Q2 2020 FB Financial Corp Earnings Call
[music].
Good morning, everyone and welcome to Ftn Financial Corporation second quarter 2020 earnings Conference call.
Hosting the call today from FBR financially, it's Chris homes, President and Chief Executive Officer.
He is joined by Michael MACI interim Chief Financial Officer, Greg Bowers, Chief Credit officer and without it.
Oh, that's the ventures, there will be available during the question answer session.
Please note after you financials earnings release supplemental financial information and this mornings presentation are available on the Investor Relations page of the company's website at Www Dot Firstbank online dot com and on the Securities and exchange Commission's website.
Www Dot FCC dot com.
Today's call is being recorded and will be available for replay on SP financials website, approximately an hour after the conclusion of the call.
At this time, all participants have been placed in listen only mode.
I will be open for questions after the presentation.
With that I would like to turn the conference call over to Robert <unk> Director of corporate Finance.
Thank you Jamie.
During this presentation financial May make comments, which constitute forward looking statements under the federal Securities laws.
All forward looking statements for subject to risks uncertainties and other factors that may cause actual results performance or achievements that that'd be financial to determine here from any results expressed or implied by such forward looking statement.
Many of such factors beyond anxious ability to control forget and listeners are cautioned not to put undue reliance on such forward looking statement.
A more detailed description of these and other it is contained in <unk> financials periodic inquiry and current reports filed with me.
Leading happy financials, most recent form 10-K.
That is required by law that'd be 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.
On by FCC regulation G.
The presentation of the most directly comparable GAAP financial measures and a reconciliation of the GAAP non-GAAP measures to comparable GAAP measures is available and that'd be financials earnings release supplemental financial information in this mornings presentation, which are available on the Investor Relations page of the company's website at Www Dot first bank.
<unk> dot com and on the Fccs website Www Dot I think he got guys.
I would now like turn the presentation decorative Chris Helms that'd be financials question [noise].
Thank you Robert and good morning.
Thank you all for joining us this morning, and we do appreciate your interest in that they financial.
Well last quarter's call I highlighted the company's priorities and how they get chain. It didnt I used to these uncertain times.
Those priorities were and still our first the health and safety of our associates and customers second liquidity.
Our capital for profitability and then yeah great.
I'll touch on each of these priorities then some more yeah I want to start by saying how proud I am of our team for the level of execution that we achieved on those goals. This core number by our associates listening to this call and I want to congratulate them on a job that's been remarkably well done.
Our financial performance this quarter was outstanding including record revenue and pretax pre provision earnings we produced an incredible reports to 9% adjusted pretax pre provision return on average assets or.
Our profitability would largely driven by our mortgage theme producing a record 33.6 billion.
Perfect, particularly in our pretax contribution.
After a 26 million dollar provision that moved our allowance for credit losses to 2.51% a long held investment nothing excluding our PPP loans.
We had an actual our own a of 1.3%.
The Companys earnings power has allowed us to reinforce our balance sheet with fantastic liquidity.
Conservative allow for credit losses, and an additional 23 million intangible book value Oh, while operating in the middle of a pandemic.
This demonstrates our business model is complimentary bank in mortgage segments. We frequently described the company is a great community bank with a great mortgage division.
And this quarter exemplifies that description.
The diving deeper now under our priorities are our focus remains the health and safety of ourselves to customers.
I believe we've entered a new normal for the foreseeable future approximately 700 of our so just continue to work remotely.
And we've continued to think strong productivity under this environment.
Well our drive throughs in our branches never closures in March and April we had suspended lobby accident access for all of our brands is aligned with gathered from our state and local governments.
Let's stay at home orders began expiring in late April in early May we moved to reopen our lobbies we reopened our first brands lobbies Omega three month, which needs guards hand, sanitizer mask and poker distancing markers in place by the end of June almost all all of our branch lobbies.
Had been reopened.
It takes accounts that have risen in many of our customers are shown a preference in recent weeks from drive throughs.
We have moved to make lobby access appointment only in some select branches.
We continue to monitor case count will continue to take necessary safety precautions.
As discussed on our last call, we've been very proactive reaching out to our customers and we provided.
First deferrals to everyone that requested one.
This outreach resulted in 918 million dollar then loans being granted a first apparel roughly 60% of our initially deferred loans are still in their first deferral period, which makes it the lump that point to get clarity on how those credits ultimately will turn out.
Those loans that have hit the end of their first deferral, roughly 138 million or about 38%.
Balances that have have requested.
Roughly 30% the balances have requested received a second deferral.
38% about those that have received second deferrals make up about 10% of the notes that have come out of additive hurdle.
We've been in constant communication with our customers as our relationship manager in check you had in gather information.
Anecdotally were hearing positive news from the field on our population of deferred loans.
