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FB Financial Corporation (NYSE:FBK)
Q3 2020 Earnings Call
Oct 27, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to FB Financial Corporation's third 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, Interim 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 an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation.

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

Robert Hoehn -- Director of Corporate Finance

Thank you. 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 is 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, FB Financial's, President and CEO.

Christopher T. Holmes -- President and Chief Executive Officer

Thank you Robert and good morning everybody and thank you for joining us today. We appreciate your interest in FB Financial. And I am excited to update you on what I think one of the strongest and most impactful quarters that FB Financial has had since have been with the company.

During the quarter, first, we converted our consumer online and mobile banking platform in July which really improved our customer online banking experience and out mobile experience. The new systems improved our capabilities and we have gotten excellent feedback from our customers over the new app and how smoothly that conversion went.

Second, we lifted the team in Memphis in the July and added some very strong well-known commercial relationship managers in that market. We anticipate some significant production over the next couple of quarters as they bring some of their long-standing clients over to FirstBank. And we expect that momentum to really continue and gain steam over the course of 2021.

Third, we closed our Franklin merger on August 15 and then hustled to get through the systems conversion less than two months later on October 12. From a strategic perspective, we feel that this positions us well to be Nashville's premier community bank and further entrenches us as Tennessee's premier community bank. Fourth, we raised $100 million of 4.5% subordinated notes at the end of August. That further protects our balance sheet and provides us dry powder for future organic growth and accretive M&A.

And finally, we posted a record-breaking adjusted EPS of $1.46 per share, record breaking adjusted earnings of $59.5 million in a very strong adjusted pre-tax pre-provision return on average assets of 3.13%. Thank you to the teams that put so many sleepless nights toward accomplishing those milestones. To see how our associates had come together to embody our one team, one bank philosophy over the past few months has made me very proud of the people and the culture that we have here at FBK.

As you may remember from past calls, we reordered our priorities back in March to number one, the health and safety of our customers and associates, number two, liquidity, number three, capital, number four, profitability and fifth, growth. These priorities remain in place to ensure the strength of our balance sheet. This positions us to aggressively pursue organic growth and accretive M&A when the time is right.

On the first of those, health and safety, we have had minimal cases of COVID across our employee base and we continue to emphasize our safety protocols as most of our associates have returned to the office. We have continued to protect our team and provide a safe environment for our customers while moving our operations back to near normal.

For priority number two, we built our liquidity position to 14.7% of tangible assets and have access to an additional $6.1 billion in contingent liquidity available to us. We are very comfortable of the company's liquidity position and excess liquidity. So we expect our own balance sheet liquidity position to come down over the next few quarters as we unwind some non-core funding that came over in the merger. On priority number three. Our tangible common equity to tangible assets has increased to over 9% and that's even with a balance sheet that's seeing $843 million in organic deposit growth over the course of this year and still has $310 million PPP loans on the books. Our total risk-based capital ratio is 15.9%, which is about as high as we have ever had. We also took on a larger C&D portfolio with the Franklin merger and on a combined basis managed to get that well under 100% of the regulatory guidance thresholds this quarter, which is a year earlier than we had originally anticipated and that we had originally committed. We feel very strongly that our balance sheet is positioned well, both to weather any economic issues that may arise and to take advantage of any opportunity that may present themselves in the future.

So while I am talking about capital, I will speak to our credit a bit as well. Year-to-date, we have increased our allowance for credit losses by $153 million. Over that same period, we have experienced only $2 million in net charge-offs. Our ACL to loans held for investment excluding PPP loans is up to 2.66%. Our ACL to nonperforming loans is 421%. We feel very good, maybe a little too good about the protection that we have in place for our loan portfolio. On priority number four, profitability. We need to keep working to bring our cost deposits down, given the decline that we have seen on earning assets. That's been a focus and will remain a focus until we regain our peer leading margins. However year-to-date, mortgage has put up $81 million in pre-tax contribution, when we went into the year, expecting about $10 million to $15 million in pre-tax contribution. As a result, our adjusted PTPP ROAA, that's a mouthful, has been over 3% each of the past two quarters. So I would say, we have gotten a pretty effective hedge on our margin in times of declining rates.

