FB Financial Corp (FBK) 2020 Q4 法說會逐字稿

Good morning and welcome to FB Financial Corporation's Fourth Quarter 2020 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mettee, Chief Financial Officer; Greg Bowers, Chief Credit Officer; and Wib Evans, President of FB Ventures, who will be available during the question-and-answer session.

Please note FB Financial's earnings release supplemental financial information and this morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately 1 hour after the conclusion of the call. (Operator Instructions)

With that, I would like to turn the call over to Robert Hoehn, Director of Corporate Finance. Please go ahead.

Thank you, Kate. During this presentation, FB Financial 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's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K. Except as required by law, FB financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.

In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release, supplemental financial information in this morning's presentation, which are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov.

I would now like to turn the presentation over to Chris Holmes.

All right. Thank you, Robert, and good morning. Thank you all for joining us this morning. We appreciate your interest, as always, in our company. And as we started thinking about the themes and preparing our comments for this quarter, it really struck me what a significant year 2020 was for our associates and our shareholders.

Our team has actually had a really special year, and I want to give you a few facts. First, on our financials. Our adjusted net income for the year was $142 million. This represents adjusted EPS of $3.73 versus $2.83 per share last year for a 31.8% increase. This is an adjusted return on average assets of 1.68% and an adjusted return on tangible common equity of 19.1%. Those earnings also moved our tangible book value to $21.64 a share, growing over the prior year by nearly 17%. Yes, I said nearly 17%, okay? Remember that this growth came after we provided $108 million for loan losses and increased our allowance to 2.48% of loans, a figure that's among the highest of our peers. Our balance sheet is in excellent shape as we end 2020.

In addition to the increase in our balance, we grew from $6 billion in assets to $11 billion in assets during the year. But rather than this growth stressing our capital ratios, we maintained a tangible common equity to tangible assets ratio of 9.3%. And we increased our total risk-based capital from 12 -- capital ratio from 12.2% to 15.2%, all of this without an equity raise.

Beyond the year's financial results, there were some other noteworthy accomplishments. Four years ago, our only relevant presence in an MSA within Jackson, Tennessee, where we were third in market share. Over the last 4 years, we've built top 10 market shares in Nashville, where we're sixth, by the way, with $4.8 billion in deposits; in Chattanooga, where we're fifth in market share; in Knoxville, where we're ninth; and in Bowling Green, where we're seventh. Those are markets that each have projected household income growth of over 8% over the next 5 years and projected population growth that's expected to be 4% and above.

Finally, we continue to be a great place to work for our associates. Of all the accomplishments of 2020, I personally might be the most proud of American Banker recognizing us as one of the top banks to work for, for the first time this year. We've been recognized as a top workplace by The Tennessean, the largest newspaper here in Tennessee for the past 5 years. And it's nice to add national recognition as a superior workplace. Building on that culture, we've not had a single pandemic-related job elimination. And for those associates that were unable to perform their job due to branch closures, there was no reduction in pay. And I'd like to think there was never a concern on behalf of our associates that we would do things any other way.

So with all that, I think we've had a monster 2020. And I want our team to take a minute to be proud of themselves 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 monster year with a fantastic 2021 and 2022. We go into 2021 with a lot of excitement and optimism because we have a lot of levers that we can pull to build on last year's performance.

First, the acquisitions to get the headlines, but we're an organic growth company and we pride ourselves outworking competitors and taking market share. With 2 acquisitions in COVID last year, we had plenty of distractions. Today, we're positioned very well for organic growth in Nashville, Knoxville, Chattanooga, Jackson and Bowling Green, which are all very strong growth markets. We have excellent leadership in place, strong branch delivery networks, good market presence and plenty of room to grow our market shares.

In Memphis, we recently added a new market president and a team of relationship managers. In [Brownsville] and Humboldt, we have very little market share, so we can be very aggressive in getting after new business. Two other contributors, we expect the reliable, steady, slower growth but higher-margin contribution that we've come to rely on from our smaller community markets. And we'll be aggressive in recruiting and hiring additional relationship managers in every part of our footprint. With our culture, size and momentum, there's not a better home for ambitious relationship managers.

Across all our markets, we set aggressive targets internally. And in aggregate, we expect to deliver mid- to high single-digit loan growth in 2021. We expect the first half of the year to be slower than the second half, but we also expect our markets to be among the best as economic activity increases during the year.

Mortgage is another area of strength. Volumes and margins remain elevated, and our team will continue to capitalize on this favorable environment. We produced $23 million of adjusted pretax contribution last quarter in what's typically the slowest quarter for mortgage activity in the year. Our team has continued to perform well in January, so we expect the first quarter to be another strong one for mortgage. And then we'll -- after that, we'll be back into the purchase season, that between continued low rates and the current housing start trends, we expect to be strong.

As you all know, mortgage volumes are very, very difficult to forecast. And frankly, we failed every time we've tried to do it. But we expect the first quarter to be similar to Q4 with a 70% to 100% of the previous quarter's contribution. And we expect continued strength in the second and third quarters, barring a significant change in the environment.