We provided a new slide in the Investor deck, we give some feedback.
We're saving from our regional presence.
In summary.
Is that after a crop in April may and many of our markets have been bouncing back reasonably well I caution we continue to monitor market activity in our customer base.
As the case counts have begun to rise in some parts of our footprint.
Moving on to the curriculum to liquidity.
We're thrilled with our 581 million a customer deposit growth.
Little difficult to tell at this point, how much of that will be sticky Bakken matter is that were trusted partner to our clients.
But we don't grow 581 million in deposits and in one quarter without some help from broader market conditions I wouldn't do our best hold onto as much of those deposits as we can but it's difficult to predict it at this point how much of that will site would have passed a couple of quarters.
We believe we're well positioned to take on prank on synergies balance sheet, which has historically been more reliant on non core funding and our communication for Franklin over the past six months, we've identified approximately 450.
$15 million.
In FHLB brokered and other non core deposit ratio relationships with the cost of around 1.65% that we could exit by year end.
Well balance that elimination not core funding with our current priority on balance sheet liquidity.
Well, we believe that we had the opportunity to pay off in wholesale funding more quickly we had anticipated.
Our third priority capital preservation, we increased our total risk based capital ratio to 13.2% this quarter up from 12.5% in first quarter through strong provisioning of profitability.
We believe that we have plenty of capital demand through the downturn.
We also maintained maximum flexibility and we currently have only common equity and trust preferred in our regulatory capital stack.
We have investment grade rating from Kroll should we choose to access the debt capital markets.
For some additional capital cushion.
We believe with our strong profitability existing capital levels continue to support our dividends.
Moving on to credit so far we've not seen significant signs of deterioration in our portfolio.
Given the economic environment, we expect some uptick in substandard and substandard loans over the coming quarters and ultimately we expect some some increase in our net charge off to follow up we still feel very good about our underwriting standards in our portfolio. We continued to closely monitor our asset quality.
Our message to our relationship managers has been that this is not the time to set of problems.
Yes alone that need some attention.
We weren't all that any potential issues sooner versus later.
Good I'm sure we'll face some challenges over the next six to eight quarters, but we will suffer from a lack of focus.
Bill profitability as I mentioned earlier, our pretax pre provision earnings were $57.8 million or 3.2 numbers Smith.
As a percent or as a percentage of average assets, which is a record quarter for us.
As expected the margin to they've got the facing some headwinds at the lower interest rate environment. Our headline on margin net interest margin number would normally not be one that's acceptable to us.
But it's been.
Partially the result of our on balance sheet.
Positioning.
We found some credits.
And had prudent loan growth over the past couple of quarters, while at the same kind of in building our liquidity will continue to keep an eye on how this recent influx of deposits behaves in adequately BPP loans are forgiven.
In the absence of retrofitted synergy.
Which will have a say 10 to 15.
At this point impact on our core margin the second and third quarters should be a trough for us.
I expect our margin again to bounce back in the second half.
However, the same rate environment that created the headwind for our banking segment allowed our mortgage.
Area to deliver 33.6 million dollar than direct contribution.
This was the.
Herculean effort from our team as they capitalize on strong volumes and above average margins, while benefiting from the record low but steady interest rate environment from March through the end of the second quarter.
We expect our mortgage team to capitalize on this environment for as long as it continues.
I have a few other update before turning things over to Greg and Michael.
We can we've consistently been updating our technology over the past couple of years in consumer online and mobile banking was last remaining significant platform that was due for enhancements.
Well, we converted farmers National Bank last quarter, we placed their customer go under our new system and we've had great feedback from the user experiences and from those capabilities.
Later this week, we're converting the rest of our customer base onto that same platform and we're excited to provide an improved experience for our customers.
On the Franklin synergy merger, we anticipate closing in August and conversion before the end of the year.
Dialogue between those two management teams has been consistent positive since the announcement.
We're hearing that their core credit portfolio continues to perform as expected.
And they continue to make progress on moving out.
Non core portfolio as well.
We are.
Eager to be able to officially joined forces with those associates and begin taking advantage of the combined strengths of the team.
With that ill, let Greg go into a bit more detailed and credit portfolio.
Thanks, Chris.
By a high level thoughts on the portfolio and then we'll be available on the question and answer section as well.
For a refresher we are at our core a community bank that makes loans to support the economic activities of our markets. The strategy means dealing with any putting our faith in local people, we trust and notably good operators. Our strategy has always been to focus on end market lending, while avoiding shared national credits and purchase.
Participations for the sake of growing loan balances.
Our portfolio reflects that buys.
Since we last spoke we have raised $315 million in PPP funding for customers that agents and help at the outset of this downturn and you can see the industries, where those PDP funds went on page 11 of the presentation.
