Simmons First National Corp (SFNC) Q4 2020 Earnings Call Transcript

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Simmons First National Corp (SFNC 0.17%)
Q4 2020 Earnings Call
Jan 26, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Simmons First National Corporation Fourth Quarter Earnings Call and Webcast. [Operator Instructions]

I would now like to hand over the conference call to Mr. Steve Massanelli. You may begin.

Stephen C. Massanelli -- Executive Vice President, Chief Administrative Officer and Investor Relations Officer

Good morning, and thank you for joining our fourth quarter earnings call. My name is Steve Massanelli, and I serve as Chief Administrative Officer and Investor Relations Officer of Simmons First National Corporation. Joining me today are George Makris, Chairman and Chief Executive Officer; Bob Fehlman, Chief Financial Officer and Chief Operating Officer; David Garner, Executive Director of Finance and Accounting and Chief Accounting Officer; and Matt Reddin, Chief Banking Officer.

The purpose of this call is to discuss information and data provided by the Company in its quarterly earnings release issued this morning and to discuss the Company's outlook for the future. We will begin with prepared comments followed by a Q&A session. We've invited institutional investors and analysts from the equity firms that provide research on the Company to participate in the Q&A session. All other guests in this conference call are in listen-only mode. A recording of today's call, including our prepared remarks and the Q&A session will be posted on our website simmonsbank.com under the Investor Relations page for at least 60 days.

During today's call, we'll make forward-looking statements about our future plans, goals, expectations, estimates, projections and outlook. I'll remind you that actual results could differ materially from those projected in or implied by the forward-looking statements due to a variety of factors. Additional information concerning some of these factors is contained in the Company's SEC filings, including, without limitation, the description of certain risk factors contained in the Company's Form 10-K for the year ended December 31, 2019, the Form 10-Q for the quarter ended June 30, 2020, and the forward-looking information section of the Company's earnings press release issued this morning. The company assumes no obligation to update or revise any forward-looking statements or other information.

Lastly, in this presentation, we will discuss certain non-GAAP financial metrics we believe provide useful information to investors. Please note that additional disclosures regarding non-GAAP metrics, including the reconciliation of these non-GAAP metrics to GAAP are contained in the Company's earnings press release in fourth quarter investor presentation, which are included as exhibits to the Company's current report filed this morning with the SEC on Form 8-K and available on the Investor Relations page of the Company's website simmonsbank.com.

I'll now turn the call over to George Makris.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Thanks, Steve, and welcome once again to our fourth quarter and year end earnings call. I want to begin by thanking the 40,000 Simmons' associates we persevered during an unprecedented time for those excellent results for our Company, but as importantly, sustained service for our customers. In our press release, we reported net income $255 million for 2020, an increase of $17 million or 7.2% compared to 2019. 2020 diluted earnings per share were $2.31. Included in 2020 earnings were $9 million in net after-tax non-core items. Excluding the impact of these items, the Company's core earnings were $264 million for 2020. Diluted earnings per share for the year were $2.40. Our return on average assets was $1.2%. Our return on average common equity was 8.7%. Our return on tangible common equity was 15.5% and our efficiency ratio was 54.7% for 2020.

Fourth quarter 2020 net income was $53 million, and diluted earnings per share for that period were $0.49, essentially flat from 2019. Included in fourth quarter earnings were $9 million in net after-tax non-core items. Excluding the impact of these items for the fourth quarter of 2020, the Company's core earnings were $62 million and core diluted earnings per share were $0.57.

As of December 31, 2020, total assets were $22 billion, our loan balance was $13 billion, and our deposit balance was $17 billion. Our capital remains very strong quarter end. Our total risk-based capital ratio was 17%, our common equity Tier 1 ratio was 13%, while our Tier 1 leverage ratio was 9%. And December 31, 2020, the ratio of stockholders' equity was 13% and ratio of tangible common equity was 8.5%.

