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Simmons First National Corp (NASDAQ:SFNC)
Q3 2020 Earnings Call
Oct 19, 2020, 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 Third Quarter Earnings Call and Webcast. [Operator Instructions].

I would now like to hand the conference over to your speaker today, Steve Massanelli. Please go ahead.

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

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

The purpose of this call is to discuss the information and data provided by the company in our 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 have invited institutional investors and analysts from the equity firms that provide research on our 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 will make forward-looking statements about our future plans, goals, expectations, estimates, projections and outlook. I remind you that actual results could differ materially from those projected in, or implied by the forward-looking factors statement, due to a variety of factors. Additional information concerning some of these factors is contained in our SEC filings, including, without limitation, the description of certain risk factors contained in our Form 10-K for the year ended December 31 2019, our Form 10-Q for the quarter ended June 30, 2020 and the forward-looking information section of our earnings 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 reconciliations of these non-GAAP metrics to GAAP, are contained in our earnings press release and third quarter investor presentation, which are included as exhibits to our current report filed this morning with the SEC on Form 8-K and available on the Investor Relations page of our website at simmonsbank.com.

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

George A. Makris -- Chairman and Chief Executive Officer

Thanks Steve and welcome to our third quarter earnings conference call. We're very proud of our results for the third quarter, especially under these trying conditions. I'd like to begin today's call by thanking the Simmons' associates for their commitment, dedication, and continued demonstration of our community banking values.

In our press release, we reported net income of $65.9 million for the third quarter of 2020, an increase of $7 million compared to the second quarter. Diluted earnings per share were $0.60. Included in the third quarter earnings were $2.5 million in net after-tax merger related early retirement program, and branch rightsizing costs excluding the impact of these items, the company's core earnings were $68.3 million for the third quarter of 2020, and core diluted earnings per share were $0.63 for the quarter. Our return on average assets was 1.2%. Our return on average common equity was 8.9%. Our return on tangible common equity was 15.4% and our efficiency ratio was 54.1% for the third quarter.

As of September 30, total assets were $21.4 billion. Our loan balance was $14 billion and our deposit balance was $16.2 billion. Our loan pipeline of approved and ready to close loans was only $70 million at the end of the quarter, signaling that loan demand remains very weak, in almost every aspect of our commercial economy.

Our net interest margin for the quarter was 3.21% and our core net interest margin, which excludes accretion, was 3.02%. The lower yielding PPP loans and additional liquidity, decreased the net interest margin by 30 basis points. Our non-interest income for the third quarter was $72 million, a decrease of approximately $13 million compared to the same period last year. The decrease was primarily due to the large gain on the sale of Visa class B common stock that was recognized in the third quarter of 2019. This decrease was partially offset by a $9.5 million increase in mortgage lending income, and a $15 million increase in the gain on sale of securities.

Non-interest expense for the third quarter was $119 million. Core non-interest expense for the quarter was $115 million. Our capital remains very strong at quarter end. Our total risk-based capital ratio was 16%. Our common equity tier-1 ratio was 13%. While our tier-1 leverage ratio was 9%. Ratio of tangible common equity was 8.7% at September 30. We have once again shared an extensive presentation on our website at www.simmonsbnk.com, along with the press release and financial data, which gives much more detail regarding our quarterly results and other important information about our company.

I'd like to take a minute to discuss some asset quality information found in our presentation. In our recap of loans excluding PPP loans, we show our allowance for credit losses or ACL for loan types in selected industry categories. Notably, our ACL for our energy portfolio is 19.5%; for our hotel portfolio, 4.1%; for restaurant portfolio, 3.8%; and for our retail portfolio, 3.6%. In our COVID-19 loan modification update, we show those commercial still in a modification period. We expect only 3.9% of our loans to be considered for loan modifications longer than six months.

