Q4 2020 FB Financial Corp Earnings Call
Okay.
Good morning, and welcome to FB financial Corporation's fourth quarter, 'twenty and 'twenty earnings Conference call.
And the call today from FB financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Magee, Chief Financial Officer, Greg Bowers, Chief Credit Officer, and with Evans President of FB ventures, and will be available during the question and answer session. Please note FB Financial's earnings.
Release supplemental financial information and this morning's presentation are available on the Investor Relations page of the company's website at Www Dot first bank online dot com and on the Securities and exchange Commission's website at Www Dot FCC Dot Gov.
Today's call is being recorded and will be available for replay on FB Financial's website, approximately one hour after the conclusion of the call.
At this time, all participants have been placed in a listen only mode and call will be opened for questions. After the presentation with that I would like to turn the call over to Robert how and director of corporate Finance. Please go ahead.
Thank you Kate.
During this presentation.
And may make comments, which constitute forward looking statements under the federal Securities laws.
All forward looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB financial to differ materially from any results expressed or implied by such forward looking statements.
Many of such factors are beyond FB financial.
And as control ability to control or predict and listeners are cautioned not to put undue reliance on such.
And state.
And more detailed description of these and other risks is contained and SB financial's periodic and current reports filed with the SEC and <unk>.
Cleaning FB Financial's, most recent form 10-K, and except as required by law FB financial and disclaims any obligation to update or revise any forward looking statements contained in this presentation.
And as a result of new information future events or otherwise in.
In addition, these remarks may include certain non-GAAP financial measures as defined by SEC regulation G.
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The most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures and available and FB Financial's earnings release supplemental financial information and 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 SEC's website at Www Dot FCC Dot Gov.
And now like to turn the presentation over to Chris Holmes.
Alright. Thank.
Thank you Robert and good morning. Thank you all for joining US importing we appreciate your interest as always and our company.
Oh.
And as we start things start to thinking about the themes and preparing our comments for this quarter. It really struck me was significant ear 2020 was for our associates and our shareholders our team.
Has it actually had a really special year and I won't give you a few facts and the first on our financials.
Our adjusted net income for the year was $142 million.
This represents adjusted EPS of $3.73 versus $2.83 per share last year.
For a 31.8 per cent increase.
And this is an adjusted return on average assets of 168% and an adjusted return on tangible common equity of $19 one per cent.
Those earnings also moved our tangible book value to $21.64 a share.
Growing over the prior year by nearly 17%.
Yes S at nearly 17% and can I remembered.
This growth came after we provided 108 billion per loan losses and increased our allowance to pinpoint four eight per cent of loans.
Bigger that's among the highest of our peers are.
Our balance sheet is in excellent shape as we enter 2020.
In addition to the increase and our allowance we grew from 6 billion and assets to 11 billion and assets during the year.
But rather than this growth stressing our capital ratios, we maintain a tangible common equity to tangible assets ratio of nine 3%.
And we increased our total risk based capital and 12 book capital ratio from 12, 2%.
0.2 per cent all of this without an equity raise.
Beyond the year's financial results and there were some other noteworthy accomplishments.
Four years ago are only relevant presence and and MSA within Jackson, Tennessee, where we were where we were third and market share.
Over the last four years, we built top 10 market shares and Nashville, where we're six by the way with $4 $8 billion and deposits and Chattanooga, where where death and market share and Knoxville, where we're night and and bowling Green and where were seven.
Those are markets that he can't predict projected household income growth of over 8% over the next five years and projected population growth and expense that's expected to be 4% and above.
Finally, we continue to be a great place to work for our status is of all the accomplishments of 2020.
And I'm personally might be the most proud of American banker, recognizing us as one of the top banks to work for for the first time and this year we've.
We've been recognized as a top workplace by the Tennessee and.
The largest.
Newspaper here in Tennessee for the past five years.
And it's nice to add and national recognition as a superior workplace building.
Building on that and culture, we've not had a single pandemic related job elimination.
And for those associates are debt were unable to perform their jobs due to branch closures. There was no reduction in play and I'd like to think there was never a concern on behalf of our associates that we would do things any other way.
So with all of that.
We've had a monster 'twenty and 'twenty and.
And I want our team to take a minute to be proud of themselves and what they've accomplished.
But after that minute, it's time for us to get back to work because we want to follow that mantra here with a fantastic 'twenty and 'twenty, one and 'twenty 'twenty two.
We go into 'twenty and 'twenty, one with a lot of excitement and optimism because we have a lot of labor that we can pull to build on last year's performance.
First.
The acquisitions get the headlines, but we're and organic growth company and we pride ourselves on that work and competitors and taking market share.
With two acquisitions and Covid last year, we had plenty of distractions today, we're positioned very well for organic growth in Nashville, and Knoxville, and Chattanooga, Jackson, and bowling Green and which are all very strong growth markets.
We have excellent leadership and place strong branch delivery networks, good market presence and plenty of room to grow our market shares.
And Memphis, we recently added a new market president and a team of relationship managers and boards and how comfortable we have very little market share. So we can be very aggressive and getting after new business.
Two other contributors we ex.
Two other contributors, we expect a reliable steady slower growth, but higher margin contribution that we've come to rely on from our smaller community markets and will be aggressive and recruiting and hiring additional relationship managers and every part of our footprint with our culture size of momentum, there's not a better home.
And for ambitious relationship managers across all our markets, we set aggressive targets internally and in aggregate, we expect to deliver mid to high single digit loan growth in 'twenty and 'twenty one.
We expect the first half of the year to be slower than the second half.
But we also.
Expect our markets to be among the best as economic activity increases during the year.
Mortgages and other areas of strength.
Volumes and margins remain elevated and our team will continue to capitalize on this favorable environment. We produced 23 million of adjusted pre tax contribution last quarter.
