Good evening and welcome to FB Financial Corporation’s Second Quarter 2020 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mettee, Interim Chief Financial Officer; Greg Bowers, Chief Credit 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. The call will be open for questions after the presentation. With that, I would like to turn the conference call over to Robert Hoehn, Director of Corporate Finance.

Thank you. 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 factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial’s ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in FB Financial’s periodic and current reports filed with the SEC, 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-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial’s earnings release, supplemental financial information, and in this morning’s presentation which are available on the Investor Relations page of the company’s website at www.firstbankonline.com and on the SEC’s website at www.sec.gov. I would now like to turn the presentation over to Chris Holmes, FB Financial’s President and CEO.

Thank you, Robert, and good morning. Thank you all for joining us this morning and we do appreciate your interest in FB Financial. On last quarter’s call, I highlighted the company's priorities and how they have changed in the pace of these uncertain times. Those priorities were and still are: first, the health and safety of our associates and customers; second, liquidity; third, our capital; fourth, profitability; and then fifth, growth. I'll touch on each of these priorities in some more depth, but I want to start by saying how proud I am of our team for the level of execution that we achieved on those goals this quarter. Number of our associates are listening to this call and I want to congratulate them on a job that's been remarkably well done. Our financial performance this quarter was outstanding, including record revenue and pre-tax pre-provision earnings. We produced an incredible 3.29% adjusted pre-tax pre-provision return on average assets for the quarter. Our profitability was largely driven by our mortgage team producing a record $33.6 million pre-tax contribution. After a $26 million provision that moved our allowance for credit losses to 2.51% of loans held investment excluding our PPP loans, we had an actual ROAA of 1.30%. The company's earnings power has allowed us to reinforce our balance sheet with fantastic liquidity, a conservative allowance for credit losses, and an additional $23 million in tangible book value, all while operating in the middle of the pandemic. This demonstrates our business model's complementary bank and mortgage segments. We frequently describe the company as a great community bank with a great mortgage division, and this quarter exemplifies that description. Diving deeper now on our priorities, our focus remains the health and safety of our associates and customers. I believe we've entered a new normal for the foreseeable future. Approximately 700 of our associates continue to work remotely, and we have continued to see strong productivity in this environment. While our drive-throughs and branches never closed, in March and April, we had suspended lobby access for all of our branches in line with guidance from our state and local governments. As stay-at-home orders began expiring in late April and early May, we moved to reopen our lobbies. We reopened our first branch lobbies on May 7, with sneeze guards, hand sanitizer, masks, and social distancing markers in place. By the end of June, almost all of our branch lobbies had been reopened. As case counts have risen and many of our customers have shown a preference in recent weeks for drive-throughs, we have moved to make lobby access limited only to some select branches. We continue to monitor case counts, and we’ll continue to take necessary safety precautions. As discussed on our last call, we've been very proactive in reaching out to our customers, and we provided first deferrals to everyone that requested one. This outreach resulted in $918 million in loans being granted initial deferrals. Roughly 60% of our initially deferred loans are still in their first deferral period, which makes it a little difficult to get clarity on how those credits will ultimately turn out. Of those loans that have hit the end of their first deferral, roughly $138 million or about 38% of the balances have requested and received a second deferral. The 38% of balances that have received second deferrals make up about 10% of the notes that have come out of the deferral. We've been in constant communication with our customers as our relationship managers check in and gather information. Anecdotally, we're hearing positive news from the field on our population of deferred loans. We provided a new slide in the investor deck to get some feedback that we're receiving from our regional presidents. The summary is that after a trough in April and May, many of our markets have been bouncing back reasonably well. I’d caution that we continue to monitor market activity and our customer base as the case counts have begun to rise in some parts of our footprint. Moving on to liquidity, we're thrilled with our $581 million customer deposit growth. It's a little difficult to tell at this point how much of that will be sticky. The fact of the matter is that we're a trusted partner to our clients, but we don't grow $581 million in deposits in one quarter without some help from broader market conditions. We're going to do our best to hold on to as many of those deposits as we can, but it's difficult to predict how much of that will stay with us past a couple of quarters. We believe we're well-positioned to take on Franklin’s synergies; balance sheet which has historically been more reliant on non-core funding. In our communication with Franklin over the past six months, we've identified approximately $415 million in FHLB, brokered, and other non-core deposit relationships with a cost of around 1.65% that we could exit by year-end. We will balance that elimination of non-core funding with our current priority of on-balance sheet liquidity, but we believe that we have the opportunity to pay off the wholesale funding more quickly than we had anticipated. On our third priority, capital preservation, we increased our total risk-based capital ratio to 13.2% this quarter, up from 12.5% in the first quarter through strong provisioning and profitability. We believe that we have plenty of capital to manage through the downturn. We also maintain maximum flexibility and we currently have only common equity and trust preferred in our regulatory capital stack, and we have an investment-grade rating from Kroll should we choose to access the debt capital markets for some additional capital cushion. We believe that our strong profitability and existing capital levels continue to support our dividend. Moving on to credit, so far, we've not seen significant signs of deterioration in our portfolio. Given the economic environment, we expect some uptick in substandard loans over the coming quarters, and ultimately, we expect some increase in our net charge-off to follow. We still feel very good about our underwriting standards in our portfolio. Our relationship managers have been that this is not the time to settle the problem. If you have a loan that needs some attention, then we want to know about any potential issues sooner rather than later, and I'm sure we'll face some challenges over the next six to eight quarters, but we won't suffer from a lack of focus. On profitability, as I mentioned earlier, our pre-tax pre-provision earnings were $57.8 million or 3.29% as a percentage of average assets, which is a record quarter for us. As expected, the margin is facing some headwinds from the lower interest rate environment. Our headline margin net interest margin number would normally not be one that's acceptable to us. However, this has been partially the result of our on-balance sheet positioning. We've been prudent in providing some credits and had prudent loan growth over the past couple of quarters while at the same time building our liquidity. We will continue to keep an eye on how this recent influx of deposits behaves and how quickly PPP loans are forgiven. In the absence of record synergy, which will have a 10 basis point to 15 basis point impact on our core margin, the second and third quarters should be a trough for us. I expect our margin to begin to bounce back in the second half of the year. However, the same rate environment that's created the headwind for the banking segment allowed our mortgage areas to deliver $33.6 million in direct contribution. This was a Herculean effort from our team as they capitalized on strong volumes and above-average margins while benefiting from the record-low but steady interest rate environment from March through the end of the second quarter. We expect our mortgage team to capitalize on this environment for as long as it continues. I have a few other updates before turning things over to Greg and Michael. We’ve consistently been updating our technology over the past couple of years, and consumer online and mobile banking was the last remaining significant platform that was due for enhancements. When we converted Farmers National Bank last quarter, we placed their customers under our new system, and we've had great feedback from those user experiences and from those capabilities. Later this week, we're converting the rest of our customer base onto that same platform, and we're excited to provide an improved experience for our customers. On the Franklin Synergy merger, we anticipate closing in August and conversion before the end of the year. Dialogue between those two management teams has been consistent and positive since the announcement. We're hearing that their core credit portfolio continues to perform as expected and they continue to make progress on moving out of that non-core portfolio as well. We are eager to be able to officially join forces with those associates and begin taking advantage of the combined strengths of the team. With that, I'm going to let Greg go into a bit more detail on the credit portfolio.

