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Franklin Financial Network (NYSE:FSB)
Q4 2019 Earnings Call
Jan 21, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good evening, and welcome to the FB Financial Corporation's conference call regarding their fourth-quarter 2019 earnings release and proposed merger with Franklin Financial Network Incorporated. 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, as well as Myers Jones, chief executive officer; and Chris Black, chief financial officer from Franklin Financial Network Incorporated. Please note FB Financial's press release and each of this evening's presentations are available on the Investor Relations page on the company's website at http://www.firstbankonline.com.

Today's call is being recorded and will be available for replay on FB Financial's website approximately one hour after the completion of this call. At this time, all participants have been placed in a listen-only mode. The call will be opened for questions after the presentation. During this presentation, FB Financial may make comments, which constitute forward-looking statements under the federal securities laws.

All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB Financial's to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put any 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, as well as the press release announcing the transaction of the company's most recent earnings release. 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 and FB Financial's earnings release, supplemental and financial information and this evening's presentation, which are available on the Investor Relations page of the company's website at http://www.firstbankonline.com and on the Securities and Exchange Commission's website at http://www.sec.gov. I would now like to turn the presentation over to Chris Holmes, FB Financial's president and CEO.

Chris Holmes -- President and Chief Executive Officer

Thank you very much, Keith, and good evening, and thank you for joining us on this call and hear about our fourth-quarter earnings and the merger announcement with Franklin Financial Network. We appreciate your interest in both companies. We have exciting news tonight that I know you all want to hear about, but first, I want to walk through the highlights for the year and let James briefly cover our earnings and then I'll turn it over to Myers and Chris for a moment before I share my thoughts on the merger with Franklin Synergy. Looking at 2019, we feel that we delivered outstanding results.

Our highest priority is always going to be taking care of our customers and the top initiative in our strategic plans states just that. When we formalized 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 of how we execute on that are our core growth and profitability metrics. For the year, we delivered on those metrics.

Adjusted EPS of $2.83 or 8.4% growth over 2018 with no share buybacks, which resulted in an adjusted RO -- return on average assets of 1.55% and a return on average tangible common equity of 16.4%. Excluding acquired balances, we grew loans by 10%, and customer deposits by 6.3%, while noninterest-bearing deposits increased by 14.8%. We're proud of those growth and profitability metrics. And as a result, we call 2019 a successful financial year.

2019 was also an exciting year for us from a strategic standpoint. We acquired 10 branches from Atlantic Capital Bank, increasing our market share in Chattanooga from seventh to fifth, and in Knoxville, from 11th to ninth. 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 to our new treasury platform, which is partially responsible for the -- for our outstanding organic -- outstanding organic noninterest-bearing deposit growth of 14.8% 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 are now properly positioned to excel in the favorable environments while avoiding a drag on earnings in higher rate environments. And we announced the pending acquisition of Farmers National Bank in Scottsville, Kentucky, where we will enter the Bowling Green MSA, ranked seventh in market share, including over 50% market share in Scottsville, Kentucky. We anticipate closing that acquisition in mid-February and look forward to officially welcome these associates and customers to our FirstBank family.

Also, a very strong year, and we're very proud of our associates for continuing to execute and deliver these results. I'll now turn it over to James, to talk through our quarter results.

James Gordon -- Chief Financial Officer

Thanks, Chris, and good evening, everyone. Obviously, this is an exciting time in the history of our company, but first, let me share some thoughts on the fourth-quarter and 2019 earnings. We had another solid quarter of results with adjusted EPS of $0.70 per diluted share. Adjusted ROAA of 1.42% and adjusted return on average tangible common equity of 15.2%.

We delivered annualized loan growth of 5.9% for the quarter, which is in line with our current guidance of 5% to 10% over the near term. Customer deposits were up slightly at 1.5% annualized growth for the quarter, excluding the $104.1 million 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's rate cuts, as we were at 3.91% when excluding the 21 basis points impact of accretion and non-accruals within our expected range of 3.85% to 4.15%.

