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spk00: Good morning and welcome to Reliant Bancorp's third quarter 2020 earnings conference call. This morning's call is being recorded. Hosting the call today from Reliant Bancorp is Devan R. Jr., chairman and CEO. He is joined by Jerry Cooksey, Reliant Bancorp's chief financial officer, John Wilson, Reliant Bancorp's president, and Alan Mims, chief credit officer of Reliant Bank. Please note, Reliant Bank Corp's press release and this morning's presentation slides are available on the investor relations page of the company's website at www.reliantbank.com. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation. During this call, members of Reliant Bank Corp's management may make comments which constitute forward-looking statements within the meaning of and subject to the protections afforded by the federal securities laws. All forward-looking statements are subject to risk and uncertainties and other factors that may cause the actual results and the performance or achievements of Reliant Bancorp to differ materially from any results, performance, or achievements expressed or implied by such forward-looking statements. Many of such risk, uncertainties, and other factors are beyond Reliant Bancorp's ability to control or predict and listeners are cautioned not to place undue reliance on such forward-looking statements. Because such statements speak only as of the date they are made, a more detailed description of these and other risks, uncertainties, and other factors are contained in Reliant Bancorp's public filings with the Securities and Exchange Commission, including in its most recent annual report on Form 10-Q, 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K. Except as otherwise required by applicable law, Reliant Bank Corp. disclaims any obligation to update or revise any forward-looking statements made during this call, whether as a result of new information, future events, or otherwise. I would also refer you to page one of the presentation slides for disclaimers regarding forward-looking statements, non-GAAP financial measures, and other information. I would now like to turn the presentation over to Mr. Ard, Reliant Bank Corp.' 's Chairman and CEO.
spk04: Good morning and thanks for joining us for our third quarter earnings call. To begin, I'd like to take just a minute to remember all those who've been impacted by the COVID-19 pandemic. The challenges to our society and economy have been profound, but we're seeing encouraging signs of recovery, particularly in Middle Tennessee and Chattanooga. Our company remains strong and our dedicated, talented team is working hard to do what we can to contribute to the recovery efforts. Nashville has again shown its resiliency in continuing to be one of the more robust economies in the nation, and Clarksville's strength is evident in the steady employment afforded by Fort Campbell, Austin Peay University, and others. We're grateful to be a part of the economic story for each of our markets. Given the challenges we just mentioned, it's particularly rewarding to announce that our team produced another outstanding quarter. The results of the third quarter are summarized on page five of our presentation. The substantial synergies we anticipated from the two mergers completed earlier this year are being proven out, with revenue enhancements and cost savings realized as expected. Net interest income for the company in the third quarter was $30.5 million, a 1.9% increase over the second quarter of this year, and a 117% increase over the third quarter of 2019. The improvements versus the prior quarter are attributable to lower interest expense and funding costs, continued improvement in our deposit mix and higher interest income, offset slightly by some modest compression in our loan yields. Our loan yield included $3.9 million of purchase accounting accretion during the third quarter, down from $5.2 million in the second quarter, principally due to fewer loan payoffs. The net result of these changes was a full basis point decline and our gap net interest margin. But excluding purchase accounting accretion, our core net interest margin increased by 17 basis points to 3.98% in the third quarter, driven by attractive loan yields on new production, lower deposit costs, and an improved funding mix. Loan demand rebounded in the third quarter, with $260.3 million in new loan commitments closed during the quarter at a weighted average rate of 4.38%. Deposit growth also continued to remain strong with significant increases in money market and checking accounts. Non-interest-bearing deposits as a percent of total deposits grew to 21% at the end of the third quarter. Our cost of deposits declined 17 basis points in the third quarter. We do see additional opportunities to lower costs in the fourth quarter and beyond. Finally, asset quality remains sound. Once again, we had no net charge-offs in the quarter. and non-performing assets decreased 16% from the linked quarter. Our allowance for loan losses provided a 292% coverage of non-performing loans at quarter end. And the $1.5 million loan loss provision reflects what we believe is stabilization of the loan portfolio as the uncertainty surrounding risk factors related to the COVID-19 pandemic start to wane. We've seen a significant drop-off in requests for loan modifications as you'll hear later from our Chief Credit Officer, Alan Mims. These temporary pandemic relief efforts largely ended in the third quarter. While the extent of potential credit losses absent these relief efforts remains somewhat uncertain and likely will until the first half of 2021, we believe the allowance for loan losses adequately reflects our loss exposure. I'd now like to turn the call over to Jerry Cooksey, our Chief Financial Officer, for a detailed look at our financial results.
