Cadence Bank (CADE) 2020 Q4 法說會逐字稿

Good day, and welcome to the BancorpSouth Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Will Fisackerly, Executive Vice President and Director of Corporate Finance. Please go ahead.

Good morning, and thank you for being with us. I will begin by introducing the members of the senior management team participating today. We have Chairman and Chief Executive Officer, Dan Rollins; President and Chief Operating Officer, Chris Bagley; and Senior Executive Vice President and Chief Financial Officer, John Copeland.

Before the discussion begins, I'll remind you of certain forward-looking statements that may be made regarding the company's future results or future financial performance. Actual results could differ materially from those indicated in these forward-looking statements due to a variety of factors and/or risks. Information concerning certain of these factors can be found in BancorpSouth's 2019 annual report on Form 10-K.

Also during the call, certain non-GAAP financial measures may be discussed regarding the company's performance. If so, you can find the reconciliation of these measures in the company's fourth quarter 2020 earnings release.

Our speakers will be referring to prepared slides during the discussion. You can find these slides by going to bancorpsouth.com and clicking on our Investor Relations page, where you'll find them on the link to our webcast, or you can view them at the exhibit to the 8-K we filed yesterday afternoon. These slides are also in the Presentations section of our Investor Relations website that was recently added.

And now I'll turn to Dan Rollins for his comments on our financial results.

Thank you, Will. Good morning. Thank you for joining us today to discuss BancorpSouth's fourth quarter and full year 2020 financial performance. I will begin by making a few brief remarks about our fourth quarter and annual performance. John will discuss these results in more detail, and Chris will provide more color on credit quality and our business development activities. After we conclude our prepared comments, our executive management team will be happy to answer questions.

Let's turn to the slide presentation. Slide 2 contains the legal reminders Will has already talked about.

Slide 3 provides the annual highlights for 2020. We have a number of items to cover on our fourth quarter results, so I'll keep the comments here pretty short. Looking back, we are very pleased with our full year performance. As we were finishing the first quarter, I doubt any of us expected to be able to report full year PPNR of almost $400 million, up over 20% from 2019. I'm extremely proud of the outstanding efforts our team exhibited in 2020 to reach these results.

The reported net operating income, excluding MSR, of $2.30 per diluted common share compared to $2.51 for 2019. Earnings were obviously adversely impacted by the $86 million in provision that we recorded, primarily related to the economic impact of the COVID-19 pandemic.

From a business development perspective, we had an outstanding deposit growth year, reporting organic growth of $3.2 billion or 19%. This is obviously consistent with our industry peers and is reflective of the increase in liquidity, resulting from government stimulus programs and other economic conditions.

From a loan perspective, most of our activity for the year was the result of the Paycheck Protection Program. We originated over 15,000 PPP loans, totaling just over $1.2 billion. As of year-end, we had received forgiveness applications for over $600 million of these loans, and we had actually received SBA forgiveness approval and funding for approximately $263 million.

Given the rate environment, our mortgage team had an outstanding year and a record year. Production totaled $3.2 billion and exceeded our previous annual record of $2 billion by 60%. Of this total, just under 60% represented purchase money production. Production and servicing revenue for the year totaled $99 million.

Our business development success, combined with a continued focus on managing expenses, resulted in continued improvement in our operating efficiency ratio, excluding MSR, which declined to 61.6% from -- for 2020 from 64.9% in 2019. We are obviously pleased with our ability to continue to improve efficiency.

The last couple of bullets relate to capital deployment. We closed the merger with Texas First early on in the year. The transaction added approximately $400 million in assets to our Central Texas market. Rodney Kroll and his team have been a great cultural fit for our company.

Finally, we repurchased 3.3 million shares of our stock early in 2020 before pausing as a result of the economic uncertainty associated with the pandemic. In December, our Board authorized 6 million shares for our 2021 share repurchase program as the previous program expired at year-end. We will continue to monitor the economic environment and attempt to manage our capital in a prudent manner.

Slide 4 provides a 5-year look at our annual earnings results. Despite the significant impact the provision had on 2020 earnings, we have still grown operating EPS as well as PPNR meaningfully year-over-year. The continued strong efforts of our teammates has resulted in an operating EPS growing at a 4-year compound rate of 11%, while PPNR has grown at a 19% clip over the same time period.