Most of those we expect to return to regular payments, with no credit downgrade or long-term restructure. Once again, our efforts were very proactive early in the pandemic. As Fed Vice Chairman Quarles mentioned recently, March was a record month of increases in C&I loans, as companies drew on no lines of credit. That was not the case at Simmons, and it's reflected in the contrast between our loan growth during that time, and other banks, and in the ability of our customers, to return to regular payment status. And of the 1,894 consumer loans that will receive forbearances, only 167 are being considered for a second round.

Our energy portfolio declined by $42 million during the third quarter and we expect continued reductions in the fourth quarter and into 2021. We expect to begin submitting information to the SBA during the fourth quarter for forgiveness of our customers PPP loans. 63% of our PPP loans are below the $50,000 threshold. We have the detail supporting our ACL, which is 1.77% of total loans as of September 30th, and 1.9% of loans, excluding PPP loans from the total. We've highlighted management's qualitative adjustment on that slide.

And last but certainly and importantly, we want to recap, our asset quality performance in our acquired portfolios for bank acquisitions since 2013. While some of our largest charge-offs and the energy losses have been from acquired portfolios, the comparison of losses to acquired loans versus credit marks to acquired loans has been exceptional. We believe our diligence identified appropriate risk in each of the acquired portfolios and in no case, have our charge-offs in any acquired portfolio exceeded our credit mark. Once again, we're very pleased with our ability to identify portfolio risk and acquire banks and manage it within our established marks. Management of credit risk has long been a fundamental strength at Simmons and we're very proud of our record, including the management of acquired portfolio credit risk.

We continue our investment in digital capability. Our customers are adjusting their habits to the use of more self-service channels and we expect that trend to continue. We have planned several upgrades to our digital offerings from now through 2021. While we still have much uncertainty in the marketplace today, we're encouraged to see our customers taking their time to understand future opportunities. We will be well prepared to help our economy recover at the appropriate times.

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

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from the line of Brady Gailey with KBW. Your line is now open.

Brady Gailey -- KBW -- Analyst

Hey, thanks, good morning guys.

George A. Makris -- Chairman and Chief Executive Officer

Morning Brady.

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

Morning.

Brady Gailey -- KBW -- Analyst

So I wanted to start with the margin and with spread income. I think before, you all had talked about a core margin that was flat to down slightly. I think it was down, I think around 16 basis points linked quarter. But even if you -- I know with PPP and with the excess liquidity, the margins can sometimes be challenging to look at. But even if you look at spread income dollars. I mean, they were down 6% linked quarter unannualized. So maybe just talk about, what can be done on the spread side and how you're looking at the margin going forward?

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

Yeah. Brady, this is Bob. I would start off, which is talking a little bit about -- our guidance was, we expect it to be in that the 3.30% to 3.40% on a normalized basis when you back out the liquidity and the PPP. And again it's like you said, if you normalize, it'd be in the low 3.30s, which is lower than we had expected, and most of that was driven from a decrease in the loan portfolio. Some of those loans, there was more that matured that paid off this quarter, and obviously lower volume, just across the banking sector, was the driver of that. So our goal going forward is going to be, one is reinvesting into the security portfolio. Number two is, developing reasonable loan programs during this type of environment we're in. We're not going out stretching it, but looking for opportunities, as we continue to move forward.

Brady Gailey -- KBW -- Analyst

Okay. So Bob, when you look at spread income dollars, do you expect to continue to see some shrinkage there on a quarterly basis going forward, or do you think that you know at this at this level, it should be roughly flat, looking at spread income dollars?

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

I would expect it to be relatively flat. But I'd tell you this environment we are in every day, you kind of find a little different out there. But our expectation is, we've hit bottom of it and our, as we reinvest going forward, we should be picking up. But again, this environment changes every week it seems like. But our expectation would be, this would be on the bottom end of it.

Brady Gailey -- KBW -- Analyst

Yeah, OK. And then you mentioned the loan shrinkage as one of the big drivers, how do you think about loan balances going forward? Should we expect a little more shrinkage before bottoming out?