We have once again shared an extensive presentation on our website at www.simmonsbank.com, along with press release and financial data which gives much more detail regarding our quarterly results and other important information about our Company. We clearly indicated that 2020 would be an adjustment period for Simmons. However, no one anticipated the pandemic and its effect on all of those. Despite the challenges associated with the crisis, we're very proud of our accomplishments related to our objectives for 2020.

Simmons is a diversified core relationship financial institution. We have a great balance of small and large markets, the diversification with financial services which meet customers' needs for a lifetime and beyond, in a sense of commitment to the communities we serve. During 2020, in culminating with the anticipated sale of our four Illinois branches in early 2021, we exited markets in South Texas, Colorado, and Illinois in order to be able to focus even more on our core markets. We reduced our branch network by 20% through branch sales and consolidation of service locations, which has allowed us to decrease costs and more efficiently provide our products and services.

During 2020, we also identified transactional relationships, including our energy portfolio in certain large CRE loans that we chose to help move out of the bank. Many of which will move because we preferred to lead our credits under our underwriting guidelines, and to the extent, we participate in syndicated credit. We want to make sure we have a core banking relationship with the [Indecipherable] Our efforts created capacity in our commercial portfolio we did not have before. We continued the evolution of our digital bank, which allows our customers to bank with us when they want, where they want. Our customers, both consumer and commercial continue to conduct more and more of their basic banking on our self-serve platforms. COVID first curved, and I believe we hit it out and paused.

During the year, we mobilized over 15,000 associates to work. We provided over 8,000 PPP loans totaling almost $1 billion in support of 100,000 jobs for our customers, many of whom will move to Simmons. We proactively provided loan modifications to many of our customers, which prevented them from going deeper in debt, they're in such uncertain economic conditions. We had a record year in our mortgage growth, originated more than $1.5 billion in home loans, and we successfully completed our full exam cycle, including our first CFPB exam.

We integrated Landmark Bank into Simmons Bank during the beginning of the crisis and just as the economy is put on pause. That timing created unique challenges that are both [Indecipherable]. We repurchased over 6 million shares of our stock, and we contributed $3 million to the Simmons First Foundation to establish upon that grants for conservation projects throughout our service area. So where are we today?. The shorter answer is, we like where we want to be. Our deposits and liquidity are at an all-time high, giving us capacity we've not seen since 2014.

Our capital levels are at the top range for our industry. Our asset quality is stable and improving even in these economic times. Our allowance for loan losses is at an unprecedented level. Our loan concentration levels are well below regulatory guidelines. Our regulatory compliance programs were validated during the year. Our profitability is excellent, and our loan pipeline is starting to rebuild. In March of last year, we could not have written script as anticipated all that we've seen. But I believe today, we're in a really good position. While our core loans and deposits will be the basis for our growth in six years over time. Because of our diverse business model, we were able to manage all areas of the Bank to produce outstanding results in 2020. We are certainly not a one-trick pony. So I'm very proud of our team and look forward to very promising 2021.

I'll now turn the line over to our operator and invite questions from our analysts and institutional investors.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Gary Tenner with D.A. Davidson.

Gary Tenner -- Davidson -- Analyst

Thanks, guys. Good morning.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Good morning, Gary.

Gary Tenner -- Davidson -- Analyst

Just a couple of questions from me. The commentary about kind of working down some of the transactional relationships. I'm just wondering was that particularly impactful in the fourth quarter in terms of the downdraft and loan balances and construction and commercial real estate? Or was that more of a algorithm of just the lack of production during the middle part of the year?

Matthew S. Reddin -- Executive Vice President and Chief Banking Officer

Yeah, this is Matt Reddin Yes, we did experience as you would think is because of year end timing, most of our borrowers wanting to exit to the permanent market. We did have one of our largest borrowers in Kansas City, an industrial developer took, they sold their entire self-storage unit, plus they exited multiple industrial buildings to the current market, which was an $80 million total transaction. But we also saw multiple transactional out of Texas, in St. Louis, that -- we knew that really even heading into 2020 prior to the pandemic, and the timing hit at the end of the year.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Gary, just a thought. Let me add a couple of things. One is, most of the reduction was planned. And I think we've been pretty clear with the Reliance Bank and their portfolio, and then some transactional loans in Texas. I think you can see based on the loan yield change quarter-over-quarter, that many of the loans that we exited had very, very low rates. So it was planned. But also in our presentation, we have a slide on our loan pipeline because I think that also gives a true picture to what was out there to fill up in our loan portfolio, as these loans were leaving the bank.