As the current guidepost for the month of December, our contractual yield on loans was 5.19%. Our cost of total deposits was 99 basis points and our net interest margin, excluding accretion and non-accrual interest collections, was 3.86%. We believe that we've seen a pause in downward pressure on our loan yields, and we are actively managing our deposit costs 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 over the second half of 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 pre-tax contribution of $3 million. For 2020, we hope to deliver total mortgage pre-tax contribution results that would be flat to slightly down from 2019's adjusted contribution of $11.7 million. That target will be largely dependent upon the overall rate environment. On credit, you saw our net charge-offs and provision expense increased this quarter, as we had a single loan that accounted for $2.6 million of our charge-offs or 24 basis points of our 30 basis points of net charge-offs for the quarter.

The remaining balance of that credit is $1.6 million, and it accounted for the majority of our increase in non-accrual loans this quarter. The credit reference is an isolated occurrence related to specific events with a single borrower. The underlying trend of our loan portfolio remains solid, and we continue to see overall strength in our markets. With that summary of the quarter, I will turn it over to Chris Black, to speak about Franklin Financial's quarter.

Chris Black -- Chief Financial Officer, Franklin Financial Network Incorporated

Thanks, James. Good evening, everyone. We had a strong quarter at Franklin Financial. We delivered core EPS of $0.68 for the quarter, up 11.5% from the fourth quarter of 2018.

We continue to see progress in our balance sheet rotation, optimization and a reduction of non-core banking activities. Our SNC 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 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 from last quarter and 43 basis points from the fourth quarter of 2018. We are excited to join forces with FB Financial going forward and build upon our very strong core community bank. I'll now turn it to Myers, to share his thoughts on our merger.

Myers Jones -- Chief Executive Officer

Thanks, Chris. Hello, everyone. We are here tonight to celebrate a momentous occasion. This pairing with FirstBank is 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 and negotiation that each of our customer-centered 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 want to thank all of our Franklin Synergy associates for getting us to this point.

And I think that we should all be excited about this next chapter and our potential together with FirstBank. With that, I will turn the call back over to Chris Holmes for his comments on our merger.

Chris Holmes -- President and Chief Executive Officer

Thank you, Myers and 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 Nashville MSA; second, combining the talent base of FirstBank with Franklin Synergy's strong community bankers; and third, the opportunity to meaningfully improve our earnings per share while taking a protective approach to our balance sheet and tangible book value per share. On the first item, we'll add eight branches to the distribution network across the MSA, all in highly attractive locations.

As we've said time and again, we believe that density in the scale in a banking -- in a market provides tremendous value and brand recognition, pricing power and ability to accelerate growth, that is, growth and profitability. The two objectives that we preach every day. With this merger, we achieved the density and scale that we've been building toward in Nashville since 2012 and that, we believe, is going to prepare -- propel our growth and profitability. Following the close of the transaction, we'll rank first in Williamson County, second in Rutherford County and tenth in Davidson County in terms of deposit market share.

In the broader Nashville MSA, we'll move from 12 up to six, with $4 billion in deposits. From a demographic standpoint, Williamson and Rutherford Counties are driving forces behind the Nashville MSA being as attractive as it is. Williamson is the wealthiest county in Tennessee, while Rutherford is the third wealthiest. From 2010 to 2020, Williamson and Rutherford Counties were the two fastest-growing markets in the state when you excluded counties with less than 15,000 residents.

Over the next five years, Williamson is expected to be the fastest-growing county in Tennessee and Rutherford, the third fastest, again, excluding the smaller counties. While FirstBank has had 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 has been partially due to Franklin Synergy's dominance. We've been doing our best to compete with them in Williamson County, but we've been largely unable to do so due to Franklin's deep relationships in the community.

It feels great to stop beating our head against the wall and being on the same team going forward. Rutherford County has been a steady market for FirstBank since we expanded there with the acquisition in 2007, but we've not had the distribution network and scale we've needed to fully take advantage of the growth that Rutherford County has experienced. But pairing with Franklin Synergy and becoming the second largest market share bank in that county, we're excited about our future in that community. On reason No.

2 for partnering with Franklin Synergy, their bankers are the best in their markets. What we found during diligence was 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 and risk around the noncore assets and the funding issues. If you look at our assumptions, we've modeled 30% cost saves on this transaction. This relatively low rate of cost savings is despite our plan to consolidate seven branches in our combined footprint or almost half of the 15 branches that get added in this merger.