George A. Makris -- Chairman and Chief Executive Officer

Hey Brady, this is George. We would probably expect a little more shrinkage, not much. But let me give you a couple of statistics here to show what's happened, particularly in the third quarter. So this year since January, we've had $1.5 billion of early payoffs. So those have paid off before the loan matured. $628 million of that happened in the third quarter. So from a new production standpoint. We have booked $1.4 billion of new production since January 1st. Now only $850 million of that is funded at this point. But after six months, we have booked $1.2 billion of new production. So what we're seeing in the marketplace is, our customers are deleveraging. They are paying off their debt, and they're not taking on any new risk. So until we see more certainty in the economy that gives our customers more encouragement to invest, we're a victim of that uncertainty, and who knows in a couple of weeks, we could have a major change in economic policy, and I suspect most people are just sitting on the sideline to see, let's get ready to happen too [Phonetic].

Brady Gailey -- KBW -- Analyst

Yeah. That makes sense. And then finally for me is just, given the spread income headwinds, you guys have already been pretty good about realizing some efficiencies in your expense base. I think as you put in the release, you closed another 23 branches just last week. Is there more work to be done on the expense side, or are there additional opportunities that you can pursue, whether it's on the headcount or branch side to bring the expense base down, to help offset some of this spread income pressure?

George A. Makris -- Chairman and Chief Executive Officer

Brady, I think certainly there is additional opportunity for us to compress our non-interest expense, both from a facility standpoint, and I think ultimately from a headcount standpoint. If our customers continue to do their basic banking through digital channels. Certainly, more efficient way for us to provide those services to our customers. That's going to really be driven by consumer preference, and not anything that we're going to force here at Simmons. I would say that yes, we have an ongoing effort from a branch rationalization perspective. We've taken care of what we consider to be the obvious branch closures. Now we're looking at more consolidation within uncertain markets, to provide more products and services in an integrated fashion. So that process is under way and I would expect us to make great progress during 2021 on that front.

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

Yes. Brady, this is Bob. I would also agree with George. A lot has been done this year. I think it's important to know, where we were in the first quarter of this year, after the Landmark acquisition. Our core non-interest expense was $127 million for that quarter. That was before the cost saves related to that acquisition, and other branch rightsizing and others, to move down with just in two quarters down $115 million as a normalized cost, is a lot of realized cost saves in a short period of time. And I agree with George, we've got -- there is always room and we're going to -- it will be a lot hard to work on the next stage. We've gotten the low hanging fruit. But there's opportunities, but we have made a lot of progress this year.

Brady Gailey -- KBW -- Analyst

Great, thanks for the color, guys.

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

Thanks Brady.

George A. Makris -- Chairman and Chief Executive Officer

You bet.

Operator

Thank you. Our next question comes from the line of Stephen Scouten with Piper Sandler. Your line is now open.

Stephen Scouten -- Piper Sandler -- Analyst

Hey everyone. Good morning.

George A. Makris -- Chairman and Chief Executive Officer

Good morning Steve.

Stephen Scouten -- Piper Sandler -- Analyst

Maybe just first, I wanted to follow up a little bit more on these core NIM trends. I want to confirm, it sounds like you feel like deposits are kind of at their low, and I would assume when you reinvest in the securities book, that these reinvestment yields are going to be below the average. I'm wondering if you can give some color, where those securities yields could be coming on that? And then kind of how you think about the liquidity from here? How much of that excess liquidity could be reinvested in the near term?

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

So I'll start and the first thing I would say is on the investment portfolio. Our team has done a really good job the last quarter, reinvesting. On the other side, we got to the 1st of September, and we've looked at our portfolio, and there were some opportunities. We asked our team to go out and look at the next 12 to 18 months for calls, and basically realize those gains today, instead of them being called over the next 12 to 18 months with no gain in the process. We also look for some -- there were some nice gains out there that we basically had a year and a half worth of gain of interest income, that we took at that time. So we really -- we will always look for opportunities on our security portfolio. How we're reinvesting today and our team is working on it every day. But we're, what I would call more of the barbell approach. We've got portions of our portfolio that were gone longer term. Those are coming in at about 2.75 yield, and then we're doing the shorter term in the three to five year range, that are coming in at -- in the 1.50 range. So overall we're probably in the 2.25 on a reinvestment range when you look forward, and not increasing our duration, very much.

