgage retail footprint, we grew core banking segment non-interest expenses by 3.3% over the second quarter as we continue to make investments in the back office and infrastructure built to support our organic and acquisitive growth.
Over the last two quarters, non-interest expenses have increased primarily due to the ACBI acquisition, higher incentive compensation, seasonal and fulmination expenses and continual investments in people throughout the Company. As we faced revenue headwinds into 2020, we will attempt to control that growth in the low-single-digits, but we will not sacrifice the investments needed to prepare ourselves for future growth.
Our effective tax rate was 24.4% for the third quarter. For the remainder 2019, we expect our effective tax rate to be in the 23.5% of range due to projected equity compensation benefits in Q4 and back in the 24.5% range for 2020 being slightly higher in Q2 and Q4 and a lower in Q1 and Q3.
On Slide 10, our asset quality remains sound and provides a strong foundation for our company. Non-performing assets to total assets increased slightly for the quarter, but on the whole, our loan portfolio remains in solid shape. Provision expense increased as compared to the second quarter as we prepared for defining credit environment. We are still figuring out the impact to see something anticipate higher overall provision expenses in 2020 than in 2019.
On capital since the first quarter following our IPO, our tangible book value per share is increased by $6.47 or 56% to $18.03 at the end of the third quarter. Our excess capital was utilized on the branch acquisition in the second quarter, which helped drive our adjusted return on average tangible common equity to 17.7% this quarter.
We anticipate our pending acquisition to be roughly neutral at close at the transaction. We believe that we are well positioned to continue growth organically to support our dividend and execute on future M&A, as well as support our share repurchase plan as needed.
With that overview, I want to turn the call back over to Chris for closing comments and we will open the call to your questions.
All right. Thank you, James, appreciate your comments. We again, -- we're pleased with the results of the quarter and excited about the foundation that we have headed into the last and the rest of in 2014.
So with that, Molly, we will take some questions.
Thank you. [Operator Instructions] We will take our first question from Catherine Mealor of KBW. Please go ahead. Your line is open.
You gave a lot of information, which was really helpful, specifically everything on the margin. And the one thing I think I missed is, where what did you say, James, was the rate of loans for the month of September?
Let me get that back and make sure I give you the right number. All right here. The let me make sure I give you the right number. For the month of September, our contractual rate was 5.42%.
Got it. Okay. And that compares if we just get back to the quarter...
It was roughly 5.5% for that third quarter on the contractual rate.
Okay. That makes sense. And on the deposit side, I mean, how the margin guide is super helpful and 5 to 10 bps per rate cut totally makes sense. How do you think about how quickly you'll be able to push down your deposit cost? I mean the CDs maturing makes sense as that $64 million re-price is down. But as you think about kind of core deposits and negotiated rates, how much traction have you been getting on these deposits in bringing deposit cost down so far?
Yes. So Catherine, we think about it as going as quickly as possible is how we think about it. And we so and we did see declines of 3 to 4 basis points each month in the quarter, July, August and September and so that's the way we continue to think about it. As it's become more this is a little more qualitative than quantitative. But as it's become more apparent that rates are going to are certainly decreasing than it seems to be that the market is has picked up some.
And so, we've got some optimism there as we so not as much in the fourth quarter as we do probably going into next year that rates, hopefully, will begin to pick up and accelerate in terms of deposit pricing. Haven't seen that in our numbers yet, so that's what we saw in the last 3 months. But we are optimistic that, that could be the case and so that's how we're thinking about it.
And we have additional liquidity, I think, to defend any deposit pricing that we need to be more rational that may cost us a little bit in growth for the near term. So I think we can manage that fairly effective. We've taken with each of the cuts and even since the last cut, we've taken a pretty aggressive cut, particularly in our certificate of deposit rates, particularly in those that will be renewing. So we're optimistic, but it's still a tough battle ahead on that front.
And then as you think about the higher liquidity of $107 million we saw this quarter, is your as you think about next quarter, do you feel like you'll maintain the same level of liquidity? Or do you feel like bringing that down to your, as a way to kind of manage the margin helps some of this NIM compression. I guess how should we have to model those?
