This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk11: Good morning and welcome to FB Financial Corporation's fourth 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 Matee, Chief Financial Officer, Greg Bowers, Chief Credit Officer, and Whib Evans, President of FB Ventures, who will be available during the question and answer session. Please note FB Financial's earnings release Supplemental financial information and this morning's presentation are available on the investor relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately one hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation. With that, I would like to turn the call over to Robert Hohen, Director of Corporate Finance. Please go ahead.
spk07: Thank you, Kate. 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 other risks is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation. whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of The most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FP 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.
spk06: All right. Thank you, Robert, and good morning. Thank you all for joining us this morning. We appreciate your interest, as always, in our company. And as we started thinking about the themes and preparing our comments for this quarter, it really struck me what a significant year 2020 was for our associates and our shareholders. Our team has actually had a really special year, and I want to give you a few facts. First, on our financials. Our adjusted net income for the year was $142 million. This represents adjusted EPS of $3.73 versus $2.83 per share last year for a 31.8% increase. This is an adjusted return on average assets of 1.68% and an adjusted return on tangible common equity of 19.1%. Those earnings also moved our tangible book value to $21.64 a share, growing over the prior year by nearly 17%. Yes, I said nearly 17%. Okay, remember that this growth came after we provided $108 million for loan losses and increased our allowance to 2.48% of loans, a figure that's among the highest of our peers. Our balance sheet is in excellent shape as we end 2020. In addition to the increase in our allowance, we grew from $6 billion in assets to $11 billion in assets during the year. But rather than this growth stressing our capital ratios, we maintained a tangible common equity to tangible assets ratio of 9.3%. And we increased our total risk-based capital from 12.2% to 15.2%, all this without an equity raise. Beyond the year's financial results, there were some other noteworthy accomplishments. Four years ago, our only relevant presence in an MSA was in Jackson, Tennessee, where we were third in market shares. Over the last four years, we've built top 10 market shares in Nashville, where we're sixth, by the way, with $4.8 billion in deposits, in Chattanooga, where we're fifth in market share, in Knoxville, where we're ninth, and in Bowling Green, where we're seventh. Those are markets that each have projected household income growth of over 8% over the next five years and projected population growth that's expected to be 4% and above. Finally, We continue to be a great place to work for our sessions. Of all the accomplishments of 2020, I personally might be the most proud of American Banker recognizing us as one of the top banks to work for for the first time this year. We've been recognized as a top workplace by the Tennessean, the largest newspaper here in Tennessee for the past five years, and it's nice to add national recognition as a superior workplace. Building on that culture, we've not had a single pandemic-related job elimination. And for those associates that were unable to perform their job due to branch closures, there was no reduction in pay. And I'd like to think there was never a concern on behalf of our associates that we would do things any other way. So with all that, I think we've had a monster 2020. And I want our team to take a minute to be proud of themselves for what they've accomplished. But after that minute, it's time for us to get back to work because we want to follow that monster year with a fantastic 2021 and 2022. We go into 2021 with a lot of excitement and optimism because we have a lot of levers that we can pull to build on last year's performance. First, the acquisitions get the headlines, but we're an organic growth company and we pride ourselves on outworking competitors and taking market share. With two acquisitions and COVID last year, we had plenty of distractions. Today, we're positioned very well for organic growth in Nashville, Knoxville, Chattanooga, Jackson, and Bowling Green, which are all very strong growth markets. We have excellent leadership in place, strong branch delivery networks, good market presence, and plenty of room to grow our market shares. In Memphis, we recently added a new market president and a team of relationship managers. In Florence and Huntsville, we have very little market share, so we can be very aggressive in getting after new business. Two other contributors, we expect the reliable, steady, slower growth, but higher margin contribution that we've come to rely on from our smaller community markets. And we'll be aggressive in recruiting and hiring additional relationship managers in every part of our footprint. With our culture, size, and momentum, there's not a better home for ambitious relationship managers. Across all our markets, we set aggressive targets internally, and in aggregate, we expect to deliver mid to high single-digit loan growth in 2021. We expect the first half of the year to be slower than the second half, but we also expect our markets to be among the best as economic activity increases during the year. Mortgage is another area of strength. Volumes and margins remain elevated, and our team will continue to capitalize on this favorable environment. We produced 23 million of adjusted pretax contribution last quarter in what's typically the slowest quarter for mortgage activity in the year. Our team has continued to perform well in January, so we expect the first quarter to be another strong one for mortgage. And then after that, we'll be back into the purchase season. that between continued low rates and the current housing start trends, we expect to be strong. As you all know, mortgage volumes are very, very difficult to forecast, and frankly, we've failed every time we've tried to do it. But we expect the first quarter to be similar to Q4 with a 70% to 100% of the previous quarter's contribution. And we expect continued strength in the second and third quarters, barring a significant change in the environment. On net interest margin, we continue to carry significant levels of liquidity, which weighs on the margin, but gives us some levers over the next couple of quarters to improve our funding costs. This past quarter, we did a good job of further purifying our balance sheet and reduced non-core funding by $462 million. between FHLB advances and wholesale type deposits. We have another $80 million or so to go in the first two quarters of the year. On the asset side, it's difficult to find higher yielding assets. Everybody knows. So we're still likely going to lose some yield on our