Q3 2020 FB Financial Corp Earnings Call
Good morning, and welcome to ask me financial Corporation's third quarter Twentytwenty earnings Conference call.
During the call today from SB financial was Krish, Hobbs, President and Chief Executive Officer He.
He is joined by Mike on the T. <unk> interim Chief Financial Officer, Gregg Bowers, Chief Credit Officer.
<unk> presence on the F.B. ventures will be available during the question and answer session.
Please note.
Financial's earnings release supplemental financial information had this web presentation are available on the Investor Relations page of the company's website at Www Dot first back online Dot Com Oh.
Oh Securities Exchange Commission's website at Www Dot C.C. Dot Gov.
Today's call is being recorded and will be available for replay on after you financed website approximately an hour after the conclusion of the call.
This time, all participants have been placed and this is only about.
Called be open for questions. After the presentation with that I would like to turn the covert Robert <unk> director of corporate finance.
Thank you.
During this presentation be financial May make comments, which constitute forward looking statements under the federal Securities Law office.
All forward looking statements are subject to risks and uncertainties and other factors that may cause actual results performance or achievements of that'd be great.
Actual could differ materially from any results expressed or implied by such forward looking statements.
Many of such factors are beyond that be financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward looking.
A more detailed description of these and other risks is contained in <unk> periodic and current reports filed with the FTC, including SB Financial's. Most recent form 10-K, except as required by law, a few 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 and sit down and Barbara FTC regulations in.
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 EFI Financial's earnings release supplemental financial.
Financial information in this morning's presentation, which are available on the Investor Relations page of the company's website at Www Dot first bank online dot com and on the Fccs website at Www Dot that's easy dotcom.
I would now like to turn the presentation over to Chris homes at the financials, President and CEO.
Thank you Robert and good morning, everybody. Thank you for joining US today. We appreciate your interest in the a and B could angel.
And I'm excited to update you on what I think one of the strongest and most impactful quarters that it makes an angel had since I've been with the company stock during the quarter first we converted our consumer it online and mobile banking platform in July, which really improved our customer on banking experience our mobile experience all the newer systems improved okay.
Building and we've got an excellent feedback from a comp hurdle, the new app and how smoothly that convert and what.
A second well.
We.
Let the team in Memphis and in July and added some very strong well no commercial relationship managers in that market a week, we anticipate a some significant production over the next couple of quarters as they bring some of their long standing clients over the first thing.
We expect that momentum to really continue to <unk>, Oh, and then again staying over the course of 21.
Third we closed our Franklin <unk> merger on August 15th and then household or to get through the systems conversion less than two months later on October 12 from a strategic perspective, we feel this positions us well to be now supports premier community Bank and further entrenches us it's kinda sees Premier community Bank.
Fourth we raised $100 million Oh afford a half percent sub subordinated notes at the end of August that further protect your balance sheet and provide this dry powder for future organic growth and accretive M&A.
Finally, we posted a record breaking adjusted EPS of $1.46 cents per share.
Record breaking adjusted earnings of 59, and a half a million and a very strong adjusted pre tax pre provision return on average assets of 3.13%.
Thank you didn't change that but still many sleepless nights towards accomplishing those milestones to see how our associates.
Have come together to embody our one team one bank philosophy over the past few months. It made me very proud of the people and the culture that we have here at <unk> <unk>.
You may remember from.
In past calls, we reordered our priorities back in March two <unk> number one the health and safety of our customers and associates number two liquidity.
Three capital number for profitability and then growth.
He probably would remain in place to ensure the strength of our balance sheet division has positioned us to aggressively pursue organic growth and creating a M&A when the time is right.
Oh, well the first of those health and safety, we have had minimal credit teaches of code across our employee base and we continue to emphasize our safety protocols as most of our associates have returned to the office. We've continued to protect our team that provide a safe environment for our customers while moving our operation.
Back to near goal.
Oh priority number two when built our liquidity position to 14.7% of tangible assets and have access to an additional 6.1 billion in contingent liquidity available to us, but we're very comfortable the company's liquidity position and access to liquidity. So we expect our own balance sheet liquidity position.
Over the next few quarters, we own when some noncore funding that came over the murder.
Oh priority number three our tangible common equity to tangible assets increased to over.
10% and that even with the balance sheet Oh. This thing at 843 million in organic deposit growth over the course of this year and still has 310 million MPP long PPP loans on the books, our total risk based capital ratio to 15.9%, which is about as high as we've ever had a we also.
Ah took on a larger C and D portfolio with the Franklin merger and on a combined basis managed to get that well under 100% of the regulatory guidance threshold. This quarter, which is a year earlier than we had originally anticipated and that we had originally committed.
We feel very strongly that our balance sheet is positioned well boat to whether any economic issues that may arise and to take advantage of any opportunities that may present themselves in the future.
So while I'm talking about capital Oh, I'll speak to our credit a bit as well a year to date, we've increased our allowance for credit losses by $153 million.
Over that same period, we've experienced only $2 million in net charge offs are hcl the loans held for investment excluding PPP loans is up to 2.66%.
Our hcl to nonperforming loans is 421%.
We feel very good maybe a little too good about the protection that we have in place for our loan portfolio.