Yes. I think we would keep it relatively flat to down, and that would be dependent on loan growth and deposit growth to offset that. Like I said, we'll we can defend deposit growth because we have built up that excess liquidity coming into the quarter. So we'll have flexibility to do either or whichever one is more profitable at the end of the day. It may impact the margin a little bit, but I think if some noted including yourself. It actually helps on the dollars, right, not so much on the rate this quarter, which accounted for about half of our decline in the margin, but it helped our dollars actually be up in net interest income.
Great. And then on buybacks, I mean, you announced a small acquisition this quarter, and your commentary clearly suggests that you're still actually looking another small deals. Are you interested in buybacks? Or is it really M&A preferred method of capital deployment right now?
Yes, M&A is preferred right now, and so we're not actively in the market right now.
Okay. That makes sense.
But also, remember that deal we announced, and we try not to take any tangible book value dilution, so we're really not leveraging capital now. If we get to something else, then we decide to do that that would be a different deployment option for the capital.
[Operator Instructions] We will take our next question from Peter Ruiz of Sandler O'Neill. Please go ahead, your line is open.
Maybe just looking at mortgage. Obviously, really nice quarter here and you guys essentially matched your full year guidance just in this quarter alone. And I appreciate the color on kind of the slightly above breakeven in the fourth quarter and maybe in the first quarter as well. But can you kind of talk about the dynamics there? I mean your margin was up pretty significantly, I think, 62 basis points in the quarter. So maybe kind of what drove the higher margin this quarter and how much of that is sustainable and those puts and takes there?
Yes. I think there's a couple of and I'll try to answer. If I don't, come back to me. But I think from your first point about that we've seen some increase in the last several weeks in the 10-year in mortgage rates for the 10-year, have them 70s, 1.80% range. So that'll slow down some of the refi activity plus the seasonal nature of the purchase money. So we're optimistic, but we want to be realistic at the same time.
On the margin going up, I think that was really twofold. One was taking off the lower margin businesses from the wholesale channels that we sold to TPO and correspondent as well as a lot of capacity and the or the lack of capacity allowed us to get better margin, even on the production levels. So it was somewhat the environment and it was somewhat the change in the mix of our business structure. That margin was probably on the higher end because of the environment, but it should be up and much higher than it was previously because of change in the mix.
Okay. Maybe just one more for me on expenses, taking out mortgage kind of the impacts there, you're still thinking mid-single digit for the banking segment here in the near term?
Yes. That's kind of what we're thinking in the near term. We'll continue to evaluate it in 2020, but that's what we're thinking in the near term. As we continue to grow the whole company, we're trying to make sure, one, we're prepared with the right people and infrastructure, but two, that we're controlling that at the right pace. And so that's a good estimate, and we will but we'll be evaluating it depending on the environment in 2020.
We will take our next question from Tyler Stafford of Stephens. Please go ahead. Your line is open.
Hey, this is actually Andrew Terrell on for Tyler this morning. Hey, Chris, I think in your prepared remarks, you mentioned deposit costs moved lower each month throughout the quarter. Do you have the breakdown of just what the total deposit costs were at for each month in the quarter? And just where they ended September 30 at?
Yes, I do. Give me one second.
I've actually given, and I'll give you that. So starting in July, they were at 1.15% and then 1.11% in August and 1.08% in September.
Got it. Okay. Maybe just move over to back to mortgage now. So you guys had $1.2 billion in sales during the quarter. I think 23% of this still came from third-party and correspondent. So just to be clear, there are no more sales expected from third-party or correspondent moving forward. That's kind of all-out now, right?
Right, we closed out the closed inventory. We actually transferred the locks to let me know, there maybe 1 or 2 loans, but nothing that can be significance.
Yes.
Understood. And just trying to figure out how kind of the excess of those 2 channels affected the gain on sale margin in the quarter? Do you have what the sales for the third-party and correspondent were from a gain on sale perspective?
Not well, the sales happened remember, we book all the income of the locks, and we didn't really lock much activity, none in the TPO because we sold this by June 30, and there's only a minimal amount locks on that. So very little impact from those 2 on the gain on sale margin during the quarter.