We're also working through our deferral program to Echo, Chris our relationship managers in the failed or having a positive conversations with our borrowers, but it's still too early in this process for us to really know what will happen with many of those credits.
Roughly 920 million in loans that restate the first AFFO.
We still have around 550 million that have not come out of that first forbearance period.
At this point 138 million have received approval for a second deferral.
That number will increase as we continue to work during the remaining deferrals.
Feedback from clients have received initial deferral is across the board with our open door policy many of our plans except to the first deferral based more on the uncertainty rather than actual business level.
As such that group wont be needing or requesting second deferrals.
For those that are seeking second deferral. Some plans still have limited revenues such as restaurants hotels, others don't have an urgent need for a second deferral, but still aren't back to 100% and feel that some cushion right now is prudent.
In general uncertainty rains.
But anecdotally the Reopenings had provided the level of relate that has generated at a modest increase in capital for our clients.
With that we continue to monitor those loans are we feel positive about them, but were cannot tell you how many will deteriorate and how many will ultimately participate in a second deferral period. At this point, we will look to continue to update our investors as we participate in investor conferences, this quarter and I'll next quarter's earnings call.
On an overall asset quality, we did experience an uptick in a substandard loans from 74 million to 88 million from the first to second quarter.
The majority of this increase was related to four relationships.
Approximately $13 million, an aggregate outstanding balances as of June Thirtyth.
Each of these loans had been marginal credits prior to the pandemic and have deteriorated with the economy. So this was not unexpected increase.
Moving on on Slide 12.
We've laid out some of our industry specific industry exposure is again.
Before I give updates on those each of those percentages use our total loans held for investment as our denominator.
If we were to exclude PPP loans than those would raid retail 8.3%.
Healthcare, 5.7%.
I will tell 4.3%.
Other leisure 2.5.
Transportation 2.2.
And restaurant, 1.4%.
These percentages are generally inline with where they were last quarter.
Slide 13 reflects the largest segment within these industry groups our retail portfolio.
As reflected here it is pretty much a portfolio split evenly between cnine, including owner occupied real estate.
And our non owner occupied CRT properties.
This is the segment that has received a lot of attention nationally as retailers have been forced to deal with closures.
Landlords have been impacted by tenants not being able to make their payments.
For us so far and Weve reached out to our relationship managers on the property by property basis, our portfolio has fared okay.
As we've discussed before this portfolio is fairly well distributed across our footprint and across a wide variety of underlying sources of repayment in other words, the retailers ultimately making the payments.
For our CRT properties. This is a portfolio that looks like 2 million to $4 million local strip centers.
Not large power centers or malls.
Our largest single loan is less than $8 million and is fully leased with a conservative loan to value and strong investor group.
The thing and I portfolio reflects the comments from our market leaders that you saw on one of the earlier slides.
Overall generally positive.
Slide 14 shows our health care, but.
As we've discussed on previous calls.
Folio has an emphasis on the assisted living and skilled nursing side of the business.
This to the segment that has received a significant focus associated with the virus, but thankfully reports from our clients have been satisfactory with no known outbreak in their facilities.
Physicians to have continued to manage through the process and incorporated new protocols within their practices.
On slide 15, we continue to monitor our hotels.
Portfolio is the whole had has about a 57% loan to value and heading into this we felt good about the underwriting of our portfolio and still there today.
Hotels that become a waiting game as we know that people will start traveling again, but we just don't know when yet.
As a result wearing plan to work with our clients in this space and provide additional deferrals as request as related.
Reports on occupancy coming back had been mixed across our footprint for the weekend in July 4th total Nashville, and then say occupancy not just our clients in the area was at 38%.
Our largest client has seen similar levels on their national properties at around 32% versus 70% occupancy back in February.
However, we have a larger plaza reports their property north of Atlanta being in the 8% range in June July so that's great to hear.
As a reminder, we have not been responsible for all of the construction cranes building downtown Nashville hotels, and only have one property, there which is to an operator waitress with a high quality national flag.
Sure the four loans that I mentioned moving to sub standard this quarter or hotels.
Those are properties acquired and previous acquisitions, which did not benefit from our standard underwriting bent toward higher equity national flags and strong operators.
Frankly, the properties weren't performing to well before the pandemic it just exacerbated their issues.
Our teams are addressing appropriate exit strategies at this time.
Lastly, also within this segment is an approximately 5 billion dollar property, which we've discussed previously the Memphis market and its exit is being addressed fire teams has significant reserves.
As we know the summary on this page says it all we continue to remain concerned about the space and our teams are monitoring it heavily.
Other leisure on slide six thing.
That's a portfolio that includes categories going into this they were highlighted as potential industries of concern.
So far we extend satisfactory results here too.
And as noted here some areas such as marinas have actually seeing a pickup in business associated with consumers.
Looking for site recreational activities.