contractual rate on loans, XPPP, as long as this rate environment continues. But we think that we still have some good progress that we can make on our deposit costs to offset that. On non-interest expense, we realized our cost savings on the Franklin merger earlier than expected. We may realize an additional $1 to $2 million in annual run rate cost savings in the second half of 2021, but we don't expect additional dramatic improvements in the first half of the year. With this larger balance sheet and our larger platform and conversion activities behind us though, we feel like we're in a good spot to focus on some operational improvements that should help reduce expense through productivity gains and avoiding future expenditures. I would expect low to mid single digit growth to our core bank expenses fourth quarter run rate in 2021. On credit, we feel as good about our portfolio as ever. The deferrals and PPP loans serve their purpose of putting our customers back on their feet, and we use this opportunity to improve the overall quality of our loan book. We did have one credit that we've been giving you updates on over the last few quarters that we decided to charge down in the fourth quarter. This accounted for 55 of our 58 basis points in net charge-offs, and we think we've nipped this one in the bud, and we got it behind us. I'm going to let Greg give you some more color, but I feel pretty good about where we stand, and I think 2021's metrics will bear that out. To recap all that, we achieved density and relevance in some exceptional markets, and we have local leadership teams in place that know how to capitalize on the resources that we provided for them. We've turned ourselves into an excellent option for talent that's looking to make a move. Our capital liquidity positions are better suited than ever to take advantage of good business opportunities. We have a very strong non-interest income engine that should continue to deliver outstanding results. We've already achieved our targeted cost savings on FSB, and we think that we have some expense control opportunities in front of us. The margin is compressed, but we think we're well positioned to continue driving down funding costs while deploying lower yielding liquidity into core loan growth. And credit shouldn't be a headwind for us in 2021. With a great 2020, and by the way, did I mention that we did grow tangible book value by almost 17% despite $108 million provision during the year? I want to make sure we got that one in there. We're poised for a fantastic future. And with that, I'm going to turn things over to our Chief Credit Officer, Mr. Bowers, for some detail on credit. All right. Thank you, Chris. I share your sense of optimism for 2021 and confidence in our overall asset quality. The integration of our portfolios has moved along well and I appreciate all of the hard work that our teams in the markets have done in this regard. It's no easy feat. We ask of them to coordinate the move of their customers on the new systems while ensuring great customer service at the same time. It's been remarkable. We say that asset quality remains positive overall and with one exception, We believe you will see that in our credit metrics today. That exception is a problem credit that, as Chris noted, we have called out with you for the past three quarters. Like most deals that get into trouble, information comes in over time and you assess it accordingly. Circumstances change, information gets updated, and things either get better or worse. And in this case, it just continued to decline. And just like any other deal in our portfolio, when problems surface, we address them swiftly and decisively and then take the appropriate steps. In this case, it was determined that appropriate steps included a charge down related to that loan. As a result, our net charge-offs for the fourth quarter were 58 basis points, or $10.4 million. Of this, $10.4 million, $9.9 million, or 55 of the 58 basis points in charge-offs were tied to that one credit. The balance was placed on non-accrual, which accounted for 17 basis points of our 88 basis points in non-performing loans. to loans held for investment this quarter. With that, we believe this loan is appropriately marked and rated, and our focus will continue to be on its resolution. With that one exception, the asset quality of the portfolio remains good, and as Michael will detail for us, significantly reserved. When I speak about the portfolio's quality, one measure of this is in our deferred portfolio. Deferrals are down to about $200 million, or 2.9% of the portfolio. That's a long way from the roughly $1.6 billion we had at one point. Note that when we say deferred, we are including all of the loans that remain on some form of modified payment schedule. We take comfort in noting that of that approximately $200 million, roughly 65% is making interest payments with about 35% of that portfolio on a full deferral. That is, we have allowed them to forego interest and principal. Hotels remain the hardest hit area within deferrals. No surprise there, making up 44% of the full deferrals, 41% of the interest only deferrals. We remain cautiously optimistic about the ultimate resolution for the remainder of that portfolio, and are very pleased to see that it has come down so far. The next area that we believe continues to reflect positively regarding our overall portfolio is in what we have called our industries of concern, and as you know, We've broken these out each quarter since the beginning of the pandemic. I think you'll share our sense of overall improvement here, too, as you review these slides. Specifically, we'll move to the hotels on slide 15, excuse me, and try to provide a little more color on that segment. Again, overall, we still feel confident in the underwriting of that book as a whole, but occupancy rates continue to be impacted by the pandemic. We continue to work with those customers that we believe are strong operators, and our customers continue to work with us in instances where we have asked for additional capital. We continue to be comforted by the quality of our properties, management teams, and investors, and we sleep well at night knowing that we have avoided projects in Nashville's core downtown tourist area, larger luxury properties, and conference center properties. I look at these figures specifically that the bulk of the deferrals are paying interest as a positive. Another segment that continues to struggle is restaurants, which we have on slide 16. That's due to the reduced capacity restrictions, especially in our metropolitan markets, and overall trends across the geographies. On the whole though, our group generally continues to be okay, but I'm not recommending that we give them an all clear flag. These shutdowns and reduced capacity limits are a challenge, and long-term prospects for the industry remain cloudy. We'll share with the group that this doesn't mean we haven't had very specific issues. For example, we have one customer with a full service operation that recently closed. However, the guarantors that were part of our underwriting are stepping up and performing on the debt. As we've also