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spk02: Good morning, and welcome to FB Financial Corporation's third 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 Mati, Interim Chief Financial Officer, Greg Bowers, Chief Credit Officer, and Webb 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 Finance's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in listen-only mode. The call will be open for questions after the presentation. With that, I would like to turn the call over to Robert Hone, Director of Corporate Finance.
spk06: Thank you. During this presentation, FB Financial may make comments which constitute forward-looking statements under the Federal Securities Law. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and others is contained in FE Financial's periodic and current reports filed with the SEC, including FE Financial's most recent Form 10-K. Except as required by law, FE 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 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.
spk07: Thank you, Robert. Good morning, everybody. Thank you for joining us today. We appreciate your interest in FB Financial. I'm excited to update you on what I think is one of the strongest and most impactful quarters that FB Financial has had since I've been with the company. During the quarter first, we converted our consumer and online mobile banking platform in July, which really improved our customer online banking experience and our mobile experience. The new systems improved our capabilities and we've gotten excellent feedback from our customers on the new app and how smoothly that conversion went. Lifted a team in Memphis in July and added some very strong, well-known commercial relationship managers in that market. We anticipate some significant production over the next couple of quarters as they bring some of their long-standing clients over to First Bank. And we expect that momentum to really continue and gain steam over the course of 21. Third, we closed our Franklin merger. on August 15 and then hustled to get through the systems conversion less than two months later on October 12. From a strategic perspective, we feel that this positions us well to be Nashville's premier community bank and further entrenches us as Tennessee's premier community bank. Fourth, we raised $100 million of 4.5% subordinated notes at the end of August. That further protects our balance sheet and provides us dry powder for future organic growth and accretive M&A. Finally, we posted a record-breaking adjusted EPS of $1.46 per share. record-breaking adjusted earnings of $59.5 million and a very strong adjusted pre-tax, pre-provision return on average assets of 3.13%. Thank you to the teams that put so many sleepless nights towards accomplishing those milestones. To see how our associates have come together to embody our one team, one bank philosophy over the past few months has made me very proud of the people and the culture that we have here at FBK. As you may remember from past calls, we reordered our priorities back in March to number one, the health and safety of our customers and associates, number two, liquidity, number three, capital, number four, profitability, and fifth, growth. These priorities remain in place to ensure the strength of our balance sheet to position us to aggressively pursue organic growth and increasing M&A when the time is right. On the first of those, health and safety, we have had minimal cases of COVID across our employee base and we continue to emphasize our safety protocols as most of our associates have returned to the office. We've continued to protect our team and provide a safe environment for our customers while moving our operations back to near normal. Little priority number two, we built our liquidity position to 14.7% of tangible assets and have access to an additional $6.1 billion in contingent liquidity available to us. We're very comfortable with the company's liquidity position and access to liquidity, so we expect our own balance sheet liquidity position to come down over the next few quarters as we unwind some 9-4 funding that came over in the merger. On priority number three, our tangible common equity to tangible assets has increased to over 9%, and that's even with a balance sheet that's seen $843 million in organic deposit growth over the course of this year and still has $310 million in PPP loans on the books. Our total risk-based capital ratio is 15.9%, which is about as high as we've ever had. We also took on a larger C&D portfolio with the Franklin merger and on a combined basis managed to get that well under 100% of the regulatory guidance threshold this quarter, which is a year earlier than we had originally anticipated and that we had originally committed. We feel very strongly that our balance sheet is positioned well both to weather any economic issues that may arise and to take advantage of any opportunities that may present themselves in the future. So while I'm talking about capital, I'll speak to our credit a bit as well. Year to date, we've increased our allowance for credit losses by $153 million. Over that same period, we've experienced only $2 million in net charge-offs. Our ACL to loans held for investment excluding PPP loans is up to 2.66%. Our ACL to non-performing loans is 421%. We feel very good, maybe a little too good, about the protection that we have in place for our loan portfolio. Priority number four, profitability. We need to keep working to bring our cost deposits down, given the decline that we've seen on earning assets. That's been a focus and will remain a focus until we regain our peer-leading margin. However, year-to-date, mortgage has put up $81 million in pre-tax contribution when we went into the year, expecting about $10 to $15 million in pre-tax contributions. As a result, our adjusted PTPP ROAA has been over 3% each of the past two quarters, so I'd say we've gotten a pretty effective hedge on our margin in times of declining rates. For priority number five, growth, we continued the measured approach that we put in place back in 2019 when we started pumping the brakes on terms and rates that we felt were nonsensical We used this year to prune some of our weaker credits while focusing on deepening relationships with some of our best customers. With local economies across our footprint picking up, our regional presidents are seeing significant pickups and new opportunities this quarter and expect some real momentum as we head into 2021. On the topic of growth, the company grew about $3.7 billion in assets overnight in mid-August. We've included a