And typically the slowest quarter from mortgage activity and the year. Our team has continued to perform well in January so we expect first quarter to be another strong one for mortgage.
And then after that we'll be back into the purchase season.
And that between continued low rates and the current housing start trends, we expect to be strong.
As you all know mortgage volumes are very very difficult to forecast and frankly, we failed every time, we've tried to do it but we expect the first quarter to be similar to Q4 with a 72 to 100 per cent of the previous quarters contribution and we.
We expect continued strength and the second and third quarters, barring a significant change and the environment.
On net interest margin, we continue to carry significant levels of liquidity, which weighs on the margin.
But it gives us some leverage over the next couple of quarters to improve our funding cost.
This past quarter, we could go to and we did a good job of further purifying your balance sheet and reduce noncore funding by $462 million.
And between F. H L b advances and wholesale type deposits, we have another 80, Meg and or so to go with the first two quarters of the year on the asset side, it's difficult to buy and higher yielding assets everybody knows.
So we're still likely go to lose some yield on a contractual rate on loans ex PPP as long as this rate environment continues, but we think that we still have some good progress that we can make on our deposit cost to offset that.
Oh noninterest expenses, we realized our cost savings on the Franklin merger earlier than expected.
We realize and additional we may realize and additional $1 million to $2 million and annual run rate cost savings and the second half of 'twenty 'twenty, one, but we don't expect additional dramatic improvements and the first half of the year.
This larger balance sheet, and a larger platform and conversion activities behind us, though we feel like we're in a good spot to focus on some operational improvements that should help reduce expenses through productivity gains and avoiding future expenditures.
And I would expect low to mid single digit growth.
Growth through our core banking expenses fourth quarter run rate in 'twenty and 'twenty one.
Oh credit we do.
And as good or bad our portfolio was ever although deferrals and PPP loan and serve their purpose of putting our customers back on their fees and we use this opportunity to improve the overall quality of our loan book.
Did have one credit that we've been giving you updates on over the last few quarters that we decided to charge down and the fourth quarter. This accounted for 55 of our 58 basis points and net charge offs and we.
That's one and the Bud and we got it behind us.
I'll, let Greg and give you some more color, but I feel pretty good about where we stand and I think 'twenty and 'twenty ones metrics will bear that out.
To recap all of that.
We achieved density and relevance and some exceptional mortgage and.
And we have local leadership teams and plagues and know how to capitalize on the resources that we provide it for them.
Turned ourselves into an excellent option for talent that is looking to make a move.
Capital and liquidity positions are better suited than ever to take advantage of good business opportunities we have.
Have a very strong noninterest income engine and it should continue to deliver outstanding results. We've already achieved our targeted cost savings on the FSB and.
And we think the other.
We have some expense control where opportunities in front of us the margin has compressed, but we think we're well positioned to continue driving net funding costs, while deploying lower yielding liquidity into core loan growth and.
And credit it shouldn't be a headwind and force in 'twenty and 'twenty one.
With a great 'twenty and 'twenty.
And by the way did I mention that we did grow tangible book value by almost 17% and despite $108 million provisioned and the ear and we'll make sure. We got that went in there we're poised for a fantastic future and with that I'm going to turn things over to our Chief Credit officer, Mr. Bowers for some detail on credit.
Alright, Thank you, Chris I share your sense of optimism for 'twenty, and 'twenty, one and confidence and our overall asset quality and.
Integration of our portfolios has moved along well and I appreciate all the hard work that our teams and the markets have done in this regard it's no easy feat, we ask of them to coordinate the move and their customers on the new systems, while ensuring great customer service at the same time, it's been remarkable.
When you say that asset quality remains positive overall and with one exception. We believe you will see that in our credit metrics today that exception as a problem credit that as Chris noted, we have called out with you for the past three quarters like most deals and get into trouble and information comes in overtime and you assess it accordingly.
<unk> expenses change information gets updated and things they either get better or worse and in this case and just continuing to decline and just like any other deal and our portfolio and problems surface, we address and swiftly and decisively and then take the appropriate steps in this case. It was determined that appropriate steps included a charged down related to that loan.
And as a result, our net charge offs from the fourth quarter, and 58 basis points or $10 $4 million of this $10 4 million $9 9 million or 55, and the 58 basis points and charge offs.
We're tied to that one credit.
The balance was placed on non accrual, which accounted for 17 basis points of our 88 basis points and nonperforming loans to loans held for investment this quarter.
With that we believe this flow is appropriately marked and rated and our focus will continue to be honest resolution.
With that one exception the asset quality of the portfolio remains good and as Michael will detail poorly for us significantly reserved.
When I speak about the portfolio's quality one measure of this is and our deferred portfolio day.
<unk> are down to about $200 million or two nine per cent of the portfolio. That's a long way from the roughly $1 6 billion and we had a one point.
Note that when we say deferred and we are including all of the loans that remain on some form of modified payment schedule.
And we take comfort and noting that up at approximately $200 million roughly 65 per cent is making interest payments.
And with about 35 per cent of that portfolio on a full deferral.
That is we have allowed them to forego interest and principal.
Hotels remain the hardest hit area within deferrals, no surprise, there, making up 44 per cent of the Boulder pearls 41 per cent of the interest only deferrals.
We remain cautiously optimistic about the ultimate resolution for the remainder of that portfolio and are very pleased to say that it has come down so far.
The next area that we believe continues to reflect positively regarding our overall portfolio is and what we have called our industry's up concern and as you know we broken these out each quarter since the beginning of the pandemic I think you'll share our sense of overall and improvement here too as you review these slides.
Specifically, we will move to the hotels on slide 15.
Excuse me and tried to provide a little more color on that segment again overall, we still feel confident and the underwriting of that book as a whole, but occupancy rates continued to be impacted by the pandemic. We continue to work with those customers and there. We believe are strong and operators and our customers and continue to work with us and instances, where we have asked.