Slide 5 contains our financial highlights specific to the fourth quarter. We reported net income available to common shareholders of $66.4 million or $0.65 per diluted share. While we had several nonroutine items in our fourth quarter results that John will certainly discuss in just a minute, we had one large item that we consider to be nonoperating. As we discussed in our third quarter call, we had a large number of retirements occurred late in the year. These retirements resulted in our total lump sum payments for the year exceeding the lump sum payment threshold, resulting in a partial settlement charge under the pension accounting rules. This charge of $5.8 million was recorded in our fourth quarter results. From an efficiency perspective, these retirements will benefit our financial results going forward as we were able to reduce our FTE headcount by approximately 100 people over the course of 2020, even with our merger early in the year with Texas First State Bank.

When adjusting for this charge, we reported net operating income available to common shareholders, excluding MSR, of $70.8 million or $0.69 per diluted share, which represents an increase of 6% compared to the fourth quarter of 2019. We recorded a modest provision of $5 million for the quarter. While net charge-offs were slightly elevated compared to recent quarters, most of the activity was related to loans that we had previously been identified as impaired and that were simply charged down. All of our other credit quality metrics continue to remain strong as evidenced by the 16% decline in nonperforming assets. Chris will discuss credit quality in more detail in just a second.

We reported PPNR of $93.6 million for the quarter. This represents an increase of just over 9% compared to the fourth quarter of 2019. From a sequential quarter standpoint, PPNR was impacted by seasonal trends in our noninterest revenue businesses as well as some other nonroutine items that John is going to talk about.

We had another great deposit growth quarter, reporting total deposit and customer repo growth of $459.7 million or 9.1% annualized. While the additional liquidity and balance sheet mix has provided additional margin headwinds, we saw a nice 6 basis point decline in our total cost of deposits for the quarter which helped us hold our net interest margin fairly stable. John and Chris will talk about the components of the margin in just a second.

Our mortgage team had another great quarter with record fourth quarter production of $846 million, which resulted in just shy of $20 million in production and servicing revenue. While the margin declined as a result of the pipeline trends, these results are unprecedented for this particular time of the year and a fourth quarter record for us.

Finally, I wanted to briefly mention our recent merger announcements with National United in Gatesville, Texas; and FNB Bank in Scottsboro, Alabama. Both of these banks are just shy of $800 million in assets each and have a community-focused business model, just like ours. We are excited to have the opportunity to get back into the M&A game as we've gotten a little more clarity on the economy and our market valuation has recovered. We are hopeful that we can get the necessary approvals to be able to close these transactions sometime in the second quarter of this year.

I will now turn to John and allow him to discuss our financial results in more detail. John?

Thanks, Dan. If you'll turn to Slide 6, you'll see our summary income statement for the quarter. In reviewing the summary income statement, net income available to common shareholders was $66.4 million or $0.65 per diluted common share for the quarter. As Dan mentioned earlier, the $5.8 million pension settlement charge was really the only significant nonoperating item in our fourth quarter results. The MSR adjustment and any other nonoperating items were all immaterial for the quarter.

Accordingly, we reported net operating income, excluding MSR, available to common shareholders of $70.8 million for the quarter or $0.69 per diluted common share compared to $71.2 million, also $0.69 per diluted common share for the third quarter of 2020, and $67.8 million or $0.65 per diluted common share for the fourth quarter of 2019.

I would like to remind you that the merger with Texas First, which closed on January 1, will impact the comparability of the financial information shown on this slide as well as the subsequent slides to the fourth quarter of 2019. Since the merger closed at the beginning of the year, sequential quarterly comparisons this year are not impacted.

This slide also highlights the pretax pre-provision net revenue metrics that Dan mentioned earlier, both in terms of dollars and as a percentage of average assets. As he mentioned, the fourth quarter always has seasonal revenue headwinds in our noninterest revenue product offerings. Additionally, we had some nonroutine items and variances that I'll address in a moment.

Our net interest revenue increased by 0.6% compared to the third quarter of 2020 and increased by 3.6% compared to the fourth quarter of 2019. Our net interest margin, excluding accretable yield, actually increased 1 basis point to 3.24% for the quarter from 3.23% for the third quarter of 2020. We had just over $2 million in accelerated fee income recognized in the quarter on the $263 million of PPP loans that were forgiven in the quarter. This income offset somewhat the continued pressure that our liquidity dynamics is putting on the margin.

Outside of the mix impact, the components of our margin held up quite nicely for the quarter. Our loan yields, excluding net accretion and PPP, declined slightly from 4.55% for the third quarter to 4.53%. The pressure on asset yields was somewhat offset by continued improvement in our deposit costs. Chris will discuss that more in a moment, but our total cost of deposits declined another 6 basis points in the fourth quarter to 38 basis points.