Segments, such as theaters have not been is fortunate but as noted we've been in close communication with that operator, and guarantor group and they've developed a plan and have the resources to carry out.
Moving on to slide 17, transportation and warehousing similar story here a segment for concerned but overall has performed okay on the larger end of the business. It looks like the operators are reporting good results, although smaller size. This sainsbury back company.
We had one of these smaller operators with loans with us under a may in five.
File bankruptcy this quarter and moved it into sub standard.
This is an industry that has more than its share of undercapitalize operators and it's not unusual.
Frankly with or without a pandemic to see things like that pop up.
We do like to point out there within this segment, we're glad to report that we have no exposure to commercial airlines or cruise line.
Lastly on slide 18.
We breakout our restaurant exposure.
We're hearing mixed results from these customers.
The full service operators are struggling more with the closures along with caution issues associated with reopening at reduced capacities.
But the quick service that seems to be surviving in some cases doing better than prior years as they've adapted theyre drafter business.
As we note here one of our largest clients reports good results and has benefited from their model, which includes more of a fast casual and sportsbar combination.
As well is benefiting from being an overall lower leverage operator.
We do highlight here also a larger relationship that's not in the 1.4% of restaurant exposure that is not performing to par and without further improvement we can see our future downgrade on this.
Overall the segment that we will continue to monitor closely.
I'll close by saying that for our entire portfolio, we're working with clients and frankly seeing positive direction with the Reopenings in our markets were thankful for the diversification of our footprint across both metropolitan and community markets as well as diversification of the size of our transactions.
However, it is Taylor.
Overall like most banks to lead times, we have some noise in our engines isolated not demick, not any more or less than the rest of the industry. At this point. So we're managing for our conservative position and hoping for the best.
Our future results will ultimately be affected by the length in depth of the downturn.
As governmental assistance programs run out or new ones are developed our customers will be impacted.
With that I'll turn things over to Michael to talk more about our profitability.
Thank you Greg I know that we've covered a lot. So far so I'll give some brief color on Cecil margin and mortgage and then be happy to answer any questions. After our prepared remarks.
First phone Faisal use the blended the economic forecasts that Moody's put out in late June.
With our markets generally opened since early may the pre downturn strength of Tennessee as a hole in the pre downturn to start to Nashville.
As one of the hottest job markets in the country pretty kind of it we did not feel that way to 100% baseline made sense for us at this point.
The resulting economic input to that land are laid out on slide 19.
The largest drivers of the increase this quarter, where the CRT index and the unemployment rate, which you can see both deteriorated from last quarter forecast.
These input and adjustments ultimately glad to 2.51% allowance for credit loss, which we believe it hopefully higher revenue off is that will fare to the cycle and we don't mind carrying that given the levels of uncertainty going forward.
Moving on the margin, which as Chris mentioned is facing some pressure due to bad balance sheet mix as well as lower yielding assets.
The balance sheet mix, we've been trying to nail down how much an increase in deposits is related to PBB funding. Another government stimulus programs to determine how much liquidity, we can expect to retain.
However, the positive cash and fluid and comes from many sources deposit balances of customers, who receive PPP funds from our originations were up $250 million remarks in June.
If you dig deeper in cap increased by the amount of PDP funding that they received from us that only account for 138 million a deposit growth.
We'll continue to stay short and liquidity funds from excess deposits in the near term as we determine how the recent influx will behave.
First and five guidance on our yields in cost contractual yield on loans. Excluding PPP lies is 4.5 not present for the month of viewed as opposed to 4.75% for the quarter.
Cost of non interest bearing deposits as Jay was flat at point by 5% first 0.56% quarter and cost of customer time deposits is 1.7% in June personal enforced at an 8% for the quarter.
We have cut rack rates on deposits about as much as we intend to cut the third to execute on bringing down our liability costs well maybe continue to work some of our horrified money market accounts down.
As a reminder, we have 560 million in Cds with a weighted average cost of 1.75% repricing in the second half the 2020.
The weighted average right those products would roll into its currently 38 basis points. So we have real opportunity on the time deposit front as well.
Mortgage third is a strong counterbalance to the declining yields at the bank based in the second quarter.
The group benefited this quarter from strong origination volumes and capacity constraints in the industry that led to higher margin on loans in our pipeline and ultimately our gain on sale Martin's late in the quarter.
These capacity constraints of extended the amount of time. It takes for mortgages held for sale to be originated in has contributed to higher than typical morgans.
You probably noticed that in our mortgage banking revenue competitive fair value changes were 34.8 million for the quarter into phase 3.2 million in first quarter, which is obviously significant.
As you recall mortgage revenue is recognized at the time of interest rate lock and subsequently the interest rate like Bob pipeline has been hedged.