For priority number five, growth. We continued the measured approach that we put in place back in 2019. We started pumping the brakes on terms and rates that we felt were nonsensical. We have used this year to prune some are weaker credits while focusing on deepening relationships with some our best customers. With local economies across our footprint picking up, our regional presidents are seeing significant pickups in new opportunities this quarter and expect some real momentum as we head into 2021.

On the topic of growth, the company grew about $3.7 billion in assets overnight in mid-August. We have included to Slide in this quarter's deck that lays our just what bringing these two banks creates for us in the Nashville MSA and how some of our assumptions has shifted from announcement to today. Strategically, we are thrilled to have the top market share in Williamson County and the second market share in Rutherford County while being in the top 10 in Davidson County. We continue to think that achieving critical mass in a market creates some synergies that leads to additional opportunities. From a people perspective, at announcement we thought that we were combining with some of the top like players with this merger in our market. That became a bit more clear after seven months that we were working together toward the closing. So now that we have been working on the same team every day for a couple months, I can definitively say that the talent is even better than expected.

The company as a group of high-performing individuals that are used to winning. With every new hire, whether organic or through a merger, we let that each associate knew that that they are joining the FirstBank team and they work for one of the elite performing community banks in the country. Our message is that our performance stacks up well against our competition and you should always be proud of your company.

We believe that this message has resonated well with all of our teammates, including our new teammates and we are excited to go out and tell that story in the market. We still have some work to do to get things fully integrated and humming on all cylinders, but we have been really pleased with how things have gone so far. I will let Michael walk you through all the gives and takes of the purchase accounting later. But a couple of points I want to focus your attention on, from a financial perspective. First, the transaction ended up being accretive to tangible book value per share. With the pandemic and its impact on the loan mark, we were evaluating the terms back in March, April and May, we thought we might see some dilution. But ultimately the purchase accounting swung back the other way due to the zero rate environment and the interest rate mark on loan portfolio. Each of our three whole-bank transactions that we have done since going public have been neutral or accretive to tangible book value per share and we will do our best to continue that streak as we move forward.

Second item is that we ultimately decided to classify the non-core institutional portfolio as assets held for sale. The legacy Franklin team has done a tremendous job of working that portfolio and moving loans from that portfolio out of the bank since announcement and we are examining some book sale options. That portfolio had about $263 million critical in principal balances as at 9/30. The credit quality of that portfolio is actually doing quite well and there are some strong sponsors behind some of the private equity backed loans in the portfolio. So we are hopeful that we will ultimately be able to realize better execution than our mark and we don't feel any pressure to take any bottom-feeder type of bid that we may see on that portfolio. All that said, I sit here and look at what we have accomplished this year and I look how our balance sheet is positioned and I look at the demographics of our footprint now that we closed the merger and I can't help but think that our team has created an incredible amount of franchise and shareholder value while world has been shut down. We are laser-focused on getting Franklin integrated and we will enter 2021 firing on all cylinders and fully take advantage of opportunities.

With that, I am going to turn the call over to Greg Bowers to talk about our loan portfolio.

Greg Bowers -- Chief Credit Officer

Thanks Chris. Good morning. We have spoken on previous calls about our asset quality and how it has continued to perform well, even in these unusual times. That continues to be our message for this quarter. From a credit metrics perspective, as you have seen in the release, we continue to report good numbers that speak for themselves, including trends associated with past dues, our watch list, classifieds and non-performers. But I will touch on a few important specific categories.

On the deferral front, we have seen that move down from a high on a combined company basis of over 20% to roughly 6% at quarter-end. As we have noted before, at the onset of this, we were proactive in reaching out to our customers in providing relief which was a combination of our desire to help our customers as well as risk management. Behind these numbers lies a few things for consideration and review.

Initially, those that truly need it relief, the hardest hit, got deferrals. But remember that many have requested a the deferral were in the category of, hey, we are doing fine, but with all of this uncertainty, I am going to seek a deferral out of conservatism in protecting against what might come next. So that was our report in the first quarter. Then as the second quarter came around, those that were in the latter category went back to their pre-COVID plan and deferrals began to drop. Now here we are with the third quarter report and I am glad to say, we continue to make progress in that regard.

In summary, we are cautiously optimistic about the size of this portfolio continuing to reduce but remain pragmatic that without a vaccine or continued stimulus, uncertainty regarding the ultimate outcome will remain the watchword. This is especially true within the hotel segment which accounts for the largest single concentration within the deferral portfolio. Moving to Slide 12. This provides an overview of the new combined portfolio as of quarter-end, moving total loans up by roughly $2.7 billion with the merger with Franklin Synergy Bank. We are excited about the impact that this makes on our company. Chris has hit on this today and in previous presentations, but I think it is worthy to highlight some of the changes as we put these two portfolios together.