If you'll turn to Slide 7, you'll see a detail of our noninterest revenue streams. I will just briefly touch on the noninterest revenue and expense items that were either nonroutine in nature or that created notable variances. You'll notice that mortgage and insurance revenue both experienced typical seasonal fourth quarter trends, which Chris will discuss more in a moment.

Outside of that, the only other item of note was that we had a historic tax credit project that reached substantial completion in the fourth quarter. This required us to record the remaining book amortization, which was $2.7 million, as an offset to the other noninterest revenue line item. There was a related $3.0 million -- $3 million tax credit benefit that was recorded in the quarter as a reduction to income tax expense.

Slide 8 presents a detail of noninterest expense. There are several items to mention here. First of all, salaries and benefits expense was positively impacted by approximately $6.7 million from various employee benefit accrual true-ups. We have certain long-term incentive compensation plans that have not hit their target payout thresholds, and we also had other year-end true-ups related to our annual incentives, medical plans and other benefit plans. We've already mentioned the pension settlement charge, which is shown in a separate line item.

Foreclosed property expense was slightly elevated for the quarter as we sold 2 of our larger parcels of other real estate at an aggregate loss of just over $900,000. Finally, other miscellaneous expense was elevated as a result of $5 million in total write-downs and expenses, primarily related to various fixed asset and facility dispositions resulting from branch closures.

That concludes our review of the financials. Chris will now provide some color on our business development activities.

Thank you, John. Good morning, everyone, and happy new year.

Starting with Slide 9, you will see our funding mix as of December 31 compared to both the third quarter of 2020 and the fourth quarter of 2019. We reported $460 million in deposit and customer repo growth for the quarter, which is 9.1% on an annualized basis. Deposits and repos have grown $3.6 billion since the end of 2020 with approximately $400 million being attributable to the Texas First merger.

We experienced deposit growth across the entire footprint, had 4 divisions exceed the 20% mark for annualized deposit growth. These were our Tennessee Metro, Central Arkansas, Northeast Arkansas and Texas Hill Country divisions. Our total cost of deposits declined to 38 basis points for the quarter from 44 basis points for the third quarter. We continue to monitor, adjust posted rates across all of our deposit product offerings, and we'll continue to adjust accordingly. Of note, the current time deposit cost for the bank at 1.28% for the quarter, which is higher than our current posted rates.

Moving to Slide 10, you will see our loan portfolio as of December 31 compared to the third quarter of 2020 and the fourth quarter of 2019. The quarterly and annual trends seen here have been driven by the P3 program as loan demand outside of that program has been somewhat flat and covering normal burn rates. Total loans decreased $305 million during the quarter, primarily due to forgiveness of $263 million during the quarter that Dan mentioned earlier.

When looking at our annual performance, loans increased approximately $1 billion for the year. When you factor in the acquired loan balances from the Texas First merger, we saw a decline of approximately $200 million over the course of the year outside of the P3 program. And looking at our quarterly activity, we continue to see loan growth coming from our Texas markets as our Houston, Dallas and Austin divisions all reported net loan growth for the quarter despite the P3 forgiveness.

Slide 11 covers P3 in a bit more detail. As of year-end, we had received forgiveness on just over 4,000 loans totaling $263 million. Since that time, we have continued to process applications and receive funds from the SBA. As of yesterday, we had processed forgiveness applications for over 7,500 loans totaling $761 million, and we have received total forgiveness payments of $355 million from the SBA. Meanwhile, our teammates are also actively working on applications for funding under the second phase of the program. As of yesterday, we've received just over 3,300 applications totaling $314 million. It's important to note, however, some of these applications may not qualify under the revenue reduction requirements. We're actively working with all of our customers to determine the qualifying applications.

Moving to Slide 12, we can cover some credit quality highlights for the quarter. We recorded a nominal provision of credit losses of $5 million for the quarter. And at face value, net charge-offs appear slightly elevated at $11.2 million for the quarter. However, this total is comprised almost exclusively of the charge-down of credits that were identified as impaired and specifically reserved for in prior quarters, including certain acquired assets. As Dan mentioned, we saw improvement in our nonperforming asset totals, which were down over 15% quarter-over-quarter. Otherwise, our credit metrics are holding up well in this pandemic environment. Our allowance coverage remained stable at 1.74% of net loans and leases, excluding PPP loans.

We continue to actively monitor the segments of the loan portfolio that have been identified as higher risk as a result of the pandemic. This is shown on Slide 14. As we previously communicated to assist borrowers, we have shifted from a deferral approach to offering temporary interest-only terms. As you can see here, loans that are in temporary interest-only status have increased from approximately $110 million on September 30, while loans in deferral have declined to an insignificant amount. As you'd expect, these modifications continue to be largely concentrated in the hotel/hospitality portfolio.