spk08: Thank you, Devan, and good morning. As Devan said, we had another very solid quarter, as you'll see as I take you through the numbers. Moving to the financial results table on page five of the earnings presentation, third quarter 2020 net income was $11.5 million, or 69 cents per diluted common share. Net income included three large non-core items that had a material effect on an overall excellent third quarter. First, purchase accounting accretion was $3.9 million for the quarter, with $985,000 of that attributable to early payoffs of acquired loans. You may note that the purchase accounting accretion for payoffs was well below the $2.5 million earned in the second quarter. As we noted in our second quarter earnings call, we had anticipated that payoffs would slow down in the third quarter. The contribution to earnings per share net of taxes was approximately 18 cents. Merger expenses were only $78,000 for the quarter as compared to $2.6 million in the second quarter. Third, provision expense was $1.5 million for the third quarter, substantially lower than the second quarter as the uncertainty around the risk factors related to the COVID-19 pandemic began to come into clearer focus. Pre-tax, pre-provision third quarter income for the bank segment was $15.9 million. Our calculation of pre-tax, pre-provision income for the bank segment and a comparison to prior periods is provided on page six of the earnings presentation. Let's move to page seven and look at the performance of our bank segment. As noted in the opening comments, the third quarter adjusted net interest margin was 3.98%, an increase of 17 basis points from the linked quarter. The margin expansion is the result of continued improvement in our deposit rates, which declined 17 basis points for the quarter, offset slightly by a decrease in the earning asset yield, principally in the loan portfolio where yields fell 34 basis points, mainly due to lower purchase accounting accretion from paid off loans. Our non-interest-bearing deposits continue to expand in the third quarter, reaching 21% of all deposits at September 30, 2020. Turning to page eight, our deposit portfolio continues to trend upward in the third quarter, following the mergers in the first and second quarter. Our deposit portfolio totals totaled $2.6 billion at September 30, 2020, and has grown at a CAGR of 38.1% since 2016. As shown on the right side of the page, we have also had continued success at reducing our use of wholesale deposits. Although they took higher at September 30, 2020, wholesale deposits remain at very modest levels overall. Let's move to page nine and look at our loan portfolio. Loans totaled $2.4 billion at September 30, 2020, an increase of $40.5 million over the length quarter, or a 7% annualized growth rate, which is a reflection of the rebounding economies in our market. Given the difficult environment presented by COVID-19, we are encouraged by this continued growth. Our robust pipeline and over $450 million in approved lines of credit sets the stage for further expansion of our market share in the coming quarters. Moving to the right side of the page, the yield on loans held for investment decreased 25 basis points to 5.73% for the third quarter. The decrease is due almost entirely to lower purchase accounting accretion from paid off loans, with core loan yields declining by only four basis points from the linked quarter. Turning to page 10, capital ratios continue to meet the definition of a well-capitalized financial institution, and available liquidity remains adequate to fund our company. Our capital ratios continue to improve despite the economic uncertainty caused by the pandemic, and we remain very comfortable with our capital, liquidity, and reserve levels. Finally, on page 11, we present several measures of shareholder value. As mentioned earlier in my comments, tangible book value per share improved in the third quarter following our two transactions earlier in 2020. We ended the third quarter at $14.65, a 4.9% increase from the link quarter due to strong net income and a link quarter AOCI increase of $1.4 million. We believe we can continue driving shareholder value through earnings and through building tangible book value. I will now turn the presentation over to Alan Mims, Chief Credit Officer, for his perspective on our loan portfolio and credit metrics.