For additional capital.
We continue to be comforted by the quality of our properties management teams and investors and we sleep well at night, knowing that we have avoided projects and Nashville's core downtown tourist area larger profit luxury properties and conference Center properties.
And these figures specifically that the bulk of the deferrals are paying interest as a positive.
Another segment that continues to struggle as restaurants, which we have on slide 16.
Yeah.
And that's due to the reduced.
Capacity restrictions, especially in our metropolitan markets and old.
All trends across the geographies.
On the whole, though our growth generally continues to be okay, but I'm not recommending that we get them and I'll clear flag day shutdowns and reduced capacity limits are a challenge and.
And long term prospects for the industry remain cloudy.
We will share with the group, but this doesn't mean, we haven't had various specific issues. For example, we have one customer with a full service operations. There recently closed however, the guarantors that were part of our underwriting are stepping up and performing on the debt.
And as we've also noted on the positive side. The quick service segment of the business has fared well while overall, we're cautious about restaurants, we would entertain opportunities per se isn't and well capitalized operators and this segment.
If it made sense.
Lastly, roughly 25 per cent of our other leisure portfolio slide 17.
And on deferrals. So we have included that disclosure again this quarter.
Rather than a systemic issue and that portfolio. It's a handful of loans that comprise roughly 90 per cent of the deferred balances and those are customers and whose industries have remained impacted by the pandemic, but we feel good about our guarantors and collateral and each situation and think that the businesses should bounce back well once the vaccine.
And as widely distributed.
And our other industries are concerned and for example, retail health care and transportation and continue to perform and have minimal remaining deferrals you can see that we have reduced our disclosure on these industries this quarter and.
And that's because simply and generally they've returned to normal and there's nothing significant to highlight.
And as always if that changes, we'll really incorporate that into the deck for you.
From an overall economic viewpoint with the exception of hospitality and entertainment ARPA per our footprint has continued to perform economically better than any of us would have guessed back in April.
Moving on now to the institutional portfolio are held for sale portfolio. It has been reduced down to roughly $215 million down from $241 million. At Q3, you will recall that announcement and roughly a year ago now that portfolio.
And that approximately $430 million.
We maintain our position of exiting this portfolio as soon as we can we're willing to sell on a one off or a bulk basis, but as we've said before we're not willing to give away a performing portfolio will continue to work on this from the sales side and.
And then in the meantime, we'll just continue to do what we do with any loan and manage them on a one on one basis.
So for the institutional portfolio that held for sale portfolio, we say positive trash and that they continue to reduce standing now at half where it was at announcement.
It is appropriately marked and our expectation that it will reduce further from pay downs, one off loan sales or selling it and bulk.
Regarding our outlook for 'twenty and 'twenty, one we continue to be cautiously optimistic about trends throughout our market. The additional government stimulus should continue to be a welcome to assist until the vaccine and successfully distributed and our markets move back to normal.
The residential housing market and Nashville, and really across our entire footprint is still performing very well and is aided by continued influx of corporate.
And relocations as our new neighbors arrived from California, and New York, Chicago and on to enjoy our lifestyle and business environment here in Tennessee.
And as loan growth continues to pick back up we will remain vigilant and our underwriting our mantra has been and will continue to be long term profitable growth.
So in summary, a few points to highlight we're still in a pandemic and remain cautiously optimistic.
We had a jump and charge offs due to one specific deal.
Deferrals or down industries, I've concern share levels of and pregnant.
The held for sale portfolio continues to decline.
Our overall credit metrics are stable and.
And our reserves are strong.
With that I'll turn things over to Michael.
Thank you, Greg and good morning, everyone and my prepared remarks today will focus on margin and mortgage Cecil and an update on the financial impact of the Franklin merger.
Starting first and margin we are seeing the decline and contractual yield on loans beginning to slow.
Floating PPP loans, our December contractual yield is 448 per cent compared to $4 five 3% from the fourth quarter and $4 five 4% and the third quarter.
New originations and the fourth quarter of a weighted average rate of around $4. One five per se. So we would expect and continue to lose a few basis points per quarter on a contractual and you'll go for me.
Meanwhile, our cost of interest bearing deposits was around 59 basis points and December compared to 63 back and forth for the quarter.
We have $314 million and Cds coming due and the first quarter with a weighted average cost of around 151 basis point.
And the cheap rates on their deposits are currently 41 back and forth.
And the second quarter, we have an additional $308 million with a current rate of 124 basis points and our rates your rate of about 40 basis points.
For the past few quarters, we've managed to keep around 60 per span of our maturing deposits and.
Right around five to 10 back and forth above what the rate would indicate and we expect those trends to continue.
We also believe that we have continued room to lower our costs and money market accounts and think that next quarter, we should be able to pretty much match reductions and our contractual loan rates would decline and lower deposit costs.
We also continue to make strong progress and bang down non core deposits and borrowings last quarter, we discussed $571 million and noncore funding from the Franklin murder.
And we felt would leave the balance sheet and the fourth quarter, we were successful and exiting $362 million about $571 million and the remaining 200 and known and wholesale funding is the money market relationship and we ended up keeping and we actually marked out of the cost of approximately 35 basis points.
We expect to keep those on our balance sheet. The other contractual obligation in 2024.
In addition to the $362 million and legacy Franklin and funding, we paid down 100 million and legacy first birthday, and federal home loan Bank advances.
As noted the prepayment and Tony on that federal home.
Moving back and bags was around four and a half million.
And no federal home loan bank funding remaining on our balance sheet as of year end.
Looking forward, we have an additional $50 million and non core money market accounts.
And are scheduled to leave the balance sheet and the first quarter and another 20 million unexpectedly and in April.
We also intend to redeem and Franklin and legacy subordinated debt $40 million of which becomes callable after March 31 and.
And 20 million and which is callable after June 30th.