And not all of those closures will be Franklin Synergy branches, we'll keep the best of what our two banks offer. If I were a bank analyst or investor, I might assume that we were sandbagging with 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 from most bank M&A are not present or desired in this transaction. At the core of Franklin Synergy is an incredibly strong group of relationship managers. They epitomize our definition of everything that a community banker should be.

They live in and are active in their communities. They bank their friends and neighbors. They have a travel club for their customers. They serve on boards and hold civic leadership positions, and they dominate their markets.

In fact, they remind us of ourselves and our community markets. In Nashville, FirstBank has a very strong commercial bank, but we've never been able to transition into the strong community bank that we have -- we've desired to be. The Franklin team is exactly that. We are very excited to pair with this exceptional team and hopefully, provide them with additional resources to enable them to go out and win even more than they already do.

One other compelling part of the union between the two companies is that for some time, FirstBank has been considering bringing several pieces of its operations -- of the operations part of the company together in a centralized operation center. Following the close of this transaction, we plan to keep Franklin Synergy's headquarters location in downtown Franklin, while we will maintain some of the branches in Lexington, Tennessee, we will be turning that cluster of buildings into -- in downtown Franklin into our primary operations center. We want the combined company to be a cornerstone of the Williamson County community, and we want our impact there to grow as our company continues to mature into the southeast the leading community bank franchise. To summarize, we highly value the core bank, its associates, their customers and their ties to the communities, and we want to support them as they combine -- as they continue to dominate their markets.

Moving to the third point, the financial results of the transaction, we think this checks the boxes that enables us to make the investment. We're tangible book value neutral. We're picking up roughly 10% in EPS accretion, and we do that while protecting our balance sheet, more on that in a second, and paying across the $10 billion asset threshold. We achieve all of that while attaining true math in our most vibrant market.

Personally, I believe, this creates significant franchise value for the company and 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 need to be comfortable with four things: the credit culture; the construction and commercial real estate concentration; the funding profile; and the healthcare SNC and leverage lending portfolios. Following a thorough review of the portfolio, credit culture, underwriting practices and credit monitoring, we're comfortable with the credit culture and understand the construction in CRE portfolios.

In our meeting with Franklin Synergy's management team over the course of diligence to negotiations, they described themselves, 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've put into place over the past few years. Their credit officer will take a senior role with the combined company continuing to serve Franklin Synergy's existing relationship managers while picking up responsibility for our Rutherford and Williamson County bankers, Eddie will work closely with FirstBank's 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 that 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, manage to that goal over the four quarters that -- following the close and operate at that level. On the third concern, we will have an initial core funding hold upon close that we'll have to grow out of both organically and potentially through acquisition. The culture of Franklin Synergy prior to 2019 had not been to concentrate on the liability side of the balance sheet.

Their strategy was to let the treasury function provides the funding and that was done with extensive use of wholesale liabilities and broker deposits. Over the past year, Franklin Synergy's management team has been in the process of adding more deposit relationships to the objectives for their bankers, and they've started to see some results over the past couple of quarters. We look forward to fostering that progress with our treasury management services and retail products. We'll work together to continue to trend on growing customer deposits.

On the last concern, we've decided to wholly divest of Franklin's shared national credits, healthcare and corporate portfolios totaling $430 million. We've assumed a mark on these portfolios reflective of a 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 of 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're also elated in the financial impact and think -- that we think we're going to see.

We can't wait to welcome Franklin Synergy team members and customers into our FirstBank family. With that overview, I want to turn the call over to James to talk about the transaction in a little more financial detail.

James Gordon -- Chief Financial Officer

Thanks, Chris. First, I just want to emphasize how excited we are about this merger. We believe that Franklin Synergy is one of the strongest community banking franchises in Middle Tennessee, and we are thrilled to be able to add their associates to the FirstBank family. Our team feels 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 slide by slide, but I do want to provide some 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 hired a big four firm on the loan review side, and we evaluated 66% of the non-owner-occupied CRE portfolio, 41% of the construction and development portfolio and 46% of the core C&I portfolio, including owner-occupied CRE.

Supplemented by additional deeper discussions of the construction and development, CRE, as well as the shared national credit and healthcare and corporate portfolios. We also have had extensive discussions with senior management on credit philosophy, monitoring and the 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; and the $430 million corporate SNC healthcare and leverage lending book. We feel good about the core community banking book.