spk03: Thanks, Jerry, and good morning. I'll begin my comments on page 12 of the presentation. We continue to report strong credit metrics Non-performing assets declined 15.9% during the quarter, and past views continue to be minimal and well-controlled. Similar to the second quarter, we further strengthened our allowance position through our normal provisioning process and with an eye to continuing concerns arising from the COVID-19 pandemic. We reported no net charge-offs for the quarter and $40 million, or 1.75%, in loan growth. Therefore, nearly the entire provision of $1.5 million was attributable to COVID-19 concerns. Notably, we continue to compute our allowance level based on the incurred loss methodology as we're not required to adopt CECL until 2023. While we have seen some improvement in national and local economic conditions, concerns remain with muted reopening plans and continued increases in virus cases reported. We actively monitor market conditions and will respond in our allowance methodology as appropriate. With this quarter's provision level, the allowance reached 84 basis points of total loans held for investment. It's important to note that purchase accounting rules require that acquired loan portfolios be valued at their fair value, which makes the allowance to loans ratio appear low. However, when unaccreted purchase discounts are considered, total reserve for credit loss becomes 1.64%, and 1.72% excluding PPP loans. At quarter end, we feel that we have adequately provided for possible losses. For informational purposes, we've included slides 14 and 15 for segments we view as having increased risk during the COVID-19 pandemic. We included details of our hospitality and retail CRE portfolios to highlight the strengths included in each. I would also like to update our continuing efforts to provide much needed assistance to our customers during this unprecedented time. As you will note on page 16 of the presentation, we provided initial payment relief to over 20% of our portfolio, either in principal deferment or full payment deferrals for up to a 90-day period. Those deferrals were granted liberally per regulatory guidance. For second modification requests, we performed a much more detailed level of due diligence to confirm a valid business need for those requests. As shown in the second column of page 16, we granted far fewer second modification requests and generally with less concessions, such as allowing the customer to go to interest payments rather than full deferrals or granting deferrals for only a month rather than for a 90-day period. For the second round of modification requests in particular, We've also been paying close attention to assess there's not been a material decline in borrowers' financial conditions. Importantly, through September 30th, we've had only one borrower downgraded as a result of those enhanced reviews. At quarter end, modified loans made up only 93 basis points of all loans. Finally, I'd like to update our PPP loan program. Throughout both rounds of funding for the program, we were able to serve 894 small businesses in our market with $83.3 million in funding. We've begun submission of select forgiveness requests to the SBA, but as with other banks, we've not yet been given decisions on those loans to date. The Treasury Department recently granted relief for some of our small business customers through streamlined or automatic forgiveness of loans of $50,000 or less, which covers 63% of our PPP loan customers. We remain hopeful that Congress will increase that relief to apply to all PPP loans of $150,000 or less. If passed, 86% of our PPP customers would qualify. Thank you. I'll now turn the presentation over to Devan for his final closing comments.
spk04: Thanks, Alan. I want to conclude my comments this morning by reviewing our 2020 strategy, which is found on page 17 of our presentation. As with most companies, it's been adapted to manage through the challenges presented by the COVID-19 pandemic. First, our board of directors and management team is firmly committed to making the right decisions to protect our employees, customers, communities, and shareholders. That also includes supporting our customers with loans based on sound underwriting, protecting our capital, and being proactive in reducing discretionary spending. Second, we believe current economic conditions will create opportunities for strategic acquisitions. although due diligence will be even more comprehensive and credit-focused. We've demonstrated our ability to identify, execute, and successfully integrate value-enhancing acquisitions, and we remain on the lookout for potential partners. With our size and the geographies we've targeted, we think we can be a great partner for banks who determine that it's time to pursue a sale as a way of creating value for their shareholders. Third, maintaining our track record of consistent, Organic earning asset growth is critical to our long-term success, and that comes from building lasting relationships with customers in our markets, not buying loans or participating in syndicated credits. We expect loan growth to be slower in 2020 than our prior forecast, but believe the relationships our bankers have built will continue to result in high-quality balance sheet growth in 2021. Our recent acquisitions of Community Bank & Trust and First Advantage Bank opened new markets for us, including the attractive Clarksville MSA. And those markets have performed well through this challenging period. Our legacy markets have also started to rebound, and we're seeing an increase in loan demand outside the PPP loan program. We expect that demand to accelerate as the national economy continues to recover. And as we look for additional growth opportunities, talent acquisition and retention remain top priorities. In June, we were named the top workplace by the Tennessean newspaper, one of only two local banks on the list, which we believe is a testament to the strong culture at our company. I'm very proud of how our employees have pulled together during the pandemic. They've risen to the challenge of servicing our customers and building relationships in a very tough environment. The team has shown strong adaptability and endurance through not just two mergers in the span of three months, but also in adopting new ways of doing business to respond to the challenges of COVID-19. The results show in the strong earnings, asset quality, capital, and liquidity levels reported in this presentation. Operator, that concludes my remarks this morning, and we're ready to take questions.