slide in this quarter's deck that lays out just what bringing these two banks creates for us in the National NSA and how some of our assumptions have shifted from announcement to today. We're thrilled to have the top market share in Williamson County and the second market share in Rutherford County while being the top 10 in Davidson County. We continue to think that achieving critical mass in a market creates some synergies that leads to additional opportunities. From people perspective, at announcement, we thought that we were combining with some of the top flight players with this merger in our market. That became a bit clear. A bit more clear, after seven months that we were working together towards the close. Now that we've been working on the same team every day for a couple of months, I can definitively say that the talent is even better than expected. The company has a group of high performing individuals that is used to winning. With every new hire, whether organic or through a merger, we let each associate know that that they're joining the First Bank team, and they work for one of the elite performing community banks in the country. Our message is that our performance stacks up well against your competition. You should always be proud of your company. We believe that this message has resonated well with all of our teammates, including our new teammates, and we're excited to go out and tell that story in the markets. We still have some work to do to get things fully integrated and humming on all cylinders, but we've been really pleased at how things have gone so far. I'll let Michael walk you through all the gives and takes of the purchase accounting later, but a couple of points I want to focus your attention on from a financial perspective. First, the transaction ended up being accretive to tangible book value per share. With the pandemic and its impact on the loan mark, as we were evaluating the terms back in March, April, and May, we thought we might see some dilution. But ultimately, the purchase accounting swung back the other way due to the zero rate environment and the interest rate mark on the loan portfolio. Each of our three whole bank transactions that we've done since going public have been neutral or accretive to tangible book value per share. We'll do our best to continue that streak as we move forward. The second item is that we ultimately decided to classify the non-core institutional portfolio as assets held for sale. The Legacy Franklin team has done a tremendous job of working that portfolio and moving loans from that portfolio out of the bank since announcement. and we are examining some bulk sale options. That portfolio had about 263 million in principal balances as of 9-30. The credit quality of that portfolio is actually doing quite well, and there are some strong sponsors behind some of the private equity back loads in the portfolio. So we're hopeful that we will ultimately be able to realize better execution than our mark, and we don't feel any pressure to take any bottom feeder type bids that we may see on that portfolio. All of that said, I sit here and look at what we've accomplished this year, and I look at how our balance sheet is positioned, and I look at the demographics of our footprint now that we have closed the merger, and I can't help but think that our team has created an incredible balance of franchise and shareholder value while the world's been shut down. We're laser focused on getting Franklin integrated, and we'll enter 2021 firing on all cylinders and points to take advantage of opportunities. I'm going to turn the call over to Greg Bowers to talk about our role portfolio. Thanks, Chris. Good morning. We've spoken on previous calls about our asset quality and how it has continued to perform well, even in these unusual times. That continues to be our message for this quarter. From a strict credit metrics perspective, as you've seen in the release, we continue to report good numbers that speak for themselves, including trends associated with past dues, our watch list, classifieds, and non-performers. But I'll touch on a few important specific categories. On the deferral front, we've seen that move down from a high on a combined company basis of over 20% to roughly 6% at quarter end. As we've noted before, at the onset of this, we were proactive in reaching out to our customers and providing relief, which was a combination of our desire to help our customers, as well as risk management. Behind these numbers lies a few things for consideration and review. Initially, those that truly needed relief, the hardest hit, got deferrals. But remember that many who requested a deferral were in the category of, hey, we're doing fine, but with all this uncertainty, I'm going to seek a deferral out of conservatism and protecting against what might come next. So that was our report in the first quarter. Then as the second quarter came around, Those that were in the latter category went back to their pre-COVID plan and deferrals began to drop. Now here we are with the third quarter report, and I'm glad to say we continue to make progress in that regard. In summary, we are cautiously optimistic about the size of this portfolio continuing to reduce, but remain pragmatic that without a vaccine or continued stimulus, uncertainty regarding the ultimate outcome will remain the watchword. This is especially true within the hotel segment, which accounts for the largest single concentration within the deferral portfolio. Moving to slide 12, this provides an overview of the new combined portfolio as of quarter end, moving total loans up by roughly $2.7 billion with a merger with Franklin Synergy Bank. We are excited about the impact that this makes on our company. Chris has hit on this today and in previous presentations, but I think it is worthy to highlight some of the changes as we put these two portfolios together. First, let's clarify how we presented the portfolio so we're all on the same page. My comments will be about the loans held for investments, not the non-core institutional portfolio. I'm talking about the plain old relationship-based local market loan and deposit book, not the loans held for sale. With the merger, you will see that we remain a balanced and well-diversified company. An area that has trended up is within the percentage of the portfolio which is real estate based. No question about it, Franklin Synergy held a higher concentration than First Bank has historically, but it took advantage of the market, built upon relationships and expertise, and is extremely successful in this area. That