We think that it looks and feels like loans we would be making in those markets if we have their presence there, and we are excited to continue growing that portfolio. The corporate book does not align with our philosophy as it does not generally involve local customers or financial sponsors. We will not be putting that onto our balance sheet, and we have assumed a discount on the portfolio to protect tangible book value as that portfolio is exited. We have lumped that number into our PCD 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 in loss net income as a result of divesting that $430 million of loans and have assumed that will decrease their wholesale funding on a roughly matching basis. Through that review, we have ultimately assumed non-accretable credit marks of 2.7% that will handle any losses in the exit of the nonstrategic portfolio in a CECL-based allowance for credit loss reserve for the core portfolio. We have also assumed an accretable mark of 1.3% on the portfolio, roughly, evenly split between fair value credit and interest rate marks. This will come back in through income of the lives of the loans, also that is approximately $110 million of initial combined gross credit and rate marks on Franklin Synergy's loan portfolio or approximately 3.9%.

We have assumed 30% cost savings to Franklin Synergy stand-alone noninterest expense with 50% phased-in over 2020 and 100% phased-in, 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, it's possible we could choose to try to stay under the $10 billion in assets at December 31, 2020. But we have modeled that income loss beginning on June 30, 2021, to be saved.

We have assumed that we are taking advantage of Franklin Synergy's REIT subsidiary and gained conservatively $2.5 million from state tax benefit annually going forward. With those adjustments in Franklin stand-alone earnings power, we estimate that we will achieve roughly 10% EPS accretion through this transaction while staying tangible book value neutral. As is typical, we have assumed no revenue synergies in our modeling, but we do believe that there are plenty of opportunities to grow revenues, easily identifiable items include improving Franklin's funding base and hiring additional bankers and wealth managers in Middle Tennessee, due to the increased brand strength of FirstBank across Nashville. In summary, we created a transaction that protects our balance sheet and tangible book value per share, while providing for earnings per share accretion and growth, which creates value for all of our stakeholders.

I'm happy to answer any additional questions that you all might have on the modeling and due diligence process in the question-and-answer session. Now I'll turn it back over to Chris.

Chris Holmes -- President and Chief Executive Officer

Thank you, James. We want to welcome Myers and Chris and the entire Franklin Synergy team into the FirstBank 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.

We're 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 evening's call, and we would now like to open it up for questions.

Questions & Answers:


Operator

[Operator instructions]. We'll take our first question from Jennifer Demba with SunTrust.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good evening. Can you just talk about the background of the deal, how long you guys have been talking and how everything came together?

Chris Holmes -- President and Chief Executive Officer

Good evening.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Yes. So first off, we're sitting, I guess, two blocks. We're pushing the box -- a branch two blocks from the Franklin Synergy headquarters. And so we know each other.

Our headquarters office is in downtown Nashville, theirs is in downtown Franklin. But we do compete. We know each other. And we see each other socially and -- when we go to football games and things like that.

So we know the folks. This conversation really started, I guess, in the last quarter of the year. And it sort of picked up steam near the end of that quarter and led to the announcement. So we also -- so we've known several folks there.

Chris Black, who is sitting at the table, has been an employee of both organizations. He left FirstBank to go -- to become the CFO at Franklin Synergy, left with good -- left on good terms. And so -- left with -- it's a good thing for him. He left on good terms.

But -- and so that was -- that's how -- and he didn't have anything with it coming together other than the fact that he was -- he did -- he was the CFO. But there was a comfort level as -- with some of their financial information because we sort of talk the same language there.

Operator

We'll take our next question from Stephen Scouten with Piper Sandler.

Stephen Scouten -- Piper Sandler -- Analyst

Hey, Ron. Good evening. So congrats on the deal. I think it's pretty exciting.

It's exciting to see you all focusing on the Nashville MSA. I guess, first of all, is it fair to assume that this will be what you focus on for 2020? Or would you still think about looking at other incremental deals if they came about, came to you in other markets?

Chris Holmes -- President and Chief Executive Officer

Yes, this is going to be what we focus on for 2020. And so we're going to be -- it's going to take all of our attention on -- we're totally focused on execution on this deal. A little like I was talking about seeing these guys and us seeing each other, we'll continue to see bankers at conferences and things like that. And I'm sure there will be casual dialogue, as Stephen you know.