On net interest margin, we continue to carry significant levels of liquidity, which weighs on the margin but gives us some levers over the next couple of quarters to improve our funding costs. This past quarter, we did a good job of further purifying our balance sheet and reduced noncore funding by $462 million between FHLB advances and wholesale-type deposits. We have another $80 million or so to go in the first 2 quarters of the year.

On the asset side, it's difficult to plan higher-yielding assets, everybody knows. So we're still likely going to lose some yield on our contractual rate on loans X 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.

On noninterest expense, we realized our cost savings on the Franklin merger earlier than expected. We realize an additional -- we may realize an additional $1 million to $2 million in annual run rate cost savings in the second half of 2021, but we don't expect additional dramatic improvements in the first half of the year.

With this larger balance sheet and our larger platform and conversion activities behind us, though, we feel like we're in a good spot to focus on some operational improvements that should help reduce expense through productivity gains and avoiding future expenditures. I would expect low to mid-single-digit growth to our core bank expenses fourth quarter run rate in 2021.

On credit, we feel as good about our portfolio as ever. The deferrals and PPP loans served their purpose of putting our customers back on their feet, and we use this opportunity to improve the overall quality of our loan book. We did have one credit that we've been giving you updates on over the last few quarters that we decided to charge down in the fourth quarter. This accounted for 55 of our 58 basis points in net charge-offs. And we think we've nipped this one in the bud, and we gotten it behind us. I'm going to let Greg give you some more color, but I feel pretty good about where we stand. And I think 2021's metrics will bear that out.

To recap all that, we achieved density and relevance in some exceptional markets, and we have local leadership teams in place to know how to capitalize on the resources that we provided for them. We've turned ourselves into an excellent option for talent that's looking to make a move. Our capital and liquidity positions are better suited than ever to take advantage of good business opportunities. We have a very strong noninterest income engine that should continue to deliver outstanding results. We've already achieved our targeted cost savings on FSB, and we think that we have some expense control opportunities in front of us. The margin is compressed, but we think we're well positioned to continue driving down funding cost while deploying lower-yielding liquidity into core loan growth. And credit shouldn't be a headwind for us in 2021.

With a great 2020 -- and by the way, did I mention, we did grow tangible book value by almost 17% despite $108 million provision in the year. I want to make sure we got that one in there, we're poised for a fantastic future. And with that, I'm going to turn things over to our Chief Credit Officer, Mr. Bowers, for some detail on credit.

All right. Thank you, Chris. I share your sense of optimism for 2021 and confidence in our overall asset quality. The integration of our portfolios has moved along well, and I appreciate all of the hard work that our teams in the markets have done in this regard. It's no easy feat. We asked them to coordinate the move of their customers on the new systems while ensuring great customer service at the same time. It's been remarkable.

We say that asset quality remains positive overall. And with one exception, we believe you will see that in our credit metrics today. That exception is a problem credit that, as Chris noted, we have called out with you for the past 3 quarters. Like most deals that get into trouble, information comes in over time, and you assess it accordingly. Circumstances change. Information gets updated and things either gets better or worse. And in this case, it just continued to decline. And just like any other deal in our portfolio, when problems surface, we address them swiftly and decisively and then take the appropriate steps.

In this case, it was a term that appropriate steps included a charge down related to that loan. As a result, our net charge-offs for the fourth quarter were 58 basis points or $10.4 million. Of this, $10.4 million, $9.9 million or $55 of the 58 basis points in charge-offs were tied to that 1 credit. The balance was placed on nonaccrual, which accounted for 17 basis points of our 88 basis points in nonperforming loans to loans held for investment this quarter. With that, we believe this loan is appropriately marked and rated, and our focus will continue to be on its resolution. With that one exception, the asset quality of the portfolio remains good, and as Michael will detail for us, significantly reserved.

When I speak about the portfolio's quality, one measure of this is in our deferred portfolio. Deferrals are down to about $200 million or 2.9% of the portfolio. That's a long way from the roughly $1.6 billion we had at one point. Note that when we say deferred, we are including all of the loans that remain on some form of modified payment schedule. We take comfort in noting that up at approximately $200 million, roughly 65% is making interest payments with about 35% of that portfolio on a full deferral. That is we have allowed them to forgo interest and principal.

Hotels remain the hardest hit area within deferrals. No surprise, they're making up 44% of the full deferrals, 41% of the interest-only deferrals. We remain cautiously optimistic about the ultimate resolution for the remainder of that portfolio and are very pleased to see that it has come down so far.

The next area that we believe continues to reflect positively regarding our overall portfolio is in what we have called our industries of concern. And as you know, we've broken these out each quarter since the beginning of the pandemic. I think you'll share our sense of overall improvement here too as you review these slides.

Specifically, we'll move to the hotels on Slide 15, and try to provide a little more color on that segment. Again, overall, we still feel confident in the underwriting of that book as a whole, that occupancy rates continue to be impacted by the pandemic. We continue to work with those customers that we believe are strong operators, and our customers have continued to work with us in instances where we have asked for additional capital. We continue to be comforted by the quality of our properties, management teams and investors. And we sleep well at night knowing that we have avoided projects in Nashville's core downtown tourist area, larger luxury properties and conference center properties. I look at these figures, specifically that the bulk of the deferrals are paying interest as a positive.