Both of those charges are on the balance sheet and a more cost of around five per cent.
Despite our progress and exiting non core funding and some stabilizing trends and our core margin excess liquidity does and will continue to weigh on our state and Martin and.
Strong deposit growth led by seasonal increases and public bonds of around 400 million drove our cash balances to increase 24% from the third and fourth quarter and cash now represents 12% of tangible assets.
Our total on balance sheet liquidity increased to 15, 2% and tangible assets during the quarter.
Based on historical seasonality with public bonds, and we anticipate that these deposits will begin to leave the balance sheet by early second quarter and continued to decline and the third quarter.
And our loan growth the field is very confident about what they'll be able to produce this year. However.
However, we have not gone and the growth come back into our numbers yet. So we remain fairly conservative about how much growth will stay and the first and second quarters.
We think that a mid to high single digit GAAP for the year is achievable and we will keep you updated as the outlet channel.
For the remaining liquidity, we intend to continue increasing our investment portfolios as we wait for organic loan growth engines and restart.
Moving to mortgage the team produced another strong quarter, which led to a record year for the division.
Mortgage continues to provide the company with a counterbalance to NIM pressure that bags had been facing.
During the third quarter earnings call, we discussing elevated gain on sale and a peak on margin from new production and that is demonstrated on slide seven.
As expected and the fourth quarter, there was a seasonal dip and volume and margin, but overall the group continues to benefit from elevated origination.
We do expect from compression in 2021 as refinance volume has declined and bring capacity back to the marketplace.
But this will somewhat be offset by the strength and the housing market and a very strong purchase market.
And we would like to congratulate the team for a record year and continued robust earnings.
Additionally on fee income we received relief on the interchange reduction associated with crossing 10 billion and access for the year.
That plan $3 million and reduced revenue that we had expected and the second half of 'twenty 'twenty, one will now be delayed until 'twenty and 'twenty two.
Yeah.
And so we went to a 100% baseline scenario.
And the forecast paired with a slightly charge and make that our loan portfolio was responsible for approximately $17 million and reserve releases.
In order to adjust for what our APL Committee determined that it was too little other models of lineup from our C&I portfolio.
We adjusted our qualitative factors on the C&I fees, which resulted in an approximately 8 million and additional allowance on that portfolio offsetting some of the model of the colon and reserves.
That goes along with a few other moving parts, including charge offs resulted and the net $3 million relief that you saw and our provision expense this quarter.
If the vaccine is more broadly distributed and the economic forecasts continue to improve we believe it is likely that we'll see further reserve releases over the coming quarters.
And the extent of those releases will depend heavily on how our outlet for our local economy changes.
Finally, I'll finish with an update on the purchase accounting related to our Franklin financial merger, we experienced an additional nine and a half million and merger charges and the quarter.
While we could have an additional two to 3 million and charged from the first quarter. All significant merger expenses are now behind us.
And you should see a relatively clean and noninterest expense line going forward.
We also saw an increase of goodwill and $10 7 million with the majority of the increase related to the new Mark on the $200 million and non core money market fund and that I referenced earlier.
With these merger charges and additional goodwill we have to make this transaction wound up being roughly neutral to tangible book value per share.
And then the second on cost savings I would point you to the other noninterest expense line item and our banking segment income statement disclosure on page 13 of the financial supplement.
This quarter there's.
Four and a half million there'll be prepaid and penalty embedded in that line item exclude.
Excluding that the banking segment other noninterest expense was $52 9 billion with our first full quarter of Franklin included.
This is about 12 and a half million more than we were running prior to the Franklin our second quarter of 2020.
And indicates we've already hit our 30% cost savings target on the Franklin synergy and merger.
So.
Those are some details on all the various moving pieces, but the end result was and it has been for the past few quarters for us exceptionally strong profitability with adjusted pretax pre provision return on average assets and 343 per cent and adjusted return on average assets of 195 per cent.
We expect to remain and elite financial performer and we look forward to updating you over the coming quarters.
Alright, Thanks, Greg and micro for that color I'd like to quickly discuss a few other changes and we announced during the quarter and then I'll open the line up for questions.
First we removed the interim tag from Michael's title.
We had.
Many applicants interested and are in the position, including several good friends of the company.
For that reason, we hired an outside adviser to take us through and objective process and Michael overwhelmingly proved to be the right person to be our CFO.
Michael is and rising star and the industry.
He has spent nine years with the bank and has been extremely impressive and each role that you share with us and the only regret is that because of COVID-19 and many of you haven't been able to spend any time with them as soon as weak and safely travel will rectify that and you'll see why we're excited about our team and our direction.
We look forward to his leadership and elevating the finance function to a new level force.
Next Jim Ayers has stepped away from the chairman role and the company.
Jim reached has reached a point and life, where he is enjoying the fruits of his labor and it's well aren't.
And Jim will continue to be a member of our board he'll continue to be and he'll continue to be a very significant presence at first name.
We look forward to his continued valuable counsel his continued support as our largest shareholder and to him continuing to be the banks most passionate advocate for.
For the bank and our communities.
Replacing Jim as chairman as Stuart and the border Stewarts one of our independent Board members and he was a member of the board for 12 years prior to stepping away to become Tennessee's Commissioner of Finance and administration and 2018.
And he he rejoined the board late last year.
He's been a very successful investor and is one right now he had experience on other public company boards and we look forward to his experience and guidance as he assumes the role of chairman of our board.
So to close I.
Team delivered phenomenal results and 2020 more.
More importantly, though we prepared a runway for the next two years our team has a mandate to go forth and dominate and we're eager to share how well they execute on that plan and the coming quarters with that I'd like to open it up for questions.
We will now begin the question and answer session to ask a 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 it.
Jonathan The question queue. Please press Star then two.
Yeah.
Our first question is from Catherine Mealor of K B W. Please go ahead.
Thanks, Good morning.