Slides 15 to 17 provide an updated view of the more granular information we've provided on the last couple of quarters related to the higher-risk portfolios. I won't spend additional time discussing these, but they're there for your information and review.

Moving on to the mortgage and insurance. The tables on Slide 18 provide a 5-quarter look at our results for each product offering. Our mortgage banking operation had another great quarter, particularly when considering seasonality, producing $846 million mortgage loans for the quarter, contributing to $19.9 million in production and servicing revenue. We indicated in last quarter's call that we had a backlog of refinance activity to work through, and this is reflected in the slight decline in purchase money volume for the quarter, which was 55%. $466 million in purchase money production is still very strong, however, for a typical slow time of year. The slight decline in the pipeline quarter-over-quarter contributed to the margin decline you see as compared to the third quarter. Furthermore, margins continue to remain at levels that we feel are not sustainable in a normal production environment.

Moving on to insurance. Total commission revenue for the quarter was $29.8 million compared to $32.8 million for the third quarter of 2020 and $27.6 million for the fourth quarter of 2019. While sequential quarter comparisons are impacted by the fourth quarter seasonality in the renewal cycle, our total commission revenue increased by 8% over the fourth quarter of 2019. This is reflective of a high customer retention and the continued firming of the market as premiums continue to rise across all product types. Our insurance teammates worked through several significant storms last year, and they did a great job taking care of customers and communities across a significant amount of our coastal footprint.

Finally, I think it's important to briefly recognize our wealth management team. We reported record wealth management revenue for 2020, and our total assets under management recently crossed the $11 billion mark for the first time.

Now I'll turn it back over to Dan for his concluding remarks.

Thanks, Chris. While 2020 provided many challenges that were certainly unexpected and unprecedented during our lifetimes, I'm proud of the accomplishments our team achieved despite these difficult circumstances. Our bankers generated over $1.2 billion in P3 loans, as Chris calls them, in a very short period of time; reporting -- reported record deposit growth; and assisted our customers with other needs, including deferrals and loan modifications. Our mortgage team exceeded our prior record production year by 60%, and our insurance team and wealth management team both reported meaningful revenue growth. Finally, our human resources, technology and other back-office teams supported all of these efforts directly while also managing other projects, included our COVID-19-related alternative work arrangements for our teammates as well as several technology upgrade projects throughout the year.

As we look into 2021, we are optimistic that we can continue to build on these successes. We are hopeful that our growth efforts, along with the steps we have taken to improve efficiency, including branch and headcount reductions, will allow us to continue to improve our financial performance. We are also cautiously optimistic that the vaccine rollout will allow us to return to a more normal lifestyle. We are ready to be able to get back out on the road and visit with you all in a face-to-face environment.

With that, operator, we'd now be happy to answer any questions.

(Operator Instructions) The first question comes from Jennifer Demba with Truist.

Two questions. Wondering how much you think mortgage production and revenue will come off this year based on your current pipeline and your expectation for margins. And then my second question is regarding more capacity and interest in more bank acquisitions in '21.

Okay. I can try a couple of those. So talking to the mortgage team today, we're running well ahead of normal first quarter performance. First quarter is also a seasonally slow time period. We continue to run well ahead of what we've seen in the past. I don't know that I have -- can compare it to first quarter 2020. But looking back historically, first quarter has been a very slow time period. I think we expect to see elevated mortgage revenues from normal throughout 2021. How that compares to 2020, I think we expect that 2020 will be the top end of that, and we should settle back down from 2020 to a lower level in 2021. I don't have a number for that. But I know the team is out there today, and they're continuing to run wide open, so lots of activity. We're continuing to hear stories that there is limited product for sale in many markets that we cover. The days on market for homes is continuing to contract. So that's all driving the low rate environment for more mortgages.

Shifting to your M&A question, I think we continue to believe that our team can play. When we look at the 2 transactions that we've got in the pipeline today, we hope that they are close enough in the pipeline together that we will put those on our system, do a system conversion or an operational integration at the same time. If we're able to do that, that certainly gives us capacity to continue to do more of that in 2021.

The next question comes from Brad Milsaps with Piper Sandler.

Dan, just kind of curious if you could maybe offer a little more color on maybe expense trajectory this year. I know there are a lot of moving parts. You've obviously got the 2 deals coming in the back half of the year but just kind of any more color on kind of like the best starting point. I noticed that in the release, you didn't pull out the $5 million of asset write-downs sort of in your calculation of core earnings for the quarter. Just kind of curious if there's more of that to come or if there's some expense savings you see from that, if I have that sort of defined correctly as branch consolidation, et cetera, that would lead to cost savings.