noted on the positive side, the quick service segment of the business has fared well. While overall we're cautious about restaurants, we would entertain opportunities for seasoned and well-capitalized operators in this segment if it made sense. Lastly, roughly 25% of our other leisure portfolio, slide 17, remains on deferral, so we have included that disclosure again this quarter. Rather than a systemic issue in that portfolio, It's a handful of loans that comprise roughly 90% of the deferred balances. Those are customers whose industries have remained impacted by the pandemic, but we feel good about our guarantors and collateral in each situation and think that the businesses should bounce back well once the vaccine is widely distributed. Our other industries of concern, for example, retail, healthcare, and transportation, continue to perform and have minimal remaining deferrals. You can see that we have reduced our disclosure on these industries this quarter and that's because simply in general, they've returned to normal and there's nothing significant to highlight. As always, if that changes, we'll reincorporate that into the deck for you. From an overall economic viewpoint with the exception of hospitality and entertainment, our footprint has continued to perform economically better than any of us would have guessed back in April. Moving on now to the institutional portfolio, our help for sale portfolio, it has been reduced down to roughly $215 million, down from $241 million at Q3. You will recall that announcement roughly a year ago now, that portfolio stood at approximately $430 million. We maintain our position of exiting this portfolio as soon as we can. We're willing to sell on a one-off or a bulk basis. But as we've said before, we're not willing to give away a performing portfolio. We'll continue to work on this from the sales side. And in the meantime, we'll just continue to do what we do with any loan and manage them on a one-on-one basis. So for the institutional portfolio, that help for sale portfolio, we see positive trends with it continuing to reduce, standing now at half where it was at announcement. It is appropriately marked. and our expectation is that it will reduce further from paydowns, one-off loan sales, or selling it in bulk. Regarding our outlook for 2021, we continue to be cautiously optimistic about trends throughout our market. The additional government stimulus should continue to be a welcome assist until the vaccine is successfully distributed and our markets move back to normal. The residential housing market in Nashville, and really across our entire footprint, is still performing very well and is aided. by continued influx of corporate relocations as our new neighbors arrive from California, New York, Chicago, and on to enjoy our lifestyle and business environment here in Tennessee.
spk04: And as loan growth continues to pick back up, we will remain vigilant in our underwriting.
spk06: Our mantra has been and will continue to be long-term profitable growth. So in summary, a few points to highlight. We're still in a pandemic and remain cautiously optimistic. We had a jump in charge-offs due to one specific deal. Deferrals are down. Industries of concern show levels of improvement. The help for sale portfolio continues to decline. Our overall credit metrics are stable, and our reserves are strong. With that, I'll turn things over to Michael. Thank you, Greg, and good morning everyone. My prepared remarks today will focus on margin, mortgage, CECL, and an update on the financial impact of the Franklin merger. Starting first with margin, we are seeing the declining contractual yields on loans beginning to slow. Excluding PPP loans, our December contractual yield was 4.48% compared to 4.53% for the fourth quarter and 4.54% in the third quarter. New originations in the fourth quarter of a weighted average rate of around 4.15%, so we would expect to continue to lose a few basis points per quarter on the contractual yield going forward. Meanwhile, our cost of interest-bearing deposits was around 59 basis points in December compared to 63 basis points for the quarter. We have $314 million in CDs coming due in the first quarter with a weighted average cost of around 151 basis points, and the sheet rates on those deposits are currently 41 basis points. In the second quarter, we have an additional $308 million with a current rate of 124 basis points and a rate sheet rate of about 40 basis points. So for the past two quarters, we've managed to keep around 60% of our maturing deposits at rates around 5 to 10 basis points above what the rate sheet would indicate, and we expect those trends to continue. We also believe that we have continued room to lower our cost of money market accounts. and think that next quarter we should be able to pretty much match reductions in our contractual loan rates with decline in our deposit costs. We also continue to make strong progress in paying down non-core deposits and borrowings. Last quarter we discussed $571 million in non-core funding from the Franklin merger that we felt would leave the balance sheet in the fourth quarter. We were successful in exiting $362 million of that $571 million, and the remaining $200 million in wholesale funding is a money market relationship that we ended up keeping, and we actually marked that at a cost of approximately 35 basis points. We expect to keep those on our balance sheet until the contractual obligation ends in 2024. In addition to the $362 million in Legacy Franklin funding, we paid down $100 million in Legacy First Bank Federal Home Loan Bank advances. As noted, the prepayment penalty on that Federal Home Loan Bank advance was around $4.5 million, and we had no federal home loan bank funding remaining on our balance sheet as of year end. Looking forward, we have an additional $60 million in non-core money market accounts that are scheduled to leave the balance sheet in the first quarter, and another $20 million expected to leave in April. We also intend to redeem Franklin's legacy subordinated debt, $40 million of which becomes callable after March 31st, and $20 million of which is callable after June 30th. Both of those charges are on the balance sheet and a mark cost of around 5%. Despite our progress in exiting non-core funding and some stabilizing trends in our core margin, excess liquidity does and will continue to weigh on our stated margin. Strong deposit growth led by seasonal increases in public funds of around $400 million drove our cash balances to increase 24% from the third to the fourth quarter. And cash now represents 12% of tangible assets. Our total on-balance sheet liquidity increased to 15.2% of tangible assets during the quarter. Based on historical seasonality with public funds, we anticipate that these deposits will begin to leave the balance sheet by early second quarter and continue to decline into the third quarter. On our loan growth, the field is very confident about what they'll be able to produce this year.
spk07: However, we have not seen the growth come back into our numbers yet, so we remain fairly conservative on how much growth we'll see in the first and second quarters.