Good morning Catherine.
I just wanted to follow on one comment that you made on on Durbin and I think I've ever heard you say Michael that you have been granted a waiver on and Durbin for this year I just wanted to see if you could talk all day about how that happened because it looks like you're still over 10 billion and asset. Thanks.
Yeah. Thanks Catherine.
There were some regulatory guidance that came out and late last year that.
You gave some relief because of asset kind of in place and due to COVID-19.
And we had a path to being under 10 billion and go into.
And the into the end of the year and so we work with our regulators very closely and work through that and and so they did end up providing is really even though we're still over the $10 billion Mark.
Yeah, and cabin and I'll give you just a slight bit of color on that because we did some real study and counsel and from outside parties.
All of that.
And and had some some.
Conversations with our regulatory agencies and if you go back to.
When we announced the deal in January of 'twenty.
And we even laid the thoughts back the other the fact that we very well may cause we knew that there would be some shrinking of the balance sheet because of wholesale funding and some other things and so are we.
And we felt like we had a path.
Even then to be under 10 billion at the end of 'twenty and 'twenty and then comes Covid the incomes are.
And the PPP then comes all the funding and so balance sheets are elevated.
There are sort of hot hot hot or all the banks and so there was a.
A and announcement by agencies that they would provide some relief on on those facing asset thresholds, including this one.
And so because we were at a little bit of other unusual circumstances. We had some we had some dialogues there and it and it it it looks like bad debt.
That we do qualify where we are.
And we'd be we'd have to actually be excluded from the exemption as I understand data and it looks like we will not be excluded.
Okay great.
Great clarification, and then on.
Can you remind us your thoughts on your outlook for Accretable yield and I know that there's a lot of moving parts with that just given the change and the landmarks on the Franklin deal and it looks like this quarter it correctly and was.
Very well and that's still your expectation for 'twenty and 'twenty one.
Yeah that is our expectation and that's going to continue to be quite low in terms of the accretion impact on our yields.
The way that I look at where I talk about it and it's a fairly purified and number at this point, there's accretion can really give you some artificial confidence in your margin.
Again, the way, we look at it and so and so when you put when you boil it down it yes, most of that is out and screening and we roll forward for the day three quarters, it's going to continue that way.
We expect.
And given some of the movements on the interest rate marks is there ever it is there a period, where it could be actually negative.
Yeah.
And I don't need more of that amortization.
And I don't.
Yeah. It says, it's it's it's not impossible, but it's not but it's not likely.
Got it okay, all right thanks for the color.
Thanks, guys.
And next question is from Stephen Scouten of Piper Sandler. Please go ahead.
Hey, good morning, everyone.
The board and Steven Okay, well I'm doing very well, thank you and <unk>.
I'm curious, maybe first and foremost where if you guys have given kind of any guidance around where you think the loan loss reserve could eventually normalize in them and a seasonal world I mean, obviously there's.
More noise and yours, and then maybe some of your other peers, given the FSB acquisition and the App.
Absolute level still extremely high so I'm, just wondering how you're thinking about that assuming of course that kind of the economic improvements and vaccine trends we've seen continue.
Yes, so I'm a comment first Steven and mine and mine are going to be much more global and him and Michael.
I'll comment too.
Because I agree with what you're saying I mean, certainly what it looks high.
Relative to peers.
And but trust us we go we have a very.
Defined process that we've laid out with our book.
Both consultants and and outside auditors and so we have a lot of dialogue around it and and so it is it does.
So we agree it does appear high.
And and I, and they'll records, saying, but I would be careful and make sure I say this and the right way I do not think that it will have that level of losses by a long shot and I think every single C E O.
These calls you've listened to would probably say the same thing based on our experience thus far with Cecil.
And where we're where we were following a process and so you know as you can see this quarter it told us and we need some some release.
You know we were not gonna be surprised if it tells us that and you know some more.
<unk> had a board, but we haven't you know.
I have heard they actually people that I have great respect for other she is that true.
And she I always talk about you know maybe.
We'd like to keep it around 2% and we'd like to keep it around ex percent of whatever where we've shied away from that we're not we're just following the process and see and it will see and where is it it takes us at this point and as we get.
More and more competent quarter by quarter, we'll probably get again and I've said this before but it will probably exercise a little more qualitative and.
Input that we have been but that's kind of where we are today.
Yeah, Chris I think you hit on it really well and not a whole lot that other than you know.
And as the economy and praise we get some more stimulus I think.
You can see opportunities that debt.
But there's opportunities for relief, but yeah as Chris mentioned.
And and like we called out.
As we look at certain buckets C&I for instance, and that's where where we felt like it was sort of debt to maybe increase.
From our modeled results, whereas construction and.
CRE, we came down because of the outlook, our outlook improved and the economy and and and the commercial real estate debt.
We're taking it.
My mother is quarter by quarter, and just going through the process and I think that there will be opportunity and an improved economy.
So at least and releases assuming that we continue to see kind of Covid abate.
Yeah, no that all makes a lot of sense and I guess, maybe a follow up to that is I mean at the end of the day and my view, it's all capital.
And I'm, just you're putting in a different bucket, but let's say it moves back into maybe core capital. If you will how do you think about share repurchases because even apart from loan loss reserve releasing it you know as I see it you should build capital internally and a and a very rapid pace.
Yeah.
And agree with everything you just said.
We we we kind of look at the same way, it's almost like it's capital.
And so so we would like.
I like the way you look at it.
And we view share repurchases as one option on the table for managing our capital and.
And so we are at.
Something that we keep all the book it.
And the forefront of our mind, especially at this now because youre exactly right.
The good news is we're accumulating capital at a really rapid pace and I think that's a good news and.
Don't know if I mentioned, but you know our tangible book value went up almost 17% last year and got hurt and so.
[laughter] and so we are we are accumulating capital rapid pace and so we we were.