First, let's clarify how we presented the portfolio, so we are all on the same page. My comments will be about the loans held for investment, not the non-core institutional portfolio. I am talking about the plain old relationship-based local market loan and deposit book, not the loans held for sale. With the merger, you will see that we remain a balanced and well-diversified company. An area that has trended up is within the percentage of the portfolio which is real estate based. No question about it. Franklin Synergy held a higher concentration than FirstBank has historically. But it took advantage of the market, built upon relationships and expertise and is extremely successful in this area. That real estate portfolio is primarily broken out into a commercial real estate piece and a residential real estate piece.

The residential segment is your standard homebuilding portfolio, lending to builders who are building single-family homes in our market for sale. And if you are going to be in homebuilding business, we don't believe there are any better counties to be in than Williamson, Rutherford and Davidson MSA. The area statistics continue to demonstrate strong growth and tight inventory levels. The legacy Franklin Synergy's portfolio reflects that market. The focus was on dealing with the right people, the right subdivisions, assessing inventories and concentrations and monitoring the construction process. You will also see that our ratio of construction and development has a percent of risk-based capital as Chris already alluded to, is already below the 100% regulatory threshold. Now it stands at 90%, which is frankly bit quicker than we had expected.

On the commercial real estate side, we see similarities within the two portfolios as well. Again, a focus on dealing with people that we know, borrowers with skin in the game, a local market focus and owners willing to stand behind their deals. Generally, similar underwriting parameters with a bent toward a little higher dollar size in certain instances. We have already begun the steps of merging the two company's credit processes and organizations. We will spend a lot of time going forward melding the two cultures and continuing to assimilate the portfolios.

Moving to the next Slide number 13. As we have done in the past, we began breaking out the portfolio along the lines of industry of concern. This first Slide provides an overview with the next Slides providing a little more granularity.

Slide 14 references the retail portfolio which has continued to be something that we are all watching. But I would say that, in general we continue to see good results. This has a significant C&I owner-occupied fees that has fared well as has the CRE side. This is one of the segments that has moved up with the merger. And while in general, we would say that the portfolios are similar, typically smaller retail strip centers, we have picked up a atypically larger loan in the $34 million range secured by a regional mall. That property however is not sought a deferral. It's meeting its obligations and actually generating positive cash flow. Occupancy is high and its performance owes to leverage with low loan-to-value in the mid-50% range.

On Slide 15, the hotel Slide, this highlights one of my previous comments that hotels represent the largest component of our deferrals. This portfolio consists of over 100 notes ranging from a few hundred thousand dollars to our largest single exposure just under $26 million. We remain cautiously optimistic about the portfolio. I wish that we could report across the board step-ups and occupancy and performance, but at this point it continues to a mixed bag of results. We do remain positive about our original underwriting and the willingness of the borrowers to support their properties.

As an example of that, without going into too much detail, we have entered into an agreement with one of our largest customers which calls for them to bring all of the deferred interest current, establish a reserve account for the upcoming year and in conjunction with this, we agreed to extend the maturity for roughly a year. Rather than requiring principal and interest, we did agree to an interest-only structure. On an overall basis, we believe this corroborates our position that we are dealing with good properties and investors who have both the willingness and the wherewithal to stand behind these lines. Lastly on this Slide, I would note that our portfolio is primarily limited service and full service properties which, as you know, is the model or models that can support the location at an overall lower occupancy rate compared to that of, say, a luxury property.

Healthcare is our next Slide number 16, which accounts for 4.7% of portfolio. Overall, not much to report here. Generally good results. Anecdotally, we are hearing from the field that physician practices are steady after reopening while assisted living and skilled nursing operators are having to continue to deal with the COVID protocols which is impacting occupancies. Our restaurant exposure is reflected on Slide number 17, accounting for just under 2% in total. As we talked about before, we have a pretty diverse portfolio here. Concentrations moved up slightly with the merger as did our largest single exposure. Now it's approximately $11 million to a good local operator and strong financial footing. But as with all markets, the limited service operators are actually finding the going easier than the full service and continue to be challenged with constraints on seating capacity. So far so good on this portfolio as well, but one that we will continue to monitor closely.