Another segment that continues to struggle is restaurants, which we have on Slide 16. That's due to the reduced capacity restrictions, especially in our metropolitan markets and overall trends across the geographies. On the whole, though, our group generally continues to be okay, but I'm not recommending that we get them an all-clear flag. These shutdowns and reduced capacity limits are a challenge, and long-term prospects for the industry remain cloudy. We'll share with the group that this doesn't mean we haven't had various specific issues.

For example, we have 1 customer with a full-service operation that recently closed. However, the guarantors that were part of our underwriting are stepping up and performing on the debt. As we've also noted, on the positive side, the quick-service segment of the business has fared well. While overall we're cautious about restaurants, we would entertain opportunities for seasoned and well-capitalized operators in this segment if it made sense.

Lastly, roughly 25% of our other leisure portfolio, Slide 17, remains on deferrals so we have included that disclosure again this quarter. Rather than a systemic issue in that portfolio, it's a handful of loans that comprise roughly 90% of the deferred balances. Those are customers whose industries have remained impacted by the pandemic, but we feel good about our guarantors and collateral in each situation and think that the businesses should bounce back well once the vaccine is widely distributed.

Our other industries of concern, for example, retail, health care and transportation, continue to perform and have minimal remaining deferrals. You can see that we have reduced our disclosure on these industries this quarter. And that's because simply, in general, they've returned to normal, and there is nothing significant to highlight. As always, if that changes, we'll reincorporate that into the deck for you. From an overall economic viewpoint, with the exception of hospitality and entertainment, our footprint has continued to perform economically better than any of us would have guessed back in April.

Moving on now to the institutional portfolio, our held-for-sale portfolio, it has been reduced down to roughly $215 million, down from $241 million at Q3. You will recall that announcement roughly a year ago now, that portfolio stood at approximately $430 million. We maintain our position of exiting this portfolio as soon as we can. We're willing to sell on a one-off or a bulk basis. But as we've said before, we're not willing to give away a performing portfolio. We'll continue to work on this from the sales side. And in the meantime, we'll just continue to do what we do with any loan and manage them on a one-on-one basis. So for the institutional portfolio, that held-for-sale portfolio, we see positive trends with it continuing to reduce, standing now at half where it was at announcement. It is appropriately marked, and our expectation is that it will reduce further from pay downs, one-off loan sales or selling it in bulk.

Regarding our outlook for 2021, we continue to be cautiously optimistic about trends throughout our market. The additional government stimulus should continue to be a welcome assist until the vaccine is successfully distributed and our markets move back to normal. The residential housing market in Nashville and really across our entire footprint is still performing very well and is aided by continued influx of corporate relocations as our new neighbors arrived from California, 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 in 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 in charge-offs due to one specific deal. Deferrals are down, industries of concern show levels of improvement. The held-for-sale portfolio continues to decline. Our overall credit metrics are stable, and our reserves are strong. With that, I'll turn things over to Michael.

Thank you, Greg, and good morning, everyone. My prepared remarks today will focus on margin, mortgage, CECL and an update on the financial impact of the Franklin merger.

Starting first on margins. We are seeing the decline in contractual yields on loans beginning to slow. Excluding PPP loans, our December contractual yield was 4.48% compared to 4.53% for the fourth quarter and 4.54% in the third quarter. New originations in the fourth quarter have a weighted average rate of around 4.15%, so we would expect to continue to lose a few basis points per quarter on the contractual yield going forward.

Meanwhile, our cost of interest-bearing deposits was around 59 basis points in December compared to 63 basis points for the quarter. We have $314 million in CDs coming due in the first quarter with a weighted average cost of around 151 basis points, and the sheet rates on those deposits are currently 41 basis points.

In the second quarter, we had an additional $308 million with a current rate of 124 basis points in the rate -- sheet rate of about 40 basis points. So for the past few quarters, we've managed to keep around 60% of our maturing deposits as rates around 5 to 10 basis points above what the rate sheet would indicate, and we expect those trends to continue. We also believe that we have continued room to lower our cost of money market account and think that next quarter, we should be able to pretty much match reductions in our contractual loan rates with decline in our deposit costs.

We also continue to make strong progress in paying down noncore deposits and borrowings. Last quarter, we discussed $571 million in noncore funding from the Franklin merger that we felt would leave the balance sheet in the fourth quarter. We were successful in exiting $362 million of that $571 million, and the remaining $200 million in wholesale funding is a money market relationship that we ended up keeping, and we actually marked out at the cost of approximately 35 basis points. We expect to keep those on our balance sheet until the contractual obligation ends in 2024.

In addition to the $362 million in legacy Franklin funding, we paid down $100 million in legacy FirstBank Federal Home Loan Bank advances. As noted, the prepayment fully on that Federal Home market loan bank in BAS was around $4.5 million, and we had no Federal Home Loan bank fundings remaining on our balance sheet as of year-end.

Looking forward, we have an additional $60 million noncore money market accounts that are scheduled to leave the balance sheet in the first quarter and another $20 million expected to leave in April. We also intend to redeem Franklin's legacy subordinated debt, $40 million of which becomes callable after March 31, and $20 million of which is callable after June 30. Both of those tranches are on the balance sheet and a mark cost of around 5%.