Hot topic of conversation and that's early on exactly what we do with all debt.
Yeah, It's bad we're by the way it would not have not bad from that.
No definitely not and maybe just one last from me I know, Chris you guys were talking and.
At the start of the call, mostly about organic growth opportunities, which which I think is great, but I'm just wondering given the success of this FSB deal and getting the cost saves out sooner than expected I mean, it really shines a light on and you're also capabilities. There. So do you think more about M&A sooner than we maybe would have thought previously given the success here and and what it seems like.
It'll be a pretty active environment.
Uh huh.
Yeah, we.
It's a it's a it's a fair question and one that we face often where.
But we're watching the environment.
But it's not something that were.
We feel compelled to jump into.
The things that we've done had been and.
And again and.
And my comments I said, you know the acquisitions get all the headlines and.
And and and ours and got some headlines, but they've actually been very strategic they've all been and footprint and we have all had and I on operating leverage on every time, everyone. We've done we've had a keen eye on operating leverage.
And so.
You know, it's an option, but it's one that will be pretty restrained on and we.
We are really excited about some other things internally that are going to improve our operation improve our organic growth capability and improve our customer experience and those things again, those aren't things that grab the headlines, but we're really focused on those things and and so.
We will be.
Uh huh.
We will be.
Available, but cautious I guess is the way I believe.
Great and it makes sense well congrats on a really good quarter and a great year.
Alright, thanks, so much really appreciate it.
The next question is from Matt Olney of Stephens. Please go ahead.
Hey, great good morning, guys.
More and manner and.
I wanted to circle back on the operating expenses and want to make sure I appreciate what's going on here it sounds like you're already received.
The cost saves from the Franklin deal, but there's a chance you could get additional savings perhaps in the back half of 'twenty 'twenty one.
I love to hear more about what drove the accelerated recognition of some of those cost savings and then secondly, the guidance of the low to mid single digits I assume that's based off the core number and the fourth quarter of 52 9 million and I get that right.
You did get that right.
You did get that right.
And.
And let's see.
So.
And on so yeah, you got that right now and that was the second part of the question first part of the question and the $1 million to $2 million and the second half yeah, our thinking there and I'm sorry, you said also debt.
We may have recognized the expenses, a little faster and so again remember 'twenty and 'twenty was recognized being able to get the expenses that flow faster and towards 2020 and.
Ear of the pandemic.
And we looked at it.
And.
Debt during 'twenty and 'twenty, if we could go ahead and get the.
And the systems conversion done and there's probably a really good time to do that it was a hard time to do that but you know the world was kind of standing still and if so if we could if we could make all that happen, while the world, saying today and we thought we'd be right, where we are with a really good run way into 'twenty and 'twenty, one and so that was already.
And so we worked really hard.
The previous question from Stephen when he was talking about Hey man you guys. It looks like you're already ready to jump in and doing other acquisition made my day.
And I can't tell you how hard the team worked in 'twenty and 'twenty and.
And it would be easy for you know your executive team to sit here and go Hey, let's do that again, well it just not that easy.
And so.
But we did you, but you're exactly right both of the of your exactly right. We worked extraordinarily hard to get it done and.
And so we did get some expenses out earlier than we modeled on the front end, which.
Which is good for all other shareholders and and everybody.
And so we think were pretty good for the next few quarters, we might have an opportunity as we get some more efficiency.
To ring, a little bit out at the end because we when we put those targets out there and we'd like to beat them and where we kind of equal at this point, but we will do at some point in 'twenty and 'twenty one and.
Do even better than we modeled and so that's that's the reason I say, we're not we're not anxious to jump back into something on the acquisition front, we never say never but its not something were out searching for and that we've said we said what we said about the expenses.
Yeah, and Matt, It's Michael just to layer on to that a little bad.
The back half saved you know one of the challenges right with Covid and.
Is office space and so we have some leases that we think will we'll exit lighter and the year that'll that can help with some of that back half sales.
And then mid single digit growth inexpensive low single digit growth.
Really I mean, if we assume the world's going to open back up Yeah, Chris mentioned travel a little bad we look forward to being back in front of our customers are clot and building our business and.
And then you know as we've.
Gone over 10 billion and and Chris mentioned, all the things that maybe don't get the headlines yeah. Some of that and we'll have some internal investments debt.
It can lead to some expense growth again with minimal and we think we can get run it but.
And that's kind of what that comment was about yeah.
Flow to minutes, let him add yeah yeah.
Okay.
And then circling back on the discussion around the core margin. It sounds like there's some additional room to take down the interest bearing deposit costs from the fourth quarter levels and.
I think I heard at least for the common.
The first quarter, you think theres, some room to offset the pressure on the cash.
Core loan yields did I hear that correctly and I know, it's early but do you feel like you can kind of continue that trend beyond the first quarter at this point.
So some of that core loan yield we don't know it it's.
It's a plus or minus but some of that that core loan yield. We think we can offset possibly all of it.
It is true this quarter.
So it's kind of a plus or minus situation, there, but where we that's our goal is to try and offset it.
And we can't guarantee that we can totally do that with me and circles.
Okay, and then I guess the other issue within the margin discussion that you brought up and and other banks are talking about and it's just the excess liquidity position and it sounds like you're willing to put a portion of this towards the securities portfolio I love to hear more about how you're thinking about how much of this.
How much of a build you would you would kind of consider and and.
And what types of securities you've been buying more recently.
Yeah, Matt.
You know, we're running at about 10, 5% right now, but traditionally we've been more and the 12% range. So I think you can choose from some growth.
And that 11, 13% range.
Not all next quarter or this quarter, but.
And and we we.
We backed off a little bit on municipals.
Yeah that keeps getting longer and longer dated and spreads come in and so we've been looking at more kind of shorter debt. It's a modest three to five year stuff when I want to keep an eye on duration.