Moving to the deposits; a lot of work was done in the first quarter, a little bit more in second quarter. We think there is a little bit more room, not a lot. I mean, you start getting into the low ends, but we continue to look at that, and we believe in Q4, there'll be a little bit of improvement in those rates going forward. Liquidity wise, we're number one. I mean, there is two sides as to where do we put the money; number one, investment portfolio or two, in the loan portfolio. George mentioned, we're looking at that. But again we're not going to stretch the loan portfolio in this environment we're in. On the investment, we're going to be very measured and timed, as when we go back in; and our goal would be to reinvest up to about $0.5 billion by the end of the quarter. And the other side of the liquidity, it's really -- we can't really control that and this environment is based on the deposits. So right now, we've got a lot of deposits that are on the books that have come in, when the COVID started, and we'll see where that goes over time, if we maintain that. But that does have a negative impact on the NIM right now, but that's where we're looking right now.

Stephen Scouten -- Piper Sandler -- Analyst

Okay. That's really helpful color. Thanks. And then on the deferred loans, I think you guys said on the mid-quarter call you thought, maybe they come down to 10% to 15% by the end of the quarter, but looks like we did a bit better than that. I got it at 8.2%, ex the PPP loans, if my math is right there. So what kind of outperformed expectations maybe on the deferred -- the path of deferred loans, and maybe if you could note any color specifically on the hotel book, if possible?

George A. Makris -- Chairman and Chief Executive Officer

Okay. So we had probably more payoffs than we expected in the third quarter. But once again, our customers were not put into a position of borrowing more money, before we gave them relief. So many of them were in a position to get back to regular payments, earlier than anticipated in that, and that was our goal. They didn't want to have to pay deferred interest over a period of time.

We're very comfortable with our category 4-7 loans, and as you can see on one of the slides, almost 60% of that total is hotels. We've done a deep dive into our hotel book, and quite honestly, we're still fairly comfortable with how that's going to come out. We're seeing gradual increases in occupancy. We still have several hotels under construction. We hope that they are able to open as planned, if they are, then we've got really no problems there. But we're being very cautious in our categorization of these deferred loans.

So our field guys have been very focused on helping our customers come out of this COVID pandemic in good shape, and ready to continue to grow. And I think their effort has been the primary reason we're seeing a better performance than we thought we would,

Stephen Scouten -- Piper Sandler -- Analyst

Okay, that's great. That's great. And then maybe last thing for me, just looking at non-accrual loans and maybe classified loans up a little bit, was there anything meaningful to call out there to note in the increase in non-accruals, and how do you think about the pace of potential net charge-offs over the next two to three quarters, as some of these deferrals and maybe fiscal policy benefits run out?

George A. Makris -- Chairman and Chief Executive Officer

Well, I would say we had a couple of large loans with two non-accrual. One was a hotel loan that's still under construction, but it hit the original opening date. Another is a student housing project in Texas that we're trying to work through today. So the bulk of the increase in our non-performings were for those two large loans. We don't anticipate any losses on either one of those at this point, but they met our requirement for non-accrual and that's where they ended up. From a loss standpoint, you know, we're trying to hear on the side of caution, and when you take a look at our ACL calculations, we thought it is very important to put it in our presentation. Our calculated ACL is below 1%, but our ACL's at 1.77% or 1.9%, excluding PPP. So our management adjustment factors, we believe, were very conservative and particularly in the areas where we recognize some potential weakness, and that's hotels, retail and certainly our energy portfolio.

Stephen Scouten -- Piper Sandler -- Analyst

Got it. Very helpful. Thanks for your time this morning, guys.