Priority number four profitability or we need to keep working to bring our cost of deposits down given the decline that we've seen on the old earning assets. That's been a focus and will remain a focus until we regained our peer leading margin.
However, a year to date a mortgage.
It's put up 81 million in pre tax contribution or when we went into the year expecting about 10 to 15 million in pre tax contribution.
As a result, our adjusted things should be paid our Oh, Hey, that's a mouthful.
Has been over 3% each of the past two quarters. So I'd say, we've gotten a pretty effective hedge on our margin in times of declining right.
Priority number five.
Growth. We continued the measured approach should we put in place back in 2019, we started pumping the brakes on terms and rates that we felt were nonsensical.
We use this year to prune some of our weaker credits, while focusing on deepening relationships with some of our best customers.
With local economies are all across our footprint.
Picking up.
Our regional presidents are seeing significant pickups, and new opportunities for this quarter and expect some real momentum as we head into 2021.
On the topic of growth the company grew.
About 3.7 billion in assets overnight in mid August.
We've included a slide in this quarter's deck that lays that out just what bringing these.
These two banks creates for us in the Nashville, where they say and how some of our assumptions have shifted from announcement to today strategically.
We're thrilled to have the top market share and Williamson County in the second important share in rather candy, while many of the top 10 Davidson County, we continue to think that achieving critical mass in a market creates some synergies that leads to additional opportunities.
Eco perspective at announcement.
We thought that we were combining with some of the top five players where this merger in our market.
That became a bit clear.
Bit more clear after seven months that we were working together towards the close now that we've been working on the same theme every day for a couple of months I can definitively say that the talent is even better than expected.
The company has a group of high performing individuals that is used to winning with every new hire whether organic or through a merger with that it just shows you know.
That that they're joining the first bank team and they weren't born of the elite performing community banks in the country. Our message is that our performance stacks up well against your competition you should always be proud of your company. We believe that this message is resonating well with all of our team.
Made including our new thing makes we're excited to go out and tell that story in the market.
We do have.
Got some work to do to get things fully integrated and coming on all cylinders, but we've been really pleased how things have gone so far.
I'll, let mark Mike will walk you through all the gives and takes the purchase accounting later, but a couple of points I want to focus your attention on from a revenue perspective first the transaction ended up being accretive to tangible book value per share per share when the pandemic and its impact on the loan Mark we were evaluating the terms back and more.
Our table. They we thought we might see some dilution, but ultimately the purchase accounting swinging back the other way due to the zero rate environment and the interest rate Mark on the loan portfolio.
Each of our three whole bank transactions that we've done since going public have been neutral or accretive to tangible book value per share and we'll do our best to continue that streak.
Paul.
The second item is that we ultimately decided to classify the non core institutional portfolio as assets held for sale are the Nike brand team has done a tremendous job of working that portfolio and losing load from that portfolio out of the make this announcement.
And we are examining some wholesale options.
Portfolio had about 263 million in principle balances.
And then third by the credit quality of that portfolio is actually doing quite well and there are some stroll sponsors that some of the private equity backed loans in the portfolio. So we're hopeful that we will ultimately be able to realize better execution that or more and we don't feel any pressure to take any bottom feeder type bids that we may see you on that.
Yeah.
Oh all of that said.
At the end of what we've accomplished this year and I look at how our balance sheet position and the demographics of our footprint now that we have closed the merger and I can't help but think that our team has created an incredible buyout of franchise and shareholder value while the world then shut down.
We are laser focused on getting frankly integrated and will enter 2021 fired on all cylinders and poised to take advantage of opportunities with that I will turn the call over to Greg powers to talk about our loan portfolio.
Thanks, Chris Good morning will.
Talking to.
They spoken on previous calls about our asset quality and how it has continued to perform well even in these unusual times that continues to be our message for this quarter.
Strict credit metrics perspective, as you've seen in the release, we continue to report good numbers speak for themselves, including trends associated with past dues.
Our watch list classified Nonperformers.
But I'll touch on a few important specific categories on the deferral front, we have seen that move down from a high on a combined company basis of over 20% roughly 6% at quarter end as we've noted before at the onset of this we were proactive in reaching out to our customers and providing really which was a combination of ours.
Desire to help our customers as well as risk management.
Behind these numbers lies a few things for consideration and where do you.
Initially those that truly needed really the hardest hit got deferrals, but remember that many are requested deferral. We're in the category of Hey, we're doing fine, but with all this uncertainty I'm going to take a deferral out of conservatism and protecting against what might come next so that was our report in the first quarter then.
The second quarter came around those that were in the latter category went back to their pre Calvin plan and deferrals began to drop.
Now here, we are with the third quarter report and I'm glad to say, we continue to make progress in that regard.
In summary, we are cautiously optimistic about the size of this portfolio continuing to reduce our remaining pragmatic there without a vaccine are contained stimulus uncertainty regarding the ultimate outcome will remain the watchword.
This is especially true within the hotel segment, which accounts for the largest single concentration within the deferral portfolio.
Moving to slide 12. This provides an overview of the new combined portfolio as of quarter end moving total loans up by roughly $2.7 billion with the merger with Franklin synergy Bank.