The gain on sale line item is a bit of a lagging indicator in our current fair valued at more indicative of where our gain on sale margins came in during the month of June and where would we would expect gain on sale to be in the first half of Q3.
Timing also play the park whoever the gain sit and gain on sale or fair value Mark in the large value personal job in first quarter was indicative of market dislocation in the mortgage markets ultimately with the help of bad intervention mortgage secondary markets returned to pre David levels, and led to wide margins and robust demand.
We also have a continued focus on expense control.
Core banking expenses were slightly down from the first quarter, we completed the conversion of farmers National Bank of Scotland May 17.
And we finalized our planned reductions in force for that acquisition, it's a bit a full run rate of expense savings in the third quarter.
With that ill turn the call back over to Greg.
Alright, Thanks, Michael and thank you Greg for that color.
So we know that challenges are coming as we manage through economic uncertainty the Franklin merger and the continued impact of the pandemic.
That being said, we executed well on our stated priorities and had a very strong performance this quarter.
We're coming off quarter with exceptionally strong earnings and moving forward with our reinforce balance sheet positions us for success.
Complimentary business segments of the strong community banking Itron mortgage segment also position us for success in the current low interest rate environment. Our credit portfolio is behaving normally today and were brace bringing headwind.
In the coming quarters.
Moving forward, we position ourselves for good combination with Franklin synergy and we're excited about the closing of the transition can transaction.
And David notwithstanding.
Already and excited for the balance of 2020.
With that.
I'd like to open it up for questions.
Ladies and gentlemen at this time will begin the question answer session is.
That's a question you May press Star then one.
If you are using a speaker phone we do ask you. Please pick up your handsets before pressing the keys to ensure the best sound quality.
So it's all your questions you May press star into.
Once again that is star and then one to join the question Q.
At this time, we'll pause momentarily to assemble the roster.
Our first question today comes from Stephen Scouten from Piper stand There. Please go ahead with your question.
Hi, guys good morning.
Good morning.
And so I wanted to get a one point of clarification, if I could on the on the loans that are in deferral. Currently I think if I heard you right from the 980 million.
Sounded like 550 million, we're still on deferral and then I think you said 138 were requested a second deferral. So it ballpark does that mean about 250 million have already fallen out of that 980 million in total initial deferrals does that close to correct.
Yeah. That's that's right. It's in the 240 to 50, something like that yes, okay, great great and so.
I know you said a lot to your customers felt like they were doing after the on a proactive basis and probably wouldn't need a second deferral, but.
What's your feeling with the 250 that came off maybe do you have any indications of what type of industries is there any concentrations there that glean any give us any color as to how the overall mark is performing.
Yeah.
I'd say, it's across the board is not there no industry concentration some of its some of its actually consumer.
And so you got to consumer.
Piece of that and the non lot of lot of industry concentration it'd be representative of the community Bank that we are Greg.
Made reference to the vacuum we're community bank admitted.
Kind of a reflection of the communities.
I would say.
I'm not exactly your question I think it may help a little bit.
If you notice 10% of the.
If you notice there was a bigger percentage of.
Dollars than number of of loans and so you do see somewhere.
You know who probably a good example, where they're probably going to request.
[music].
Second deferral.
But they're going to havent higher balance and so you're going to see some some smaller ones, particularly that just.
Don't ask for a second borough deferral keep going until we see some with more balance that ask.
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But but.
We have seen no concentration.
We know we do have I would say this too.
As we look at larger balances.
We know we do have some that are still out there that were already talking to about a second deferral again hotels would be a good example, where we may have up to.
25 or $30 million credit.
Really comfortable with the collateral really comfortable with the.
With the owner in really comfortable with the investors.
And as Greg again, as Greg said, it's just a matter time. So you know one and one thing also Chris we have seen.
Some customers go from a deferral that is completely different P and that payments to just interest only now as well so as they manage through this.
Yes, good point.
Okay. That's very helpful and it seems like you guys are pretty well ahead of the game from reserve standpoint leased to me here and should be in the Kakap kind of.
That's our core Tom maybe of your peers relative to reserves to loans. So can you can you talk a little bit more about that I know you'd laid out the equal math in that one slide but talk about the quantitative versus qualitative factors. There and then maybe also with that one larger credit. He was a $25 million relationship you mentioned if that has specific reserves.
So if you have that number of specific reserves related to that credit.
Yes, so I will take the first part of that minimal.
Mike will comment on seasonal grid comment on the credit.
And I would say this.
Steven and look sequel is still while we've been talking about it for a long term.
Is were two quarters in and I think we're all still learning some things about and one of the things that weve.
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We have probably and this is my impression and Michael make slack me on the hand to hand here, but I do you know.
And you May remember the as I did start my career public accounting whether to young so I do actually have an understanding and appreciation for the theory behind some of these things and so.