spk06: We think that amid the high single-digit gap for the year is achievable, and we will keep you updated as the outlook changes. For the remaining liquidity, we intend to continue increasing our investment portfolios as we wait for organic loan growth engines to restart. Moving to mortgage, the team produced another strong quarter, which led to a record year for the division. Mortgage continues to provide the company with a counterbalance to NIM pressure that the bank has been facing. During the third quarter earnings call, we're discussing elevated gain on sales and a peak on margin for new production, and that is demonstrated on slide seven. As expected in the fourth quarter, there was a seasonal dip in volume and margin, but overall the group continues to benefit from elevated originations. We do expect some compression in 2021 as refinance volumes decline and bring capacity back to the marketplace, but this will somewhat be offset by the strength in the housing market and a very strong purchase market. we would like to congratulate the team for a record year and continued robust earnings. Additionally, on fee income, we received relief on the interchange reduction associated with crossing $10 billion in assets for the year. So that planned $3 million in reduced revenue that we'd expected in the second half of 2021 will now be delayed until 2022. On CECL, we went to a 100% baseline scenario. The change in the forecast paired with the slightly changing mix in our loan portfolio was responsible for approximately $17 million in reserve relief. In order to adjust for what our APL committee determined was too little of a model of allowance on our CNI portfolio, we adjusted our qualitative factors on the CNIP, which resulted in approximately $8 million in additional allowance on that portfolio, offsetting some of the model decline in reserves. Those, along with a few other moving parts, including charge-offs, resulted in the net $3 million release that you saw in our provision expense this quarter. As the vaccine is more broadly distributed and the economic forecast continues to improve, we believe that it is likely that we'll see further reserve releases over the coming quarters. The extent of those releases will depend heavily on how our outlook for our local economy changes.
spk07: Finally, I'll finish with an update on the purchase accounting related to our Franklin financial merger.
spk06: We experienced an additional $9.5 million in merger charges in the quarter. While we could have an additional $2 to $3 million in charges in the first quarter, all significant merger expenses are now behind us, and you should see a relatively clean non-interest expense line going forward. We also saw an increase of goodwill of $10.7 million, but the majority of the increase related to the new mark on the $200 million in non-core money market funding that I referenced earlier. With these merger charges and additional goodwill, we estimate that the transaction wound up being roughly neutral to tangible book value per share. Spending a second on cost savings, I would point you to the other non-interest expense line item in our banking segment income statement disclosure on page 13 of the financial supplement. This quarter, there's the $4.5 million FHLB prepayment penalty embedded in that line item. Excluding that, the banking segment, other non-interest expenses, $52.9 million with our first full quarter of Franklin included. This is about $12.5 million more than we were running prior to the Franklin second quarter of 2020 and indicates we've already hit our 30% cost savings target on the Franklin Centerview merger. So, those are some details on all the various moving pieces, but the end result was, as it has been for the past few quarters for us, exceptionally strong profitability with adjusted pre-tax, pre-provision return on average assets of 2.43% and adjusted return on average assets of 1.95%. We expect to remain an elite financial performer and we look forward to updating you over the coming quarter. Alright, thanks Greg and Michael for that call. I'd like to quickly discuss a few other changes that we announced during the quarter and then I'll open the line up for questions. First, we removed the interim tag from Michael's title. We had many applicants interested in the position, including several good friends of the company. For that reason, we hired an outside advisor to take us through an objective process, and Michael overwhelmingly proved to be the right person to be our CFO. Michael is a rising star in the industry. He has spent nine years with the bank and has been extremely impressive in each role that he's had with us. My only regret is that because of COVID, many of you haven't been able to spend any time with him. As soon as we can safely travel, we'll rectify that, and you'll see why we are excited about our team and our direction. We look forward to his leadership elevating the finance function to a new level for us. Next, Jim Ayers has stepped away from the chairman's role in the company. Jim has reached a point in life where he is enjoying the fruits of his labor, and it's well earned. Jim will continue to be a member of our board, and he'll continue to be a very significant presence at First Bank. We look forward to his continued valuable counsel. His continued support is our largest shareholder, and to him, continuing to be the bank's most passionate advocate for the bank in our communities. Replacing Jim as chairman is Stuart McWhirter. Stuart's one of our independent board members, and he was a member of the board for 12 years prior to stepping away to become Tennessee's commissioner of finance and administration in 2018. And he rejoined the board recently. late last year. He's been a very successful investor in his own right. He had experience on other public company boards and we look forward to his experience and guidance as he assumes the role of chairman of our board. So to close, our team delivered phenomenal results in 2020. More importantly though, we've prepared a runway for the next two years. Our team has a mandate to go forth and dominate and we're eager to share how well they execute on that plan in the coming quarters. With that, I'd like to open it up to questions.
spk11: 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 are using a speaker phone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then 2. Our first question is from Catherine Miller of KBW. Please go ahead. Thanks, good morning.
spk06: Good morning, Catherine.
spk10: I just wanted to follow up on one comment that you made on Durban. I think I overheard you say, Michael, that you have been granted a waiver on Durban for this year. I just wanted to see if you could talk a little bit about how that happened, because it looks like you're still over $10 billion in assets. Thanks.
spk06: Yeah, thanks, Catherine. There was some regulatory guidance that came out late last year that gave some relief because of asset kind of inflation due to COVID. And, you know, we had a path to being under $10 billion going into the end of the year.