Thanks, Chris. I'll give high-level thoughts on the portfolio and then will be available in the question-and-answer section as well. For a refresher, we are at our core a community bank that makes loans to support the economic activities of our markets. The strategy means dealing with and putting our faith in local people we trust, and know to be good operators. Our strategy has always been to focus on end market lending while avoiding shared national credits and purchasing participations for the sake of growing loan balance. Our portfolio reflects that bias. Since we last spoke, we have raised $315 million in PPP funding for customers that needed some help at the outset of this downturn, and you can see the industries where those PPP funds went on Page 11 of the presentation. We are also working through our deferral program. To echo Chris, our relationship managers in the field are having positive conversations with our borrowers, but it's still too early in this process for us to really know what will happen with many of those credits. Of the roughly $920 million in loans that received first deferrals, we still have around $550 million that have not come out of that first forbearance period. At this point, $138 million have received approval for a second deferral. That number will increase as we continue to work through the remaining deferrals. Feedback from clients that received initial deferrals varies. With our open-door policy, many of our clients accepted the first deferral based more on uncertainty rather than actual business level. As such, that group won't need or request second deferrals. For those that are seeking second deferrals, some plans still have limited revenues such as restaurants and hotels. Others don't have an urgent need for a second deferral but still aren't back to 100%, and feel that it's prudent to have a cushion right now. In general, uncertainty reigns, but anecdotally, the re-openings have provided a level of relief that has generated a modest increase in confidence from our clients. With that, we continue to monitor those loans and feel positive about them, but we cannot tell you how many will deteriorate, and how many will ultimately participate in a second deferral period at this point. We will look to continue to update our investors as we participate in investor conferences this quarter and our next quarter’s earnings call. On overall asset quality, we did experience an uptick in substandard loans from $74 million to $88 million from the first to the second quarter. The majority of this increase was related to four relationships with approximately $13 million in aggregate outstanding balances as of June 30. Each of these loans had been marginal credits prior to the pandemic and have deteriorated with the economy, so this was not an unexpected increase. Moving on, on Slide 12, we've laid out some of our specific industry exposures again. Before I give updates on those, each of those percentages use our total loans held for investment as our denominator. If we were to exclude PPP loans, then those would read retail 8.3%, healthcare 5.7%, hotel 4.3%, other leisure 2.5%, transportation 2.2%, and restaurant 1.4%. These percentages are generally in line with where they were last quarter. Slide 13 reflects the largest segment within these industry groups. Our retail portfolio, as reflected here, is pretty much a portfolio split evenly between C&I, including owner-occupied real estate, and our non-owner-occupied CRE properties. This is a segment that has received a lot of attention nationally as the retailers have been forced to deal with closures, and landlords have been impacted by tenants not being able to make their payments. For us so far, and we've reached out to our relationship managers on a property-by-property basis, our portfolio has fared okay. As we've discussed before, this portfolio is fairly well distributed across our footprint and across a wide variety of underlying sources of repayment, in other words, the retailer is ultimately making the payments. For our CRE properties, this is a portfolio that looks like $2 million to $4 million local strip centers, not large power centers or malls. Our largest single loan is less than $8 million and is fully leased with a conservative loan-to-value ratio and a strong investor group. The C&I portfolio reflects the comments from our market leaders that you saw on one of the earlier slides. Overall, generally positive. Slide 14 shows our healthcare book. As we've discussed in previous calls, this portfolio has an emphasis on the assisted living and skilled nursing side of the business. This too is a segment that has received significant focus associated with the virus, but thankfully, reports from our clients have been satisfactory with no known outbreaks in their facilities. Physicians too have continued to manage through the process and incorporate new protocols within their practices. On Slide 15, we continue to monitor our hotels. The portfolio as a whole has about a 57% loan-to-value ratio, and heading into this, we felt good about the underwriting of our portfolio and still feel that way today. Hotels have become a waiting game, as we know people will start traveling again, but we just don't know when yet. As a result, we are inclined to work with our clients in the space and provide additional deferrals as requested or needed. Reports on occupancy coming back have been mixed across our footprint. For the weekend in July 4, total Nashville MSA occupancy, not just our clients in the area, was at 38%. Our largest client has seen similar levels on their Nashville properties at around 32% versus 70% occupancy back in February. However, we have a larger plan to report to their property north of Atlanta being in the 80% range in June and July. So, that's great to hear. As a reminder, we have not been responsible for all of the construction cranes building downtown Nashville hotels. And then we have one property there, which is to an operator we trust with a high-quality national flag. Two of the four loans that I mentioned which have moved to substandard this quarter were hotels. Those are properties acquired in previous acquisitions which did not benefit from our standard underwriting bent toward higher equity, national flags, and strong operators. Frankly, the properties weren't performing too well before the pandemic. It just exacerbated their issues. Our teams are addressing appropriate exit strategies at this time. Lastly, also within this segment is an approximately $5 million property, which we discussed previously in the Memphis market and its exit is being addressed by our teams and has significant reserves. As we note, the summary on this page says it all. We continue to remain concerned about this space, and our teams are monitoring it heavily.