We should have pretty closely in had made as many quality. My perception is we haven't made it much in terms of qualitative adjustments as many of our peers.
Because we look at the numbers and we look at what comes out on on hours and we stick pretty close to what it says even though.
I would tell you we don't we don't think we don't think we need all that frankly, I mean, we if.
But you know.
[laughter].
Bankers are often the last to note and so we don't we don't actually think we need all that but but but thats what the number say, it's a we stick pretty close to the numbers because its new and I think I think there a lot of folks out a lot banks and I'm not being crypt weird that are making a lot of qualitative adjustments.
And probably more than we are and I think that probably sticks us in the in the higher tier. So that's that just some some might announce that Michael.
Feel free to correct me, Yeah, I think that.
Well if that I can't flatter has since we are especially thats the but.
Yeah saving from a from my role seasonal model perspective, Chris right we did.
We did take the model Alpha we adjusted our assumptions last quarter were 100% baseline quite frankly, the economic forecasts buried pretty widely this quarter and from a from a strike movies perspective deteriorated significantly depending on which scenario you were.
Looking at.
Our our forecasting committee looked at that and we saw some some green shoots in the economy.
All nonfarm payroll number.
Improved retail spending during the quarter was set all time record setting up 17% of a one prayer inside.
That has changed kind of our forecasts and assumptions a bit.
Turning more positive outlook at a baseline or a consensus that being said as you can tell on the slot.
The numbers were still works GDP was worse.
Unemployment.
For 2020, and 2021 was higher and as we mentioned commercial real estate, which is a major driver at our model because of our construction and non owner occupied exposure was worse in price index said that off without a higher number and then qualitatively we looked at that we look at it.
Tennessee, only run and said Hey, you know we feel like we're at a better spot and we did make some adjustments down but the critical point. It. It was not materially I think we have them. Some wiggle room. There. We also got some really good feedback from our market that said, yes things are things are lucky.
Pretty decent but yeah, we don't know Greg mentioned government stimulus.
Second wave other factors that can that go into that and so we're cautious.
But but we both appropriate at this time and like I said.
We don't plan on on actually realizing a 100 and that they know it and losses.
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Yes web site and sorry, Greg you ought to.
Come in there without just for the statement on the I think at two other specific questions that $25 million referenced on this slide that is.
On our watch list.
At this point and as far as the $5 million property and you're asking about reserves that.
And reserves on two specific about.
That are in that 30% range.
Okay, then that would that watchlist credit no no reserved against that yet today.
Just our standard standard yes, just what's that got out of the standard formula for all of the watch.
Perfect. That's always helpful. Maybe if I could squeeze in one last one I'm curious if you could comment on the Nashville residential real estate market, obviously based on your mortgage results, which obviously is not Nashville, only but seems like the environment is good but with FSB concentration there and construction I'm just curious how that cold enough.
Yeah sure.
I will.
Greg now both comment on that.
Yes, so residential real estate has been.
For me anyway surprisingly strong nationally.
Given the in fact, we're in a pandemic, but but.
And even stronger national stronger locally and nationally if you take Nashville.
Inventories are low.
Builders are hermine and.
And we and we see that reflected in our portfolio. So it's quite strong.
Sales activity is strong and so it continues to go especially at certain price points.
And I'd say the mid level price points, its iridium really strong Greg Yeah I agree it.
And I Echo those surprising comment they have contained to do well I think the interest rates help on that.
One thing you might be interested in.
For our one to family construction.
Our group that is focused in the middle Tennessee area led by.
Bill Waldheim, Kirk who does a great job with this group has.
As approximately 225 million plus or minus and commitments with around 100 animal.
20, plus or minus and Outstandings.
You've got that and that's spread out David some Winston Ratherford Sumner County.
Dave since 2007% Williamson's, 33% Ratherford, 17% all of those markets are just doing great. When when it when you look at that portfolio specs are around 23% pre sold is 40% of the total.
So it is has just done very well.
Today.
That's great guys. Thanks, so much of the color congrats on a phenomenal quarter.
Thanks, David.
And our next question comes from Catherine Mealor from KBW. Please go ahead with your question.
Thanks, Good morning.
Good morning Catherine.
[laughter].
Maybe follow up just I want to come from a couple of things that you mentioned in your slide deck.
Thanks for the PPP learn to have 5.5 million income. So are you, bringing these this revenues through spread income or three fees.
There are go through spread income.
Okay.
Perfect.
That's pretty nicely I can find that.
And then on.
If we look at your Youre.
A reserve build slide you see a pretty big jump in your construction.
Tcl does their loan category I guess from 3.8 to 6.4.
Just there really add.
More of a factor as this theory price index declining as you mentioned before or is there anything specifically in that portfolio that you're more worried about today.