spk07: And so we worked with our regulators very closely and walked through that. And so they did end up providing us relief, even though we're still over the $10 billion mark.
spk06: Yeah, and Kevin, I'll give just a slight bit of color on that because we did some real study and counsels and outside parties on that and had some conversations with our regulatory agencies. And if you go back to when we announced the deal in January of 20, we even laid the thoughts back then of the fact that we very well may because we knew that there would be some shrinking of the balance sheet because of wholesale funding and some other things. And so we felt like we had a path even then to be under $10 billion at the end of 2020. And then comes COVID. Then comes, you know, PPP. Then comes all the funding. And so balance sheets are elevated or sort of high for all the banks. a uh announcement by agencies that they would provide some relief uh on on those facing asset thresholds including uh this one um and so because we were in a little bit of an unusual circumstances we had some we had some dialogue there and it it it looks like that that uh that we do qualify we We'd have to actually be excluded from the exemption, as I understand it, and it looks like we will not be excluded.
spk10: Okay, great. Great clarification. And then can you just remind us your thoughts on your outlook for accretable yield? I know that there's a lot of moving parts with that, just given the change in the loan marks on the Franklin deal. And so it looks like this quarter accretable yield was very low. Is that still your expectation for 2021? Thanks.
spk06: Yeah, that is our expectation. It's going to continue to be quite low in terms of the accretion impact on our yields. The way that I look at it, the way I talk about it internally, it's a fairly purified number at this point. Accretion can really give you some artificial confidence in your margin. again, the way we look at it. So when you boil it down, yes, most of that is out, and if we roll forward to the next few quarters, it's going to continue that way is what we expect.
spk10: And given some of the movements on the interest rate marks, is there a period where it could be actually negative?
spk04: I don't think so.
spk10: More than amortization?
spk06: No, I don't think so. It's not impossible, but it's not likely.
spk10: Got it. Okay. All right. Thanks for the call. Great quarter.
spk04: Thanks, Scott. Thank you.
spk11: The next question is from Stephen Scouten of Piper Sandler. Please go ahead.
spk00: Hey, good morning, everyone. Good morning, Stephen. Hope you're well. I'm doing very well. Thank you. So I'm curious, maybe... First and foremost, if you guys have given kind of any guidance around where you think the loan loss reserve could eventually normalize in a CECL world. I mean, obviously, there's more noise in yours than maybe some of your other peers, given the FSB acquisition. And the absolute level is still extremely high. So I'm just wondering how you're thinking about that, assuming, of course, that kind of the economic improvements and vaccine trends we've seen continue.
spk06: Yeah, so I'm going to comment first, Steve, and mine are going to be much more global. And Michael will comment too because I agree with what you're saying. I mean, certainly it looks high relative to peers. But trust us, we have a very defined process that we've laid out with – both consultants and outside auditors, and so we have a lot of dialogue around it. And so it is, it does, so we agree it does appear high. And I am on record saying, but I want to be careful in making sure I say this in the right way, I do not think that we'll have that level of losses by a long shot. And I think every single CEO whose calls you've listened to would probably say the same thing based on our experience thus far with CECL. But, you know, we're following a process. And so, you know, as you can see in this quarter, it told us we need some release. You know, we're not going to be surprised if it tells us that, you know, some more headed forward. But we haven't. You know, I have heard actually people that I have great respect for, other CEOs, some other CEOs talk about, you know, maybe we'd like to keep it around 2% or we'd like to keep it around X percent or whatever. We're shying away from that. We're just following the process and seeing where it takes us at this point. As we get more and more confident quarter by quarter, we'll probably get, again, I've said this before too, we'll probably – exercise a little more qualitative input than we have been. But that's kind of where we are today.
spk07: Yeah, Chris, I think you hit on it really well.
spk06: There's not a whole lot to add other than, you know, as the economy improves, we get some more stimulus. I think you can see opportunities that there's opportunities for relief. But, you know, as Chris mentioned, And like we called out, as we look at certain buckets, CNI, for instance, that's where we felt like it was predicted to maybe increase from our model results, whereas construction and CRE, we came down because of the outlook improved in the economy and in the commercial real estate space.
spk07: We're taking it month by month, quarter by quarter, and just going through the process.
spk06: And I think that there will be opportunity in an improved economy to see some releases, assuming that we continue to see COVID abate.
spk00: Yep. Nope. That all makes a lot of sense. And I guess maybe a follow-up to that is, at the end of the day, in my view, it's all capital. You're putting it in a different bucket. But let's say it moves back into maybe core capital, if you will. How do you think about share repurchases? Because even apart from loan loss reserve releasing, as I see it, you should build capital internally at a very rapid pace.
spk06: Yeah, I agree with everything you just said. We kind of look at it the same way. It's almost like it's capital. And so I like the way you look at it. and we view share purchases as one option on the table for managing our capital uh and so we we uh it's something that we keep on in the forefront of our mind especially at this now because you're exactly right um the good news is we're accumulating capital at a really rapid pace and i think that's Good news, I don't know if I mentioned, but our tangible book value went up by almost 17% last year. And so we are accumulating capital at a rapid pace, and so it's a hot topic of conversation internally on exactly what we do with all that. By the way, it's not a bad problem to have.