Yes, appreciate that. I think that you're on the right track, so you're right. We didn't pull out branch closure cost. That's just an ongoing process. But when we look back at our totals, let me give you some totals, so you've got details. I didn't go back to 2019. But in 2020, we closed a total of 9 offices: 7 branches and 2 loan production offices. We opened 4 offices, so we were down net there by 5. And what we've got planned right now, I don't think we have any open new -- I don't think we have any new offices currently on the board to open in 2021, but we have 8 closures that should happen probably within the first quarter. Maybe 1 of them or 2 of them will fall into the second quarter, but we're well down the path on closing 8 offices in 2021. And some of the expense that you saw in 4Q is the cleanup of that so that we're not carrying expenses for those offices into the new year.

The expense run rate in 4Q, as John said, had a lot of onetime items in there. Our health coverage expense was very low last year, comparatively speaking, certainly running below what our expectations were. I suspect that is a all company-wide benefit. People didn't go to the doctor as much in 2020. It'd be interesting to see what happens to health care cost in 2021. So that true-up impacted us.

The lower performance that we've done because of the pandemic certainly impacted some of the equity awards that we've got out there that will not pay out at target amounts. So that money was cleaned back up in the fourth quarter. The 100 people that were down in the fourth quarter, we talked about in the third quarter. I think in the third quarter, we said we were going to be 80 to 90 people off. But when you look year-over-year, we were down 100 people from January 1 to December 31. And during that time period, remember, we closed a merger transaction that brought on 50 or 60 people there. So in total, we had a great year working towards reducing our salary and overhead costs there.

Our anticipation is that we will continue to be able to manage expenses in a way where we can continue to be improving our operating efficiency. When you look at operating efficiency ratio for 2021, clearly, the mortgage trends helped us significantly last year. So I think you have to normalize that. But if you pull that back, I think we expect to be able to do pretty well.

Okay. Great. That's helpful. And maybe just as my follow-up for John. You guys have done a really good job managing your liquidity relative to other banks. You're just not sitting on as much. You've built the bond portfolio. How much more of that do you expect to continue, just kind of trying to think about what that means for kind of NIM compression going forward?

Is that Brad? Yes, Brad. I think I am optimistic about the margin and the fact that we've seen most of the effect of our asset mix dilution of the margin and squeeze on the margin. The margin -- the core margin was up 1 bp for the quarter versus the third quarter, so that gives me some optimism. If you back out -- if you look at the core margin and you back out also PPP, we were down very slightly in the fourth quarter versus the third quarter. So once again, I'm optimistic about that.

But the reality is that repricings, we've got about $3 billion in loans. We've -- fixed and variable rate loans repricing in the next 12 months, they're on the books now, like 4.35%, something like that. They're going to reprice lower, no doubt about that. We are helped -- and I mention this almost every quarter, helped by having roughly half of our variable rate loans at loan floors already so -- rate floors. So that certainly helps. So I'm optimistic about continued -- the continued margin, about the ability to slow down the squeeze there, especially the point -- the fact that we had, I think, a 38 bp deposit cost for the quarter. And we can -- we have some room to push that down even further.

We've still got high cost on CDs that will continue to [reposition].

Yes. CDs, in particular, we have about $2.5 billion in CDs that are repricing significantly lower than what they're on the books for now. So that's going to help as well. So I'm optimistic.

The next question comes from Brett Rabatin with the Hovde Group.

Was hoping to get a little color, if possible, on just thinking about reserve release potential this year and then maybe talking about the hotel book and how that's trending and how you're reacting to the current maybe lockdowns having some impact on hotels.

Yes. We're fortunate to be in the footprint that has had less of the government restrictions placed on it than many other parts of the country. So I guess from that perspective, we're fortunate. There are people moving around. There's more and more events going on, that are traveling a little more. I think there's fewer people doing that, but at least there are things happening there. I started with your second question on hotels. I'm going to let Chris jump in here.

The detail that we put into the deck for you, we continue to see increasing revenue in the hotel. So their average room rate is climbing, and the occupancy is climbing in those -- in that book. Clearly, we've got a couple of hotels that are stressed, and we've got a couple of hotels that have moved into substandard category. But overall, I think if, in fact, the vaccine works and if, in fact, the back half of the year people can begin moving around again, I think we feel like we've got borrowers that will survive and be fine.