Okay, understood thanks for taking my questions and congrats on the quarter.
[Operator Instructions] We will take our next question from Kevin Fitzsimmons of D.A. Davidson. Please go ahead, your line is open.
Hey guys, good morning. Just Chris, appreciate your comments on M&A, and just maybe a follow-up in terms of if you are interested in other opportunities and you're having conversations, what's higher on your priority list in terms of appetite in terms of where and what that balance sheet would look like?
Yes. So in terms of where, we'd love existing geography first. And so we love existing geography and continuous markets first. It really what we love. And thinking our thinking there is operating leverage and trying to gain some more density in places where we are and then create some operating leverage for us. So that would be the highest on our list. And then right behind that is going to be liquidity. And so we're going to look at the deposit side of balance sheet. We want good, solid deposit relationships, preferably those that have a cost to deposit lower than ours are things that we look at.
So the quality of deposit the deposit side of balance sheet would be the second thing. And then we're going to look at the financial metrics. And so and I think the acquisition you saw us announced in September is a good example of what we look for that we didn't take any tangible book value dilution on that. As James made reference when he was going to capital, it doesn't cost us any capital in that case, and so and we get some of earnings accretion. In this case, it was pretty small relative size, very small transaction. And so we didn't get a lot of EPS accretion, but we did get some. And if we if you think about that, if we can do 2 or 3 of those, those numbers really begin to add up, and so we'd like to look for some others.
I think another thing on the balance sheet structure. On the loan side, we would like a loan book that's more granular and very customer-focused, not a lot of wholesale purchase participations next or any of those kind of things, which the smaller guys tend not to have.
Right, right. That makes a lot of sense. Just one follow-up on margin. So as I just want to clarify, so what you're saying is 5 to 10 basis points or so per Fed rate cut. So just from the 1 we got in September, that would imply 5 to 10. And I would think that is it reasonable to think that it would be toward the higher end because deposit re-pricing hasn't really caught up yet, but that would diminish going forward. And then separately, if we got another cut this month and that would be on top of the 5 to 10 basis points we're already talking about. Thanks.
Yes. So some of the September cut is already in the numbers since LIBOR is kind of as I call it, as front run dropping the Fed as we're seeing right today. LIBOR is already coming down in advance of the cuts. So some of that is in there, so I'd say, if you took away the liquidity hit, so we've basically had a full quarter of our rate cut. When you kind of balance out the 2 cuts in the third quarter, we were at 10, but roughly half of that was the build in the liquidity just on the margin didn't impact the dollar that much. So but yes, so we are at some continuing impact of the September cut and then another cut may come next week and then maybe even another one in December, say. I think it would be on the higher side of the 5 to 10 when you combine all of those together in the fourth quarter.
We will take our next question from Jennifer Demba of SunTrust. Please go ahead, your line is open.
Hey guys, it's actually Steve on for Jennifer. Two kind of quick questions here, you guys talked about margin potentially increase in the back half of next year. Does that include any potential future rate cuts? Or does that kind re-stabilize from here?
That'd be more re-stabilized from here. We wouldn't be thinking about any rate cuts beyond the fourth quarter.
It was really the rate cuts that may happen in the fourth quarter, early first quarter depending which day you look when they expect rate cuts. But and then 3 to 6-month lag before you can fully get deposits caught back up with the compression in your variable-rate loans. So...
So if we got a cut in October, say, and do you guys think the second half of next year, you could start to see the deposit costs kind of caught up and margin increasing?
Yes. I think that's a reasonable assumption.
Yes.
Okay. And then on provision, you guys said the increase was due to just kind of conservatism on the credit rate environment maybe worsening a little bit. Are you seeing something that made you do that? Or are you just being a little more conservative out there?
Yes. I'm really glad you asked that question. No, we're not seeing anything in our portfolio that's making us think that. So I'll be clear. Good question, glad you asked it. And we're not seeing anything in our portfolio. We are seeing things in the market, in competitive pressures that just make us shake our head. And that is not a I won't make that has also that is not a quantitative leading indicator.