Thank you, Greg. I know we’ve covered a lot so far, so I'll give some brief color on CECL, margin, and mortgage, and then be happy to answer any questions after our prepared remarks. First, on CECL, we use a blend of the economic forecasts that Moody's put out in late June. With our markets generally open since early May, the pre-downturn strength of Tennessee as a whole, and the pre-downturn strength of Nashville, which is one of the hottest job markets in the country pre-COVID, we did not feel that applying 100% of baseline made sense for us at this point. The resulting economic input to that blend is laid out on Slide 19. The largest drivers of the increase this quarter were the CRE index and the unemployment rate, which both deteriorated from last quarter's forecast. These inputs and adjustments ultimately led to a 2.51% allowance for credit losses, which we believe is hopefully higher than any losses that we'll see over the cycle, but we don't mind carrying that given the levels of uncertainty going forward. Moving on to the margin, which as Chris mentioned, is facing some pressure due to both the balance sheet mix, as well as lower yielding assets. On the balance sheet mix, we’ve been trying to nail down how much of the increase in deposits is related to PPP funding, and other government stimulus programs to determine how much liquidity we can expect to retain. However, depositor’s cash is fluid and comes from many sources. Deposit balances of customers who received PPP funds from our origination are up $250 million from March to June. If you dig deeper and cap the increase by the amount of PPP funding that they received from us, that only accounts for $138 million of deposit growth. We will continue to stay short and liquid with these funds from excess deposits in the near term as we determine how the recent influx will behave. For some thoughts on our yields and costs, the contractual yield on loans, excluding PPP loans is 4.59% for the month of June, as opposed to 4.75% for the quarter. The cost of non-time interest bearing deposits in June was flat at 0.55% versus 0.56% for the quarter, and the cost of customer time deposits is 1.7% in June versus 1.78% for the quarter. We have cut rates on deposits about as much as we intend to cut them. So, to execute on bringing down our liability costs, we'll need to continue to work some of our higher-priced money market accounts down. As a reminder, we have $560 million in CDs with a weighted average cost of 1.75%, re-pricing in the second half of 2020. The weighted average rates of those products would roll into as currently 38 basis points. So, we have real opportunity on the time deposit front as well. Mortgage serves as a strong counterbalance to the decline in yields that the bank faced in the second quarter. The group benefited this quarter from strong origination volumes and capacity constraints in the industry that led to higher margins on loans in our pipeline, and ultimately on our gain on sale margins late in the quarter. These capacity constraints have extended the amount of time it takes for mortgages held for sale to be originated, and it has contributed to higher-than-typical margins. You probably noticed that in our mortgage banking revenue components, fair value changes were $34.8 million for the quarter, as opposed to $3.2 million in the first quarter, which is obviously significant. As you recall, mortgage revenue is recognized at the time of interest rate lock, and subsequently, the interest rate pipeline has been hedged. The gain on sale line item is a bit of a lagging indicator and our current fair value is more indicative of where our gain on sale margins came in during the month of June, and where we would expect gain on sale to be in the first half of Q3. Timing off it plays a part in determining the gain on sale, a fair value mark, and the large value percentage drop in the first quarter was indicative of market dislocation in the mortgage markets. Ultimately, with the help of Fed intervention, mortgage secondary markets returned to pre-COVID levels and led to wide margins and robust demand. We also have a continued focus on expense control. Our core banking expenses were slightly down from the first quarter. We completed the conversion of Farmers National Bank of Scottsdale on May 17, and we have finalized our plan reductions in force for that acquisition and should be at a full run rate of expense savings in the third quarter. With that, I will turn the call back over to Chris.