spk05: Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And the first question will come from Graham Dick with Piper Sandler. Please go ahead.
spk01: Hey guys, good morning. Morning, Graham. So I was just wanting to get some more color on the core NIM trends going forward, specifically on the deposit side of things. You guys have a level you'd like to work total deposit costs down to, and what do you think would be the driving forces of that, maybe CD repricing or continued work on customer accounts?
spk04: Yeah, Graham, I think it would certainly be a combination of the two. We do have some additional opportunities to cut deposit costs in the fourth quarter. We've still got some old promotional CDs that are rolling over, not nearly what we saw in the last couple of quarters. We've been kind of slow, I guess, and measured as well in reducing money market rates. I think we've got a little room to lower those again, especially with what's going on in the market. Wholesale funding rates now for us are in the 15 to 20 basis point range. So there's definitely some room for a little bit more kind of squeeze out of deposit costs as we go forward. I'd probably look at anything less than about 50 basis points in the interest-bearing deposit category as being a good place for us to be. So all in with some stable... stabilization in loan yields, and we think we've got room for another five basis points or so in our net interest margin in the fourth quarter.
spk01: Great. That's super helpful. And I guess moving on to credit, your old credit story has been really solid lately, two straight quarters of net recoveries and a fair amount of loss protection when you include that $19 million in remaining loan marks. Just want to know maybe how you're thinking about the timing of any charge-offs that might come as a result of COVID. Does this seem like a mid-21 event, and how do you factor in the level of government stimulus into that assumption?
spk03: Alan, you want to take that? Yeah. We don't have anything that has really kind of risen to the level of, I guess, overly concerning as far as any of the loans especially in any of our higher risk segments just due to COVID. I believe if there's going to be any kind of charge-offs or any kind of modifications to those loans from a principal standpoint, it would be sometime in 2021 if cases continue, reopening plans or the reopening that we've seen even continues to slow or backpedal from here, so I think it would be out some good time in 2021. I also think that should there continue to see these increasing cases that actually causes a pullback in the economy, I think there's going to have to be some additional stimulus, and I believe the stimulus would then support where our businesses have been just over the first round. And I think we would continue to see our losses pushed out or possibly not happen because of the additional funding that has been granted, especially through programs such as the PPP loan program.
spk01: Great. That's really helpful. That's all for me. I'll hop back into the queue and congrats on a great quarter. Thanks.
spk05: Thanks, Graham. The next question comes from Amar Sama with Raymond James. Please go ahead.
spk09: Good morning, Amar. Hey, hope you're all well.
spk05: Yes.
spk09: Good. Can we talk a little bit about the manufactured housing business? I think last time we spoke, the business seemed to be holding up relatively well earlier on in the pandemic. What are you hearing from your clients in these communities, and have you seen any signs of stress?
spk04: I'm going to let John Wilson take that one since manufactured housing reports up to him. But we continue to be very pleased with the performance of that whole group. They're real pros at what they do. We're continuing to see some good production up there with, frankly, with credit costs that are pretty much in line with what we're looking at the rest of the bank. John can probably expand a little bit on what we're hearing from customers in some of the different markets that we're in. John?
spk07: Yes, how are you today? Great, thank you. Good. So, in talking with our manufacturer housing group, the band's comments are spot on. They continue to see a very strong application process coming in from their dealers on this pull-through rate has continued to be strong. Loan yields have had some downward pressure, but not in the same ranges that we're seeing in the commercial banking side of it. And the addition or growth in the portfolio has been consistent on month-over-month basis there. So outlook for the remainder of the year, we're going into a quarter that generally they see some slowing down, whether it's weather or holidays. But their application pipeline is still very solid. And they're encouraged that going into 2021, it will continue to be a really viable option for individuals in the markets that they're serving to, you know, I guess, acquire their family homes. Very affordable and their credit history for the MH group has been what we view as below industry standards. They've had a real strong lower past due ratio, 30-day past dues, than most of their peers.