Were excited about the impact that this makes on our company.
Chris has hit on us today and in previous presentations, but I think as worthy to highlight some of the changes as we put these two portfolios together.
First let's clarify how we have presented the portfolio. So we're on the same page my comments will be about the loans held for investments not the non core institutional portfolio I'm talking about the Plano relationship based local market loan and deposit book not the loans held for sale.
With the merger you will say that we remain a balanced well diversified company an area that has trended up as within the percentage of the portfolio, which is real estate based no question about it frankly, its energy held a higher concentration in first bank has historically, but it took advantage of the market build upon relationships and.
Expertise and is extremely successful in this area.
That real estate portfolio is primarily broken out into our commercial real estate space and the residential real estate fees.
The residential segment is your standard homebuilding portfolio lending to builders, who are building single family homes in our market for sale.
If you're going to be on the homebuilding business.
I don't believe there are any better counties to be and then Williamson rather burden Davidson fennessey area.
Areas statistics continue to demonstrate strong growth and tight inventory levels. The legacy Franklin synergies portfolio reflects that market.
The focus was on dealing with the right people the right subdivision assessing inventories and concentrations and monitoring the construction process.
You will also see that our ratio of construction and development as a percent of risk based capital as Chris already alluded to is already below the 100% regulatory threshold now stands at 90%, which is frankly quickly or quicker than we had expected.
On the commercial real estate side, we see similarities within the two portfolios as well.
Again, a focus on dealing with people that we know borrowers with skin in the game a local market focus and owners willing to stand behind their deals generally similar underwriting parameters with a path toward a little higher dollar size in certain instances.
We have already begun the steps of merging the two companies credit processes and organizations will spend a lot of time going forward melding. The two cultures and can thing to us and we liked the portfolios.
Moving to the next slide number 13.
As we have done in the past, we began breaking out the portfolio along the lines of industries of concern.
This first slide provides an overview with the next slides, providing a little more granularity.
Slide 14 references the retail portfolio.
Which has continued to be something that we're all watching but I would say that in general we continue to see good results.
This has a significant CNS owner occupied piece that has fared well as has the salary side. This is one of those segments that has moved up with the merger and while in general we would say that the portfolios are similar typically smaller retail strip centers.
We have picked up and they typically larger loan and the 30 million $34 million range secured by regional mall.
That property. However has not saw the deferral is meeting its obligations and actually generating positive cash flow.
Occupancy is high and its performance always some.
Leverage with low loan to value in the mid 50% range.
On slide 15, the hotel slide.
This highlights one of my previous comments that hotels represent the largest component of our deferrals. This portfolio consist of over 100 homes ranging from a few hundred thousand dollars to our largest single exposure just under 26 million.
We remain cautiously optimistic about the portfolio I wish that we could report across the board step ups in occupancy and performance, but at this point it continues to be a mixed bag of results.
We do remain positive about our original underwriting and the willingness of the borrowers to support their properties.
As an example of that without going into too much detail. We have entered into an agreement with one of our largest customers, which calls for them to bring all of the deferred interest current.
Stablex or reserve account for the upcoming year and in conjunction with this we agreed to extend the maturity for roughly a year.
Rather than requiring principal and interest we did agree to an interest only structure on.
On an overall basis, we believe this corroborates our position that we are dealing with good properties and investors who had both the willingness and the wherewithal to stand behind these loans.
Lastly on this slide I'd note that our portfolio is primarily limited service and full service properties, which as you know is a model that our models that can support the location that an overall lower occupancy rate compared to that of say a luxury property.
Healthcare is our next slide number 16.
Which accounts for 4.7% in the portfolio.
Overall not much to report here generally good results anecdotally, we are hearing from the field that physician practices are steady after reopening while assisted living and skilled nursing operators are having to continue to deal with a common protocols, which is impacting occupancy.
Our restaurant exposure as reflected on slide number 17 accounting for just under 2% in total as we've talked about before we have a pretty diverse portfolio here concentrations moved up slightly with the merger as did our largest single exposure now at approximately $11 million. So good local operator.
In strong financial footings, but as with all markets. The limited service operators are actually finding the going easier than the full service and continued to be challenged with constraints on seating capacity.
So far so good on this portfolio as well, but one that we will continue to monitor closely.
As noted in our prior quarters presentations not included within this segment's numbers. We did have a larger diversified business operator, whose performance was declining with the rating that had been moved to criticize and Q2.
You will recall that we indicated that without an improvement it would likely continue to decline. This roughly 25 million dollar exposure has done just that and accounts for the majority of the pickup and our substandard assets for this quarter.
Slide 18 highlights our other leisure portfolio, which represent a mix of industries accounted for just under 2% of the total.
As we discussed before some segments here I've seen a benefit over the past few quarters as outdoor activities.
Over the past few quarters, such as outdoor activities, while indoor venues have continued to struggle.
Overall, we are continuing to see satisfactory performance within the segment, but we'll keep it under review as you would expect.
Slide 19 breaks out transportation and warehousing also under 2% of the total overall continued good results within this segment, which has seen some industry has actually improved within the current economic environment, such as trucking and warehousing, we do lose some air travel and support business, but rest assured that does not include direct that to any color.