Mortgages are still pretty rich so you haven't seen a whole lot of growth and and.
The investment portfolio, but we want to be really prudent and and really think about the overall balance sheet strategy prefer to deploy it and the good loans.
Quite frankly.
We'll take opportunities as they come.
Okay.
That's great Thanks, and commentary nice corner.
Alright.
Thanks, Matt.
The next question is from Alex Lau of J P. Morgan. Please go ahead.
Hi, good morning.
Good morning, Alex I hope you're well.
Thank you.
My first question is on the mortgage business. So you've operated very efficiently from the past three quarters within efficiency ratio and the 50% to 60% can you talk about some other factors contributing to this efficiency during the pandemic and looking into 'twenty and 'twenty. One can you continue at these low.
Well as the gain on sale margin moderates. Thank you.
Yeah, Alex we got with Evans is with US who is runs our ventures, including mortgage and I'll, let Michael talk about that.
But it's true.
Yeah Alec.
You know, obviously margins have thickened up tremendously.
Tremendously from and our efficiency ratio standpoint, which helped us a lot.
We don't expect debt to continue we see some compression already.
Coming down and latter part of the year, we see it again here in early January so we see that coming down you would see obviously you know we've had some capacity issues in the industry, which allowed debt net margin to creep up as we have hired additional folks to maintain its volume.
That will also put pressure on net efficiency ratio so.
And being in that 50 860 per cent range not sustainable generally through the year and we expect that to be elevated zone.
Thanks for that and then my second question I want to touch on technology have you seen an acceleration of your digital platforms in terms of adoption during the pandemic and in 'twenty and 'twenty. One you've mentioned some investments are any of those related to technology initiatives.
Yeah.
Yeah Alex.
On the technology side, we've definitely seen acceleration.
And take up rates or AR technology.
We have.
So a couple of things we did a conversion.
Both our online and mobile system mid part of last year and so we've got a really nice recent.
Upgrade there it's been very well received by <unk>.
Customers and so we seem to take a break from that and and timing was was reasonably good and they have a good time to perfectly it would've been in the first quarter instead of the second quarter of last year.
But because because.
And.
And I, we're not this is not unique to us at all.
But as you know we've got a lot of customers that just hadn't taken up the technology, but it really had to do and the during COVID-19.
And they.
That debt debt continues they don't they they didn't use it during COVID-19 and they're going back with the branch lobbies open back up there and they're continuing to use it and so are we.
We've seen that the take up rate and move a quite a bit and then.
And we have bid on a technology ramp up from an investment stay and boy for about a probably three years in terms.
Of our continuous improvement and so that gets those investments get larger and not smaller and so as we move into 'twenty, one and we think about capital expenditures.
And in my comments.
You may actually made a reference to.
Where we were.
Uh huh.
Debt.
And we were ringing and expenses out of the.
Out of the merger.
And it moving forward.
We thought we would have some places where we would gain some efficiencies but also.
Improve on our our capital cost and so are not our capital costs, we gained some expenses and and actually.
We've reduced some expenses.
And gain some efficiencies and those are all technology related and that's applying technology. So it's coming not only at the customer on the customer side, but it's coming on the back office side, where we're getting more and more efficient and it's our it's our biggest place of capital investment.
Great. Thank you.
Sure.
The next question is from Brock Vandervliet of UBS. Please go ahead.
Hey, good morning, guys.
Good morning, Brian Good morning.
Alright.
Follow up on the mortgage question.
And the gain on sale margins and.
Yeah as you all know I've, just been and giant.
Where do you see that and normalizing to from now say, where it was and the and the fourth quarter, just trying to get a sense of.
Now, where we should think about the business kind of retracing too.
Hey, Brian It's Michael.
I think it.
If you look on slide seven.
We have the $3 42, there circled that that's kind of indicative of where new originations came out and then the and the fourth quarter and.
Obviously, yes saw and saw a decline there from from third quarter and second quarter, where capacity was a really big constraint and then as we've mentioned, we're still staying a bit of compression and then there are you know its hard to go back to Tonight painter 18, because we were in different channels and retail and consumer.
Direct business and so normalized would be probably slightly below that number.
And in June and comments here, but I think you still have some some room to move down.
But you're not gonna shouldn't should not return to the $2 27 number that you pay and the fourth quarter and IP and that one and.
And we.
And our plan for the year, we cannot play moving down and so that's right basically throughout the year as there gets to be a little more capacity and the system.
Okay got it and you.
You mentioned, you mentioned and office space.
And the second half of.
'twenty 'twenty one and.
As we emerge from Covid.
You know any any other strategic.
And not that office space is necessarily strategic but any other changes and you see.
Making and that and the business or is it really.
And I'll return to normal.
Yeah. It's.
Let's say the.
Normal, we'll probably look different.
You know.
We do.
And so our mortgage business is.
Yeah.
We like it for a few reasons. Other reasons is that we can learn some things and you know they they had work from home folks.
More than any other part of our business.
They've had more of that didn't fit and any other part of our business for a long time and.
And they're able to measure and the key is you got maybe a major productivity and they get really strong productivity and a certain certain things and be the horrible we've been able to also see that and some other parts of our business and so I think.
Being able to.
And <unk>.
Putting more bad.
Better measurement around some productivity.
Areas that we have not previously measure.
And <unk>.
It is one area that we're focused on because again that and that improves efficiency improves.
And of work life balance and that they can improve employee morale over all and so that's something that we're that we're thinking about.
And.
And I'd say, that's probably the biggest one is.
And but the ripples from that as you said can be office space can be branch space.
There's a lot of talk about branch consolidations.
And we'll have a little bit of that book, but we won't have that that much and.
Because we're in a number of communities and so we're going to keep a presence in those communities and a lot of those communities and we only have one branch anyway and.
So and frankly the cost of that is much less than most people understand.
So we may have a little bit of that but we're probably.