Despite our progress in exiting noncore funding and some stabilizing trends in our core margin, excess liquidity does and will continue to weigh on our stated margins. Strong deposit growth led by seasonal increases in public funds of around $400 million drove our cash balances to increase 24% from the third to the fourth quarter, and cash now represents 12% of tangible assets. Our total on balance sheet liquidity increased to 15.2% of tangible assets during the quarter. Based on historical seasonality with public funds, we anticipate that these deposits will begin to leave the balance sheet by early second quarter and continue to decline in the third quarter.

On our loan growth, the field is very confident about what they'll be able to produce this year. However, we have not seen the growth come back into our numbers yet, so we remain fairly conservative on how much growth we'll see in the first and second quarters. We think that a mid- to high single-digit guide for the year is achievable, and we will keep you updated as the outlook changes. For the remaining liquidity, we intend to continue increasing our investment portfolios as we wait for organic loan growth engine to restart.

Moving to mortgage. The team produced another strong quarter, which led to a record year for the division. Mortgage continues to provide the company with a counterbalance to NIM pressure that the bank has been facing. During the third quarter earnings call, we discussed seeing elevated gain on sale and a peak on margin for new production, and that is demonstrated on Slide 7. As expected in the fourth quarter, there was a seasonal dip in volume and margins. But overall, the group continues to benefit from elevated originations. We do expect some compression in 2021 as refinance volumes decline and bring capacity back to the marketplace, but this will somewhat be offset by the strength in the housing market and a very strong purchase market. We would like to congratulate the team for a record year and continued robust earnings.

Additionally, on fee income, we received relief on the interchange reduction associated with crossing $10 billion assets for the year. So that planned $3 million in reduced revenue that we had expected in the second half of 2021 will now be delayed until 2022.

On CECL, we went to 100% baseline scenario. The change in the forecast paired with the slightly changing mix in our loan portfolio, was responsible for approximately $17 million in reserve release. In order to adjust for what our APL committee determined was too little of a model of allowance on our C&I portfolio, we adjusted our qualitative factors on the C&IP, which resulted in approximately $8 million in additional allowance on that portfolio, offsetting some of the model decline in reserves.

Those, along with a few other moving parts, including charge-offs, resulted in the net $3 million release that you saw in our provision expense this quarter. As the vaccine is more broadly distributed and the economic forecast continue to improve, we believe that it's likely that we'll see further reserve releases over the coming quarters. The extent of those releases will depend heavily on how our outlooks to 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 $9.5 million in merger charges in the quarter. While we could have an additional $2 million to $3 million in charges in the first quarter, all significant merger expenses are now behind us and you should see a relatively clean noninterest expense line going forward. We also saw an increase of goodwill of $10.7 million, with the majority of the increase related to the new mark on a $200 million in noncore money market funding that I referenced earlier. With these merger charges and additional goodwill, we estimate this transaction wind up being roughly neutral to tangible book value per share.

Spending a second on cost savings, I would point you to the other noninterest expense line item in our Banking segment income statement disclosure on Page 13 of the financial supplement. This quarter, there's the $4.5 million FHLB prepayment fealty embedded in that line item. Excluding that, the Banking segment other noninterest expense was $52.9 million with our first full quarter of Franklin included. This is about $12.5 million more than we were running prior to the Franklin second quarter of 2020 and indicates we've already hit our 30% cost savings target on the Franklin Centerview merger.

So those are some details on all the various moving pieces. But the end result was, as it has been for the past few quarters for us, exceptionally strong profitability with adjusted pretax, pre-provision return on average assets of 2.43% and adjusted return on average assets of 1.95%. We expect to remain the lead financial performer, and we look forward to updating you over the coming quarters.

All right. Thanks, Greg, and Michael, for that color. I'd like to quickly discuss a few other changes that we announced during the quarter, and then I'll open the line up for questions.

First, we removed the interim tag from Michael's title. We had many applicants interested in the position, including several good friends of the company. We -- for that reason, we hired an outside adviser to take us through an objective process, and Michael overwhelmingly proved to be the right person to be our CFO. Michael is a rising star in the industry. He has spent 9 years with the bank and has been extremely impressive in each role that he's held with us. My only regret is that because of COVID, many of you haven't been able to spend any time with him. As soon as we can safely travel, we'll rectify that, and you'll see why we are excited about our team and our direction. We look forward to his leadership, elevating the finance function to a new level for us.

Next, Jim Airs has stepped away from the Chairman's role in the company. Jim has reached a point in life where he is enjoying the fruits of his labor, and it's well earned. Jim will continue to be a member of our Board. He'll continue to be -- and he'll continue to be a very significant presence at FirstBank. We look forward to his continued valuable counsel, his continued support as our largest shareholder and to him continuing to be the bank's most passionate advocate for the bank in our communities.

Replacing Jim as Chairman is Stewart McCarter. Stewart is one of our independent board members, and he was a member of the Board for 12 years prior to stepping away to become Tennessee's Commissioner of Finance and Administration in 2018. And he rejoined the Board late last year. He's been a very successful investor in his own right. He had experience on other public company boards, and we look forward to his experience and guidance as he assumes the role of Chairman of our Board.