Our show Airlines.
In summary asset quality remains good deferrals, continuing to come down and we're excited about the merger and working with our new teammates and customers.
It wouldn't be an update from credit from a credit perspective. However, if we didn't remind us all that any enthusiasm we have at this point must continue to be tempered with the uncertainties related to the pandemic.
With that I'll turn it over to Mike.
Thank you Greg and good morning, everyone. My prepared remarks today will focus on seasonal and the financial impact of the Franklin merger margin and mortgage and then I'll be available for the few nice action as well.
First on seasonal there are two sides to focus on slide 20 lays out our economic forecasts and resulting LTL by each reporting category and slide 21 shows the walk forward from June day sale of $113 million to Septembers 184 million.
I'll touch first on our forecast assumption, we used a blended the baseline forecast as well as more positive forecast that Moody's put out in July with that when we feel like we're pretty well captured our current expectations for our market.
The rest of the country continue to react than maybe you did put out additional forecast in August and September they were incrementally more positive than our dillard scenarios, but.
But in that time between forecast, we didn't have any noticeable changes in economic activity in our markets and we ultimately stuck with our July blend for the quarter.
Looking at they feel on our legacy portfolio. There were two primary drivers to the slight relief that we saw in the quarter. The first was declining balances in the sector with the improving economic forecast that we use for Q3 as opposed to Q2.
Together these combined to produce approximately $7 million IPO reversals. This quarter, we had a little bit of heartburn about letting those reserves go we still feel very adequately reserved and continue to make good paper that what our model tells us at this point, but a few qualitative adjustment.
On the Franklin related Hcl, there were a few components that I'll touch on the first then I'll speak to as our non purchased credit deteriorated allowance as of September Thirtyth. There were 1.7 billion in loans in that bucket in our FICO model told if they needed to 3.06% NHL.
That resulted in provision expense of $52.8 million for the quarter.
Given the unique nature of that provision providing for the entire reserve on the portfolio in one quarter, we back that out of our adjusted earnings.
The second piece to this Franklin related Hcl was the purchase credit deteriorated Hcl.
As of September Thirtyth, there was about.
About 700 million and learned in that bucket in our supermodel and qualitative factors led us to an I feel a 3.62% to $24.8 million on that portfolio.
PPD Hcl does not count towards tier two capital and was established a close impacting goodwill rather than being Expensed on day one.
All told we wound up at 184 million and Hcl or 2.66% of loans held for investment excluding CPP.
Segue from our NGL to our provision expense.
There were four main pieces starts that before we've talked about to which our legacy portfolio reserve release in the FSB related they want access.
The other two are related to provision for unfunded commitments.
With the outlook for the economy, continuing to improve from quarter to quarter, we had a release on unfunded commitments of 900 million or 4.9 million.
On the FSB Fad, our assumptions on the economic environment led to provision for unfunded commitments on day, one at 10.4 million.
Similar to our non PCD provision due to the unique nature bettering this entire reserve on the portfolio in one quarter. We've also back this out of our adjusted earnings.
You can see the details of these four components on our provision excellent except on slide 21.
Moving from seasonal into an update on our purchase accounting I'd first like to talk to the loan Mark and I think it's helpful to point you to the bottom of slide eight as I'm talking through the.
At announcement, we had assumed 110 million of total pre tax impact of tangible common equity related to the landmark.
Be that initial initial provisioning they weren't PCBA feel or fair value Mark.
It closed we wound up with $101 million of impact.
$88 million that was related to a deal which compared to $41 million estimated announcement to put that into relative term EFI kase initial adoption seasonal brought our legacy Standalone I feel up from 31 million to 54 million.
The economic forecast from that point on bought our Hcl from 54 million to what would have been 106 million standalone in this quarter roughly double what would have been expected on a standalone basis back in January so.
So that moved from 441 million to 88 million.
Pretty well followed suit.
The second piece of that $101 million the mark on the non strategic portfolio at.
At announcement, we'd assumed an 8% mark on that $430 million portfolio.
At September Thirtyth, we had a $22 million mark on the remaining $263 million or 8.4%.
In the past few months, we've seen a large portion of that portfolio either refinance at par or get sold to other banks close to par.
We feel comfortable that 8% level captures a liquidity mark there and while we were we will be opportunistic if we get the right price on the portfolio, we feel no pressure to sell given the credit quality of the remaining ones.
Between the Hcl on the fair value Mark on the noncore portfolio, we wound up at 112 million in credit Mark were 75 million to send to the now, but we feel pretty good.
The last piece of the 101 million loan market are the fair value re liquidity and credit Mark that.
That number came in at 11 million, our premium versus $35 million market. We had assumed announcement so 46 million are selling.
Obviously, the right environment with a huge driver there.
Checking in on other purchase accounting assumption from announcement versus what we realize.
Between the two banks, we've expensed around 30 million of murder charge today versus 50 million than we'd expected at announcement.
Despite it being a fourth quarter event, we realize most of the conversion related expenses in the third quarter we.
We have $5 million to $10 million left than we'd expect to see in the fourth quarter related to linger in contract terminations and conversion costs.