real estate portfolio is primarily broken out into a commercial real estate piece and a residential real estate piece. The residential segment is your standard home building portfolio, lending to builders who are building single family homes in our market for sale. And if you're going to be in the home building business, we don't believe there are any better counties to be in than Williamson, Rutherford, and Davidson in Tennessee. The area's statistics continue to demonstrate strong growth and tight inventory levels. The legacy Franklin Synergies portfolio reflects that market. The focus was on dealing with the right people, the right subdivisions, assessing inventories and concentrations, and monitoring the construction process. You will also see that our ratio of construction and development as a percent of risk-based capital, as Chris already alluded to, is already below the 100% regulatory threshold, now stands at 90%, which is frankly quicker than we had expected. On the commercial real estate side, we see similarities within the two portfolios as well. Again, a focus on dealing with people that we know, borrowers with skin in the game, a local market focus, and owners willing to stand behind their deals. Generally, similar underwriting parameters with a bent toward a little higher dollar size in certain instances. We've already begun the steps of merging the two companies' credit processes and organizations. We'll spend a lot of time going forward melding the two cultures and continuing to assimilate the portfolios. Moving to the next slide, number 13. As we have done in the past, we began breaking out the portfolio along the lines of industries of concern. This first slide provides an overview with the next slides providing a little more granularity. Slide 14 references the retail portfolio. which is continuing to be something that we're all watching, but I would say that in general we continue to see good results. This has a significant C&I owner-occupied piece that has fared well, as has the CRE side. This is one of the segments that has moved up with the merger, and while in general we would say that the portfolios are similar, typically smaller retail strip centers, we have picked up an atypically larger loan in the $34 million range secured by a regional mall. That property, however, has not sought a deferral, is meeting its obligations, and actually generating positive cash flow. Occupancy is high, and its performance owes to leverage with low value in the mid 50% range. On slide 15, the hotel slide, this highlights one of my previous comments, that hotels represent the largest component of our deferrals. This portfolio consists of over 100 notes ranging from a few hundred thousand dollars to our largest single exposure, just under 26 million. We remain cautiously optimistic about the portfolio. I wish that we could report across the board step-ups in occupancy and performance, but at this point, it continues to be a mixed bag of results. We do remain positive about our original underwriting and the willingness of the borrowers to support their properties. As an example of that, without going into too much detail, we have entered into an agreement with one of our largest customers, which calls for them to bring all of the deferred interest current, establish a reserve account for the upcoming year, and in conjunction with this, we agreed to extend the maturity for roughly a year. Rather than requiring principal and interest, we did agree to an interest-only structure. On an overall basis, we believe this corroborates our position. that we're dealing with good properties and investors who have both the willingness and the wherewithal to stand behind these loans. Lastly, on this slide, I'd note that our portfolio is primarily limited-service and full-service properties, which, as you know, are models that can support the location at an overall lower occupancy rate compared to that of, say, a luxury property. Healthcare is our next slide, number 16. which accounts for 4.7% of the portfolio. Overall, not much to report here, generally good results. Anecdotally, we're hearing from the field that physician practices are steady after reopening, while assisted living and skilled nursing operators are having to continue to deal with the COVID protocols, which is impacting occupancies. Our restaurant exposure is reflected on slide number 17, accounting for just under 2% in total. As we've talked about before, we have a pretty diverse portfolio here. Concentrations moved up slightly with the merger, as did our largest single exposure, now at approximately $11 million to a good local operator and strong financial footings. But as with all markets, the limited service operators are actually finding the going easier than the full service, who continue to be challenged with constraints on seating capacity. So far so good on this portfolio as well, but one that we will continue to monitor closely. As noted in our prior quarter's presentations, not included within this segment's numbers, we did have a larger diversified food business operator whose performance was declining with a rating that had been moved to criticize in Q2. You will recall that we indicated that without an improvement, it would likely continue to decline. This roughly $25 million exposure has done just that and accounts for the majority of the pickup in our substandard assets for this quarter. Slide 18 highlights our other leisure portfolio, which represents a mix of industries accounting for just under 2% of the total. As we discussed before, some segments here have seen a benefit over the past few quarters as outdoor activities over the past few quarters, such as outdoor activities, while indoor venues have continued to struggle. Overall, we're continuing to see satisfactory performance within this segment, but we'll keep it under review as you would expect. Slide 19 breaks out transportation and warehousing, also under 2% of the total. Overall, continued good results within this segment, which has seen some industries actually improve within the current economic environment, such as trucking and warehousing. We do list some air travel and support business, but rest assured that does not include direct debt to any commercial airlines. In summary, asset quality remains good. Deferrals continue to come down, and we're excited about the merger and working with our new teammates and customers. It wouldn't be an update from a credit perspective, however, if we didn't remind us all that any enthusiasm we have at this point must continue to be tempered with the uncertainties