So to close, our team delivered phenomenal results in 2020. More importantly though, we've prepared a runway for the next 2 years. Our team has the mandate to go forth and dominate. And we're eager to share how well they execute on that plan in the coming quarters. With that, I'd like to open it up to questions.

(Operator Instructions) Our first question is from Catherine Mealor of KBW.

I just wanted to follow on one comment that you made on Durbin. I think I overheard you say, Michael, that you have been granted a waiver on Durbin for this year. I just wanted to see if you could talk a little bit about how that happened? Because it looks like you're still over $10 billion in assets.

Yes. Thanks, Catherine. There was some regulatory guidance that came out late last year that gave some relief because of asset kind of inflation due to COVID. And we had a path to being under $10 billion going into the end of the year. And so we worked with our regulators very closely and walked through that. And so they did end up providing us relief, even though we're still over the $10 billion more.

Yes. And Catherine, I'll give just a slight bit of color on that. Because we did some real study and councils and outside parties on that and had some conversations with our regulatory agencies. And if you go back to when we announced the deal in January of '20, we even laid the thoughts back then of the fact that we very well may -- that we knew that there would be some shrinking of the balance sheet because of wholesale funding and some other things. And so we felt like we had a path even then to be under $10 billion at the end of 2020.

And then comes COVID. Then comes PPP. Then comes all the funding. And so balance sheets are elevated, are sort of high for all the banks. And so there was an announcement by agencies that they would provide some relief on those facing asset thresholds, including this one. And so because we were in a little bit of an unusual circumstances, we had some dialogue there. And it looks like that, that we do qualify. We have to actually be excluded from the exemption, as I understand it. And it looks like we will not be excluded.

Okay. Great. That's great clarification. And then on -- can you just remind us your thoughts on your outlook for accretable yield? I know that there's a lot of moving parts with that just given the change in the loan mark from the Franklin deal. And so it looks like this quarter, accretable yield was very low. Is that still your expectation for 2021?

Yes. That is our expectation. It's going to continue to be quite low in terms of the accretion impact on our yield. So it's -- the way that I look at, the way I talk about it internally, it's a fairly purified number at this point. There's -- accretion can really give you some artificial confidence in your margin as, again, the way we look at it. And so when you boil it down, it -- yes, most of that is out. And we roll forward for the next few quarters, it's going to continue that way is what we expect.

And give us some of the movements on the interest rate marks. Is there ever a -- is there a period where it could be actually negative, be more of the amortization?

I don't -- yes. It's not impossible, but it's not likely.

The next question is from Stephen Scouten of Piper Sandler.

So 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 a CECL world? I mean, obviously, there's more noise in yours than maybe some of your other peers given the FSB acquisition. And the absolute level is still extremely high. So I'm just wondering how you're thinking about that, assuming, of course, the kind of the economic improvements and vaccine trends we've seen continue.

Yes. So I'm going to comment first, Stephen, and mine are going to be much more global. And Michael will comment too. Because I agree with what you're saying. I mean, certainly, it looks high relative to peers. And -- but trust us. We go -- we have a very defined process that we've laid out with both consultants and outside auditors. And so we have a lot of dialogue around it. And so it is -- it does -- so we agree. It does appear high. And I'm on record saying, but I want to be careful in making sure I say this in the right way. I do not think that we'll have that level of losses by a long shot.

And I think every single CEO whose calls you've listened to would probably say the same thing based on our experience thus far with CECL. But we're following the process. And so as you could see in this quarter, it told us we need some release. We're not going to be surprised if it tells us that and then some more headed forward. But we haven't -- I have heard actually people that have great respect for other CEOs -- some of the other CEOs talk about maybe we'd like to keep it around 2%, and we'd like to keep it around X percent or whatever. We're shying away from that. We're not -- we're just following the process and seeing it. We're seeing where it takes us at this point. As we get more and more confident quarter-by-quarter, we'll probably -- again, and I've said this before too. We'll probably exercise a little more qualitative input than we have been. But that's kind of where we are today.

Yes. Chris, I think you hit on it really well. And not a whole lot to add other than, if the economy improves, we get some more stimulus. I think you can see opportunities that there's opportunities for a relief. But as Chris mentioned, and like we called out, as we look at certain buckets, C&I, for instance, yes, that's where we felt like it was prudent to maybe increase from our modeled results. Whereas construction and CRE, we came down because of the outlook improved in the economy and in the commercial real estate space. So we're taking it month-by-month or quarter-by-quarter and just going through the process. And I think that there will be opportunity in an improved economy to see some releases, assuming that we continue to see kind of the debate.

Yes. Nope. 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, in my view, it's all capital, just you're putting it in a different bucket. But let's say it moves back into maybe core capital, if you will. How do you think about share repurchases? Because even apart from loan loss or releasing, as I see it, you should build capital internally at a very rapid pace.