We ended up adding non net branches from the acquisition Franklin at least all their locations except for their former headquarters location, which has become our operation to.
Our current plan is to file sub tenants for these closed locations. So that the current real estate environment. It may take a little bit longer than originally anticipated to realize our full run rate of cost revenue that said, we feel very strongly that we will hit our 30% cost divestment in early 2021.
On Durban, we are clearly over 10 billion in assets today, there is a potential path to getting under 10 billion at 12 31, but we're weighing the cost benefit of executing on that strategy at.
At this point, we are more likely than not to be over $10 billion at 12, 31 and would realized loss in interchange revenue created in the second half of 2021, which is how we model the transaction that announcement.
Finally, we calculate about 50 bips of tangible book value accretion as of today versus our neutral announcement as Chris noted each of our pass through the whole bank deals have been either accretive or neutral to tangible book value.
And it feels pretty good to protect that value for our shareholders.
Moving on to the margin PPP and liquidity continues to weigh on the stated number the third quarters fairly Matthew given Pvp liquidity and haven't Franklin on the books for only half the quarter.
Contractual loan yields decreased 21 basis points to 4.36% from 4.5% in Q2.
PPP lines had about 18 best of impact on the contractual yield this quarter and for recent color. Despite contractual right on the portfolio was around 4.45% at 930.
Excluding PBP learns the contractual rate on the held for investment portfolio was around 4.6%.
On the liability side total deposit cost decreased nine basis points, 0.56%, 2.65% in Q2.
Despite cost of deposits was 0.59% as of September Thirtyth.
There are $257 million in time deposits maturing in the fourth quarter with a weighted average cost of 1.77%.
The sheet rates for those deposits would have been repriced approximately 40 basis points for comparison during the third quarter, we had a little under 290 million as Cds material with a 1.84% average cost.
Okay shoot rate of just under 40, Bips and we renewed about 65% of those at an average cost of just under 50 basis points.
We have also identified $471 million in legacy Franklin deposit relationships at a contractual rate of 1.25% that we would consider not quite core customer.
Customer relationships that we think will be leaving the balance sheet this quarter.
Moving to mortgage the team produced another record quarter, so we'd like to congratulate their work in that regard and our mortgage production continues to provide us with strong counter balance to the NIM pressure that the bank is facing in this low rate environment.
Similarly to last quarter. The group continues to benefit from strong origination volumes and capacity constraints in the industry producing atypical margins on loans in our pipeline and ultimately on our gain on sale margins as seen on slide 25.
As we highlighted during our second quarter earnings call the Mark to market value demonstrated in Q2, you flow the gain on sale in Q3, plus some execution pick up as expected.
Our expectation is gain on sale will continue to be at elevated levels in Q4 due to our current mark to market value but.
But we will have likely seen the peak for margins on new production.
With that I will turn the call back over to Keira Hi, Thank you Michael and thank you Greg for the color.
Because we're very proud of what we've accomplished this quarter. There are many challenges that still lay ahead for us, but we're excited to meet those that execute against those in and capitalize on the opportunities.
With that I'd like to open the line up for questions. Operator, yes. Thank you. We will now begin the question and answer session to ask.
Question You May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to try your question. Please press Star then too.
Time, we will pause momentarily to assemble the roster.
And the first question comes from Catherine Mealor with KBW.
Thanks, Good morning.
Good morning Catherine.
Thanks for all of the tolerance is a couple of months.
Yes, you kind of Nitty questions and then maybe we'll get more big picture, but my first question is just on the.
The outlook for core core bank extends its if we strip out mortgage.
It looks like your core banking expenses were just under $60 million I know weve the partial quarter as Franklin and then you've got the cost savings coming in is there any kind of visibility you can get to what that number looks like revenue they get fourth quarter, and then can be a growth rate for next year.
Yes, and Kevin.
I don't know that morning.
With us and.
I don't know exactly but the dollar, but let me make a couple of comments.
Our core banking expenses or pretty close to flat.
Let I'll call, our legacy core bank expenses pretty pretty close to flat quarter over quarter.
Our cost saves are coming in.
As expected.
Perhaps slightly earlier.
[music].
In terms of Uh huh.
It is it's a couple of things that move both ways our cost saves are coming in.
I'd say generally as expected maybe slightly better because some of it we're getting some of them earlier.
And as we look out.
[music].
We could we could actually beat that number sometime in 21.
There are a couple of things that are moving in there. We've got some branch you go from the branch closures.
We plan to do some subleasing.
That's that's less a try the sublease market is less attractive than it was when we made that announcement and so we're allowing that that could drag on a little more than we expected, but even with all that we think will will will meet.
Or exceed that we are very confident that we would meet the cost saves and likely exceed those in.
And so.
Those those two elements mortgage will continue to remain elevated in the in the fourth quarter revenue expense standpoint, that's purely variable expense related to volume.
If you'll notice our efficiency on that business continues to get better and better again, because it's because our variable expense and bear it our revenue is going up so much so.
And so that's kind of the moving pieces as we look at both Corey any other verification okay.
All right that's helpful.
Helpful and then.
Oh, there are other seasonal think they were up a little bit more than expected. This quarter anything kind of one time in that line or is that a good run rate.