related to the pandemic. With that, I'll turn it over to Michael. Thank you, Greg, and good morning, everyone. My prepared remarks today will focus on CECL and the financial impact of the Franklin merger, margin, and mortgage, and then I'll be available for the Q&A section as well. First, on CECL, there are two slides to focus on. Slide 20 lays out our economic forecast and resulting ACLs by each reporting category, and slide 21 shows the walk forward from June's ACL of $113 million to September's $184 million. I'll touch first on our forecast assumptions. We used a blend of the baseline forecast as well as more positive forecasts that Moody's put out in July. With that blend, we feel like we have pretty well captured our current expectations for our markets. As the rest of the country continued to reopen, Moody's did put out additional forecasts in August and September that were incrementally more positive than our July scenarios. But in that time between forecasts, we did not see noticeable changes in the economic activity in our markets. so we ultimately stuck with our July blend for the quarter. Looking at the ACL on our legacy portfolio, there were two primary drivers to the slight release that we saw in the quarter. The first was declining balances, and the second was the improving economic forecast that we used for Q3 as opposed to Q2. Together, these combined to produce approximately $7 million in ACL reversal this quarter. We had a little bit of heartburn about letting those reserves go, but we still feel very adequately reserved and continue to mostly stick with what our model tells us, at this point with a few qualitative adjustments. On the Franklin-related ACLs, there were a few components that I'll touch on. The first that I'll speak to is our non-purchase credit deteriorated allowance. As of September 30th, there were $1.7 billion in loans in that bucket and our CECL model told us they needed a 3.06% in ACLs. That resulted in provision expense of $52.8 million for the quarter. Given the unique nature of that provision, providing for the entire reserve on the portfolio in one quarter, we backed that out of our adjusted earnings. The second piece to this Franklin-related ACL was the purchase credit deteriorated ACL. As of September 30th, there was about $700 million in loans in that bucket, and our CECL model and qualitative factors led us to an ACL of 3.62%, or $24.8 million on that portfolio. That PCD ACL does not count towards Tier 2 capital, and was established at close, impacting goodwill rather than being expensed on day one. All told, we wound up with $184 million in ACL, or 2.66% of loans held for investment, excluding PPP. Segueing from our ACL to our provision expense, there were four main pieces to our expenses quarter. We have talked about two, which are legacy portfolio reserves relief and the FSB-related day one expense. The other two are related to provision for unfunded commitments. With the outlook for the economy continuing to improve from quarter to quarter, we had a relief on unfunded commitments of .9 million. On the FSB side, our assumptions on the economic environment led to a provision for unfunded commitments on day one of 10.4 million. Similar to our non-PCD provision, due to the unique nature of building this entire reserve on the portfolio in one quarter, we've also backed this out of our adjusted earnings. You can see the details of these four components on our provision expense on slide 21. Moving from CECL into an update on our purchase accounting, I'd first like to talk to the loan mark, and I think it's helpful to point you to the bottom of slide 8 as I'm talking through this. At announcement, we had assumed $110 million of total pre-tax impact of tangible common equity related to the loan mark, be that initial provisioning, day one PCD APL, or fair value marks. At close, we wound up with $101 million of impact. Eighty-eight million of that was related to ACL, which compared to 41 million estimated in announcement. To put that into relevant terms, FBK's initial adoption of CECL brought our legacy standalone ACL up from 31 million to 54 million. The economic forecast from that point on brought our ACL from 54 million to what would have been 106 million standalone this quarter, or roughly double what would have been expected on a standalone basis back in January. So that move from $41 million to $88 million has pretty well followed suit. The second piece of that $101 million is the mark on the non-strategic portfolio. At announcement, we'd assumed an 8% mark on that $430 million portfolio. At September 30th, we had a $22 million mark on the remaining $263 million, or 8.4%. In the past few months, we've seen a large portion of that portfolio either refinance at par or get sold to other banks close to par. We feel comfortable that the 8% level captures a liquidity mark there, and while we will be opportunistic if we get the right price on the portfolio, we feel no pressure to sell given the credit quality of the remaining loans. So between the ATL and the fair value mark on the non-core portfolio, we wound up with $112 million in credit marks versus $75 million assumed at the announcement, which feels pretty good to us. The last piece of the $101 million loan market are the fair value rate, liquidity, and credit marks. That number came into the $11 million premium versus the $35 million mark that we had assumed at announcement, so a $46 million swing. Obviously, the rate environment was a huge driver there. Checking in on other purchase accounting assumptions from announcement versus what we realized. Between the two banks, we've expensed around $30 million in merger charges to date versus $50 million that we'd expected at announcement. Despite it being a fourth quarter event, we realized most of the conversion-related expenses in the third quarter. We have five to 10 million left that we'd expect to see in the fourth quarter related to lingering contract terminations and conversion costs. We ended up adding nine net branches from the acquisition. Franklin had leased all of their locations except for their former headquarters location, which has become our operations hub. Our current plan is to find sub-tenants for these closed locations, so with the current real estate environment, it may take a little bit longer than originally anticipated to realize our full run rate of cost savings. That said, we feel very strongly that we'll hit our 30% cost of investment in early 2021. On Durban, we're clearly over $10 billion in assets today. There is a potential path to getting under $10 billion at 1231, but we