Usually we only report ready to close, but we have three distinct buckets opportunity proposal ready to close, and we thought it was important to show all three of those buckets from last December until now, because it really shows the lack of demand in the market place after COVID hit. And we certainly depend on new originations to fill the bucket back up for those planned amortizations and then when we have loans, we'd like to move out of the bank. We depend on new production. I'm happy to report that our pipeline starting to rebuild. And Matt, I think our approved ready to close as of last week exceeded $230 million, which is a healthy pipeline for us. So I think, it's a combination of both.

You asked if it was planned or just lack of new production. Its a combination. We're starting to see light at the end of the tunnel.

Gary Tenner -- Davidson -- Analyst

All right. So I appreciate the color. I'm just wondering based on what the pipeline looks like and any more planned run-offs to the degree there is, excluding PPP changes is altered, when do you think the kind of low point here in terms of loan balances? Or do you think it gets a little bit lighter before it starts to grow from here?

Matthew S. Reddin -- Executive Vice President and Chief Banking Officer

I think, yeah its matching. There's no question. Our pipeline is building. Our borrowers -- our relationship borrowers are active. And so we're starting to do more and more projects, or moving more and more business our way. But the first quarter, there is a little bit of unknown. I think there will be some continued payoffs on what we would call planned transactional, non-relationship customers that have not exited in 2020, they still plan to. Those look to happen more in the first quarter, some good slide in the second quarter. So the question on the -- if it's the low. I would say unknown, but I would say we're real close is how I would phrase that.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

You know there are a couple of other categories like mortgage warehouse that were at all-time highs. At the end of the year, we really don't expect that loan balance to sustain over 2021. We still have some more energy credits that we expect to move out of the bank during the first half of the year. So there will be certain pockets or business. But the core business, and that is what we're generating out of each one of our divisions. But we're expecting to have a good year this year from an origination standpoint.

Gary Tenner -- Davidson -- Analyst

Okay, great. I appreciate the color, and thanks for taking my questions.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Sure.

Operator

Our next question comes from David Feaster with Raymond James.

David Feaster -- Raymond James Financial Inc. -- Analyst

Hey, good morning, everybody.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Morning, David.

David Feaster -- Raymond James Financial Inc. -- Analyst

I just wanted to kind of follow-up on the growth conversation. Could you just give us a sense of the composition of your loan pipeline where you're seeing demand by segment and geography, and just thoughts on new loan yields? And then just a quick clarification question on your mid-single digit loan growth guidance. I would assume that's ex-PPP, but just wanted to clarify that.

Matthew S. Reddin -- Executive Vice President and Chief Banking Officer

Correct. Yes, I can give you a little deeper color on kind of the loan portfolio, I mean the loan pipeline. We're very pleased kind of going into 2021, how diversified our pipeline is geographically and in product type. We spent a lot of time in 2020 pre-COVID, and we continued the investment in more commercial banking infrastructure on then -- what I would call the C&I side. So we now see our pipeline showing about 50% true commercial clients, not commercial real estate, that's across categories of -- business are doing very well right now. But we do have some repeat CRE borrowers that, relationships that we're going -- they're active again. So we'll see that pipeline grow as well. But its -- we stabilize growth a lot in our Company, as we've integrated multiple banks and now we're in a position that we are in that stabilized growth. It is not just on heavily weighted toward a certain category where we're seeing opportunity, we actually grew loans in the fourth quarter right here in Little Rock. Little Rock had some success. I think that this proves up just a flight to quality, our market share here. So we had a nice little growth in the fourth quarter. I think that will continue. We have a nice pipeline here. Northwest Arkansas really didn't miss a beat, as it relates to COVID due to their economic wherewithal. DFW -- its continuing to do well, plenty of opportunities our pipeline there. If you looked at a percentage where the growth opportunities, and even where our pipeline is, it's in DFW. I think, you'll also see Kansas City continue to perform for us in 2021. I think St. Louis, two years post Reliance, they seem as having some nice opportunities come our way. And then I think you'll see Nashville for us rebound in 2021. So I would say overall health of the pipeline where it's coming from it's very diversified.