Okay.
Not thing.
In other fees our loan fees were were consistent not particularly high or swap fees were were $9 million, yes, they were fairly consistent.
And so.
So the.
No as we can.
Review, the detail and if theres something there we can certainly.
Put that our debt.
Okay, and then maybe one one last one from me just the increase in classified assets. This is just.
Well, let me just give you the Franklin deal closing or was there any kind of migration back on the legacy perspective.
Great Great Catherines, Greg Bowers good morning.
Good morning.
And I think you'll see some of that from the merger, but as I referenced.
We did have one larger account that's about $25 million from legacy first bank that moved into substandard quarter and that's that's the one we've referenced and you referenced in your comments actually is what is what that it was referenced in the comments its act if that gets actually referencing.
Dec as well yes.
I had a cap how does and then what type of credit is that.
It's it's a it's not a record on that yesterday diversified foodservice is what I call.
So its if you play that.
Got it okay, Yes, that's right that's right got it okay got it great. Thank you so much I think you.
Alright, Thank you Kathryn.
Thank you and the next question comes from Jennifer Demba with tourists Securities.
Thank you good morning, yes.
Good morning, Jennifer.
Hi, can you remind us what kind of its Steve yes.
You would expect next year per quarter I should just say over 10 billion in assets in the fourth quarter.
Yeah, it's about a five it's Bob if I may on between five and 6 million is what it would what would what that's what that.
I'll refrain [laughter], that's what that price control would cost us.
Yes.
And can you also update us on the CFO search.
Yes.
Yeah, that's a bit going well and and.
We would expect to conclude that for the year and so it's oh and we've been pleased.
With that how that's going and interest in that kind of thing.
Okay. One more question you mentioned a couple of times.
This environment might give you some opportunities in terms of acquisitions.
Well, it's about what you're interested in at this point and what kind of timing, we'd be looking at how long before you'd be.
Comfortable doing another deal.
Yeah, It is that Oh.
I do want to be.
Clear that as a as I say the banks that need their buddies as sit around the table that I'm sitting [laughter] that that we we are.
We're thrilled with our position, but we're also really focused right now internally and ER and making sure that our engine is hitting on all cylinders here a week every acquisition that we do and it's been really it's been a a financially successful as we highlighted we didnt, we don't talk about the business.
But if they have it's actually been really strategically successful and we say things about about the Franklin merger and the folks and what we get in terms of.
Critical mass and and I would go back to prior to that same thing with the branch acquisition from Atlantic Capital and then you go back prior to that I'd say the same thing about that the transaction, we did with the <unk>.
Right and all of those really strategic in operating leverage.
And and so we're sitting here now I wish we would go and we really will make sure our organic growth engine is still.
Best.
I think in our markets and it among our peers and so that is absolutely job. One is making sure we get some things right and I know that's kind of takes a little more time I suspect, we'll get hit with opportunities frankly before we are ready for them, we wouldn't be disappointed if we didn't get an opportunity for for.
Three to six months, but I suspect, we will and we will have to make the same strategic decision that we we always do it needs to be it would have to be where that was really strategic to us again, we wouldn't do would just because.
Some light there is an opportunity it's got to be awarded that's strategic for us and so that's a lot of wind to say, we're happy right now to continue to improve all of our operating metrics organically.
And as we move into 21.
We'll see what what opportunities come our way.
Is it really kind of where we where we sit I would I would say.
We're really happy, though with our balance sheet and the strength of our balance sheet and.
So financially I think we're we sit in great position.
Thanks, so much.
Okay. Thanks, Jeff.
Thank you and the next question comes from Stephen Scouten with Piper Sadler.
Hey, good morning, everyone.
The more as David.
One quick clarifier on the Durbin impact that $5 million to $6 million was that just the back half 21 numbers that annualized number.
That's an annual number or so so we would expect it to go in place some in assuming that we don't get under 10 billion I'd say, it's a <unk> it'd be a real long shot, but but we because of some things were doing to pay off some wholesale funding and.
And.
It's not.
Completely out of the question, but it's a long shot.
Right.
And then on the.
Food services credit there that 25 million dollar exposure.
I guess one question around the reserves any specific reserve there I can't remember if he noted that last quarter and then if you could touch on the percentage of the reserve.
Island looks like about 66 basis points versus in a much higher in the other category. So wondering kind of what's different for you guys around that portfolio and what gives you confidence that that kind of lower percentage on that segment.
Okay.
Yeah. Good morning, this is Greg I.
I would I would just drift as to the to the Cecil numbers that we've got in here as far as the Hcl specific.
On the reserves just in general.
On those that's how it so that's how we measure that.
And what was the second to the saying that as David What's Michaelson CNV present, we did see some improvement there quarter over quarter I think that.
The stimulus is.
Played played into the performance in that and kind of a loss expectations, we'll see how that looks going forward, but.
That that segment certainly been.
We buy some of that.
Yes, I think so.
Thanks, Mike Burton, maybe with BBB line affiliated with Us.
That's right yeah.
The first bar, so nothing specific other than what our Cecil calculation would.
Would would cause us to it it would cause a little living increase because of the rating of that kind of thing, but nothing specific other than that.