All right. Thanks, Michael, and thank you, Greg, for that color. So, we know that challenges are coming as we manage through economic uncertainty, the Franklin merger, and the continued impact of the pandemic. That being said, we executed well on our stated priorities and had a very strong performance this quarter. We're coming off a quarter with exceptionally strong earnings, and moving forward with our reinforced balance sheet positions us for success. Our complimentary business segments of the strong community bank and the strong mortgage segment also position us for success in the current low interest rate environment. Our credit portfolio is behaving normally today and we're braced for any headwinds in the coming quarters. Moving forward, we positioned ourselves for a good combination with Franklin Synergy, and we're excited about the closing of the transaction. Pandemic notwithstanding, we’re ready and excited for the balance of 2020. With that, I'd like to open it up for questions.

Ladies and gentlemen, we will now start the question-and-answer session. Our first question today comes from Stephen Scouten from Piper Sandler. Please proceed with your question.

Hey, guys. Good morning.

Good morning, Scouten.

Good morning.

So I wanted to get one point of clarification if I could, on the loans that are in deferral currently, I think if I heard you right from that, you know, $918 million, it sounded like $550 million were still in deferral, and then I think you said $138 million were – requested a second deferral. So ballpark, does that mean about $250 million have already fallen out of that $918 million in total initial deferrals? Is that close to correct there?

Yes, that's right. It's in the $240-ish, $250, something like that. Yes.