And our position where are we.
And I said well have some small branch consolidation, but there won't be a lot of that for us because if we did have a lot of that we'd be out of sales immediately.
And our presence and our Msas is relatively new and so we don't have anywhere near that legacy branch network.
Some of our older bigger competitor.
Yep.
Okay, great. Thank you very much.
Alright, Thanks, a lot.
Okay and if you have a question. Please press Star then one and that is question is from Omar Sama of Raymond James. Please go ahead.
Hey, good morning, everyone.
And so I appreciate the update on the noncore acquired portfolio from Franklin and maybe just a couple of follow up questions. There.
$200 million reduction that you've seen year over year have there been any of those one off type of sales that you referenced and that or is that just the book kind of paying down and running off.
And then the follow up is what is the secondary market look like for these credits.
Would you be content to let it continue to run off or are you committed to exiting and a bulk sale. Thanks.
Yeah, so and <unk>.
And I'm looking that it Greg and I'll comment and.
And invite him to comment as well on the first part of your question, we haven't sold any it's been.
And loan to pay it all.
And so we entity and had any sales at this point and then in terms of what what.
Happens, we would we'd sell individual loans, we sell.
And we sell it and bulk.
We we hang on to it if we had to sort of true.
So we would sell individual loans, but we're not fire sellers because we don't have to be we believe we have the advantage of it.
And more about what's in the portfolio and we've got a.
Two very capable get out of it or managing it and so.
But it's.
It's not core to our business and so for the right.
And price.
Sure.
We've got it loose and so.
And we're going to sound like I'm negotiating against you and more of a bad [laughter] whenever wherever and Firestone and Greg you want to add anything.
And about that now several oh, it's ever been and refinancing there's actually a something to highlight that you pointed out channel a lot of those companies are doing quite well and growing and they're seeing opportunities to they're only want and need to refinance out and where they're not interested and be in their bank to do that so.
That's where some of that is coming from yeah. It's a it's.
But it's a mixed bag also because they are private equity type or and or unfortunate windows windows types. You know you'll get a lot of heads up before something goes south and and you don't have a lot of a lot.
Your parachute.
Is and Anvil.
And so if it goes south and so.
Well, that's right and getting that business and that core to us so, but so far with and good luck with them and and we won't.
Debt to continue.
Okay. Thank you for that commentary and one unrelated question to that portfolio.
And as far as P. P. P have you all seen any interest from your clients on this new wave and P. P. P.
Do you expect to be active and moving forward.
Yeah, we have we have seen several of them and we do expect it to.
To do some PPP.
And we're already doing it and PPP going into Oh.
Okay.
Any guidance on where those volumes could ultimately shake out relative to round one.
Certainly going to be less net round one and.
And.
And we're and we're going to and we will handle that a little bit differently and also so we're.
It's not going to be a major impact on either our balance sheet or our fees and as we move forward.
Okay understood and that's.
Is it from me, thanks, guys and congrats on a strong quarter.
Alright, Thank you I appreciate it.
And next question is from Jennifer Dunbar, and that's true and Securities. Please go ahead.
Thanks, Good morning.
More and more of them.
Did you talk about what kind of net charge offs, you're expecting over the.
The next few quarters, obviously they were elevated this quarter would you expect any other loans to come up.
And the next couple of quarters that's bad.
Yeah Jennifer.
We are.
<unk> talked about the one charge off that had a kind of really.
Unusual I guess and back on our charge off ratio for the quarter. This with this passport.
And I have anything to it and and we talked about that for the past three quarters and so we've been we've been watching it.
We don't have anything sitting out there like that or we'd be talking about it I mean, we are our whole strategy is is to b.
B b be quick and decisive if we have and if we have 80 issues. We want other people to be weak and the sizes. So that we can make sure we deal with them at very very handled straight up way that's it for us and good for requirement.
And so we don't have have anything looming that we're aware of.
As you know it is credit where in sort of a shaky world and so by the time and get off this though and I could get a call that's a.
And as Hey, we got something we can talk to you about don't certainly don't anticipate that okay, but you never know until I, just I'll throw that qualification out there and so we would expect.
And you have to think 'twenty, one and if you if you look back at our charge off ratio over the last two or three years, it's been quite low quite low almost non existent.
I don't think it's gonna be bad and they could go to if some charge offs and also the.
When we look at what we know we just don't see a lot coming through and so I'd say it would be higher than and the last couple of years, you know absent that one credit and it can take that out and mix them.
But bad thing, we don't see anything that's going to cause it to spike up.
Greg.
No I think that's the key point is that that specific deal and should not be viewed as a proxy for the health of our portfolio are another touch point and I guess that we look at is our credit quality.
And Oh, the sub standard excuse me how have the sub standards are acting and those were up five ne and quarter over quarter.
So you know it's actually still in line with the year end 2019, as we look at it.
I guess lastly, we follow all the Mta's closely and they were up nine basis points quarter over quarter, but actually down year over year, I guess, a four basis points are our ari and other assets from foreclosure and repossession.
Got it.
And they were up $176000 plus or minus for the quarter, but if you look at it year over year, that's down from 11.5 to about seven five and you know as as you as you all know everybody on the phone and you got to take that in light also we've added $2 seven day.
Dollars plus or minus and.
And loans over that time period so.
And I agree with you Chris you can't take the risk out of and uncertainty out of this but you can.
Plan and prepare for it and that's what we think we've done done well as Michael pointed out debt reserves.
Appropriate.
Significant pretty strong.
Thank you so much.
Thanks, Jennifer.
This concludes our question and answer session I would like to turn the conference back over to Chris Holmes for closing remarks.
Alright, very good thank you and thanks, everybody for joining us and you can tell we are.
Proud of the results for the a year and the quarter and but we're excited about moving forward into 'twenty and 'twenty, one and we as always appreciate your support okay. Thanks, everybody every day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.