spk04: So, Ammar, I'll just add real quick, too. John mentioned the yields are down a little bit. We've obviously had to adjust pricing as the general rate scenario has moved down. Still, with the production we've got so far this quarter, we're running a little bit north of 8% on a weighted average basis. You know, very strong yield, low losses, low past dues. I mean, that's a business model that we really like, and we're giving them all the support we can.
spk09: Okay. That's really encouraging commentary. Thank you. Devan, maybe a bigger picture as we begin to hopefully exit this crisis, and you touched on this in your remarks a bit, You know, what is the appetite for M&A, and have you been actively having conversations with partners, and if so, how have those conversations evolved over the last few months?
spk04: I have had some, you know, fairly regular conversations, MR. It's been, you know, really it's been kind of more of a check-in right now. How are you doing? Sharing earnings releases, just making sure that, the lines in the right place in the water. I would say if you want to define active as something that is progressing towards getting a deal done, probably none of that is going on or has been going on for us. I do think there's still a good bit of internal focus with a lot of small banks and making sure that they're taking care of their customers, that they're not getting into trouble with loan losses themselves. So I would expect that to probably turn sometime in the fourth quarter, first quarter of next year. Don't know that you would see a deal announced out of us before the end of the first quarter. We still have, if you think about what we said is desirable for us in terms of geography and size, we still have a couple of dozen good prospects in that geographic territory. And when some of the dynamics that are causing all banks to kind of look at their business model start playing out, we expect to see more interest in terms of potential partners for us. So I would say first quarter late, maybe early second quarter, due diligence is going to be a real challenge. unless we can get in and do it the way we've done it in the past. But remote due diligence or, you know, doing it when you're not face-to-face and can't talk to the people is certainly going to be a challenge.
spk09: No, that makes sense. We'll stay tuned there. Thanks for taking my questions, guys. That's it for me. Congrats on what was a strong quarter. Thanks, Amar.
spk05: The next question will be from Kevin Fitzsimmons with D.A. Davidson. Please go ahead. Morning, Kevin.
spk02: Hey, Devan. How are you? I hope everyone's doing well this morning. Oh, absolutely. How about you? I'm exhausted, but trying to get through. It's Friday, so we're working through the first week of earnings. So I just want to clarify on the margin commentary. So In terms of when you mentioned possibly five basis points of sub-expansion, you're talking about the core margin, I assume the 398, and then curious how we should view the purchase accounting adjustments. I know it came down from the very elevated level last quarter, but it's still quite elevated from where it's been historically. So how should we look at the core margin and the PAA?
spk04: separately thanks yes so Kevin I mean yeah what I focus on is the core margin the gap margin is going to be it's probably going to bounce around for a little bit as you saw we had a good bit lower accretion in the third quarter than we did in the second quarter but with our you know with our core net interest margin which is the one that's going to last you know through the through the cycle we had a nice increase in the in the third quarter 398 is kind of what I look at as our real margin. A little bit difficult to say what the accretion number will be for the fourth quarter. My guess is we saw a decline in the third quarter. Probably see some in the fourth quarter. But even if you strip out the impact of the loan payoffs, we'll have what, Jerry? What would our core accretion number be? $500,000? I mean, assuming we didn't get any payoffs. It's a good bit lower, Kevin.
spk08: No, that's in the right range.
spk04: So kind of the core number for us in terms of accretion, Kevin, would be in that $400,000 to $500,000 range if we don't get paydowns or payoffs or anything like that.
spk02: Okay. So these past two quarters, we've really had a very accelerated pace of these paydowns, and it's It's a tough thing to forecast and model what that's going to be, but maybe it's reasonable to ladder that down and start working toward the scheduled base of the $500,000 or so. Okay.
spk04: Yeah, that's fair enough. But when I talk about, when our team talks about our net interest margin, you know, again, the only thing that matters to me is the core net interest margin. If we can improve that by another five or six basis points in the you know, have another good quarter in terms of loan growth. You know, you'll see that in our results. Got it.