are weighing the cost benefit of executing on that strategy. At this point, we are more likely than not to be over $10 billion at 1231 and would realize the loss in interchange revenue created in the second half of 2021, which is how we modeled the transaction and announcement. Finally, we calculate about 50 bits of tangible book value accretion as of today versus our neutral announcement. As Chris noted, each of our past three whole bank deals have been either accretive or neutral to tangible book value, and it feels pretty good to protect that value for our shareholders. Moving on to the margin, PPP and liquidity continues to weigh on the stated number. The third quarter is fairly messy given PPP, liquidity, and having Franklin on the books for only half the quarter. Contractual loan yields decreased 21 basis points to 4.36% from 4.5% in Q2. PPP loans had about 18 biffs of impact on the contractual yield this quarter. And for recent color, spot contractual rate on the portfolio was around 4.45% at 9.30. Excluding PPP loans, the contractual rate on the held for investment portfolio was around 4.6%. On the liability side, total deposit costs decreased nine basis points to 0.56% from 0.65% in Q2. The flat cost of deposits was 0.59% as of September 30th. There are 257 million in time deposits maturing in the fourth quarter with a weighted average cost of 1.77%. The sheet rates for those deposits would have them repriced approximately 40 basis points. For comparison, during the third quarter, we had a little under $290 million in CDs matured with a 1.84% average cost. This had a sheet rate of just under 40 bps, and we renewed about 65% of those at an average cost of just under 50 basis points. We have also identified $471 million in legacy Franklin deposit relationships at a contractual rate of 1.25% that we would consider not quite core customer relationships that we think will be leading the balance sheet this quarter. Moving to mortgage, the team produced another record quarter, so we'd like to congratulate their work in that regard, and our mortgage production continues to provide us with strong counterbalance to the NIM pressure that the bank is facing in this low rate environment. Similarly, to last quarter, the group continues to benefit from strong origination volumes and capacity constraints in the industry, producing atypical margins on loans in our pipeline and ultimately on our gain on sale margins as seen on slide 25. As we highlighted during our second quarter earnings call, the market-to-market value demonstrated in Q2 flowed to gain on sale in Q3, plus some execution pickup as expected. Our expectation is gain on sale will continue to be at elevated levels in Q4 due to our current market-to-market values, but we will have likely seen the peak for margins on new production. With that, I will turn the call back over to Chris. All right. Thank you, Michael, and thank you, Greg, for the color. To close, we're very proud of what we've accomplished this quarter. There are many challenges that still lay ahead for us, but we're excited to meet those and execute against those and capitalize on the opportunities. With that, I'd like to open the line up for questions, operator.
spk02: Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To draw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. And the first question comes from Catherine Mueller with KBW.
spk08: Thanks, good morning.
spk07: Good morning, Catherine.
spk08: Thanks for all of the color. I have a couple of, these are kind of nitty questions, and then maybe we'll go more big picture. But my first question is just on the outlook for core core bank expenses? If we strip out mortgage, it looks like your core bank expenses were just under $50 million. And so I know we have a partial quarter of Franklin, and then you've got the cost savings coming in. Is there any kind of visibility you can give to what that number looks like as we move into fourth quarter, and then can you growth rate for next year?
spk07: Yeah, and Kathryn, I don't know the morning graduate with us. I don't know exactly the dollars, but let me make a couple of comments. Our core bank expenses were pretty close to flat. I'll call our legacy core bank expenses pretty close to flat quarter over quarter. Our cost saves are coming in as expected, perhaps slightly earlier. in terms of, there's a couple things that move both ways. So our cost saves are coming in, I'd say generally as expected, maybe slightly better because we're getting some of them earlier and as we look out, we could actually beat that number sometime in 21. There are a couple of things that are moving in there. We've got some branch closures. We plan to do some subleasing. The sublease market is less attractive than it was when we made an announcement, so we're allowing that. That could drag on a little more than we expected, but even with all that, we think we'll meet or exceed that, we'd be very confident that we would meet the cost saves and likely exceed those. And so those two elements, mortgage will continue to remain elevated in the fourth quarter from an expense standpoint. That's purely variable expense related to volume. If you'll notice, our efficiency on that business continues to get better and better again because our variable expense and our revenue has gone up so much.
spk08: and so that that's kind of the moving pieces as we look at fourth core in any other clarification okay all right that's helpful that's helpful and then um other or other fees look like they were up a little bit more than expected this quarter is there anything kind of one time in that line or is that a good run rate
spk07: Nothing in other fees. Our loan fees were consistent, not particularly high. Our swap fees were... About $90. Yeah, so they were fairly consistent. And so I don't... No, we can...
spk08: review the detail and if there's something there we can certainly put that our debt okay and then maybe one one last one about if I may just to increase in classified assets this was just a with this mostly just due to the Franklin deal closing or was there any kind of migration in the classified from the legacy perspective but great Catherine's correct hours good morning hey good morning
spk07: I think you'll see some of that from the merger, but as I referenced, we did have one larger account that's about $25 million from Legacy First Bank that moved into substandard quarter. That's the one we've referenced, and you referenced in your comments, actually, is what it was referenced in the comments. I think it's actually referenced in the deck as well. Yes.