David Feaster -- Raymond James Financial Inc. -- Analyst

Okay, that's great color. And then just could you give us some thoughts on how the puts and takes regarding the margin? I mean, we're going to see some loan growth and improving earning asset mix. Appreciate the color on the securities book. But just as you start getting some of these together, I mean, do you think the margin has troughed here and we should see some expansion? And just any color that you could give us on the core NIM exclusive of PPP would be helpful?

Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

Yeah, David, this is Bob. I would tell you first on the margin. I think we're at the bottom of it, and actually had improvement this quarter. What we'll see going into the first quarter is continued investment in the investment portfolio. We see possibly another -- up to another $1 billion going into the investment portfolio over the next couple of months, may be into the second quarter. So that mix in yield will be a pick up. As Matt and George have said, loans, we believe are on demand and coming back up. So that's a positive.

And then cost of deposits. We think there is still some room in cost deposits. We saw a 7 basis point pickup on our cost of interest-bearing deposits, 5 basis point on cost of deposits. So that's a positive. And we again think that -- I think we'll have more in the first quarter as we continue to work on our cost of deposits.

Also, you know, you add in the PPP outside of that, we will have a benefit from the PPP in Q1, as we have more forgiveness. We had about $100 million in forgiveness in Q4. And so we are still at about $875 million on what I call PPP one. So I would expect that to be forgiven or paid off in the first and second quarter of this year is what we're planning for.

David Feaster -- Raymond James Financial Inc. -- Analyst

Okay. Okay, that's helpful. And then just last one from me. Could you just talk about capital priorities. It was good to see that you guys were somewhat active in repurchases. But just curious how you balanced buybacks versus M&A you'd given, where you're trading? And maybe just some high-level thoughts on in the day, whether your strategy has changed? What kinds of transactions you'd be interested in by size and region? And just how conversations are going?

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Well, I'll start. Bob can pipe in here shortly. I think we used our capital very wisely in 2020 in our stock repurchase program. We bought over 6 million shares during the year at an average price of less than $20 a share. Wish we could repeat that. But glad to see price where it is, to be honestly. And because the price is where it is and the multiples have come back nicely, we are having some active M&A discussion right now. Our strategy with regard to M&A is not changed. Our priority is still in market expansion opportunities. If we find an opportunity in a contiguous market made long-term strategic sense, we would certainly be interested. But our priority is in market.

So, David, I would tell you that based on current circumstances today, M&A would probably be our top priority for capital deployment. But we're not ruling out additional buybacks. We still have by about $50 million left in our currently authorized plan. So both of those are still on the table, M&A -- because current conditions has moved to the top.

Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

And David, this is Bob. I would point out a couple of things on our capital levels. Historically, we all look at what's your TCE and what is your leverage ratio. But those in these days are what I would say somewhat understated because the amount of loans we have in the PPP, which are not risk-rated, and also the liquidity levels we have at about $3.5 billion. So, the ratios we look at today that we focus on are the CET1 ratio, which is at 13.4%, that was 10.9% last year -- a year ago. Our total risk-based capital was 16.8%. So those are the ratios we're focused on right now when risk weights your balance sheet.

David Feaster -- Raymond James Financial Inc. -- Analyst

That's helpful. And just -- so being in market, does that mean you're focused on maybe the smaller end of the curve? Or how large of a transaction, would you be interested in?

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Well, our general guideline, David, is a bank of a $1 billion of assets or more, and that is primarily because of the make up of their personnel, who are ready to go to work for a larger institution with more bullets to use in the marketplace, where we have had some issues in the past or with smaller banks who have lending staffs, who really just want to work at a small community bank. Our objective is when we merge with an organization, we want their talent to come along with it. And what we found is that banks under $1 billion, generally speaking, we don't have as much success in retaining the staff as we do in banks over $1 billion. So I would just say that's a general guideline that we use is, we're trying to determine who might be a good partner.