Okay. Great, great. And so, I know you said a lot of your customers felt like they were doing this on a proactive basis and probably wouldn't need a second deferral, but what's your feeling with the $250 million that came off? Maybe do you have any indications on what type of industry if there’s any concentrations there that glean any – give us any color as to how the overall market is performing there?

Yes, let's say it's across the board. There's no industry concentration, some of it’s actually consumer. And so, you've got a consumer piece of that and then not a lot of industry concentration. It'd be representative of the community bank that we are. I would say, it’s not exactly your question, but I think it may help a little bit. If you notice, 10% of the – if you notice, there was a bigger percentage of dollars than number of loans, and so, you do see some, where, you know, hotels, probably a good example, where they're probably going to request a second deferral, but they're going to have a higher balance. And so, you're going to see some smaller ones particularly that just don't ask for a second deferral and keep going. So we see some with more balance that ask, but it – we have seen no concentration. We know we do have – I wouldn't say this too, as we look at larger balances, we know we do have some that are still out there that we're already talking to about a second deferral. Again, hotels would be a good example where we may have a $25 million or $30 million credit, really comfortable with the collateral, really comfortable with the owner and really comfortable with the investors. Then, as Greg – again, as Greg said, it's just a matter of time, so.

You know, and one thing also, Chris, we had seen some customers go from a deferral that's complete deferral, principal and interest payments to just interest only now as well, so as they managed through this.

Okay, that’s very helpful. And it seems like you guys are pretty well ahead of the game from a reserve standpoint, at least to me here and should be in the top kind of decile, quartile maybe of your peers relative to reserves to loans. So can you talk a little bit more about that? I know you’ve laid out the CECL math in that one slide, but talk about the quantitative versus qualitative factors there? And then maybe also with that one larger credit, I think it was a $25 million relationship you mentioned, if that has specific reserves? And if so, if you have that number of specific reserves related to that credit?

Yes. So, I will take the first part of that, and then, I'm going to let Michael comment on CECL, Greg comment on the credit. And I would say this, Stephen, and look, CECL is still – while we've been talking about it for a long time, you know, we're two quarters in and I think we're all still learning some things about it. And one of the things that we've – we have probably, and this is my impression, and Michael may slap me on the hand here, but I do – you know and you may remember this, I did start my career in public accounting with Ernst & Young, so I do actually have an understanding and appreciation for the theory behind some of these things. And so – and we started pretty closely and had made as many – my perception is we haven't made as much in terms of qualitative adjustments at many of our peers because we look at the numbers, and we look at what comes out on ours, and we stick pretty close to what it says, even though – I would tell you we don't think we need all that, frankly. I mean, we – but, you know, bankers are often the last to know, and so, we don't actually think we need all that, but that’s what the number says, and so, we stick pretty close to the numbers because it's new, and I think there are a lot of folks out, a lot of banks, and I'm not being critical here, that are making a lot of qualitative adjustments, and probably more than we are, and I think that probably sticks us in the higher tier. So that's just some thoughts, but Michael, feel free to correct me if I’m wrong.

Yes, I think that's well said. I can't slap your hand since we're socially distanced, but – so and Stephen, from an overall CECL model perspective, Chris, was right. We did take the model output, but we adjusted our assumptions last quarter. We're at 100% baseline, and quite frankly, the economic forecast buried pretty loudly this quarter and from a perspective, deteriorated significantly depending on which perspective you are looking at. So, you know, our forecasting committee looked at that and we saw some green shoots in the economy. Improvement in the payroll number, improve retail spending, you know, during the quarter set our all-time record, earning up 17% on one print. And so, you know, that had us change kind of our forecasted assumptions a bit to a more positive outlook than a baseline or consensus. That being said, as you can tell on the slide, the numbers were still worse; GDP was worse; unemployment for 2020 and 2021 was higher. And as we mentioned, commercial real estate, which is a major driver in our model because of our construction and non-owner-operated exposure was worse. That all stood out in a higher number, and then, qualitatively, we looked at that; we looked at a Tennessee-only run and said, hey, we feel like we're in a better spot and we did make some adjustments down, but to Chris' point, it was not, you know, material. I think we had some more room there. We also got some really good feedback from our markets that said, you know, things are looking pretty decent, but, you know, we don't know. Greg mentioned government stimulus, a second wave of other factors that kind of go into that, and so, we're cautious, but we feel it's appropriate at this time. And like I said, you know, we don't plan on actually realizing $115 million in losses.