George A. Makris -- Chairman and Chief Executive Officer

You bet.

Operator

Thank you. Our next question comes from the line of Matt Olney with Stephens. Your line is now open.

Matt Olney -- Stephens -- Analyst

Thanks. Good morning guys.

George A. Makris -- Chairman and Chief Executive Officer

Good morning, Matt

Matt Olney -- Stephens -- Analyst

I want to stick with the credit discussion, and George, you just noted that the increase of non-accruals and multifamily and hotel -- the other loan category I was going to ask you about was retail, I think we saw an uptick of classified loans in the retail category. Any more color you can provide on that by geography or anything? Thanks.

George A. Makris -- Chairman and Chief Executive Officer

Matt, it's just a smattering across our entire footprint. And as you know, we have also increased our ACL on our retail portfolio. Some of that was a little late in coming, and we expect that even more will be late in coming. And the reason is this, there are still cash flow from existing leases in those retail facilities. What happens when those leases start renewing? That that's when we really will find out if there is any trouble in that portfolio. So we're trying to prepare for that, and we've seen a little bit of it, but there aren't any loans in our retail portfolio that went to non-accrual. It's just a little bit here and a little bit there across our entire footprint.

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

In fact, that whole portfolios of relatively smaller loans, there's no big box retail loans.

George A. Makris -- Chairman and Chief Executive Officer

That's right.

Matt Olney -- Stephens -- Analyst

Got it. Okay, that's helpful. And then shifting over to the energy portfolio, it's just 2% of loans now. Can you give us an update as far as efforts to shrink this book even more? I think we talked a few quarters about getting the energy portfolio down to about $100 million by the end of the year, but looks like we're not going to get there. Any more color on why that's been slower than we originally expected a few months ago?

George A. Makris -- Chairman and Chief Executive Officer

Well, yeah. With oil prices where they are, the real-time for us to get out of most of the loans, particularly those that are shared national credits, is that a redetermination period, that usually happens a couple of times a year. And what you would expect is that, if oil prices were going up, that the available balance would go up and our portion would go up. That is the time that we would signal, we're out guys, we're not going to raise our percentage. Well that just has happened. As these redeterminations have been done and the oil price has actually been lower than it was at the previous redetermination date, and therefore the lines of credit are shrinking. Which is OK, we still feel very comfortable with the loans we are in, with a couple of exceptions that we've mentioned before, are still good loans. We're just not an energy lending bank, and in the future, our energy portfolio is going to be with borrowers that we have a deeper relationship with, and probably energy is going to be only a portion of their borrowings with us.

So it has just taken us a little bit longer to get out of these loans than we expected. But I don't believe it has anything to do with credit deterioration. It's just a timing issue.

Matt Olney -- Stephens -- Analyst

Okay, makes sense. And then I guess going back to the discussion around loan balances shrinking, securities balances increasing. I just want to think more about the mix of earning assets and if we go back five to six years ago, I think the securities book represented almost 25% of earning assets, and today we're at 14%. I'm curious where you see this moving to over the next year or so?

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

Matt, this is Bob, I would say, normalized is probably in the 15% to 18%. Our long-term target is not to build a security book as our main earning asset. I would say though in the interim period, while we're going through this period of time, the percentage may increase higher than that 18%, closer to 20% or so. But I wouldn't look for us to go back long term, back to the 25% in security portfolio, on a 60% loan-to-deposit ratio. We're in the middle of this pandemic, and trying to figure out how to navigate through these waters right now, and the safer investment right now is a security portfolio.

Matt Olney -- Stephens -- Analyst

Okay, understood. Thanks guys. Appreciate your help.

George A. Makris -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of David Feaster with Raymond James. Your line is now open.

David Feaster -- Raymond James -- Analyst

Hey, good morning, everybody.

George A. Makris -- Chairman and Chief Executive Officer

Hello David.