spk08: Okay, I apologize. I missed that. And what type of credit is that?
spk07: It's not a restaurant. Yeah, it's a diversified food service is what I call it.
spk08: Oh, you put that in your deck before. Got it. Okay.
spk07: That's right. That's right.
spk08: Got it. Okay. Got it. Got it. All right, great. Thank you so much. I'll pop out of the queue.
spk07: All righty. Thank you, Catherine.
spk02: Thank you. And the next question comes from Jennifer Denbar with Truist Securities.
spk01: Thank you. Good morning.
spk07: Good morning, Jennifer.
spk01: Can you remind us what kind of hit you would expect next year per quarter should you stay over $10 billion in assets in the fourth quarter?
spk07: Yeah, it's about $5 million, between $5 and $6 million is what it would – that's what that – I'll refrain. that's what that price control would cost us.
spk01: Um, and can you also update us on, um, the CFO search?
spk07: Uh, yes. Uh, uh, give you this update going, uh, well, uh, and, and, uh, uh, we would expect to conclude that, uh, before the end of the year. And so, uh, it's, uh, and we've been pleased with how that's going and interest in that kind of thing.
spk01: Okay. One more question. You mentioned a couple of times this environment might give you some opportunities in terms of acquisitions. Tell us about what you're interested in at this point and what kind of timing we'd be looking at, how long before you'd be comfortable doing another deal.
spk07: Yeah, it's a... I do want to be clear that as I see the bags beneath everybody's eyes sitting around the table that I'm sitting at, that we are thrilled with our position. But we're also really focused right now internally in making sure that our engine is hitting on all cylinders. Every acquisition that we've done has been really – It's been financially successful, as we highlighted. We don't talk about this as much, but it's actually been really strategically successful. And we say things about the Franklin merger and the folks and what we get in terms of critical mass and I would go back to prior to that same thing with the branch acquisition from Atlantic Capital and then you go back prior to that and I'd say the same thing about the transaction we did with Clayton. All those really strategic in operating leverage and so we're sitting here now and we really want to make sure our organic growth engine is still best, we think, in our markets and among our peers. And so that is absolutely job one, is making sure we get some things right. And that's going to take us a little more time. I suspect we'll get hit with opportunities, frankly, before we're ready for them. We wouldn't be disappointed if we didn't get an opportunity for success. three to six months, but I suspect we will and we'll have to make the same strategic decision that we always do. It would have to be one that was really strategic to us again. We wouldn't do one just because somebody threw us an opportunity. It's got to be one that's strategic for us. And so that's a lot of wind to say we're happy right now to continue to improve all of our operating metrics organically. And as we move into 21, we'll see what opportunities come our way is really kind of where we sit. I would say we're really happy, though, with our balance sheet and the strength of our balance sheet. And so financially, I think we sit in a great position.
spk02: Thanks so much.
spk07: Okay. Thanks, Jim.
spk02: Thank you. And the next question comes from Steven Scotton with Paper Sandler.
spk04: Hey, good morning, everyone.
spk07: Good morning, Steven.
spk04: One quick clarifier on the Durban impact, that $5 to $6 million, was that just a back half 21 number or is that an annual number?
spk07: That's an annual number, so we would expect, you know, it would go in base, assuming that We don't get under $10 billion. I'd say it'd be a real long shot, but because of some things we're doing to pay off some wholesale funding, it's not completely out of the question, but it's a long shot.
spk04: Great. And then on the food services credit there, that $25 million exposure, I guess one question around the reserves. Any specific reserve there? I can't remember if you noted that last quarter. And then if you could touch on the percentage of the reserve for Sea and Islands, it looks like about 66 basis points versus, you know, much higher in the other categories. So I'm wondering kind of what's different for you guys around that portfolio and what gives you confidence at that kind of lower percentage on that segment?
spk07: Yeah, good morning. This is Greg. I would just direct us to the CECL numbers that we've got in here as far as the ACL specific reserves just in general on those. That's how we measure that. Yeah, and what was the second hit? The CNI, as did Michael. So CNI, we did see some improvement there quarter over quarter. I think the stimulus has played into the performance in that and kind of the loss expectations. We'll see how that looks going forward, but that That segment's certainly been buoyed by some of that. Yeah.
spk04: More small business, maybe with PPP loans affiliated with those?
spk07: That's right. Yeah. On that first part, so nothing specific other than what our CECL calculation would cause us to, it would cause a little bit of an increase because of the rating and that kind of thing, but nothing specific other than that.
spk04: Okay, great. And then you guys have noted the possibilities to use the liquidity to pay off some higher cost fundings and some of the non-core items from FSB. Beyond that, I mean, it looks like you still have a lot of excess liquidity. So wondering how you think about additional initiatives there, whether it be reducing the securities book or anything else that might need a little bit more there on the liquidity side.