David Feaster -- Raymond James Financial Inc. -- Analyst

Got it. That's helpful. Thanks, everybody.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Yeah.

Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

Thank you, David.

Operator

Our next question comes from Brady Gailey with KBW.

Brady Gailey -- Keefe Bruyette & Woods Inc. -- Analyst

Hey, thanks. Good morning, guys.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Hi, Brady.

Brady Gailey -- Keefe Bruyette & Woods Inc. -- Analyst

So I wanted to ask about non-organic loan growth, but the strategic exits of certain markets that you've done, I heard you say that Southern Illinois will happen here in a couple of weeks and they've gotten out Denver and South Texas. Are there any other markets out there that you would think about exiting? Or are you pretty happy with where the franchise sits right now?

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Brady, we're really happy with where we sit. There are no more markets on the chopping block, if you will. In Illinois, we have four branches there. We have about $160 million of deposits. We have $1 million of total loans. So those branches were established by Reliance Bank as a source of deposits, and they did a great job. We just don't have the infrastructure over there to support the Illinois side of St. Louis. We have 20 some odd branches in St. Louis that we're really focused on. So it made sense for us. So nothing else on the chopping block. We really like what we have, and we're committed to grow in all those markets.

Brady Gailey -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. And then George, you guys have done a great job of taking expenses out of the franchise. I mean, having your branch count down 20% in the year is a big number. Is there more work to be done there? Or do you feel like a lot of those expense reductions have really played out, and it should just be kind of a normal expense growth rate from here?

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Well, we have some more consolidation today. And I'll give you a couple of examples. In Dallas, we're getting ready to move into New Dallas Headquarters, and that will consolidate two branches that had just piecemeal pieces of our business there. So we're going to be much more efficient in a single location in Dallas than we were in two separate locations. And we're getting ready to open a new corporate headquarters in downtown Nashville, that will replace one location that we had, it was just inadequate to handle the growth that we're experiencing in the national market.

In our Pine Bluff marked, we're building a new branch out in the White Hall area, but we're going to consolidate three more branches into two in the Pine Bluff community. So it's the adjustment in existing markets that's going to lead to fewer number of branches, but not necessarily for cost saves because we're going to upgrade some facilities into true banking centers. So it's just more of an adjustment now than it is a pure closing of branches.

Brady Gailey -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. And then finally for me, I just wanted to follow-up on the bank M&A conversation. When you're looking at a transaction, can you just remind us what are your targeted metrics? Like, do you like a certain amount of EPS accretion? Or do you have a limit as far as tangible book value dilution or earn back? Just kind of talk to us about when you're pricing the deal, what are the metrics that you focus on?

Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

Hey, Brady, this is Bob. I would tell you we're very disciplined in our M&A pricing, and have been as you know. And first off, we start with reasonable assumptions on whether as cost saves the loan mark synergies on revenue. All of that, we're very conservative on those I would say. When we look at the final results, our target is to have EPS accretion. It depends on the deal size. So we look at it two ways. EPS accretion, as we're going to see it. And number two, on a stand-alone basis. What kind of accretion is the unit we're buying or providing an accretion. We would want a meaningful -- what I would say, anywhere from 4% to 8% accretion is what you would hope to have on these deals. Now again, the smaller deal, you're not going to get that level of accretion overall.

The next very important to us is what is the tangible book value dilution and more importantly, what is the earn back period? If you're going to have more cash, then the deals can be more dilutive, but you're probably going to earn it back quicker. So the earn back period, we have always targeted less than three years. Most of our deals we've announced have been two years or less, and we've hit those numbers. We also calculate our internal rate of return and we use the same assumption from one deal to the next deal, so it's more of a comparable nature, and our target is to be 15% or higher. And then after that, we look at what does it do to our capital. Do we need additional capital, or are we able to utilize our excess capital. And we look at each of the different levels in there. So those are the main focus. And all of that obviously is after we've gone through the geographic footprint, is it the right location, is it the right culture fit for the Company, and is it the right organization. We do all of that before we get to the financial piece of it.