Yes. Agree with everything you just said. We can look at the same way. It's almost like it's capital. And so I would -- I like the way you look at it. And we view share repurchases as one option on the table for managing our capital. And so we -- it's something that we keep on in the forefront of our mind, especially at this now because you're exactly right. The good news is we're accumulating capital at a really rapid pace. And I think that's good news. I don't know if I mentioned, but our tangible book value went up by almost 17% last year. And so we are accumulating capital at a rapid pace. And so we're -- it's a hot topic of conversation externally on exactly what we do with all that. Yes. It's -- by the way, we not a bad problem to have.

No. Definitely not. And maybe just one last for me. I know, Chris, you guys were talking at the start of the call mostly about organic growth opportunities, which I think is great. But I'm just wondering, given the success of this FSB deal and getting the cost saves out sooner than expected, I mean, it really shines a light on your capabilities there. So do you think more about M&A sooner than we maybe would have thought previously given the success here and what seems like it will be a pretty active environment?

Yes. We -- it's a fair question and one that we face often. We're watching the environment. But it's not something that we're -- we feel compelled to jump into. The things that we've done have been, again, in my comments, I said the acquisitions get all the headlines. And ours have gotten some headlines, but they've actually been very strategic. They've all been in footprint, and we have all had an eye on operating leverage on every time -- every one we've done, we've had a keen eye on operating leverage. And so it's an option, but it's one that we'll be pretty restrained on. And we are really excited about some of the things internally that are going to improve our operation, improve our organic growth capability and improve our customer experience. And those things, again, those aren't the things that grab the headlines. We're really focused on those things. And so we'll be available but cautious, I guess, is the way I put it.

The next question is from Matt Olney of Stephens.

I want to circle back on the operating expenses and want to make sure I appreciate what's going on here. It sounds like you already received the cost saves from the Franklin deal, but there's a chance you could get additional savings perhaps in the back half of 2021. I'd love to hear more about what drove the accelerated recognition of some of those cost savings. And then secondly, the guidance of the low to mid-single digits, I assume that's based off the core number in the fourth quarter of $52.9 million. Did I get that right?

You did get that right. You did get that right. And let's see. So on -- yes, you got that right. And that was the second part of the question. First part of the question...

The $1 million to $2 million in the second half of the year.

Yes. Our thinking there -- and I'm sorry. You said also that we may have recognized the expenses a little faster. And so again, remember, 2020 was -- I recognized being able to get the expenses out a little faster. In 2020, and year of the pandemic, and we looked at it -- and that during 2020, if we could go ahead and get the systems conversion done is probably a really good time to do that. It was a hard time to do that, but the world was kind of standing still. And so if we could make all that happen while the world is standing still, we thought we'd be right where we are with a really good runway into 2021. So that was our intent. And so we worked really hard. So the previous question from Stephen, when he was talking about, hey, man, you guys look like you're already ready to jump in and do another acquisition. Man, well, I tell you, we -- I can't tell you how hard the team worked in 2020. And it'd be easy for your executive team to sit here and go, hey, wow, let's do that again. Well, it's just not that easy.

And so -- but we did -- but you're exactly right. Both of the -- you are exactly right. We worked extraordinarily hard to get it done. And so we did get some expense out earlier than we modeled on the front end, which is good for all of the shareholders and everybody. And so we think we're pretty good for the next few quarters. We may 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 like to beat them. And we kind of equaled it at this point, but we won't do at some point in 2021, do even better than we modeled. And so that's the reason I say we're not anxious to jump back into something on the acquisition front. We never say never, but it's not something we're out searching for. And that we've said -- we said what we said about the expense side.

Yes. And Matt, this is Michael, just to layer into that a little bit. The back half saved -- one of the challenges, right, with COVID is office space. And so we have some leases that we think we'll exit later in the year that can help with some of that back half saves. And then the single-digit growth in expenses, low single-digit growth. Really, I mean, we assume the world is going to open back up. Chris mentioned travel a little bit. We look forward to being back in front of our customers, our clients and building our business. And then as we've gone over $10 billion, and Chris mentioned all the things that maybe don't get the headlines, some of that is -- we'll have some internal investments that can lead to some expense growth. Again, with minimal, and we think we can outrun it, but that's kind of what that comment was about.

Yes. Let them in.

Let them in. Yes.

Yes. Let them in.

Okay. And then circling back on the discussion around the core margin. It sounds like there's some additional room to take down the interest-bearing deposit costs from the fourth quarter levels. And I think I heard at least for the comment for the first quarter, you think there's some room to offset the pressure on the core loan yields. Did I hear that correctly? And I know it's early, but do you feel like you can kind of continue that trend beyond the first quarter at this point?

Some of that core loan yield. We don't know -- it's a plus or minus, but some of that core loan yield, we think we can offset -- possibly all of it, we managed through this quarter. So it's kind of a plus or minus situation there. But we're -- that's our goal is to try to offset it. We not -- we can't guarantee that we can totally do that, but we -- that's our goal.

Okay. And then I guess the other issue within the margin discussion that you brought up and other banks are talking about is just the excess liquidity position. And it sounds like you're willing to put a portion of this towards the securities portfolio. I'd love to hear more about how you're thinking about how much of this -- how much of a build you would kind of consider? And then what types of securities you've been buying more recently?