David Feaster -- Raymond James -- Analyst

I just kind of wanted to start back on the loan side. I mean obviously, we talked about the loan markets, pretty challenging, but you guys are clearly still open for business with $1.4 billion in organic generation. Just curious where you're seeing demand, both by market and what segments are still kind of open for business? And just, what's the competitive landscape like right now? What does it look like?

George A. Makris -- Chairman and Chief Executive Officer

So I would tell you the one area that we are still funding pretty aggressively, I would say is, single-family construction. We have some markets throughout our footprint, where developers are doing extremely well, and I think you can see by the mortgage results, that that industry is still doing well at this point in time. The markets that have really driven our year-to-date new production are, Dallas-Fort Worth, our Northwest Arkansas market has done extremely well. Middle Tennessee, Kansas City, has added over $100 million. Here in Central Arkansas, we've added $150 million since the beginning of the year. And then, believe it or not, the one division that is leaving everyone else is our Arkansas community banks. And while none of those banks individually hits our top 10, collectively, they've added $325 million of new loan production this year. So its spread out throughout out our entire footprint. Those markets are sort of leading the way.

David Feaster -- Raymond James -- Analyst

Okay, that's helpful. And then just, given the revenue headwinds that we have, one of the benefits of your -- of the [Indecipherable] build, is just the breadth of the fee income contribution that you have. Just curious, whether that can be an opportunity to fill some of the gap on the NII side, and just any thoughts on being able to cross sell some of the acquired institutions that didn't have as much fee income and maybe cross sell some of these fee income lines into those, going forward?

George A. Makris -- Chairman and Chief Executive Officer

Well, you've just hit on our 2021 priority. You probably know, that we've hired a new Head of our Wealth Division. We have already given him the green light to build out our staff throughout our entire footprint. We were very concentrated here in Arkansas and in Southwest Missouri, had very little presence, and some really good opportunity markets. We've also come out with several new credit card products, particularly from a business perspective purchasing card, it's really doing well, and we believe once we get that rolled out, that will be a tremendous opportunity for us. We've just put in a new Treasury Management platform. It has been met with great success. Got a lot of opportunity to build deeper relationships, for a lot of our lending customers in that perspective. And then you have seen what has happened with our mortgage business. And just to recap that a little bit, we hired a new Head of our Mortgage division about a year, year and a half ago. He was given the green light to build out that staff across our entire footprint. And I think the results speak for themselves. So we expect the same kind of performance from our Wealth Group as they build it out, and I think you're absolutely right, one of our biggest revenue opportunities is in our area of non-interest income.

David Feaster -- Raymond James -- Analyst

Okay, that's helpful. And then just last one from me, could you just talk about your expectations on the PPP forgiveness front and the timing of that? I mean obviously you're a huge beneficiary of the smaller loan forgiveness, but how do you think about the timing of the rest? I mean, we're hearing from some folks that might -- some borrowers might prefer to delay forgiveness for tax reasons. But just wanted to get your thoughts on the timing and the magnitude of forgiveness?

George A. Makris -- Chairman and Chief Executive Officer

Well, I would say that most of the small loans, we're going to go ahead and get processed this quarter. I don't think that's going to make much of a difference to most of those folks that have $50,000 loans or below. I think they'd like to go ahead and get that behind them as we would. And then we have the two schools. One is, I don't want that loan on our books at the end of the year, so I want you to go ahead and process my documentation for forgiveness, and then we have some, who may believe that by delaying it, there is going to be some tax benefit. We're still unclear about that. If we have a change in administration, I believe there is still going to be a higher tax rate, whether or not those loans are going to be included in taxable income or not, is still uncertain at this point. So that's just speculation. They have certainly, a longer period of time to submit for forgiveness, and that's caused us to delay recognition of income, that we thought we would have by now.

So most of it we expect -- or most of the loans we expect to get submitted during the fourth quarter. Potentially, most of the income could be deferred into 2021.

David Feaster -- Raymond James -- Analyst

That's helpful. Thanks guys.