Brady Gailey -- Keefe Bruyette & Woods Inc. -- Analyst

Got it, that's great color. Thanks, Bob.

Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

Okay.

Operator

Our next question comes from Stephen Scouten with Piper Sandler.

Stephen Scouten -- Piper Sandler -- Analyst

Hey, good morning, everyone.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Good morning, Stephen.

Stephen Scouten -- Piper Sandler -- Analyst

I'm curious a little bit on your plans for additional liquidity, Bob. I know you mentioned maybe another $1 billion in security. But I'm just wondering if you can give a little more color on how you're thinking about that, obviously liquidity remains really high, but securities yields are obviously very low, and I'm just kind of wondering how you're thinking about that? What sort of duration you're locking in today?

Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

Well, we gave some little color on it on Page 17 of the slide deck. But what we invested in the last three months and where we plan to go going forward is what I would call more of a barbell approach. We do have some munis that go a little longer-term, that are picking up a little better yield, going shorter on the treasuries, agencies, and mortgage-backed. What we're timing out there with the liquidity, we waited a couple of quarters without putting it to use, just uncertainty at times. And this quarter, as you could see, we basically went up $1 billion in liquidity, almost in cash, and still invested $1.2 billion in our security portfolio.

We have PPP loans that will be paying off in the next three to four months. We'll have PPP two coming on after that. All of that to say, we believe we have plenty of liquidity, and it was time to put some of that money to work. Now, what we can do as time goes on is, when the loan pipeline and the loan balances begin to increase, we'll be able to -- we can slow down repurchases into the security portfolio next year as we get maturities rolling off and other liquidity. So we plan to balance it in there. But our target right now is, we ended the quarter at about $3.8 billion. We're targeting to be over $5 billion -- around $5 billion or so in our security portfolio sometime in 2021. Again, we'll invest in a barbell, and our yield we picked up about 215 in yield, so that was coming from 10-11 basis points overnight money we invested in. We did -- we do have some extensions out their average in duration is about eight years when you put the whole portfolio together.

Stephen Scouten -- Piper Sandler -- Analyst

Got it. Yes. I see that now on Slide 17. Thanks for that. And then I guess, within that what -- what is kind of that churn of your existing securities portfolio? How much cash flows do you anticipate could come in, I don't know, per quarter or per year if loan growth does begin to materialize?

Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

I don't have that right in front of me, but it's roughly, I would guess $0.5 billion to $750 million a year is ballpark of what we have, and that's before putting these new balances on what you'd expected. And keep in mind, this last year, we had -- we sold $1.5 billion in securities, and most of that was taken advantage of the gains, knowing most of those were going to pay off through calls. And so, we've been pretty active. We've kept our guys busy in the investment security group this year, buying and selling, they've been very, very active.

Stephen Scouten -- Piper Sandler -- Analyst

Got it, OK. And then maybe just one other one for me. Your loan loss reserve remains very high [Indecipherable] I think ex-PPP, so that seems sufficient to me. So I'm wondering kind of how you think about loan loss reserves, one. But then also if you can talk a little bit about the charge-offs you had this quarter? I think you've remained a bit higher than peers on a net charge-off basis for the last couple of quarters, so just kind of thinking about credit a little bit there?