Yes, I'm sorry. Greg, do you want to comment there?

Yes, just – Stephen, on the – I think you had two other specific questions. That $25 million referenced on the slide, that is on our watch list at this point, and as far as the $5 million property you're asking about reserves, those reserves are in that 30% range.

Okay, so no – with that watch list credit, no reserves against that yet today?

Just our standard law.

Yes, just what gets out of the standard formula for all of the watch list.

Okay, perfect. That's all very helpful. Maybe if I could squeeze in one last one, I'm curious if you could comment on the Nashville residential real estate market, obviously, based on your mortgage results, which obviously is not Nashville only, but it seems like the environment is good, but with FSB’s concentration there and construction, I'm just curious how that's holding up?

Yes, sure. I will – Greg and I will both comment on that. Yes, so residential real estate has been, for me anyway, surprisingly strong nationally given again the fact we have a pandemic, but an even stronger locally than nationally if you take Nashville. Inventories are low, builders are active, and we see that reflected in our portfolio. So it's quite strong. Sales activity is strong. And so, it continues to go, especially at certain price points. And I'd say the mid-level price points are really, really strong. Greg?

Yes, I agree and I share those unexpected comments. They have performed well and I believe the interest rates contribute to that. You might find it interesting that for our 1-4 Family construction group focused in the Middle Tennessee area, which is led by a great leader, we have about $225 million in commitments and approximately $120 million in outstanding amounts. This is distributed across Davidson, Williamson, Rutherford, and Sumner Counties. Davidson represents 27%, Williamson 33%, and Rutherford 17%, and all of these markets are performing excellently. In that portfolio, specifications account for about 23%, and pre-sold properties make up 40% of the total. Overall, it has been very successful so far.

That's great, guys. Thanks so much for the color and congrats on a phenomenal quarter.

Thanks, Stephen.

And our next question comes from Catherine Mealor from KBW. Please go ahead with your question.

Thanks. Good morning.

Good morning, Catherine.

Good morning.

Just a couple of, many follow-ups, just, I want to confirm a couple of things. So you mentioned in your slide deck that you expect for the PPP loan to have $5.5 million of fee income. So are you bringing these revenues through spread income or through fees?

They are through spread income.

Okay, perfect, perfect. So, I just wanted to confirm that. And then, if we look at your reserve build slide, we see a pretty big jump in your construction. ACL, the loan category goes from 3.8% to 6.4%. Is the jump there really a – more of a factor of the CRE price index declining, as you mentioned before? Or is there anything specifically in that portfolio that you're more worried about today?

Catherine, it’s Michael. It's not credit-specific. It's more of the price index and CRE outlook.

Yes, it's not specific at all. It's actually totally driven by the outlook.

That's right.

Okay, great. And then, one NIM clarification, you mentioned that you expect Franklin to be a 10 basis points to 15 basis points impact on the core NIM. Is that excluding – you also talked about the FHLB brokered and non-core funding coming off by year-end, is that inclusive or exclusive of what you can do with the funding once the deal is closed?

Yes, that's exclusive of that. We've been expecting about a 10 basis point to 15 basis point impact on our margin, and we’re – as we're working through here, we're looking at things that we can do to lessen that impact, and this excess liquidity helps.

Okay, great. And then, I know I'm doing four questions. But my first two, I’m going to argue were little one. And so, I’m going to ask one more and then I’ll be done.

We don’t know how we would have to call at some point, but Catherine.

But – so my last one is just on Franklin, if you could just provide an update on how you're thinking about the loan mark and your ability to exit some of their non-core loans as with the original plan with that deal? Thanks so much.

Yes. So, loan market, if we think about, we’re sort of – we thought about it in two segments, you know, core portfolio, which – is and core portfolio is performing as expected. It’s very similar to our portfolio, perhaps a little more real estate-wise, but in terms of underwriting, it's similar to our portfolio. And so, we’d say it’s behaving not unlike ours and not unlike what you expect in this market. So, you know, the – some unknowns there, but we're – we'd say it wouldn't be much different than the outlook for our own portfolio, and the outlook has changed because the world is different, but not materially there. On the institutional portfolio, you know, which was – when we announced the transaction back in January, that's about $430 million, you know, that portfolio has been a little more volatile as we continue to monitor the valuations on that, and it will – it probably had dipped more earlier. We've seen some of that – some of the values on some of that come back. And so, I'd say, I don't know what the mark was, the mark would be bigger right now than what it was in January, but it's also a smaller portfolio. And so, as we have sort of written the waves up and down on that over the last three, four months, it's probably substantially higher than where it was in terms of valuation less or more. And I’d say we're optimistic, as I mentioned, they continue to work that portfolio. And so, there were a couple loans in there that they had identified that were taking some right now, and they've already done that, but most of what they're getting out of today, they're getting out of at par. And so, we continue to be optimistic and I can't give you too much more color on that because we're not sure where it will be when the transaction closes. Greg?