From an allowance for credit losses, from an ACL release perspective, that's a harder one. I don't know that we get to a release number in 2020. I guess it depends on when we see -- what's happening from a credit perspective, when things are getting closer to back to normal. I think we've -- we think we're properly reserved today. So I don't know that we need, under today's environment, a whole lot more. But I guess it's all dependent -- as you all know, it's all dependent upon the forecast that the economists give us at the end of every quarter. I think we continue to believe that it's looking a little better, so the need for additional funds is not there. I don't suspect we'll have any big bleed out. John, you want to jump on the ACL piece? And Chris, you can jump in on the hotels. Or you want to...

Just a little color on the hotel book, I guess. It's granular by nature. The average loan size is relatively small. Most of the book, 98% of the book, is all recourse. Our position has been to monitor these, stay in touch with the customer. We're on a 90-day review cycle for every hospitality credit so that we can get the proper loan grade and filtered into our models for the allowance and credit losses. The strategy there is primarily being supported by sponsors with liquidity and guarantors and verifying that liquidity. That's why we've moved to the interest-only approach. We want to see a willingness and a capacity to pay, and that's helping us there. There's clearly winners and losers in the book. That's why not all of them have gone to interest-only. So I think right now, we're less than half. So we've got a diverse footprint, diverse products on the hotel book across that footprint. Florida Coast is a good example of where they're doing pretty well, and those aren't moving to interest-only. So it's somewhat geographic and nature-based on the type of property that it is.

The average LTV is relatively low, and we think we've got a big reserve against that.

Right.

John, do you want to jump on ACL release?

Yes. The ACL -- in the ACL, we did have the $5 million provision for the quarter as a result primarily of our econometric service provider, data provider, a little bit of a downward adjustment in -- or upward adjustment in unemployment, which is the primary driver of our ACL model. So that's -- we felt it was prudent to add a little bit to the reserve at the end of the quarter. As to release of those, I don't expect to see any release of reserves in the near future.

The next question comes from Catherine Mealor with KBW.

I just wanted to ask a question about capital, and you've got about a $6 million buyback outstanding. Of course, you've done 2 deals so far this year. So just -- I just wanted to get your thoughts on how active you think you could be in the buyback this year given your TCE ratio and then these 2 deals. And also, can you give us an update on what you're thinking your capital ratios will look like pro forma for both of these deals as they close next quarter?

Yes. The -- both of those deals are not going to move the needle much on capital ratios, a couple of basis points here. They're not -- just not going to move the needle. One of them is a little bit accretive to tangible book, and one of them is a little bit dilutive. So in total, there's just not enough movement on the capital ratios out of the deals to get excited about.

From a buyback perspective, let me remind you of how our buyback program worked throughout -- or I guess going back into 2019. So through 2019 and into 2020, the first quarter of 2020, we had a 10b5-1 program set up that was on autopilot, and it was driven off of a matrix driven on the valuations in the market. Where we're sitting today, since the market has popped up so high, that matrix would not be executing today. But should the market move around, we're prepared to be back in the market and doing just like we did before. So we're ready, willing and able to deploy capital. We want to make sure that our buyback program is in place and operating, and we've got capacity to do that. Clearly, the best use of our funds, we believe, is to continue to find merger partners where we can enhance our profitability.

Great. And then maybe one follow-up on the margin. John, can you -- you mentioned new loan yields -- or let's say, you mentioned that you've got $3 billion of fixed and variable rate loans at about 4.35%. Any sense as to where those are repricing on average and maybe where new production is coming on average today?

New production over the last probably 60 to 90 days, around 4%.

We're hanging close to 4% or above.

Pretty good, all things equal. That's great.

Yes. I think that has to do again with ticket size. So Chris was talking about average loan size on the hotel. It's $2.4 million. And our average ticket size in total is very low, which is going to drive a higher rate. So we're pleased with that.

The next question comes from Matt Olney with Stephens.

On PPP, I think John mentioned there was about $2 million of accelerated fees in the fourth quarter.

Correct.

What's the remaining level of fees that could be accreted from that program over the next few quarters?

$17 million, give or take? I'm looking across the room. $17 million is still out there to accrete?

Yes. That's from the whole -- that's for the whole book.

Yes. The entire -- the...

For the next quarter, [investment plan].

$16 million.

John is saying $16 million, so $16 million will come off still this year. So first quarter, second quarter and hopefully not into the third quarter, so still some pretty big numbers.

Got it. Okay. Great. And then on Slide 17 in your deck, I think you include the loans that have been converted to interest-only for a limited time period. Can you talk more about those loans? What's the regulatory guidance you're giving for those types of loans? And how do you decide which loans qualify for that versus which loans do not qualify for that?