But we're going to be focused on this and really solely this during 2020.

Stephen Scouten -- Piper Sandler -- Analyst

Great. And you've put a lot in the presentation and then spoke to here about retention of talent, retention of management. When you're talking about the assumed retention of all the revenue producers, are those folks that you've looked to put under retention agreements currently? Or will that be transpiring? Or what are the targets or goals around retaining all those people?

Chris Holmes -- President and Chief Executive Officer

Yes. Our target is to retain 100%. And so that's -- we want to retain all of them. There are some really good bankers on both sides.

But certainly, in terms of Williamson and Rutherford Counties, the bulk of the key revenue producers, the vast majority are with Franklin Synergy. So we will work through the retention tools that we have things like -- well, all the retention tools that you would apply will be the types of things we'll be using to try to hang on to those folks. And I'll add this one in too. When we talk about what makes our company success, the first thing we -- the first thing on that list is being a great place to work, second one is being an elite financial performer and the third one is being a great community bank.

This is going to move our asset size up to close to $10 billion, but we're still a community bank because we think it's about how you do it, not the size of the bank. And so -- but the first of those is being a great place to work. And that's the real way that you retain folks is having a great culture and great environment and both companies do that. So when we think we bring it together, we think that's going to keep people in the seat.

Stephen Scouten -- Piper Sandler -- Analyst

That's great. And then, obviously, Franklin has a much lower NIM than you guys do on a stand-alone basis, and you're doing some balance sheet restructuring here and other things. Can you talk a little bit about where you think the pro forma NIM will shake out roughly? Or what the impact of that will be, if you have any preliminary numbers there?

Chris Holmes -- President and Chief Executive Officer

Yes. I'll let James talk about it. But you're right. There is a difference in the NIM.

And we've modeled that in, and we haven't been terribly aggressive going forward because we don't think that's probably the wise way to do it. But James, do you want to comment further on the NIM?

James Gordon -- Chief Financial Officer

Yes. I think as we take off some of the wholesale funding with the sale of the $400 million 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 our levels over time with that. So immediately, it will bring our margin down in the 3.60% kind of range, but then we expect to rebuild that over time as we work on the funding side of the balance sheet.

Stephen Scouten -- Piper Sandler -- Analyst

OK. That's helpful. And maybe just one last thing on kind of FBK stand-alone. It looked like loan growth was pretty much in line with kind of where you guys have been guiding.

But just kind of curious what you're seeing in terms of kind of overall customer demand and some of the late cycle type of activities or lending structures that you were talking about a little bit last quarter?

Chris Holmes -- President and Chief Executive Officer

Yes. So during the quarter, yes, we were at -- come around -- we're at 5.97%, I think, in terms of loan growth, some will say 6% for the quarter, 10% for the year. And so we like those numbers. We still and, I think, specifically on the quarter, we've seen a few things on the pricing front that had been a little bit crazy to us, especially when you -- on the fixed rate side, we'll see some fixed rate things that go out for longer terms.

But I would have to say, not quite as much as we had seen in the middle part of the year in terms of things that just made us wonder what was happening in the market. Demand, 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, particularly Nashville continues to be strong.

But we still see pretty good momentum in places like Knoxville or Chattanooga or Memphis.

James Gordon -- Chief Financial Officer

We do probably see some elevated early payoffs, and we don't expect that to continue to keep us in that range over the near term as well.

Chris Holmes -- President and Chief Executive Officer

Yes. That's a good point, James. We did see more payoffs actually in the fourth. And we'll have some in the first that we've seen earlier -- in the early part of the year.

Stephen Scouten -- Piper Sandler -- Analyst

Great. And congrats on two really solid quarters and a great deal.

Chris Holmes -- President and Chief Executive Officer

Thanks, Stephen.

Operator

We'll take our next question from Catherine Mealor with KBW.

Catherine Mealor -- KBW -- Analyst

Thanks. Good evening.

Chris Holmes -- President and Chief Executive Officer

Good evening.