I'll tell you one thing, we could add; I don't have specifics, but in my conversations with them, you know, they – as you mentioned, they have a significant real estate portfolio and they've shared in the robust Middle Tennessee results and sales activity with their builders. I think on the PPP – excuse me, on the deferral program, they've had similar numbers as ours as far as how that has worked through. So, I echo your comments.

Yes, they're – they continue to really work that down and they had that strategy in place to work that down, we will work it down more quickly together than they would have been able to work it down on their own. Their Chief Credit Officer Eddie Maynard and Dave McDaniel are doing a really good job of just working – continuing to work that. So, it'll be even less when we close the transaction than it is today because they constantly get things that work in there.

Great, it’s really helpful. Thank you so much.

Thanks, Catherine.

Our next question comes from Brock Vandervliet from UBS. Please go ahead with your question.

Hey, good morning, guys.

Good morning.

You gave some color in your opening remarks and I can see the slide on the mortgage results. Just trying to get my head around, you know, what would happen this quarter with the gain on sale, and you know, as important, you know, what you're thinking kind of going forward whether the seasonality, you know, and kind of what we should look for in terms of the profitability of the mortgage area in the future?

Yes, and Michael has a very deep knowledge of the mortgage part of our business, and I’m going to let him comment on that, Brock. I will just reiterate, you know, great quarter; strong – as you said strong gain on sale, strong margins, strong production, and so we kind of hit on all cylinders. You want to specifically answer those, Mike?

Yes. Good morning, Brock. I think part of the variability, you know, and one reason we added to the fair value basis, it’s kind of demonstrated. Now, if you remember, at the end of the first quarter, we were a little uncertain as to what – you know what the world looked like, so we had a reserve. We adjusted some pull-through assumptions, and so that created some variability between the two quarters. But overall, you know, that number in our fair value mark is more indicative of where we've been executing. Some margins are materially higher than where they were in the first quarter, and quite frankly, historically, you know, so we expect them to remain elevated. Yes, at the same level, likely not – capacity comes in, we'll certainly see margins lower, but we expect a strong third quarter, you know, is it going to be the second quarter? I'm not going to say it. Our team can execute, but it's not likely September, it’s a slow – short business month, and it's just not likely that there will be an increase.

I'll say your acknowledge is clean commentary, but I'll say the seasonality factor does come in, Brock. You mentioned that it will come in September, which is usually a lower month for us. And so in the quarter, you know, we had three really great months all stacked together, and September is a lower month, and so, that'll be one impact of seasonality. And in the fourth quarter, of course, seasonality will really come into play.

Yes, there are several things that play, obviously, a factor in and capacity is certainly one of them. Industries, you know, add capacity right now and I guess when you start talking about these elevated margins, as Michael said, you know, we've had an opportunity across the industry to elevate the margins. Is that sustainable? Likely not, but we don't see it changing much in Q3, but as we get into that seasonality part of Q4, which would be traditional, we expect to see some of that come down.

Okay. And I can tell from the disclosure, your channels, you know, retail, correspondent, wholesale really haven't changed. Is there anything you're doing differently with respect to the products? Is this all vanilla conforming? Or are you doing any non-QM?

Yes, Brock, so we're in the consumer direct in retail space. We exited correspondent, wholesale reverse early in the middle of last year. So, but we're 100% QM product. We don't operate in non-QM space, reducing some costs, but primarily conforming we aim to sell every loan we originate in the mortgage division.

Got it. Okay, thanks for the color.

Thanks, Brock.

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Chris Holmes for any closing remarks.

All right. Well, thank you again, everybody, for joining us today. We really appreciate your support. We're grateful for a great quarter, and we look forward to the next one. Everybody have a great day. Thanks.

Ladies and gentlemen, with that we’ll conclude today's conference with you. Thank you for attending. You may now disconnect your lines.