Yes. Matt, this is Chris. I'll take that. So the regulatory guidance primarily comes under the CARES Act which is driving the ability to do modifications. And temporarily, I think through the end of this year, it's been extended not to require those to be in a troubled debt restructuring, or TDR, status. But -- so that's one component of it.

But our approach has been, again, staying in touch with the customers, getting as up-to-date in current operating statements as we can get, verifying liquidity across the sponsors' personal balance sheets and any other guarantors, doing a global cash flow where we can and then just trying to determine what the best situation or restructuring for that customer would be and the goal of timing of getting them passed hopefully with the vaccination in the pandemic and back-to-normal course of business and then also appropriate -- working with our -- the regulators are clearly giving us guidance. They'd like to see us work with our customers. But clearly, we need to work with our borrowers in a prudent and safe fashion. So we're trying to keep those as properly graded and properly accounted for in our models.

Did that help you?

Yes. That helps. I guess just to follow up on that. Is it safe to say under the CARES Act that those loans will not be charged off in 2021, just based off the guidance you're receiving now from regulators?

Yes. I think you have to walk through the process, so let's walk through these. So we've got loans today that are paying, so they're current on a payment. They're making a monthly payment to us. So they're current on a payment. When we get to the end of the interest-only cycle, the P&I payment will pick back up.

So to get a charge-off, you've got to get to the point where you've stopped making payments, and then you've got to run through the collection process. I don't see that happening in 2021 at all. Frankly, I think I'm back to where Chris was. I think we've got people, individuals that are guaranteeing these credits. Their loan to value is very low. I think we will have 1 or 2 that are going to pop in there, don't get me wrong. But I think we feel overall really confident with what we've got on the books.

And how long is that cycle or the duration of those loans being interest-only? Is it case by case? Or is it standard across? Just any flavor you can give us for how long that duration is.

Yes. Most of them will run interest-only through the summer, some of them into the fall.

Okay. We'll keep an eye on it.

The next question comes from Kevin Fitzsimmons with D.A. Davidson.

Just a follow-up on M&A, Dan. I know the first of the 2 deals was one that was being discussed pre-COVID and then got finished once you guys got to a certain comfort level. And then this most recent one, I would assume, came together more recently. But I'm curious about the level of conversations and interest out there among would-be sellers, what you're sensing. Is there a pickup in conversations, not for something that would be near term, but just in terms of dialogue starting with would-be sellers? Is that picking up?

Absolutely. I think, as I've talked all conference calls last year, you got to go all the way back, there was lots of talk last year between bankers. And the pandemic created opportunities for bankers to be talking to each other, not necessarily about M&A, but just talking to each other about business in general, how things are going. That builds relationships, and that turns into more conversations, and that's certainly continuing to go on now.

I think there are still -- I think, today, there are quite a few community banks that are trying to figure out how do they survive in a go-forward environment with more technology, more compliance, all the headwinds that the smaller banks are flying into. And so there's a lot of opportunity out there. I think we will be in a buyer's market here for a while. I think there's probably more community banks that want to do something than there are buyers that will be able to do something.

And just on the 2 geographies of the 2 pending deals are quite different. You guys have always had more of a -- it seems like a bias toward Texas with your deals. But yet, as you demonstrate, you're willing to look at other parts of the franchise in Tennessee, for example, in Alabama. So does that signify any shift? Or are you really just open to conversations really wherever it happens to be in or adjacent to your footprint?

Yes. I would say in footprint is where we want to talk, but we've always said that anywhere within footprint is valid. And when you look back over the last several years, we've done 3 transactions that were not in Texas, the Florida Panhandle and 2 Alabama-based banks and 1 in Louisiana and the rest of the deal -- so out of the 10, we've had 4 outside of Texas and 6 inside of Texas. And I guess, if you looked at the number of banks that are operating in those states, that are chartered in those states, that's probably proportionally about right. There are just so many more banks in Texas than there are in the other states that there's more opportunity in Texas.

You're exactly right. We like the growth prospects in Texas, but we also picked up the growth prospects in the Florida Panhandle last year. We like what's happening down there. We certainly like the Chattanooga market, where we have our foot in the water a little bit. This will certainly help us in that market significantly and gives us another presence still relatively small in the Nashville market. So this gives us some betterment in our demographics.

Your question on, I guess, future is end market would be clearly preference for us. I don't think we want to go out of market just to go out of market. There's lots of opportunity within the footprint that we are currently cover.

(Operator Instructions) The next question comes from Jon Arfstrom with RBC Capital.

A couple -- I think that the queue for questions means I'm probably last, so I've got a few cleanup questions. Chris, can you talk a little bit more about the growth outlook outside of PPP? It seems like -- I don't want to say you're more optimistic but maybe less pessimistic than others. Is that a fair assessment? And just what's the overall view on growing loans organically outside of PPP?