Catherine Mealor -- KBW -- Analyst

Wanted to dig into the expense savings a little bit. You were clear, Chris, that you're not being too conservative on the 30%, just given the retention of people at Franklin. But how should we think about that 30% cost savings number and maybe expense growth into the next couple of years as you prepare for the $10 billion across? And how much of those assumptions are baked into your estimates?

James Gordon -- Chief Financial Officer

So, Catherine, this is James. I'll answer that. I think two things. We started about 18 months ago and started laying the infrastructure in, knowing that $10 billion was out there someday.

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 growth has been a little bit higher than, I would say, historically, over the last, say, 18 months. And then as part of the 30%, I think, some things that look at -- if you looked at it, it would say, would be higher, as Chris said, the branch consolidations. Then, I think, offsetting that are keeping a lot of people to maintain that balance sheet and the customers that we're bringing over built into that.

As well as building in some incremental costs to keep positions and increase our overall infrastructure to meet the demands of passing the $10 billion level from -- particularly from a regulatory. But we think we're well-positioned for that. A lot of it's in our run rate. And a lot of it where we have kept through -- keeping a very achievable 30% cost saving rate.

Chris Holmes -- President and Chief Executive Officer

Catherine, I'll add two things here just to bring for -- a little bit of commentary and clarity. First, we did mention the operations center. We will be having some expense related to the operations center in Franklin that we'll be having there, that we'll be establishing there. And so there's a little bit of the expense that doesn't get eliminated.

And then the other thing, this is not an expense thing, but we do have Durbin, the Durbin amendment, we take that into account. That doesn't come in until the second half of '21, but we do allow for the revenue reduction related to the Durbin amendment.

Catherine Mealor -- KBW -- Analyst

OK. And then, in the thinking big picture, how do you think about big picture profitability with the combination of these two companies? I know that it will bring the margin down originally and then you should kind of get some of that back as you grow core deposits. But just generally, you mentioned that it's accretive to the ROE. But how should we think about the pro forma effect on the ROA?

Chris Holmes -- President and Chief Executive Officer

Yes. I'm going to comment on big picture, and I'll let James comment on the pro forma effect on the ROA. From a big picture standpoint, when you think about the profitability moving forward, and we've modeled in, and it's slightly accretive to our ROA and slightly accretive to our return on average tangible common. But I guess, the exciting part there is we haven't built in -- what we're all excited about on the deposit side of the balance sheet.

Deposit side has been something that we are reasonably proficient at. And so we haven't built really much in there, and so excited about the opportunities that it gives us, particularly, I'd say, there. And the other thing I'd say that I'm excited about is we're -- in a lot of our communities, we're the community bank. We're 30%, 40%, 50% market share in a lot of smaller communities.

In Nashville, we've never been that. We've never been that community bank that really is -- knows the customer who has a lot of debt. And so we've been more -- 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's going to be some revenue from that. But we don't -- that's, of course, not built into the models. But we're excited about that opportunity. And so -- as specifics, I know, it was -- I don't know exactly how many basis points it was in ROA and ROTCE, but it was...

James Gordon -- Chief Financial Officer

Yes, ROTCE, I think, to our consensus number that's out there, that's a little over 14% at a little over 100 basis points back on that. And I think that's before -- I think, consensus generally doesn't take in capital planning on that. We would end up with a lot of excess capital at that point to deploy to help increase that as well. Then I think the other big opportunity, and 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 -- they operate with a fairly strong efficiency ratio already.

Adding that together along with that, this -- it will help our overall efficiency. It lessens the impact on the efficiency from mortgage as that becomes smaller to the overall pie, still large, but smaller to the overall pie on that. So our goal is to be an elite financial performer. And we think, over time, we will continue with that after this transaction.

Catherine Mealor -- KBW -- Analyst

Great. Great. And one last one, if I may, is on growth. You'll be over $10 billion in asset pro forma? How do you think about your pro forma growth rate?

Chris Holmes -- President and Chief Executive Officer

Yes. We've kept things steady. What we modeled in, James, on the pro forma growth rate on our balance sheet...

James Gordon -- Chief Financial Officer

Yes. We modeled for the first couple of years, the consensus number and then about 8% going forward after that. I would say we will have by taking off the nonstrategic assets and then focusing on deposits, I think, we will have a big opportunity to add producers in that, I'll call it, the middle market C&I business that will help us both in deposits and help replace some of that. We did not model that into our numbers.