Matthew S. Reddin -- Executive Vice President and Chief Banking Officer

Yes, Stephens. This is Matt. I would say on the charge-offs we did in the fourth quarter, we had certain certain credit that we have been doing it for a while that did come to a resolution, that resulted in some charge-offs. We actually -- I can think of one specific that, you heard George talk about earlier how we exited South Texas. We took a nice charge there on a non-relationship out-of-market transaction that we dealt with in the fourth quarter. So I would say that was -- there was this a culmination of a lot of resolution in the fourth quarter, which is an -- overall its a positive. On the reserve standpoint, George, you might have comments on the overall, what we're seeing on reserve.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Yeah, so our reserve is at an all-time high. And in our opinion, there is still maybe some residual unknown in certain categories like office and maybe some retail, that we'll have a better handle on later this year. But we think we're properly reserved in those categories. And you can see how much of our allowance is dedicated to those industry classes. Going forward, we would expect just normal provisions based on loan growth. And I think I've said this before that we've built this provision with the expectation that it would absorb reasonable losses in the portfolio. So we've got to be disciplined as we go forward and where we have recognized that risk and made a provision for. We're going to have to be willing to take that against our allowance and not be too quick to jump out there and just rebuild that allowance back up to 2% range. I really don't believe 2% is long-term percentage for us.

And when you take a look at our slide, on our ACL, you will notice that more than 50% of our total allowance is management adjustment factors. So the calculations themselves only support about 50% before we having our allowance. The rest are based on industry-specific or maybe specific reserves on certain troubled credits. So we feel very good about that.

I'll also say this Stephen that, in addition to those charge-offs that we recognized, I think we've been very aggressive in conservative in our risk ratings. Our classified loans went up. That is primarily because of some of the hotel loans that were in our modified state. And you can see that what we consider to be troubled modified loans has gone down tremendously, and I think a lot of that has to do with the fact that we went out early in the process and didn't create additional risk for our borrowers. So we're very comfortable with our risk ratings. All modified loans have been reviewed and appropriately rated. So I think our accuracy in our loan portfolio as far as risk goes is about as good as it's been in a long time.

Stephen Scouten -- Piper Sandler -- Analyst

Got it. That's really helpful color. And maybe just one kind of small follow-up to that. So if 2% is not the right number long-term, and who knows when long-term really is, if that's here in 2022, 2023 when we get to a more normalized environment, but are we talking more like 150 in your mind, or what's the right way to think about where that goes longer-term.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Well, really the only thing I can point to is our original CECL calculation that came in on January 1, and that number was about, if I recall, 150. So based on normal suggestions, the CECL calculations, it appears at that point in time, 150 was the appropriate number.

Stephen Scouten -- Piper Sandler -- Analyst

Great, very helpful. Thanks, guys. Appreciate the color.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

You bet, Steve again.

Operator

[Operator Instructions] Our next question comes from Matt Olney with Stephens Inc.

Matt Olney -- Stephens Inc. -- Analyst

Hey, thanks, good morning. I wanted to ask about core loan yields. If I back out the PPP in the accretion, looks like the core loan yield saw some nice expansion this quarter. Any color you can provide on this? Any kind of miscellaneous fees recognized in the fourth quarter? Just trying to appreciate if there could be additional pressure from this 460 core level [Phonetic] from here? Thanks.

Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

Hey Matt, this is Bob. I'll start it. I would say first off, as some of these loans that we talked about exiting the Company, we're at low rates. I mean, they were extremely low rates, and these have been on the list pretty much all year to to move. So that was part of it. The other piece of it would also be the PPP loans in the 4th quarter. We did have $100 million, so you had the additional fee income that was accreted that quarter. On a accretion level, I think accretion income was almost the exact same $8.9 million on a linked-quarter basis. So it wasn't an accretion. So I think Q4 was more of a good trend line from me going forward, that's what we used when we used our budget process. I do think, Q3 was a little lower. But as you get into Q4, I think that was a better trend line.

Matt Olney -- Stephens Inc. -- Analyst

And Bob, just to clarify. I'm looking at that for 460 core loan yield on your slide deck on Slide 50. I think that does not include PPP or the accretable. Am I interpreting that right?

Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

Core would have PPP. I'll have to go back to that one slide [Phonetic].

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Its without PPP.

Matthew S. Reddin -- Executive Vice President and Chief Banking Officer

Okay. That one does. I'm sorry I was referring to an internal report ahead. Yean, so that would all be just in the loan portfolio. And again, I'd say the bulk of that is the mix in that loan portfolio when you take $1 billion of loans that are on a lower rate.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Matt, I think we did have some extraordinary fees on some early payoffs, but not material. So maybe, may at 450, 460 would be that appropriate range considering those one-time early payment fees.