spk07: Yeah, there's a little bit of a dilemma there because we do pride ourselves on having a really strong funding side of our balance sheet that really helps our profitability. I think it really helps our stability and helps our margin, helps a lot of things. But today, there's some elevation in the deposit numbers that's not real because of the liquidity that the central bankers have made available to everybody because of PPP and the relief that folks have gotten. So that's all going on. At the same time, as we put these two balance sheets together, we're looking at some wholesale funding. So we're pretty rapidly trying to pay that down. And then we are thinking about the investment portfolio possibly. It could grow, but, of course, you're – your yields aren't great, and so you may have picked up a little bit from the tone. And this was pre-pandemic, but we had had in our markets, we had begun to see some things from both a credit perspective on the low side, but the credit perspective and a pricing perspective wasn't attractive to us. And so we've been We're absolutely 100% open for business, even growing the business, but probably at a slower pace than we have. I would expect to see us be more aggressive. Again, we've got the Franklin transaction behind us. We have a team of A players there, and I would expect us to see those folks be more aggressive as we move out into 21. And so that's another strategy.
spk04: Perfect. Super helpful. Maybe one last thing that are at a very high level. And I mean, I think someone said maybe you guys weren't necessarily seeing the economic reopening that was almost indicated by the improvement in the August Moody's numbers. But, you know, the flip side of that is I would think you're still seeing pretty strong population inflows. I mean, I think all of us are hearing about, you know, zero tax states, population growing in zero state tax, states with zero percent tax rates and
spk07: Migrations from the Northeast and so forth wondering just anecdotally if you can tell us what you're seeing in your markets And if you're seeing any you know significant influence from that phenomenon Yeah, we really are Steven good question and we get asked that very often especially from the investors in the in the Northeast that particularly in New York and other places, but we're seeing a Our job growth has just continued to be really strong in our markets, particularly Nashville would be the leader there. We're seeing technology companies make investments in new significant numbers of folks here. Amazon now has a big presence. And so we're really seeing the – we've seen those numbers begin to pick up again. GM just announced a really – a $2 billion investment in their assembly facility in Spring Hill, which is a Nashville suburb. All three of the state's assembly plants now are assembling electric vehicles. So again, folks are making big investments here. So it's actually quite good. And then I'll give you a couple from the just the residential side continues to almost defy logic. I mean it has been so remarkable. And then just pure anecdotally from somebody who lives here, the number of folks that are migrating in that you just hear are buying homes up. And when they're moving either from the West Coast, from Chicago, or from, you know, the New York area, New York, New Jersey, Connecticut, they're buying big homes here. And so we're seeing that. I mean, it's just a constant dinner party topic. So we're seeing a lot of it.
spk04: Got it. Got it. That's super helpful, Chris. Thanks so much, guys. Appreciate it, and congrats on a really good course.
spk07: Thank you. We appreciate it, Steve.
spk02: Thank you. And the next question comes from Kevin Fitzsimmons with the DA Davidson.
spk03: Hey, good morning, guys.
spk02: Good morning, Kevin.
spk03: Hey, Chris, given, you know, you've spent a lot of time on the reserve and appreciate all the detail, and given the strength of the ratio at this point and given that the calculation's led to some releases in this quarter. I mean, is it fair to say that barring no big changes in economic metrics or expectations that the bulk of the reserve build is behind you and you guys could potentially be growing organically and not necessarily adding to the reserve over the next few quarters?
spk07: Yeah, I think it's fair. We have... We've said... I think that's a pretty good characterization. And we've said fairly consistently that we have not varied too greatly from pretty straight numbers from our CECL calculations. And so, we haven't had undue influence of qualitative factors. And I understand different banks are doing that differently. That's been our approach. an allowance number that's the highest among our peers, I think. It's not the highest, it's certainly among the highest. And so, yeah, I think it's fair to say that even as we look at it, we go, wow, surely we can't need all that as what we look at in the cycle. we quickly follow that up with, hey, it could get worse than we expect. You know, there could be election turmoil. There could be all kinds of things that cause us to take a conservative approach. But I think you characterize it. We wouldn't, unless something really changed in the economic outlook, we wouldn't see it going up from here unless there was something that really changed.
spk03: Okay, great. That's very helpful. And on the institutional loan book from FSB, the decision to put that into help for sale, was that – I know originally that was the plan to look to sell that portfolio in short order, and then it was decided to step back and take some time. So was there a decision process on whether to keep that in – the help for investment portfolio or did the decision to go to help for sale imply that you saw more of a short-term opportunity to be able to sell those?