spk02: Got it.
spk04: Okay.
spk02: And just wanted to clarify on loan growth and loan pipelines. It sounded like it was fairly positive, upbeat commentary on the pipelines at the rebounding. But at the same time, Devan, I thought you mentioned about growth was going to slow. I don't know if that was just seasonal related to the fourth quarter or that was going into 2021, what you meant there.
spk04: Yeah, so, you know, typically for us, Kevin, the fourth quarter and the first quarter are a little bit slow in terms of loan growth and new loan production. You know, we are a significant player in the one-to-four family segment. residential construction business here in Middle Tennessee. That has actually stayed very strong even as we've moved into the fourth quarter. But construction typically slows down in the fourth quarter, and then the first quarter is really kind of weather-related. But having said that, you look at what we produced in the third quarter, the $260 million, a good bit of that did not actually fund at the time it was closed. and so we expect to see some you know some funding out of that going forward same left over from the you know the second quarter we've got a significant amount of uh you know kind of closed-end construction loans that we'll be funding up over the next two to three quarters the the pipeline in our pipeline is is probably about as good as it's been the challenge we see and you know i could kind of take you back through the third quarter as well there's there's some significant projects in that pipeline that I think our customers, our borrowers are still trying to decide that we want to go ahead, may have a deal that's already approved but just didn't close, or do we want to wait until after the election or we get into the first quarter and see what the economy is doing. So the pandemic has made managing our pipeline and forecasting what loans are going to do a little bit more of a challenge. But we still feel like, based on everything I just mentioned, we're kind of in the 5% to 10% annualized range in the fourth quarter. And next year, a little early to tell, but we've been able to grow loans 15% plus in a very healthy economy. If we get back to that point, I'd see a little bit better loan growth. I'm just not expecting that level in 2021.
spk06: Hope that helps. Yes.
spk02: That's very helpful. Just perhaps one just clarifying question or a couple clarifying questions. The slide 16, the 0.93% of loans that there's been second modification requests. I just want to clarify that that's the remaining total of total modifications at this point, or are there still first period modifications that haven't expired yet?
spk03: I'll let Alan take that one, Kevin. Thank you, Evan. Now, the .93 is what is active right now. All of the first round modifications, we kept them short, so they were all at 90 days or less, and all of those that rolled off, the majority of that fairly substantial number has returned to the normal payment stream. We've had a few of those even post 930. We had one of the large hotel properties rolled off from its extension or its modification. That was a $13 million loan. They continue to roll off and expire. We have some of those that will go through mid to late November and then all of the second round modifications will have played out as well.
spk02: So if I could just ask, so how are you all treating these former or current modification loans in terms of your internal classification? So have you, some banks have talked about taking a chunk of hotels and credits and putting them to at least watch. category and some have moved into special mention and just wondering how as we start we start going deeper into the cycle I would expect to see more movement or migration into that traditional classification chain and just wondering how you guys are treating that now from our first and and really our second modification request second more so than first
spk03: We looked really hard at the financials that were presented. So from the first round, we didn't do any downgrades of any of those credits. In the second round, we looked at them financially, at the projects, at owners, guarantors, sponsors, et cetera, to really determine a business need for a secondary modification. And if we approved those, if the business still looked like it was viable, they had strong operating metrics going in, and they had seen some improvement, but it may not have gotten back to the level where they were able, say, to go back to a full payment schedule. Even with, say, hotels, we moved those into interest only. But we didn't downgrade those, but we looked at the ones that, as we were considering them, If those were really weaker financially going into it, then we made a downgrade on that. But we looked at those from a credit standpoint, not really just because we did a modification. Just due to the nature of the circumstances surrounding the pandemic, I don't believe that that's necessarily a cause for a downgrade. I think if we see these coming out and we continue to see deteriorated performance and challenges where they're not going to be able to meet debt service requirements, then I think that's when we have to make those decisions and those downgrades. We're watching those, for the most part, all the time. Especially with our hotel customers, we're staying pretty close contact with them getting updated star reports earnings reports from them and if you look at our separate slides for hospitality you'll see that we've got a fairly low leverage overall good debt service coverage as we went into the pandemic and a lot of those are getting back to 60% occupancy levels and in our discussions with them right now we're actually hearing that they're able to show some limited profitability, but profitability nonetheless even at levels where they're operating now, and I think that's indicative of our strong underwriting of those on the front end. And so that kind of has helped me form my opinion of whether we needed to downgrade just on a wholesale basis A lot of those just because of the earnings challenges that they've seen thus far. I think if we continue to see that as we move forward, then certainly we'll begin the process of downgrading and assessing our overall risk. The one that we did downgrade, a smaller loan, we downgraded because all of the star report that we got on that one indicated that all of its peer group had... had really returned to somewhat normal levels of occupancy and our customer was about half that level. So we think it was more of an operator issue than it was just the industry itself or that peer group. So we made that downgrade and they're still making their payments right now, by the way. You know, we think there's some additional risk in that one. The rest of them, at this time, we don't think it's worthy of a wholesale downgrade. So, you know, long answer to say we've really not done that to this point.