Yeah got done as my that's not if not credit specific it more of the price and action.
Sorry outlook, yes, it's not Cresta say at all it's actually yes totally.
Driven by the outlook that drive.
Okay, and then what NIM clarification, you mentioned that you expect sprinkling to be 10 to 15 dependent.
Ah 10 to 15 basis points impact on the core NIM is that's excluding you also talked about is the FHLB brokered and non core funding coming off by year end is that inclusive or exclusive of what you can deal with the funding once the deal it's Craig.
Yeah, that's exclusive of of that we've been expecting about 10 to 15 basis point impact on a margin and where as we are working through here were looking at things that we can do to lessen that impacted and this excess liquidity.
Helps.
Okay, Great and then.
Good for questions.
My first Ken are you were little in 10 minutes, that's one way that data [laughter]. However, I guess, we would have called them at some point, but cabin [laughter]. Other analysts in terms of made is that me, but on the my last one is just on Franklin If you could just provide an update on how you're thinking about the landmark and your ability to exit.
And if they're not corner lung as as irrational claims with had Gil thanks, so much.
Yes, so low market, if we think about which or.
We we thought about it in two segments.
Core portfolio, which is.
Hopeful folio is performing as expected is very similar to our portfolio, perhaps a little more real estate weighted but but but in terms of underwriting is similar to our portfolio and so we'd say it's behaving.
No not unlike hours and not unlike what you expect as markets as you know the.
Some unknown is.
There, but we are.
We say it wouldn't be much different than.
The outlook for our own portfolio and the outlook has it changed because the world is different but not not materially there on the.
On the institutional portfolio, which was when we when we announced that the transaction back in.
January was about 430 million.
You know that that portfolio has been a little more volatile weather, we as we continue to monitor the valuations on that.
And it will probably had a bit more earlier.
We've seen some some some some of that.
Some of the values on some of that come back and so it's.
I'd say.
I don't know what the market with the Mark would be bigger right today than what it was in wouldn't in January.
But it's also a smaller portfolio and so.
As we have.
Sort of rich written in the waves up and down on that over the last.
Three four months, it's probably substantially higher than where it was in terms of Oh.
Turning to valuation less Maher.
And.
But I'd say, we're optimistic as as I mentioned, they continue to work that portfolio.
And so who.
There were couple of loans in there that they had.
That they had had identified that were there where they were taken some write down on they've already done then.
And.
Most of what they're getting out of today, they are getting out of it par so.
We continue that can be optimistic and I can't give you into much more color on that because we know sure where everybody when the transaction closes great tell you what one thing.
We could add having specifics, but in my conversations with them.
As you mentioned they have a significant real estate portfolio and that they've shared and the robust middle Tennessee.
Results.
Sales activity with their builders.
Thank on the PDP excuse me on the deferral program they had similar numbers.
As to ours as far as how those work through so.
I Echo your comment.
Yes there.
They continue to really work that down if they had that strategy in place to continue to work that down just we worked down more quickly together than than they would have been able to work down on their own their chief credit officer hitting later in the.
David Mcdaniel are doing a really good job of guest.
Working continuing to work that too.
We will be even less when we close the transaction than it is today as they come together yes.
Things that we're in there.
Great really helpful. Thank you so much.
Thanks, Kevin.
Our next question comes from Brock Vandervliet from Yes. Please state your question.
Hey, good morning, guys.
Mark.
You gave some color in your opening remarks, and I can see this slide on the mortgage results.
Just trying to get my head around.
What would happen this quarter with the gain on sale and.
As important.
You know, what you're thinking kind of going forward, whether it be seasonality.
You know and kind of what we should look for in terms of the profitability of the the mortgage.
The mortgage area.
In the future.
Yeah.
Michael has a very deep knowledge in the mortgage part of our business on the let him comment on that broke Brock.
I will just reiterate.
Great quarter.
Strong as you said strong gain on sale.
Strong margins strong.
Production and so we kind of hitting on all cylinders.
And for those yeah, good morning, but [noise].
Part of the variability and one reason we added the fair value basis, it's kind of demonstrate that if you remember at the end of the first quarter, we were a little uncertain as to what what the world look like that we had a reserve adjustments and pull through assumptions and so that that created some variability between the two quarters, but overall.
[music].
Yeah that.
380 ish number.
In our fair value Mark is more indicative of where we've been executing so margins are materially higher.
And then where they were in the first quarter and quite frankly historically.
Yes, do we expect them to remain elevated yes at the same level likely not compact capacity comes in we'll certainly do they see margins lower but we expect strong third quarter, yet is it going to be the second quarter, a mega fit our 10-K and execute.
But it's not likely september's a slow a short lived this month and it's just not likely in web elements. You anything there also does going and we have a look any commentary.