spk00: No, definitely not. And maybe just one last for me. I know, Chris, you guys were talking – at the start of the call, mostly about organic growth opportunities, which I think is great. But I'm just wondering, given the success of this FSB deal and getting the cost saved out sooner than expected, I mean, it really shines a light on y'all's capabilities there. So do you think more about M&A sooner than we maybe would have thought previously, given the success here and what seems like it'll be a pretty active environment?
spk04: Yeah, we...
spk06: It's a fair question and one that we face often. We're watching the environment, but it's not something that we feel compelled to jump into. The things that we've done have been, again, in my comments, I said the acquisitions get all the headlines. and ours have gotten some headlines, but they've actually been very strategic. They've all been in footprint, and we have all had an eye on operating leverage on every time. Every one we've done, we've had a keen eye on operating leverage. And so, you know, it's an option, but it's one that we'll be pretty restrained on, and we... We are really excited about some of the things internally that are going to improve our operation, improve our organic growth capability, and improve our customer experience. And those things, again, those aren't the things that grab the headlines. We're really focused on those things. And so we'll be available but cautious, I guess, is the way I put it. Great. Makes sense.
spk00: Well, congrats on a really good quarter and a great year.
spk06: All right. Thanks so much, Damon. Really appreciate it.
spk11: The next question is from Matt Olney of Stevens. Please go ahead.
spk01: Hey, great. Good morning, guys. Morning, Matt. Hey, I want to circle back on the operating expenses and want to make sure I appreciate what's going on here. It sounds like you already received a the cost saves from the Franklin deal, but there's a chance you could get additional savings perhaps in the back half of 2021. I'd love to hear more about what drove the accelerated recognition of some of those cost savings, and then secondly, the guidance of the low to mid single digits. I assume that's based off the core number in the fourth quarter of $52.9 million. Did I get that right?
spk06: You did get that right. You did get that right. And let's see. So, yeah, you got that right. And that was the second part of the question, first part of the question. The one to two million in the second half of the year. Yeah, our thinking there, and I'm sorry, you said also that we may have recognized the expenses a little faster. And so, again, remember 2020 was recognized being able to get the expenses out a little faster. in 2020, in the year of the pandemic, and we looked at it and that during 2020, if we could go ahead and get the systems conversion done, it was probably a really good time to do that. It was a hard time to do that, but the world was kind of standing still, and so if we could If we could make all that happen while the world's standing still, we thought we'd be right where we are with a really good runway into 2021. So that was our intent. And so we worked really hard. So the previous question from Steven, when he was talking about, hey, man, you guys look like you're all ready. You ready to jump in and do another acquisition? I can't tell you how hard the team worked in 2020. And it'd be easy for your executive team to sit here and go, hey, wow, let's do that again. Well, it's just not that easy. But you're exactly right. Both of you are exactly right. We worked extraordinarily hard to get it done. And so we did get some expense out earlier than we modeled on the front end, which is good for all of the shareholders and everybody. Uh, and so we think we're pretty good for the next few quarters. We may have an opportunity as we get some more efficiency, uh, to, to ring a little bit out at the end, because we, we, when we put those targets out there and we'd like to beat them and we're, we kind of equaled it at this point, but we won't do at some point in 2021, uh, do even better than we modeled. And so that's, that's the reason I say, we're not, we're not anxious to jump back into something. on the acquisition front. We never say never, but it's not something we're out searching for and that we've said what we said about the expense side. Yeah, and Matt, Michael, just to layer into that a little bit, the back half saved, you know, one of the challenges, right, with COVID is office space, and so we have some leases that we think will exit later in the year that can help with some of that back half saved. And then the single-digit growth in expenses, low single-digit growth. Really, I mean, we assume the world's going to open back up. You know, Chris mentioned travel a little bit. You know, we look forward to being back in front of our customers, our clients, and building our business. And then, you know, as we've gone over $10 billion and Chris mentioned all the things that maybe don't get the headlines, you know, some of that is we'll have some internal investments that they can lead to some expense growth. Again, with minimal, we think we can outrun it, but that's kind of what that comment was about. Yeah. Low to mid. Low to mid, yeah. Yeah, low to mid.
spk01: Okay. And then circling back on the discussion around the core margin, it sounds like there's some additional room to take down the interest-bearing deposit costs from the fourth quarter levels. And I think I heard at least for the comment for the first quarter, you think there's some room to offset the pressure on the core loan yields. Did I hear that correctly? And I know it's early, but do you feel like you can kind of continue that trend beyond the first quarter at this point?
spk06: Some of that core loan yield, we don't know. It's a plus or minus, but some of that core loan yield we think we can offset, possibly all of it. We managed to this quarter. So it's kind of a plus or minus situation there, but that's our goal is to try to offset it. We can't guarantee that we can totally do that, but that's our goal.
spk01: Okay. And then I guess the other issue within the margin discussion that you brought up and other banks are talking about is just the excess liquidity position and it sounds like you're willing to put a portion of this towards the securities portfolio. I'd love to hear more about how you're thinking about how much of this, uh, how much of a build you would, you would kind of consider and then what types of securities you've been buying more recently.
spk06: Yeah. Uh, you know, we're, we're running about 10 and a half percent right now at the, you know, traditionally we've been more in the 12% range. So I think you could see some growth in that 11%, 13% range. Not all next quarter or this quarter. And we backed off a little bit on municipals. They keep getting longer and longer dated and spreads come in. So we've been looking at more kind of shorter dated CMOs, three to five year stuff. Want to keep an eye on durations. You know, mortgages are still pretty rich, so you haven't seen a whole lot of growth in the investment portfolio, but we want to be really prudent and really think about the overall balance sheet strategy. Prefer to deploy it into good loans, quite frankly, but we'll take opportunities as they come.