As noted in our prior quarter's presentations, not included within this segment's numbers, we did have a larger diversified food business operator whose performance was declining with a rating that have been moved to criticized in Q2. You will recall that we indicated that without an improvement, it would likely continue to decline. This roughly $25 million exposure has done just that and accounts for the majority of the pickup in our substandard assets for this quarter.

Slide 18 highlights our other leisure portfolio, which represents a mix of industries accounting for just under 2% of the total. As we discussed before, some segments here have a benefit over the past few quarters as outdoor activities over the past few quarters such as outdoor activities while indoor venues have continued to struggle. Overall, we are continuing to see satisfactory performance within this segment. But we will keep it under review as you would expect.

Slide 19 breaks out transportation and warehousing, also under 2% of the total. Overall continued good results within this segment, which has seen some industries actually improve within the current economic environment, such as trucking and warehousing. We do list some air travel and support business but rest assured that does not include direct debt to any commercial airlines. In summary, asset quality remains good. Deferrals continue to come down. And we are excited about the merger and working with our new teammates and customers. It wouldn't be an update from a credit perspective however, if we didn't remind us all that any enthusiasm we have at this point must continue to be tempered with the uncertainties related to the pandemic.

With that, I will turn it over to Mike.

Mike Mettee -- Interim Chief Financial Officer

Thank you Greg and good morning everyone. My prepared remarks today will focus on CECL and the financial impact of the Franklin merger, margin and mortgage. And then I will be available for the Q&A section as well. First, on CECL, there are two Slides to focus on. Slide 20 lays out our economic forecast and resulting ACLs by each reporting category. And slide 21 shows the walk forward from June's ACL of $113 million to September's $184 million. I will touch first on our forecast assumptions. We used a blend of the baseline forecast as well as more positive forecast than Moody's put out in July.

With that blend, we feel like we have pretty well captured our current expectations for our market. As the rest of the country continues to reopen, Moody's did put out additional forecast in August and September that were incrementally more positive than our July scenarios. But in that time between forecast, we did not see noticeable changes in the economic activity in our markets. So we ultimately stuck with our July blend for the quarter.

Looking at ACL on our legacy portfolio, there were two primary drivers for the slight relief that we saw in the quarter. The first was declining balances and the second was the improving economic forecast that we used for Q3 as opposed to Q2. Together, these combined to produce approximately $7 million in ACL reversal this quarter. We had a little bit of heartburn about letting those reserves go but we still feel very adequately reserved and continue to stick with what our model tells us at this point with a few qualitative adjustments. On the Franklin related ACLs, there were a few components that I will touch on. The first that I will speak to is our non-purchased credit deteriorated allowance. As of September 30, there were $1.7 billion in loans in that bucket and our CECL model told us they needed a 3.06% in ACL. That resulted in provision expense of $52.8 million for the quarter. Given the unique nature of that provision, providing for the entire reserve on the portfolio in one quarter, we back that out of our adjusted earnings.

The second piece to this Franklin related ACL was the purchase credit deteriorated ACL. As at September 30, there was about $700 million in loans in that bucket and our CELC model and qualitative factors led us to an ACL of 3.62%, $24.8 million on that portfolio. That piece of the ACL does not count toward Tier two capital and was established at close impacting goodwill rather than being expensed on day one. All told, we wound up with $184 million of ACL or 2.66% of loans held for investment, excluding PPP.

Segueing from our ACLs to our provision expense. There were four main pieces to our expense this quarter. We have talked about two which are legacy portfolio reserve release and FSB related day one expense. The other two related to provision for unfunded commitments. With the outlook for the economy continuing to improve from quarter-to-quarter, we had a relief on unfunded commitments of $0.9 million. On the FSB side, our assumptions on the economic environment led to a provision for unfunded commitments on day one of $10.4 million. Similar to our non-PCD provision, due to the unique nature of building this entire reserve on the portfolio in one quarter, we have also backed this out of our adjusted earnings. You could see the details of these four components on our provision expense on Slide 21. Moving from CECL into an update on our purchase accounting, I would first like to talk to the loan mark and I think it's helpful to point you to the bottom of the Slide eight as I am talking through this. At announcement, we had assumed $110 million of total pre-tax impact of tangible common equity related to the loan mark, be that initial provisioning, day one PCD ACL or fair value mark. At close, we wound up with $101 million of impact. $88 million that was related to ACL which compared to $41 million as estimated at announcement. To put that into relevant terms, FBK's initial adoption of CECL bought our legacy stand-alone up from $31 million to $54 million. The economic forecast from that point on bought our ACL from $54 million to what would have been $106 million stand-alone this quarter or roughly double what would have been expected on a stand-alone basis back in January. So that move from $41 million to $88 million had pretty low followed suit.