And I think that will continue to help us to have fairly solid loan growth going forward, as well as deposit growth.

Catherine Mealor -- KBW -- Analyst

Great. Congrats.

James Gordon -- Chief Financial Officer

Thank you.

Chris Holmes -- President and Chief Executive Officer

Thanks, Catherine.

Operator

We'll take our next question from Tyler Stafford with Stephens.

Tyler Stafford -- Stephens Inc. -- Analyst

Thanks, and congratulations on the deal, guys. Maybe, Chris Holmes, first, just to start on legacy FBK, the quarter and kind of outlook. At this point, could you give us any clarity or do you have any clarity yet about how you're viewing the mortgage business for 2020?

Chris Holmes -- President and Chief Executive Officer

Yes. As we are -- what we view at this point is we think 2020 is going to be similar to 2019 in terms of our production and in terms of our profitability. And it could -- of course, it's all dependent on the rate cycle. It could be down just slightly, but we're thinking of it today as being flat to could be slightly down is the way we're thinking of it.

Tyler Stafford -- Stephens Inc. -- Analyst

OK. And then, James, just going back to one of the comments in the earnings release tonight about just the margin trajectory for 2020, you mentioned, kind of, stabilized over the first half and then some opportunities for expansion in the back half. Just as you see the margin on a stand-alone basis in 2020, what are the kind of puts and takes that you see impacting that view?

James Gordon -- Chief Financial Officer

Yes. So I think on the second half, we 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, it was 11 month.

We've kind of gone through the first renewal cycle of that in '19, that's helped us. Then we also did a 30-month product -- I mean, sorry, a 25-month product that was at 3% that will start maturing, there's around $200 million of that. That starts in the third quarter and carries through the fourth quarter, we think. Today, that rate would be $165 million, $170 million, as rates go today, and then we've continued to balance that.

We've had a good success rate on capturing that 11 month, around 70% of rollover rate at the new rates. So you factor that in there and kind of kept the balance flat. So we're also still growing net-net and keeping that balance flat in the time deposits. So I think it's a big opportunity for us, particularly in the second half of the year.

There's a little bit in the second quarter, but I think most of that will come in the third and the fourth quarter.

Tyler Stafford -- Stephens Inc. -- Analyst

OK. That's helpful. Just shifting over to the Franklin deal. Can you -- just to confirm, the $6 million pre-tax of Durbin, that does include both FBK and Franklin impacts not just FBK?

James Gordon -- Chief Financial Officer

Yes, yes. It does. Primarily ours, but yes.

Tyler Stafford -- Stephens Inc. -- Analyst

Primarily, FirstBank...

James Gordon -- Chief Financial Officer

[Inaudible] it relates to FBK. We've got a bigger retail [Inaudible].

Tyler Stafford -- Stephens Inc. -- Analyst

Yes. All right. On the $50 million of merger cost, I was a little bit surprised of the magnitude of that? Can you give us any color about what's baked into that $50 million?

James Gordon -- Chief Financial Officer

Yes, I would say, in round numbers that about a third of that is, I'll call it, an employment and related items. Then about another a third of it is related to contract buyouts, data processing, those kind of contracts and conversion cost, which will be fairly high on a deal that size. And then roughly, the other a third is kind of split between branch closing costs and then the transaction DLPs to investment bankers, lawyers and other professionals that we'll need through the process.

Tyler Stafford -- Stephens Inc. -- Analyst

OK. Got it. I may have missed this in the deck, but the Page 5, I guess, talks about how -- there are key Franklin executives that entered employment agreements, but I didn't see any exact roles for, either Myers or Chris or the others. Is that something that you can share about what -- at this point, what the expectation is for their involvement in the combined company going forward?

Chris Holmes -- President and Chief Executive Officer

Yes. We can share this. They're going to be involved, and they look forward to being involved. But all those details aren't worked out.

And so -- I say they I'm being general -- because all of those details aren't worked out and so at this point, we don't share any deeper than that. We will, just not yet.