Okay, Great and then.
You guys have noted the the possibilities to use the liquidity to pass some higher costs fundings and noncore items from FX be beyond that I mean, it looks like you still have a lot of excess liquidity. So wondering.
And how you think about additional initiatives there whether it be reducing the securities book or anything else that might need a little bit more there on the liquidity side.
Yeah.
Yes, there's a little bit of a dilemma there because.
Yeah, we do pride ourselves on having a really strong funding side of our balance sheet that really helps our profitability I think it really helps our stability stability and helps our margin helps a lot of things and so.
But but today, there's some elevation in the deposit numbers that that's not real up because of the liquidity that the that the central bankers have made available to everybody because of PPP.
And.
You know in the the relief that folks have gotten and so.
It's okay. That's all going on at the same time we're.
As we put these two balance sheets together, we're looking at them. Some wholesale funding so were trapped pretty rapidly trying to pay that down and then we are thinking about it or the investment portfolio, possibly you know it.
It could grow but of course, you know your yields or great and so.
You may have picked up a little bit from the tone.
And this was prepaid debit, but we had had it or mortgage we.
We had been big we've begun to see some things from both a credit perspective on the low side, but the credit perspective, and a pricing perspective was attractive to us and so we've been.
We absolutely 100% open for business, even grow as a business, but probably at a slower pace than we have I would expect to see us be more aggressive again, we've got the Franklin transaction behind US we have a team of eight.
Hey, players, there and I would expect us to see.
Those folks being more aggressive.
As we move out into 21, and so thats another stress.
Perfect Super helpful. Maybe one last thing very very high level and I mean, I think someone did maybe you guys weren't necessarily seen the economic reopening that we almost indicated by the improvement in the August Moody's numbers, but the flip side of that as I think you are still seeing pretty strong population inflows I mean, I think all of US are hearing about you.
Eurotech States population grown Andrew state.
Basically your tax rate migration from the northeast and so forth wondering just anecdotally if you can tell us what you're seeing in your markets and if you're seeing any significant influence on that phenomena.
Yeah, we really are a Stephen good question and we get asked that very often especially from the investors in the in the northeast that particularly in New York and other places but.
We're seeing.
Our job growth.
<unk> has just continued to be really strong in our markets, particularly national would be the leader there.
We're seeing a technology companies make investments in new significant numbers of folks hear Amazon has put a big had no has a big presence.
And so we're really seeing the we've seen those numbers begin to pick up again, GM just announced the.
A really big $2 billion investment in there.
Their assembly facility and in Spring Hill, which is a Nashville suburb all three of the states.
Let's say like plants now we're assembling electric vehicles, so again folks are making big investments here and so.
So it's actually quite good and then I'll give you a couple from the.
[music].
Just the residential side continues to almost to defy logic I mean it it has been so remarkable and then just pure anecdotally from somebody who lives here the.
The number of folks they've that are migrating in that you just here.
But it holds up.
And when they're moving freight from the West coast.
From Chicago, both from a that need of the New York area.
New Jersey, Connecticut, there, they're big homes here and so we're seeing that I mean, it's it's a it's just a constant dinner party topic. So we're seeing a lot of it.
Got it got it that's the great great. Thanks, so much guys reshaping congrats on a really good color.
Thank you we appreciate it Steve.
Thank you and the next question comes from Kevin Fitzsimmons with the D.A. Davidson.
Hey, good morning, guys.
Good morning, Kevin.
Hey, Chris given you spent a lot of time on the did reserve and appreciate all the detail and given.
The strength of the ratio at this point and given that the calculations led.
Led to some releases in this quarter I mean is it fair to say that barring no big changes in economic metrics or expectations that.
The bulk of the reserve build is behind you and you guys could potentially be growing organically and not necessarily adding to the reserve over the next few quarters.
Yeah, I think it's fair we have.
We've said consistently I think that's a pretty good characterization characterization.
And we said fairly consistently that we have had have not very cool greatly from pretty straight.
Numbers, and we own from our CECO calculations and so.
Well, we haven't had the undue influence of qualitative factors and understand different banks doing it differently. That's been our approach and that's led us to.
Allowance number that's the highest among our peers I think.
Hi, This is certainly among the highest and so yeah I think it's fair to say that we even as we look at it. We go Wow. It's it's surely can't we can't need all that is what we said we look at in the cycle now.
We quickly follow that up with hey, it could get worse than we expect.
You know there there's a perfect couldn't be election turmoil that could be all kinds of things that caused us to take a conservative approach, but I think you characterized that we wouldn't.
Unless something really change in the economic outlook, we wouldn't see it going up from here.
Unless there was something that really Jake.
Okay, Great. That's that's very helpful and.
On the institutional loan book from FSP the decision to put that into held for sale was was that I know originally that was the plan to to look to sell that portfolio in short order and.
Dan It was decided to just step back and take some time so was there but.
But this decision process on whether to keep that in the held for investment portfolio, where did the decision to go to held for sale imply that you saw more of a short term opportunity to be able to sell those.
Yeah.
Good question and then in.
And I would start by telling you it's been a conversation as late as yesterday afternoon.