But outside the seasonality factor does come in rock you mentioned that it'll come in September which is usually a lower month for us so in the quarter.
We had three really Greg months, all all stack together in September as a lower month, and so that will be one impact seasonality in the fourth quarter of course.
Seasonality will really come into play with yes, there's several things at play obviously, a factor and capacity certainly one of them the industry.
Capacity right now.
And I guess when you start talking about these elevated margins as Michael said you know we've had.
Opportunity across the industry to elevate the margins.
Is that sustainable likely not.
But we don't see a change in much in Q3.
But as we get into that seasonality part of Q4, which would be traditional we expect to see some of that come down.
Okay, and I can tell from the disclosure your channels retail correspondent wholesale really havent changed is there anything you're doing differently with respect to the products is a sole vanilla conforming or are you doing any.
Non QM.
Yeah. So we were in many consumer direct and retail space, we exited corresponded wholesale reverse.
Early to middle of last year said.
But we are 100% QM.
Product, we don't we don't operate and kind of that Nonqm space reduces syngenta ready, but primarily conforming.
We aim to fill every line we originated in the mortgage division as though.
It's from.
Product.
Got it okay. Thanks to the color.
Thanks, Rob.
Once again, if he would like to ask a question. Please press star and then one suicide yourself from the question can you maybe press star and too.
And our next question comes from Amar Summer from Raymond James. Please go ahead with your question.
Hey, good morning.
More tomorrow.
I think the kind of big topics have been hit but just circling back to expenses, you've got FNB financial franchise coming on and and then the cost savings coming out next quarter I'd be got Franklin coming on as well. So how should we think about kind of the core bank expense run rate.
Maybe the next couple of quarters and then when all the cost savings are out.
Yes, So core bank run rate has been actually has been flat for the year.
And we really like to keep it in that flattish kind of kind of way for the rest of the year we.
Do have we've completed they.
SMB Scottsville transaction.
Which is and converted it so we'll have a little bit come out there will also have a little bit of just natural increase so I think of that is more flattish.
And then of course when Franklin comes on.
We'll have that increase in expenses, but as I think about just the legacy core bank and it should be flat.
Okay I appreciate that and then on margin.
You gave the commentary on that 10 to 15 basis points from Frank when are you able to strip out your kind of core ex PPP margin right now and then how we should think about that core moving forward.
Yes, I mean X PPP, it's probably.
Five to seven that's higher and really carrying excess liquidity is another.
10, or so 10 to 15 so.
We deploy some of that liquidity and kind of work there that you'll see.
Since stabilizing in them.
Okay, and then last one for me bigger picture.
As the pandemic provided any opportunities to maybe rethink the business model you know that could be from a branch perspective head count perspective, internal processes et cetera.
Yeah.
Yeah. Thanks to I think endemic cause you to rethink everything and say.
We.
Yeah, we are our branches we've got some.
If you look at bank branches today, I mean, you see.
I think you could park in front of some meaningful percentage of bank branches and watch and if you service. If you just put them under surveillance.
Monday through Friday for the eight hours that they were opened you'd probably be amazed at the lack of traffic for some reasonable percentage of bank branches in the country today, which tells you that you see.
You don't need necessarily the transaction capability of those branches.
So we already were think had been thinking that way I think this this makes it easy but that being said we have some very very busy branches that had been around for decades, and decades and decades and get heavy lobby transaction.
Heavy lobby and transaction traffic and some of it.
We got about both ends of that spectrum it everywhere in between.
It does cause we have seen.
Transaction activity.
Drop.
At least live across the counter transaction activity drop and not return at this point and I think that probably doesn't ever return at the same level that they did.
Because we.
We've seen folks.
Use remote channels, even more than they were before so so yes. It causes you to rethink your branches.
It causes you to rethink your your your non branch facilities as well because we've got 700 big work in remote and.
You know expenses are completely in check, maybe even going down a little bit and so.
You know it caused you to think about what kind of other office space you need going forward and how you how you react to that and so it also caused you to you everybody's already thinking about their investment technology, the technologies that employ and how they make sure that their customers are able to completely transact business in them.
Efficient way so it does cause you rethink all of that it's not that we were thinking of that because we were.
But it gives you some new perspective, and Ed and it makes you getting and it maybe moves your plans into a faster.
It probably speed you're at that adaptation of some things that you had been thinking it so.
I appreciate that and that's it for me thanks, guys.
All right.
Thanks Mark.
And ladies and gentlemen at this time I'm showing no additional questions I'd like to turn the conference call back over to Chris homes for any closing remarks.
Alright. Thank you again, everybody for joining us today, we really appreciate your support we're grateful for our great quarter.
And we look forward to the next one everybody have a great great AG thread that thanks.
Ladies and gentlemen, what that will conclude today's conference. We thank you for attending you may now disconnect your lines.