Tyler Stafford -- Stephens Inc. -- Analyst

OK. And then just lastly for me, following up on Steve's earlier question just around the core margin impacts. I think a couple of quarters ago, and this may be more of a question for Chris Black, I think a couple of quarters ago, you guys talked about, at Franklin that the syndicated book was around LIBOR 2.20%. 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 pick up once you do exit those 2.30% rate FHLBs and the lower-yielding assets that you're running off?

Chris Black -- Chief Financial Officer, Franklin Financial Network Incorporated

Sure. So I think on that book, we're probably in the 5.5% ballpark on loan yield. And so a little bit akin to what James said in terms of stand-alone FBK and some of the repricing, I think, we see that similarly situated on the horizon as well. So both inside with the wholesale and across the footprint, but specifically on the loans, about 5.5%.

James Gordon -- Chief Financial Officer

We have signed about a 3.25% spread on that portfolio. That's roughly how we came up with the $10 million after tax.

Operator

We'll take our next question from Daniel Cardenas with Raymond James.

Daniel Cardenas -- Raymond James -- Analyst

Good afternoon, guys. Congrats on the deal. Just a couple of quick follow-up questions. Kind of going back to the legacy margin for FirstBank, I guess, question one here, just as I look at the accretion contribution.

In Q4, it 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 to think about in terms of accretion contribution?

James Gordon -- Chief Financial Officer

Yes. So it was a little bit higher, and that really is generally generated by payoffs on some of those credits at -- different from the marks that you have. I would say, we're going to run somewhere in the $1.2 million to $1.5 million range on a go-forward basis before this transaction, just on a stand-alone basis, maybe slightly higher than that when you have payoffs on that.

Daniel Cardenas -- Raymond James -- Analyst

OK. And the 3.6% range that you gave on a pro forma basis, that's -- is that a core number? Or is that -- is that all-in?

James Gordon -- Chief Financial Officer

Yes. That's more core. Yes.

Daniel Cardenas -- Raymond James -- Analyst

OK. Excellent. And then just quickly jumping back to mortgages in terms of expenses for the mortgage division. How should we be thinking about that in 2020? Is there room for additional improvement there?

Chris Holmes -- President and Chief Executive Officer

We hope so. There's always room for improvement in nudging the gap that's responsible for mortgage. We hope so. It's gotten more efficient with our -- with the downsizing, and we hope it continues to improve in efficiency, yes, so it's adjusting for the seasonality of the business.

James Gordon -- Chief Financial Officer

Yes. The other thing I would say on that, that distorts it, one is because of the size of last quarter, say, versus this quarter. The other thing that distorts it somewhat is on the -- the way you do the presentation of the mortgage servicing rights income or the mortgage servicing income and you take the fair value against the revenue. And that's actually been a loss.

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 as well. And so if you take that out, the efficiency ratio for mortgage looks a little better, but still opportunity is there over the course of time to work through that.

Daniel Cardenas -- Raymond James -- Analyst

OK, great. And then, I guess, given the deal that was announced and the pending transaction in Kentucky, is it safe to assume that maybe buybacks take a -- go to the back-burner here?

Chris Holmes -- President and Chief Executive Officer

Yes. It's safe to assume at least in the near term.

James Gordon -- Chief Financial Officer

Yes. And maybe -- and I think even from a legal standpoint, we still have the authorization, but not the ability to use it at this point based on the structures of really both deals.

Daniel Cardenas -- Raymond James -- Analyst

OK. Great. All my other questions have been answered. Again, congrats on the transaction.

Operator

At this time, we have no further questions in the queue. I would like to turn the conference back to Chris Holmes for any additional or closing remarks.

Chris Holmes -- President and Chief Executive Officer

OK. Thank you very much once again. We appreciate you staying with us into the evening. And we're excited about moving forward with -- as partners with Franklin -- between FBK and Franklin.

So thank you all, and have a good evening.

Operator

[Operator signoff]

Duration: 13 minutes

Call participants:

Chris Holmes -- President and Chief Executive Officer

James Gordon -- Chief Financial Officer

Chris Black -- Chief Financial Officer, Franklin Financial Network Incorporated

Myers Jones -- Chief Executive Officer

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Stephen Scouten -- Piper Sandler -- Analyst

Catherine Mealor -- KBW -- Analyst

Tyler Stafford -- Stephens Inc. -- Analyst

Daniel Cardenas -- Raymond James -- Analyst

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