spk01: Okay. That's great. Thanks for the commentary. Nice quarter.
spk06: All right. Thank you. Thanks, Matt.
spk11: The next question is from Alex Lau of JP Morgan. Please go ahead.
spk09: Hi, good morning.
spk06: Good morning, Alex. Hope you're well.
spk09: Thank you. My first question is on the mortgage business. So you've operated very efficiently for the past three quarters with an efficiency ratio in the 50 to 60%. Can you talk about some of the factors contributing to this efficiency during the pandemic? And looking into 2021, Can you continue at these levels as the gain on sale margin moderates? Thank you.
spk06: Yeah, Alex, we've got Whib Evans is with us who runs our ventures, including mortgage and all that. Whib and Michael, talk about that. Go ahead, Whib. Yeah, Alex. Obviously, margins have thickened up tremendously from an efficiency ratio standpoint, which helped us a lot. We don't expect that to continue. We see some compression already coming down in the latter part of the year. We see it again here in early January. So we see that coming down. You would see, obviously, you know we've had some capacity issues in the industry which allowed that margin to creep up as we have hired additional folks to maintain this volume that will also put pressure on that efficiency ratio. being in that 50-60% range, not sustainable generally through the year, and we expect that to be elevated some.
spk09: Thanks for that. And then my second question, I want to touch on technology. Have you seen an acceleration of your digital platforms in terms of adoption during the pandemic? And in 2021, you mentioned some investments. Are any of those related to technology initiatives? Thanks.
spk06: Yeah, Alex. On the technology side, we've definitely seen acceleration in take-up rates on technology. We have a couple things. We did conversion of both our online and mobile system mid-part of last year, and so we've got a really nice recent upgrade there. It's been very well received by And so we seem to take a break from that. And timing was reasonably good on that. If we could have timed it perfectly, it would have been in the first quarter instead of the second quarter of last year. But because, and this is not unique to us at all, but we've got a lot of customers that just hadn't taken up the technology but really had to during COVID. and that continues. They didn't use it during COVID, and they're going back when the branch lobbies open back up. They're continuing to use it, and so we've seen the take-up rate move quite a bit. And we have been on a technology ramp-up from an investment standpoint for about probably three years in terms of of continuous improvement and so that gets those investments get larger not smaller and so as we move into 21 and we think about capital expenditures in my comments you may actually made a reference to what we were that when we were ringing expenses out of the out of the merger. Moving forward, we thought we would have some places where we would gain some efficiencies, but also improve on our capital cost. Not our capital cost, but we'd gain some expenses and actually we'd reduce some expenses. and gain some efficiencies, and those are all technology-related, and that's applying technology. So it's coming not only at the customer on the customer side, but it's coming on the back office side where we're getting more and more efficient, and it's our biggest place of capital investment.
spk04: Great. Thank you. Sure.
spk11: The next question is from Brock Vandersleet of UBS. Please go ahead.
spk05: Good morning, guys.
spk04: Good morning, Brian. Good morning.
spk05: Good morning. I wanted to follow up on the mortgage question. These gain on sale margins, as you well know, have just been giant. Where do you see that normalizing to from, say, where it was in the fourth quarter? Just trying to get a sense of where we should think about the business kind of retracing to.
spk06: Hey, Brock, Michael. Yeah, I think it, you know, if you look on slide seven, we have the 342 there circled. That's kind of indicative of where new originations came out in the fourth quarter. Obviously, saw a decline there from third quarter and second quarter where capacity was at a really big constraint. As Whit mentioned, we're still seeing a bit of compression in there. you know, it's hard to go back to 19 or 18 because we were in different channels. So we're in retail, consumer direct business, and so normalized would be probably slightly below that number. We have a few comments there, but I think you still have some room to move down, but you're not going to, should not return to the 227 number that you'd see in the fourth quarter of 19. That would If we laid out our plan for the year, we kind of plan on it moving down basically throughout the year as there gets to be a little more capacity in the system.
spk05: Okay, got it. You mentioned office space coming up in the second half of 2021. As we emerge from COVID, any other strategic, not that office space is necessarily strategic, but any other changes you see making in the business, or is it really a return to normal?
spk06: Yeah, it's... I'd say normal will probably look different. Our mortgage business, we like it for a few reasons. One of the reasons is that we can learn some things. They've had work from home folks more than any other part of our business. They've had more of that than any other part of our business for a long time. and they're able to measure, and the key is you gotta be able to measure productivity, and they get really strong productivity on certain things being home. Well, we've been able to also see that in some other parts of our business, and so I think being able to put more, better measurement around some productivity areas that we have not previously measured, is one area that we're focused on because, again, that improves efficiency, improves sort of work-life balance, and I think can improve employee morale overall. And so that's something that we're thinking about. And I'd say that's probably the biggest one. But the ripples from that, as you said, can be office space, can be branch space. There's a lot of talk about branch consolidations, and we'll have a little bit of that, but we won't have that much because we're in a number of communities, and so we're gonna keep a presence in those communities. A lot of those communities, we only have one branch anyway. And frankly, the cost of that is much less than most people understand. So we may have a little bit of that, but we're probably in a position where we'll have some small branch consolidation, but there won't be a lot of that for us because if we did have a lot of that, we'd be out of some of the communities we're in. And our presence in our MSAs is relatively new, and so we don't have anywhere near the legacy branch network of some of our older, bigger competitors.