Yes. We're running about 10.5% right now. I think traditionally, we've been more in the 12% range. So I think you could see some growth in that 11%, 13% range. Not all next quarter or this quarter, but -- and we backed off a little bit on municipals. That keeps getting longer and longer-dated and spreads come in. So we've been looking at more kind of shorter data to the most 3- to 5-year stuff. I want to keep an eye on durations. Mortgages are still pretty rich. So you haven't seen a whole lot of growth in the investment portfolio. But we want to be really prudent and really think about the overall balance sheet strategy. Prefer to deploy it into good loans, quite frankly, but we'll take opportunities as they come.

The next question is from Alex Lau of JPMorgan.

My first question is on the mortgage business. So you've operated very efficiently for the past 3 quarters with an efficiency ratio in the 50% to 60%. Can you talk about some of the factors contributing to this efficiency during the pandemic? And looking into 2021, can you continue at these levels as the gain on sale margin moderates?

Yes. Alex, we have -- Wib Evans is with us who runs our Ventures, including mortgage. And I'll let Wib and Michael talk about that. Go ahead.

Absolutely. Yes, Alex, obviously, margins have ticked up tremendously on -- from an efficiency ratio standpoint, which helped us a lot. We don't expect that to continue. We see some compression already coming down in the latter part of the year. We see it again here in early January, so we see that coming down. You would see -- obviously, you know we've had some capacity issues in the industry, which allowed that margin to creep up as we have hired additional folks to maintain its volume that will also put pressure on that efficiency ratio. So being in that 58% to 60% range, not sustainable generally through the year. And we expect that to be elevated some.

And then my second question, I want to touch on technology. Have you seen an acceleration of your digital platforms in terms of adoption during the pandemic? And in 2021, you mentioned some investments. Are any of those related to technology initiatives?

Yes, Alex. On the technology side, we've definitely seen acceleration and take-up rates on technology. We have -- so a couple of things. We did conversion of both our online and mobile system mid part of last year. And so we've got a really nice recent upgrade there. It's been very well received by customers. And so we've seen take a break from that. And timing was reasonably good on that because it timed it perfectly. It would have been in the first quarter instead of the second quarter of last year. But because -- and we're not -- this is not unique to us at all. But we've got a lot of customers that just haven't taken up the technology but really had to during COVID. And they -- that continues. They didn't use it during COVID and they're going back when the branch a lot of these open back up. They're continuing to use it. And so we've seen the take-up rate move quite a bit.

And then -- and we have been on a technology ramp up from an investment standpoint for about probably 3 years in terms of continuous improvement. And so that gets -- those investments get larger, not smaller. And so as we move into '21 and we think about capital expenditures, in my comments, I actually made a reference to what we were -- that when we were wringing expenses out of the merger, and that moving forward, we thought we would have some places where we would gain some efficiencies but also improve on our capital cost. And so -- or not our capital cost. We gained some expenses. And actually, we've reduced some expenses and gained some efficiencies, and those are all technology related. And that's applying technology. So it's coming not only at the customer -- on the customer side, but it's coming on the back office side where we're getting more and more efficient, and it's our biggest place of capital investment.

The next question is from Brock Vandervliet of UBS.

I wanted to follow up on the mortgage question. These gain on sale margins, as you well know, have just been giant. Where do you see that normalizing to from, say, where it was in the fourth quarter? Just trying to get a sense of where we should think about the business kind of retracing, too.

Brock, it's Michael. Yes, I think if you look on Slide 7, we have the 3.42% there circled. That's kind of indicative of where new originations came in the fourth quarter. Obviously saw a decline there from third quarter and second quarter where capacity was at a really big constraint. As we had mentioned, we're still seeing a bit of compression in there. It's hard to go back to '19 or '18 because we were in different channels. So we're in retail consumer direct business, and so normalized would be probably slightly below that number with -- and you can comment there. But I think you still have some room to move down. But you're not going to -- should not return to the 2.27% number that you see in the fourth quarter of '19. That would...

And we've laid out our plan for the year. We kind of plan on it moving down some.

That's right.

Basically throughout the year as there gets to be a little more capacity in the system.

Okay. Got it. And you mentioned office space coming up in the second half of 2021. Just as we emerge from COVID, any other strategic -- not that office space is necessarily strategic, but any other changes you see making in the business? Or is it really a return to normal?

Yes. It's -- I'd say we did -- normal will probably look different. We -- so our mortgage business is -- we like it for a few reasons. One of the reasons is that we can learn some things. And they've had work from home folks more than any other part of our business. They've had more of that than any other part of our business for a long time. And they're able to measure -- and the key is you've got to be able to measure productivity, and they get really strong productivity on certain things being at home. Well, we've been able to also see that in some other parts of our business. And so I think being able to put more -- better measurement around some productivity areas that we have not previously measured is one area that we're focused on because, again, that improves efficiency, improves sort of work-life balance and I think can improve employee morale overall. And so that's something that we're thinking about.