spk07: Yeah. Uh, good question. And, and, and, uh, And I'd start by telling you it's been a conversation as late as yesterday afternoon, and that's why it's in hell for sale. And you characterized it again. You characterized it exactly right. Initially, we just looked at it like we're going to sell that. Then as we went through, we looked at it as back in March and April, we're thinking, boy, will we be able to sell that? And then as we then moved into here lately, we've taken the approach of it's nice to have options with it and therefore we're letting some folks look at it. But as I said before, they're going to need to come strong because it's a performing portfolio. In today's world, it's got a yield on it that's north of 5%. And those aren't easy to find. And so, you know, we're not going to fire sell it. But if somebody comes strong, then we may let it go. And so it's a constant topic.
spk03: Okay, great. And one last one, I mean, understandably there's a number of moving parts in terms of what what you all are doing on the balance sheet and uh things things moving off things moving on so taking maybe a step back looking from a bigger picture can you give some uh top level expectations on what you could see the core net interest margin doing what you could see the reported net interest margin doing and let's say on a x ppp forgiveness basis over the next two to three quarters?
spk07: Thanks. Kevin, we appreciate the question, but really, we're just not prepared to do that right now because of exactly what you mentioned. There's been a lot of moving parts and pieces, and so we tried to put out some of the parts and pieces, but we didn't want to go beyond that at this point. As we move into the quarter and we do some investor meetings and we put out a deck and we may update the deck and put out some additional information later but at this point we don't want to go any further on what we expect on the margin next quarter or the quarter after okay totally understand alright thanks guys alright thank you and once again as a reminder please press star then one if you would like to ask a question
spk02: And our next question comes from Alex Lauer with J.P. Morgan.
spk05: Hi, good morning.
spk07: Good morning, Alex.
spk05: So following two consecutive quarters of record mortgage contribution, when you think about driving pre-provision net revenue growth in 2021, what are the main levers you're thinking of offsetting some potential mortgage headwinds? And can you drive positive growth in the upcoming year?
spk07: Yeah, so if you think about where we are from a pre-tax, pre-provision revenue number, and you look at the fact that we've had a pre-tax, pre-provision ROA of well north of three, and by the way, most of our peers are hoping to get north of two and falling short. We're looking at it as though we've had sort of a perfect storm of events that has created mortgage results that are not gonna be repeated. We'd be more shocked than anybody. Matter of fact, last quarter, I think we did said something like we wouldn't expect the same performance in the next quarter, but it was even better. And so nobody's more shocked about that than we are. So as we look at 2021, we're really focused on that core earnings of the bank. And so our core earnings of the mortgage, we got a huge refinance help in this year. You know, let's say that rates go at projected, we'd expect another quite strong year. Our previous, we have, I think, our previous record contribution for mortgage was $17 million on an annual basis. And we did 38 million this quarter, okay? And so, no, it would, I mean, look, we never say never, and we set high goals, and we have been pretty good at achieving them, but I would hate to set the X As a matter of fact, I don't want to set that expectation. We're going to be focused on how we grow the margin. We'll be focused on how we continue the momentum in mortgage understanding. The volumes are going to be less and the margins are going to be less is the way we see it. But we still expect to have... peer leading and industry leading profitability in terms of our return on capital and in terms of our growth numbers and in terms of our – and in terms of – well, really those two measures, in terms of our growth, in terms of our return on capital, and in terms of our EPS growth.
spk05: Thanks for that. Can you speak about the building momentum into 2021 from your regional president? How comfortable are you returning towards that prior long-term growth, long growth target of 10 to 12% and, or has that target changed with the Franklin merger? Thank you.
spk07: Um, that long-term target hasn't, hasn't changed. Uh, and, and, um, especially with the Franklin merger because they have the strongest markets with the strongest bankers. And so we certainly wouldn't want to put reins on those guys because they do a great job. And so we wouldn't see the Franklin merger impacting it, and we would see long-term that continuing to be a good, strong goal for us. I'd say the first half of 21. Right now, actually, we see some real momentum heading into 21. But I would also say that there's some economic uncertainty headed into the first half. And so that bears on our thinking a little bit as we're thinking about 21. But I actually, taking our markets and where we are, We see momentum heading into it. We see excitement among our people heading into it coming off of what's been a challenging year. And so we think that's a good long-term target. Not sure what it will be exactly the loan growth goal yet for 21, but we do see a lot of momentum.
spk05: Thanks for taking my questions.
spk07: Yeah, hey, Alex, the one other thing I would mention there is we do have a new team in Memphis, and so they're growing off a lower base, but they're really doing a great job of bringing some things on there in that market. So we've got some events like that, too, that should help whenever we look at the overall growth for the company. Got it. Thank you. All right.
spk02: Thank you. And that does conclude the question and answer session, so I would like to return the floor to Chris Holmes for any closing comments.
spk07: Thank you very much, everybody, for being on the call. Thanks for your questions, and we appreciate you joining us. Again, we're wrapping up a great quarter, and we're looking forward to the fourth. So, everybody, have a great day. Thanks.
spk02: Thank you. The conference has now concluded. Thank you for attending today's presentation. We now disconnect your line.
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