Matt Olney -- Stephens Inc. -- Analyst

Okay, that's helpful. And then what about any color on some of the new and renewed loan production this quarter, has it compared to that 450, 460 number?

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Well, on our loan pipeline slide, we also give the average rights, and I believe flipping over to the -- on that pipeline at the end of the fourth quarter, the average rate was 412, so still above 4%.

Matt Olney -- Stephens Inc. -- Analyst

Okay. Okay. And then I want to shift over on the operating expenses, and you guys gave us some great color and good outlook there in some of your slide decks. And I think the press release mentioned the NGB update. Is NGB now within all the run rate from the fourth quarter? Just trying to figure out what's incremental from NGB that's not in 4Q?

George A. Makris, Jr. -- Chairman and Chief Executive Officer

I think it is. And so NGB, when it started a couple of years ago had two real distinct components. One was infrastructure. The second was new products and services, particularly the digital bank. The infrastructure pretty much done. So all of the expense associated with outsourcing our core processing, upgrading our networks, redundancy in the branches, those kinds of things are pretty much behind us, wo we're in a maintenance mode there. Our digital bank, a lot of that has been done, but we have a roadmap this year to enhance our digital bank. We believe that long-term it's going to be a great opportunity for us. We started the online account origination pilot in the fourth quarter. We will start rolling that out at the end of the first quarter, one division at a time, because we believe that the demand is going to be so great that we're going to have to make sure that we support that online account opening with the appropriate back office, if you will. So we're going to take that piece by piece. But by the end of the year, we will have that fully implemented.

We're going to -- last year, we integrated our credit card product with our digital bank. We've got other enhancements like that for 2021. So our focus now is not as much on infrastructure, there really is on product enhancements. Into that end, we do have some capital expense in this year's budget to support that, but nothing like the $100 million that we set aside two or three 3 years ago for the entire project.

Matt Olney -- Stephens Inc. -- Analyst

Okay. It sounds good. And then, you guys gave us a nice schedule of your expectations for accretable income for 2021. Do you guys have something similar or some commentary you can give us on expected income from PPP over the next few quarters?

Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

Well, what I can tell you on PPP is, right now we have -- you obviously were earning the 1% on it. But there is on PPP one, there's roughly about $17 million or so that is still the fees that are accrued. So those will come to income in -- I would assume right now for our second quarter is what we have budgeted, and that's what our SBA Group is telling us, and that doesn't include PPP two. We don't have any idea where PPP two will be, but our modeling is estimating it could be what Matt said, half of what we did last time or soon.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Yeah. And just for your information, after one week. So we didn't get started until last Tuesday. We've got over 2000 loan applications totaling $200 million in the pipeline right now. So that's that's a production after one week. We don't really know where it's all going to come out. We have several inquiries that haven't turned into applications yet. And then of course, we're being proactive going out at our customers to see if the current program would be beneficial to them. Okay. That sounds great. Thank you, guys.

Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

Thanks, Matt.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Thank you, Matt.

Operator

And I'm not showing any further questions at this time. I would like to turn the call back over to Mr. Makris.

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Well, thanks to each one of you for joining us today. We are, once again, very pleased with the way 2020 turned out. We're very optimistic about 2021. I think we're well-positioned in all aspects of our banks organization to take advantage of an improving economy. Thanks again, to each one of you, and have a great day. [Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Stephen C. Massanelli -- Executive Vice President, Chief Administrative Officer and Investor Relations Officer

George A. Makris, Jr. -- Chairman and Chief Executive Officer

Matthew S. Reddin -- Executive Vice President and Chief Banking Officer

Robert A. Fehlman -- Senior Executive Vice President, Chief Financial Officer, Chief Operating Officer and Treasurer

Gary Tenner -- Davidson -- Analyst

David Feaster -- Raymond James Financial Inc. -- Analyst

Brady Gailey -- Keefe Bruyette & Woods Inc. -- Analyst

Stephen Scouten -- Piper Sandler -- Analyst

Matt Olney -- Stephens Inc. -- Analyst

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