spk05: Yeah. Okay, great. Thank you very much.
spk11: Again, if you have a question, please press star then one. The next question is from Amar Sama of Raymond James. Please go ahead.
spk08: Hey, good morning, everyone. Hey, so I appreciate the update on the non-core acquired portfolio from Franklin. Maybe just a couple of follow-up questions there. You know, the $200 million reduction that you've seen year over year, Have there been any of those one-off type of sales that you referenced in that, or is that just the book kind of paying down and running off? And then the follow-up is, what does the secondary market look like for these credits? Would you be content to let it continue to run off, or are you committed to exiting in a bulk sale? Thanks.
spk06: Yeah, so I'm looking dead at Greg. I'll comment. and invite him to comment as well. On the first part of your question, we haven't sold any. It's been just loans paying off. And so we haven't had any sales at this point. And then in terms of what happens, we would sell individual loans. We'd sell it in bulk. We'd hang on to it if we had to. So we would sell individual loans, but we're not fire sellers because we don't have to be. We have the advantage of knowing more about what's in the portfolio, and we've got two very capable guys that are managing it. But it's not cool to our business, and so for the right price, we've cut it loose. We're not going to fire sell it. Greg, you want to add anything to that? Nothing about that. Several have been refinancing. There's actually something to highlight that you pointed out. A lot of those companies are doing quite well and growing. They're seeing opportunities that they're going to want to need to refinance out and we're not interested in being their bank to do that. That's where some of that's coming from.
spk00: It's
spk06: But it's a mixed bag also because they are private equity type loans. And unfortunately with those types, you know, you don't get a lot of heads up before something goes south and you don't have a lot of – your parachute is an anvil if something goes south. And so that's where – again, that's the reason that's not core to us. But so far we've had good luck with them, and we want that to continue.
spk08: Okay, thank you for that commentary. And one unrelated question to that portfolio, as far as PPP, have you all seen any interest from your clients on this new wave of PPP? You know, do you expect to be active in it moving forward?
spk06: Yeah, we have seen some, and we do expect to do some PPP. We're already doing some PPP going into what is it,
spk08: Any guidance on where those volumes could ultimately shake out relative to round one?
spk06: It's certainly going to be less than round one. And we're going to handle that a little bit differently also. So it's not going to be a major impact on either our balance sheet or our fees as we move forward.
spk08: Okay, understood. That's it for me. Thanks, guys, and congrats on a strong quarter. All right. Thank you.
spk06: Appreciate it.
spk11: The next question is from Jennifer Demba of Truist Securities. Please go ahead. Thanks. Good morning.
spk02: Good morning.
spk04: Good morning.
spk02: Would you talk about what kind of net charge-offs you're expecting over the next few quarters? Obviously, they were elevated this quarter. Would you expect any other loans to come up in the next couple of quarters of that?
spk06: Yeah, Jennifer, we talked about the one charge-off that had a really unusual, I guess, impact on our charge-off ratio for the quarter. We don't have anything, and we talked about that for the past three quarters, and so we've been watching it. We don't have anything sitting out there like that or we'd be talking about it. I mean, our whole strategy is to be quick and decisive if we have any issues. We want our people to be quick and decisive so that we can make sure we deal with them in a very hands-on, straight-up way that's good for us and good for our client. And so we don't have anything looming that we're aware of. As you know, it is credit. We're in sort of a shaky world. And so by the time I get off this phone, I could get a call that says, hey, we got something we need to talk to you about. Certainly don't anticipate that, okay? But you never know. And so I just throw that qualification out there. And so we would expect, you know, You have to think 21, if you look back at our charge-off ratio over the last two or three years, it's been quite low, quite low, almost nonexistent. I don't think it's going to be that. I think you're going to have some charge-offs that I also don't think, when we look at what we know, we just don't see a lot coming through. And so I'd say it'd be higher than the last couple of years, you know, absent that one credit. Take that out of the mix. But I'd say we don't see anything that's going to cause it to spike up. Greg, would you want to? No, I think the key point is that that specific deal should not be viewed as a proxy for the health of our portfolio. Another touch point, I guess, that we look at is credit quality of the substandard, how the substandards are acting. Those are up $5 million quarter over quarter. So, you know, it's actually still in line with the year end 2019 as we look at it. I guess lastly, we follow all MPAs closely, and they're up nine basis points quarter over quarter, but actually down year over year, I guess, four basis points. Our ORE and other assets from foreclosure and repossessions, I guess, They were up $176,000 plus or minus for the quarter, but if you look at it year over year, that's down from 11.5 to about 7.5. As you all know, everybody on the phone, you've got to take that into light also. We've added $2.7 billion plus or minus in loans over that time period. I agree with you, Chris. You can't take the risk out of an uncertainty out of this, but you can plan and prepare for it, and that's what we think we've done well. As Michael pointed out, that reserve is appropriate, significant, pretty strong.
spk02: Thank you so much.
spk04: Thanks, Jennifer.
spk11: This concludes our question and answer session. I would like to turn the conference back over to Chris Holmes for closing remarks.
spk06: right very good uh thank you and thanks everybody for joining us uh as you can tell we're proud of the results for the year in the corner and but we're excited about moving forward into 2021 and we as always appreciate your support okay thanks everybody have a great day the conference is now concluded thank you for attending today's presentation you may now disconnect
Disclaimer