It's purely qualitative. But we see some things in the market, and we're just going, man, this some folks have lost like I said, it's foolish behavior. And so when we see that, we begin to think back to times past and what's come right after that and usually it's some credit issues. And so that's just anecdotal qualitative, but that's what that's the reason. So I want to make sure, we're not seeing anything in our portfolio that's causing us any concern.
Okay. So it's more the rate structure, I think, as you guys were talking about than any kind of economic changes?
Right, it's more of a qualitative factor than quantitative factor.
Rate structure, but we're also seeing some compromise on some credit structure as well. So it's not only rate, it's there's some credit things as well. So which we're continually walking away from, and so we just we're not complying that.
Okay. And then just one final thing on mortgage actually, you guys kind of seem to think that 4Q is going to be more of a normalized seasonally 4Q. There is not really any holdover from this quarter being so strong in mortgage?
Not really. We've seen it kind of adjust back. And it looks pretty normal to us as so far for this quarter, and we would anticipate that it would continue to be normal.
We will take our last question from Alex Lau of JP Morgan. Please go ahead. Your line is open.
My first question is on CECL. I know you're still working through the impacts. But from your initial thoughts, does CECL impact your approach to M&A in any way or the types of deals that you would consider?
I think we if you saw on the last deal that we announced, we actually included the impact of CECL in there and still have no tangible book value dilution. What we're finding is that a mere tangible book value either way, it doesn't really change anything because of the additional accretion pickup. You earn it back fairly quickly.
But yes, we I think it's just another thing to do to consider when you're doing M&A and looking at that. And so what we'll consider it and make the judgment on what the right prices kind of with and without having what the impacts of it are. So it just one of the things we have to deal with now as one has to adapt CECL and others that do not have to adopt CECL now.
Got it. And just moving on to credit, I think last quarter, you mentioned you're in the process of doing an annual credit review. Is one, was there any findings from that? Is this what led to your comments around the irrational behavior in the market?
So, yes, we did comment on that last quarter. I'd tell you that process, we complete we do it annually, we'd completed it. It has gone well. And one of the benefits of that process is that it gives us the opportunity to have some really direct communication with all of our relationship managers about credit and especially larger credits and gives us the opportunity to evaluate those based on changing set of economic dynamics. And so we did challenge more a little more bigger than we sometimes would in the face of potentially slowing economy.
And so that will that leads to some pruning of the portfolio, not a massive amount, to be honest with you, but we challenged harder than we have in the last, say, 5 years and that does lead to some pruning. That's not what really leads to my comments on what we're what's leading to my comments in on some things that we don't we're not going to participate in that we're seeing in the marketplace as really just market activity and watching deals come in, especially, like I said, some credit terms where we're not that we're not willing to do, but and more than that, some pricing terms which we're not willing to do.
We see we've seen in all of our markets, we've seen 10 to 20-year fixed-rate deals anywhere from 3.25% to 3.95% and we're not talking about and we're talking about product types that just don't deserve that type of those type of terms. And so we've consistently just said even on really strong credits, we've just said, hey, we're not going to do that. And so that's really what's leading to those comments more than those reviews.
Got it. And really appreciate your comments around that the color on that behavior. Just on the specifics of that. Are there any industries or markets that you're seeing? Or is this generally broad-based in your markets?
Yes. We've actually seen it fairly broad-based. I'm sorry to say, and it's because it and sometimes we could pinpoint and go, you know what, it's one or two small banks or its one particular. In this case, it's not. It's there are there's more than one offender in our case. And some of them are large enough that they stretch across multiple of our markets. And so again, they see something that we don't see.
That concludes today's question-and-answer session. I would now like to turn the conference back to Mr. Chris Holmes for any additional or closing remarks.
Okay. Thank you, Molly. That concludes our remarks. Really appreciate everybody's attendance on the call and the questions from the analysts. We appreciate your interest in FBK. We appreciate your support, and everybody have a great day. Thank you.
This concludes today's conference. Thank you for your participation. You may now disconnect.