spk02: Okay. Thanks very much, guys. Appreciate it.
spk05: Thanks, Kevin. The next question will come from Fetty Strickland with Janie Montgomery Scott. Please go ahead.
spk08: Hey, good morning, guys. Good morning. So it was great to see the mortgage company reach profitability this quarter. Do you expect that to continue with the strong mortgage market? And what are you seeing in the mortgage pipeline going forward?
spk04: Yeah, it was gratifying to me, too, to see the profitability in the third quarter. You know, profitability for us in the third quarter is driven by a couple of different things, Teddy. One is this retail production. You know, we are in a kind of a boom period, I guess, for the mortgage business with rates where they are. So, refi activity has been really strong. I think in the third quarter, about 60% though, of our retail production was refi and the other 40% was new purchase money type mortgages. And the reason I think that's key is because Nashville's residential construction market has stayed very, very strong all year. So we would expect the refi activity to slow down as we continue in the current rate environment. But what you really want to do is you want to be able to put, you know, mortgage loans on the books that are, you know, that are purchased money that, you know, reflect really more of what's going on in the local economy. So that was a big plus, big increase in the third quarter in terms of both closings and sales out of the retail part of the portfolio. Probably the bigger story, though, in the third quarter for us was the correspondent channel. We had kind of gotten the sales had slowed down and backed up when the capital markets froze up earlier in the year. And as people and institutions have gone out looking for yield, those markets opened back up and we had some big sales out of the correspondent portfolio in the third quarter. I do think that will continue in the fourth quarter. I think retail will continue as well. I would expect another profit. in the fourth quarter, albeit it might be a little bit slower in terms of new volume. Going much further out after that, it's a little bit hard to say. It looks like our correspondent channel is doing well and will last well into the first, second quarters next year. But as everybody knows, the mortgage business has got some cyclicality to it. And depending on what the economy does, depending on what comes out of the election, we'll just have to see what impact that has on our mortgage business. But at this point, I'd say very positive on correspondent and positive on new business or purchase money mortgage lending into the first and second quarter next year.
spk08: Got it. Thanks, Devan. And I guess just one other question. So it sounds like you guys haven't necessarily seen forgiveness yet on the PPP loans, but Any idea – what are y'all's expectations going forward kind of into the fourth quarter in 2021 on just kind of percentage forgiveness? I know it's hard to tell with stuff bouncing – been bouncing around Congress for a couple months now on kind of a blanket forgiveness. But absent that, what are you guys thinking?
spk06: You want to take that, Alan?
spk03: Yeah. Okay. We've been kind of slow, Petty, in really kind of rolling that out. We've gone to our larger customers at this point, sent links, and we've had, I think, 12 forgiveness applications that have been completed, sent to SBA, and we've not gotten a decision on any of those yet. We are going to start moving more of that forgiveness piece into the really the 50,000 and up, we're still going to kind of hold on to the under 50s, or right now, the under 50s, and really start letting those move pretty quickly. But I think all of our forgiveness will start really kind of taking place sometime in next year, probably second, third quarter, when we see the numbers really start appreciably moving. All of that, if we were to get some additional simplification for $150,000 and below, I think you would see that that level run pretty quick, and that's a lot of our customer base, not quite as much of our dollar amount, but we still wait on some additional rules and that seems to be a moving target with this program overall. So we're hopeful that they'll do what we think is the right thing, which is approve the $150,000 and below so that those people can really worry about running their businesses rather than trying to gather the reams of paper that SBA and Treasury are looking for right now.