The second piece of that $101 million is the mark on the non-strategic portfolio. At announcement, we had assumed an 8% mark on that $430 million portfolio. At September 30, we had a $22 million mark on the remaining $263 million or 8.4%. In the past few months, we have seen a large portion of that portfolio either refinanced at par or get sold to other banks at close to par. We feel comfortable that 8% level captures a liquidity mark there and while we will be opportunistic if we get the right cards on the portfolio, we feel no pressure to sell given the credit quality of the remaining loans. So between the ACL and the fair value mark on the non-portfolio, we would up with $112 million in credit marks where $75 million was assumed at announcement. We still have a pretty good to us.

The last piece of the $101 million loan mark are the fair value rate, liquidity and credit marks. That number came into the $11 million as our premium versus $35 million mark that we had assumed at announcement. So a $46 million swing. Obviously, the rate environment was a huge driver there.

Checking in on the purchase accounting assumptions from announcement versus what we realized. Between the two banks, we have expensed around $30 million or merger charges to-date versus $50 million that we had expected at announcement. Despite it being a fourth quarter event, we realized most of the conversion related expenses in the third quarter. We have $5 million to $10 million left that we would expect see in the fourth quarter related to lingering contract terminations and conversion cost. We ended up adding nine net branches from the acquisition. Franklin has leased all their locations except for their former headquarters location, which has become our operations hub. Our current plan is to find sub-tenants for these closed locations. So with the current low fed rate environment, it may take a little bit longer than originally anticipated to realize our full run rate of cost savings. That said, we feel very strongly that we will hit our 30% cost save estimate in early 2021.

On Durbin, we are clearly over $10 billion in assets today. There is a potential path to getting under $10 billion at 12/31, but we are weighing the cost-benefit of executing on that strategy. At this point, we are more likely than not to be over $10 billion at 12/31 and would realize a loss on interchange revenue created in second half of 2021 which is how we modeled the transaction at announcement.

Finally, we calculate about 50 tangible bips of tangible book value creation as of today versus our neutral announcement. As Chris noted, each of our pass-through whole-bank deals have been either accretive or neutral to tangible book value and it feels pretty good to protect that value for our shareholders.

Moving on to margin. PPP and liquidity continues to weigh on the stated number. The third quarter is fairly messy, given PPP, liquidity and having Franklin on the books for only half the quarter. Contractual loan yields decreased 21 basis points to 4.36% from 4.5% in Q2. PPP loans had about 18 bips of impact on the contractual yield this quarter. And for recent color, despite contractual rate on the portfolio was around 4.45% at 9/30. Excluding PPP loans, the contractual rate on the held for investment portfolio was around 4.6%.

On the liability side, total deposit cost decreased nine basis points to 0.56% from 0.65% in Q2. Despite cost of deposits of 0.59% as of the September 30. There are $257 million in time deposits maturing in the fourth quarter with a weighted average cost of 1.77%. The sheet rate for those deposits would have been repriced approximately 40 basis points. For comparison, during the third quarter we had a little under $290 million of CDs mature with a 1.84% average cost. Those had a sheet rate of just under 40 bips and we renewed about 65% of those at an average cost of just under 50 basis points. We have also identified $471 million in legacy Franklin deposit relationships at a contractual rate of 1.25% that we would consider not quite core customer relationship that we think we will leaving the balance sheet this quarter.

Moving to mortgage. The team produced another record quarter. So we would like to congratulate their work in that regard. And our mortgage production continues to provide us with strong counterbalance to the NIM pressure that the bank is facing in this low rate environment. Similarly to last quarter, the group continues to benefit from strong origination volumes and capacity constraints in the industry, producing atypical margin on loans in our pipeline and ultimately on our gain on sale margins as seen on Slide 25.