And I'd say that's probably the biggest one. It is, but that ripples from that, as you said, can be office space, can be branch base. There's a lot of talk about branch consolidations, and we'll have a little bit of that, but we won't have that much. And because we're in a number of communities. And so we're going to keep a presence in those communities. A lot of those communities, we only have 1 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 in a position where our -- we'll have some small brand consolidation, but there won't be a lot of that for us because if we did have a lot of that, we'd be out of some of the communities we're in. So -- and our presence in our MSAs is relatively new, and so we don't have anywhere near the legacy branch network of some of our older, bigger competitors.

(Operator Instructions) The next question is from Ammar Samma of Raymond James.

So I appreciate the update on the noncore acquired portfolio from Franklin. Maybe just a couple of follow-up questions there. The $200 million reduction that you've seen year-over-year, have there been any of those one-off type of sales that you referenced in that? Or is that just a book kind of paying down and running off? And then the follow-up is what does the secondary market look like for these credits? Would you be content to let it continue to run off? Or are you committed to exiting in a bulk sale?

Yes. So I'm looking at it, Greg. I'll comment and then Mike can comment as well. On the first part of your question, we haven't sold any. It's been just loans paying off. And so we haven't had any sales at this point. And then in terms of what happens, we would -- we'd sell individual loans. We'd sell it in bulk. What we -- we hang on to it, if we had to. So we would sell individual loans, but we're not fire sellers because we don't have to be. We have the advantage of knowing more about what's in the portfolio, and we've got 2 very capable guys that are managing it. And so we -- but it's not cool to our business. And so for the right price, we'd cut it loose. And so I don't mean to sound like I'm negotiating against you, Ammar, but that -- we're not going to fire sell it. Greg, do you want to add anything to that?

Nothing about that now several refinancing. There's actually something to highlight that you pointed out. A lot of those companies are doing quite well and growing. They're seeing opportunities to -- they're going to want to need to refinance out. And we're not interested in being their bank to do that. So that's where some of that's coming from.

Yes. It's -- but it's a mixed bag also because they are private equity type loans. And unfortunately, with those types, you don't get a lot of heads up before something goes south, and you don't have a lot of -- your parachute is an anvil if something goes south. And so that's -- where that's again, that's the reason that's not core to us. So -- but so far, we've had good luck with them, and we want that to continue.

Okay. And one unrelated question to that portfolio. As far as PPP, have you all seen any interest from your clients on this new wave of PPP? Do you expect to be active in it moving forward?

Yes. We have seen some, and we do expect to do some PPP. We're already doing some PPP going into the quarter.

Any guidance on where those volumes could ultimately shake out relative to round one?

It's certainly going to be less than round one. And we're going to handle that a little bit differently also. So we're -- it's not going to be a major impact on either our balance sheet or our fees as we move forward.

The next question is from Jennifer Demba of Truist Securities.

Could you talk about what kind of net charge-offs you're expecting over the next few quarters? Obviously, they were elevated this quarter. Would you expect any other loans to come up in the next couple of quarters of that?

Yes, Jennifer, we -- we've talked about the one charge-off that had a really usual, I guess, impact on our charge-off ratio for the quarter -- this passport. We don't have anything -- and we talked about that for the past 3 quarters. And so we've been watching it. We don't have anything sitting out there like that or we'd be talking about it. I mean we -- our whole strategy is to be quick and decisive if we have -- if we have any issues, we want our people to be quick and decisive so that we can make sure we deal with them a very hands on straight up way. It's good for us and good for our clients. And so we don't have anything moving that we're aware of.

As you know, it is credit we're in sort of a shaky world. And so by the time I get off this phone, I could get a call that says, hey, we got something we need to talk to you about, certainly don't anticipate that. Okay? But you never know. And so I just -- I threw that qualification out there. And so we would expect -- you have to think '21, if you look back at our charge-off ratio over the last 2 or 3 years, it's been quite low, quite low, almost nonexistent. I don't think it's going to be that. I think you're going to have some charge-offs but I also don't think, when we look at what we know, we just don't see a lot coming through. And so I'd say it'd be higher than the last couple of years. Absent that 1 credit, if you take that out of mix, but I'd say we don't see anything that's going to cause it to spike up. Greg, you want to...

No. I think the key point is that specific deal should not be viewed as a proxy for the health of our portfolio. Another touch point, I guess, that we look at is credit quality of substandard -- how the substandards are acting. Those were up $5 million quarter-over-quarter. So it's actually still in line with the year-end 2019 as we look at it. I guess lastly, we follow NPAs closely, and they were up 9 basis points quarter-over-quarter but actually down year-over-year, I guess, 4 basis points. Our ORE and other assets from foreclosure and repositions, they were up $176,000, plus or minus, for the quarter.

But if you look at it year-over-year, that's down from 11.5% to about 7.5%. And as you all know, everybody on the phone, you got to take that in light also of we've added $2.7 billion, plus or minus in loans over that time period. So I agree with you, Chris. You can't take the risk out of and uncertainty on this, but you can plan and prepare for it, and that's what we think we've done well. And as Michael pointed out, that reserves appropriate, significant, pretty strong.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Holmes for closing remarks.

All right. Very good. Thank you, and thanks, everybody, for joining us. As you can tell, we're proud of the results for the year and the quarter, and -- but we're excited about moving forward into 2021. And we, as always, appreciate your support, okay? Thanks. Everybody have a great day.

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