And Thats whats in held for sale into four market you're in you characterize it again you characterized it exactly right. Initially we just looked at like we're going to sell that.
Then we we as we went through we looked at it as a eight a.
Back in March and April were thinking boy will we be able to us. So at and then as we then moved into a.
The immutable here here lately, we've taken the approach of.
It's nice to have have options with it and therefore, we we were letting some folks look at it but as I said before they're going to need to come skol, because there isn't performing portfolio.
In today's world, It's got a yield on it that's a north of 5%.
And those aren't easy to find and so you know it's no fire sell it but somebody somebody comes strong and that we we than we than we make we may let it go.
And so it's a it's a constant topic.
Okay, Great and one last one.
Understandably, there's a number of moving parts in terms of what what.
What you all are doing on the balance sheet and Ah things things moving off things moving on so taking maybe a step back looking from a bigger picture can you.
Give some top level expectations on what you could see the core net interest margin doing what you could see the reported net interest margin doing in let's say on an ex PPP forgiveness basis over the next two to three quarters. Thanks.
Yeah.
Kevin Yeah, we appreciate the question and but but but really really we're just not prepared to do that right now.
Because of exactly what you mentioned, there's a lot of big spend a lot of moving parts and pieces and so we tried to put out some of the parts and pieces, but we didn't want to go much. We didn't go we wouldn't want to go beyond that at this point you know as we move into the quarter and we do some investor meetings that we put out a deck and we may update today.
Deck and put out some additional information later, but at this point, we we don't want to.
We don't want to go any further on what we expect on the margin next quarter the quarter ever.
Okay totally understand alright, thanks, guys.
All right.
Thank you.
Once again as a reminder, please press Star then one if you would like to ask your question.
And our next question comes from Iceland with JP Morgan.
Hi, good morning.
Good morning, Alex.
No following two consecutive quarters of revenue record mortgage contribution when you think about driving pre provision net revenue growth in 2021, what are the main levers you're thinking of offsetting some potential mortgage headwind then can you drive positive growth in the upcoming year.
Yeah. So if you think about.
Where we are where we are from a up a pretax pre provision revenue number.
And you look at the fact that we've had a pre tax pre provision are a way of well north of three and by the way most of our peers are hoping to get north of two and falling short and.
And so we're looking at it as though we've had sort of a perfect storm of events that has created.
Mortgage results that are not going to be repeated we don't it would be we'd be that we'd be more shock anybody a frac matter fact last quarter.
I think we did said something like we wouldn't expect the same performance in the next quarter and but it was even better and so nobody had more shocked about that than than we are so as we look at 2020.
One we're really focused on that core earnings of the bank and so our core quarter earnings or the mortgage we got a huge refinanced help in this year you know, let's say that rates go at projected we'd expect another quite strong year our previous.
We have I think our previous record contribution from mortgage was 17 million on an annual basis, and we did a 38 million this quarter, okay and so.
So said no. It would I mean look we never say never and we set high goals and we have been pretty good at achieving them.
But but I would hate to set the expectation that we duplicate this mortgage year next year.
Don't matter of fact that they don't want to set that expectation.
We're going to be focused on how we grow the market will be focused on how we continued the momentum in mortgage understand volumes are going to be less than the margins are going to be less than oil is.
The way we see it.
But you know we still expect to have a year, leading an industry leading profitability in.
In terms of you know our return on capital in terms of our growth numbers and in terms of our.
And in terms of.
Well really those those two measures in terms of our growth in terms of our return on that capital and in terms of our EPS growth.
Thanks for that and then just can you speak about the building momentum into 2021 from your regional President how comfortable are you returning towards that prior long term growth loan growth target of 10% to 12% and or has that target changed with the Franklin.
Thank you.
Oh that long term target has it has it changed.
And.
Especially with the Franklin murder, because they were they have a they have and so there is the strongest markets with the strongest bankers and so we.
We we certainly wouldn't want to.
Put footwear.
Foot range on those guys because they do a great job until we wouldn't see the Franklin merger impacting it and we would see long term that continuing to be a good strong goal for us.
I'd say the first half of 21 right now actually we see some real momentum heading into 21.
But I would also say that there's some economic uncertainty headed into the first half and so that that bears on their thinking a little bit where are they.
Thinking about about 21, but I actually getting taking our markets and where we are.
We see momentum heading into it we see excitement among our people heading into it coming off of whats been a challenging year.
And so we we think thats a good long term target not sure what it'll be in.
Not sure what it'll be.
Exactly the loan growth goal, yet for 21, but.
But we do see a level though.
Thanks for taking my questions.
Yeah, Hey, Alex the one other thing I would mention there is we do have a new team in Memphis.
And so thats they are growing off a lower base, but they're they're really doing a great job of bringing some things on there in that market.
So we've got some events like that to that should help whenever we look at the overall whenever we look at the overall growth for the company. So.
Got it thank you.
Right.
Thank you and that does conclude the question answer session. So I would like to return the floor to Chris homes for any closing comments.
Thank you very much everybody for being on the call. Thanks good questions in.
We appreciate you joining us again, we wrap it up a great quarter and we're looking forward to the fourth so everybody have a great day. Thanks.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.