spk08: Got it. Thanks, Alan. So if we modeled maybe 5% or 10% in the fourth quarter, that would be conservative enough that, you know, it might be somewhere in the ballpark. Is that right?
spk03: That would probably so if we can get some decisions, but those have been sitting out there for a while, and we've gotten really no decisions from those as of yet. So, yeah. I wouldn't expect that SBA is going to ramp it up and really start doing a lot of stuff quickly based on what we've seen thus far.
spk08: Got it. Thanks so much for taking my questions, guys.
spk05: Thanks, Eddie. Once again, if you have a question, please press star then one. The next question will come from Stuart Lotz with KBW. Please go ahead. Morning, Stuart.
spk02: How's it going, Devan? Good, good. I guess most of my questions have been asked, but if we could turn to expenses pretty quickly. Jerry, it looks like the cost saves from the recent deals really came through this quarter at the bank level. How are you thinking about a run rate going into the fourth quarter? I'm calculating about $16.1 million. Is that Is there anything that's going to drive that a little bit higher in terms of seasonality around comp? Or is that a good way to think about the expenses?
spk08: Yeah, I think you're pretty well on track. We do have some seasonality, just like everybody does, where we're trying to true up certain expenses for year end. But we're tracking non-interest expense maybe up 2% for this quarter, fourth quarter versus third quarter, so it's gonna be relatively flat, just a little bit of an uptake, perhaps, based on our internal forecast.
spk02: Okay, and are all, so, you know, with the system conversion, most of the expenses, or the cost saves are already in that run rate, or do you anticipate any additional, you know, synergies in the fourth quarter?
spk08: Yeah, we still have a few contracts that we're trying to unwind, but like some data processing circuitry contracts, there are a couple of smaller vendors that you just couldn't cut them off until the fourth quarter. So we'll have a few additional savings on the contract side, but the vast majority of those have been cut off at this point.
spk02: Got it.
spk06: Hey, Stuart.
spk04: Yeah. Just real quick add on, you know, in our earnings release, we always show a segment report so you can look at the NIE both from the bank and from the mortgage company separately. And I think we'll probably come in fairly flat. Jerry mentioned 2%, somewhere between zero and 2% at the bank level. The mortgage NIA is a little bit harder to project because a lot of it's based on commissions that are earned. Those are going to be high when we're getting a lot of production and lower when we're not. Just keep that in mind. We look at it both ways, both at the bank level and at the mortgage level.
spk02: My question was just around the bank level. Great answer. No one has kind of a crystal ball of what the political landscape is going to look like. But as you guys go through your budget process and thinking about next year and the possibility of higher taxes, given your book of tax credits, how are you thinking about the possibility of a higher tax rate next year affecting that book of business given your tax rate is already pretty well below peers?
spk08: Yeah, so we have forecast just to see what the impact would be for tax rate increase. Really, I've modeled two different scenarios. One would be 28%, which I think would be a rather dramatic increase. And honestly, I don't necessarily believe that we're going to see this implemented in 2021. But, you know, better to be prepared should it happen. In the scenario of a 28% rate, we would see our income drop about 8.7%. If it's the more likely rate, at least in my opinion, 25%, that would be about a 4.97% drop in net income. Does that take into account, like, guess from you know from a tax credit standpoint would you pursue more strategies around tax credits or is that just kind of a static you're plugging in you know different that's static we get when you get into the strategy I think you know we've always been open to looking at different activities that might generate tax credit in fact we've had one relatively recently that we were taking a serious look at so it's definitely on the table at all times
spk02: That's super helpful. That does it for me. Thanks, guys.
spk05: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Devan Ard for any closing remarks.
spk04: Okay. I don't have any more remarks. I appreciate everybody joining us today and look forward to seeing you again in the first quarter. Feel free to call us if we can do anything for anybody that's online. Appreciate it. We'll call the meeting adjourned.
spk05: And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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