Yes. Great question. Clearly, we're -- our mind and energies are focused on PPP right now, both from an origination perspective and then the forgiveness perspective. So there's quite a bit of hands on deck dealing with that. But at the same time, we're seeing opportunities throughout our -- in certain segments of our footprint. We mentioned Texas. I think we're seeing bright spots in certain parts of geographies, certain types of projects.

I just think we're getting opportunities to look. I think the question will be over the next year is where does the pricing settle down, and can we pursue these opportunities at a reasonable price and get good margin. So I think there's opportunities for us to consider. And I think Dan mentioned it in his comments, too, it's -- I think our part of the footprint has been not quite as impacted by the shutdowns, and I think there's been some winners and losers because of that. And that's generating some opportunities and also some risks that we're still monitoring, as you can see.

Yes. I think I would just tag on to that. Right now, we're a small ticket lender, by and large. Our bankers are in the market dealing with customers every day. We're now a week and 2 days or a week and 3 days into round 2 of PPP, and we're pushing 3,500 applications in a week. So our team today is clearly wrapped around trying to make sure that this next group of PPP loans are all processed and processed quickly.

But we do have to shift, Jon, and we talk about that a lot here. We've got to get to the point where we can shift back into a more offensive mode, make sure our folks are out calling. The footprint that we cover in the major metropolitan markets, whether that's Nashville or soon to be bigger in Chattanooga or I mentioned the Florida Panhandle a few minutes ago, all of the big Texas markets, there's great opportunity in those markets. And having our folks have the ability to get out and mix it up with customers in a more face-to-face, more normal environment is going to be helpful and probably critical to see that growth happen. So certainly, as soon as we can get the vaccine out and get people comfortable that face-to-face contact is going and that the economy is coming back, that will benefit us. But we do like the footprint that we're sitting in.

Okay, okay. Good. Chris, probably another one for you on Slide 18. I probably ask about this every other quarter, so -- but it's the mortgage gain on sale, and you used the term elevated. And when you look at the ride that that's been on over the last 5 quarters, it's been quite a ride. But is that -- in your mind, is the 2.62% still somewhat elevated? And I see the pipeline down a bit, but -- I know it's a hard question, but just give us your thoughts on that.

Yes. We would still see it elevated. It's obviously been lumpy. It's lumpy, as we've talked about every other quarter like you said based on the volume and trends and the way the fees are accounted for. But I just think in a normal year, we would see that well below that. I think -- I don't know that we've departed from our previous comments around the high 1s or 1.75%, something like that.

Yes. I would agree with that. And it's interesting when you look at that page, Jon, looking back at March 31 of '20, pipeline ended the quarter at $570 million. We ended the year at $560 million, give or take, so close. Depending upon how things are going in the quarter, can we hold pipeline? If we hold pipeline, that will help us hold margin, but margin is elevated because of the volumes that are still running out there.

Yes. Okay, okay. That's fair. And then, John, maybe one for you on Slide 7. I'm just curious on fees outside of insurance and mortgage. Do you feel like there's still recovery room in some of the other line items, specifically the deposit service charges? It seems like credit and debit merchant is probably fine, maybe even a little bit elevated. But some of the other activity-based fees, are they back? Or is there still room to go there and there's some momentum?

I think there's still a little room to go there. As we get into a more normal environment, and I'm talking COVID-19, certainly, activity in our deposit accounts can and should pick up over time. So I think there's some improvement possible there.

And when you look at what we're hearing from the hotel customers that we're talking to and others, many in the hotel business believe there is tremendous pent-up demand to go somewhere. People are tired of being in the basement with a space heater. They want to go somewhere, Jon.

You got that right.

And so, if, in fact, that happens, then I think some of this money that people have been able to save is going to get spent. That will turn into some card fees. Certainly, the deposit service fees can be a little bit dampened by the fact that we're carrying such large balances that there's a negative on those.

We're excited about for the first time in years and years. I can't remember the last time talking to our insurance team, they're telling us that we have a hard insurance market, and we're expecting to see premiums climb 10% or more this year. That turns into direct revenue for us on the insurance side. So we're expecting to see a good year on insurance.

This concludes our question-and-answer session. I would now like to turn the conference back over to Dan Rollins for any closing remarks.

Thank you all for joining us today. If you need any additional information or have additional questions, we look forward to speaking to you again. Please call on us. Hopefully, we will all have a vaccine and a shot soon, and we will all see you again face-to-face next time we get to get together. Thank you all very much for participating. Appreciate the support of our company.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.