George A. Makris -- Chairman and Chief Executive Officer

Thanks Dave.

Operator

Thank you. [Operator Instructions]. Our next question comes from the line of Gary Tenner with DA Davidson. Your line is now open.

Gary Tenner -- DA Davidson -- Analyst

Thanks, good morning.

George A. Makris -- Chairman and Chief Executive Officer

Good morning Gary.

Gary Tenner -- DA Davidson -- Analyst

I just had a couple of questions -- good morning on the margin side, you gave some color on there. Just wondering about the funding cost side of things? Obviously you're a little bit unsure on what you can do on the loan side, in terms of volumes, given current environment. But in terms of pricing of the deposit side, it came down a little bit on the interest bearing side this quarter, but not very much. Maybe just give us a sense of what your outlook is, on pushing those costs down further?

George A. Makris -- Chairman and Chief Executive Officer

Well, I think in Q4, we're looking at that and are actively already making some changes. So I'd expect another 5-10 basis points, maybe stay in the 5 basis points in Q4. So it's just harder -- it's a big pool to move, but it's just -- we're getting toward the low end of the rates there. We still have obviously pickup on the time deposits, as those mature. Those obviously get repriced. So we'll continue to get a little bit of benefit each quarter, as we move forward. Other than that, I wouldn't look much in the borrowed funds side. Most of that has either been repriced if they're variable, and if they're not, we locked into those about a year and a half ago, when funding started to move up at more of a longer-term of three to five year periods. At the time, it was a great decision. Now obviously looking back, we wouldn't have needed it.

Gary Tenner -- DA Davidson -- Analyst

Okay, thank you. And then on the expense side of things, I wonder if you could just kind of update, where you think the kind of core expense number looks, kind of with all the dust settling on the branch rationalization, so what that kind of clean number would look like for 4Q? So I think, as we come down a bit further out there?

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

Well we gave guidance of $115 million to $11 million per quarter. Obviously we hit it with our core expense for the quarter, we hit right at the low end of that. We do have expense savings coming in. But you know right now, our guidance is still at the $115 million to $119 million level, we do believe -- but we're as George said earlier, we're going to continue to work on that. I would point out in Q1, as you're going into your '21, remember the expenses do go up in that first quarter from payroll taxes and other, beginning of the year expenses that do come in. So there is some timing differences on all banks basically. But right now, I'd say, I'm still in that $115 million to $119 million. Hopefully that's very conservative.

Gary Tenner -- DA Davidson -- Analyst

Fair enough. Thank you. Actually, one last question if I could. You gave the detail in the slide deck today on the kind of credit experience from your acquisitions. I just wonder if you could just update on the two loans you talked about, the hotel and the student housing, from which acquisitions those came out?

George A. Makris -- Chairman and Chief Executive Officer

One came from Southwest Bank, one came from Bank SNB.

Gary Tenner -- DA Davidson -- Analyst

All right, thank you very much.

George A. Makris -- Chairman and Chief Executive Officer

You bet.

Operator

Thank you, this concludes today's question-and-answer session. I would now like to turn the call back to Mr. George Makris, for closing remarks.

George A. Makris -- Chairman and Chief Executive Officer

Thank you very much to each of you for joining us today. Once again, we're very pleased with our financial performance for the quarter. So much uncertainty in the marketplace today. We're trying to be as flexible as we can in our decision making. So that when there is some certainty that returns and our customers are ready to reinvest, we're prepared to help them. So I hope you have a great day and thanks again for joining us.

Operator

[Operator Closing Remarks].

Duration: 41 minutes

Call participants:

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

George A. Makris -- Chairman and Chief Executive Officer

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

Brady Gailey -- KBW -- Analyst

Stephen Scouten -- Piper Sandler -- Analyst

Matt Olney -- Stephens -- Analyst

David Feaster -- Raymond James -- Analyst

Gary Tenner -- DA Davidson -- Analyst

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