As we highlighted during our second quarter earnings call, the mark-to-market value demonstrated in Q2 slowed to gain on sale in Q3 plus some execution pickup is expected. Our expectation is gain on sale will continue to be at elevated levels in Q4 due to our current mark-to-market value, but we will likely seeing a peak for margins on new production.

With that, I will turn the call back over to Chris.

Christopher T. Holmes -- President and Chief Executive Officer

All right. Thank you Michael and thank you Greg for the color. To close, we are very proud of what we have accomplished this quarter. The main challenges still lay ahead for us but we are excited to meet those, execute against those and capitalize on the opportunities.

With that, I would like to open the line up for questions, operator.

Questions and Answers:

Operator

And the first question comes from Catherine Mealor with KBW.

Catherine Mealor -- KBW -- Analyst

Hi. Good morning.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning Catherine.

Catherine Mealor -- KBW -- Analyst

Thanks for all of the color. I just had a couple of these are kind of needy questions and maybe a little bit more picture. But my first question is just on first the outlook for core bank expenses. If we strip out mortgage, it looks like your core bank expenses were just under $50 million. And so I know we have a partial quarter of Franklin and then you have the cost savings coming in. Is there any kind of visibility you can give to what that number looks like as we move into fourth quarter and then kind of your growth rate for next year?

Mike Mettee -- Interim Chief Financial Officer

Yes. And Catherine, good morning. Glad you are with us. And I don't know exactly the dollars, but let me make a couple of comments. Our core bank expenses were pretty close to flat, our legacy core bank expenses were pretty close to flat quarter-over-quarter. Our cost saves are coming in as expected, perhaps slightly earlier in terms of, I think it moves both ways, so our cost saves are coming in originally as expected, maybe slightly better because we are getting some of them earlier. And as we look out, we could actually beat that number sometime in 2021.

There a couple of things that have moved in there. We have got some from the branch closures. We plan to do some subleasing. That's less, some of these markets is less attractive than it was when we made at announcement. So we are allowing that that could drag on a little more than we expected. But even with all that, we think we will meet or exceed that. We very confident that we meet the cost saves and likely exceed those.

And so those two elements. Mortgage will continue to remain elevated in the fourth quarter from an expense standpoint. That's a purely variable expense related to volume. If you will notice, our efficiency on that business continues to get better and better again because it's a variable expense and our revenue has gone up so much. And so that's kind of the moving pieces as we look at fourth quarter. Any other clarification? Okay.

Catherine Mealor -- KBW -- Analyst

That's helpful. And then other fees, well, they were up a little bit more than expected this quarter. Is there anything kind of one-time in that line? Or is that a good run rate?

Mike Mettee -- Interim Chief Financial Officer

Nothing in other fees. Our loan fees were consistent, not particularly. Our swap fees were

Christopher T. Holmes -- President and Chief Executive Officer

About $1 million.

Mike Mettee -- Interim Chief Financial Officer

Yes. So they were fairly consistent. And no, we can review the detail and if there is something there, we can certainly put that in our deck.

Catherine Mealor -- KBW -- Analyst

Okay. And then one last one, if I may. Just the increase in classified assets. Was this mostly just due to the Franklin deal closing? Or was there any kind of migration into classified from a legacy perspective?

Greg Bowers -- Chief Credit Officer

Hi Catherine, this is Greg Bowers. Good morning.

Catherine Mealor -- KBW -- Analyst

Hi. Good morning.

Greg Bowers -- Chief Credit Officer

I think you will see some of that from the merger, but as I referenced, we did have one larger account that's about $25 million from legacy FirstBank that moved into substandard in the quarter.

Christopher T. Holmes -- President and Chief Executive Officer

That's the one we have referenced today and you referenced in your comments actually.

Greg Bowers -- Chief Credit Officer

Right.

Christopher T. Holmes -- President and Chief Executive Officer

It was referenced in the comments. It was actually referenced in the deck as well.

Greg Bowers -- Chief Credit Officer

Yes.

Catherine Mealor -- KBW -- Analyst

Got it. Okay. I apologize. I missed that. And what type of credit is that?

Christopher T. Holmes -- President and Chief Executive Officer

It's referenced. Yes, it's a diversified foodservice, is what I call it.

Catherine Mealor -- KBW -- Analyst

You put that in your deck before. Got it. Okay.

Christopher T. Holmes -- President and Chief Executive Officer

That's right.

Catherine Mealor -- KBW -- Analyst

Got it. All right. Great. Thank you so much. I will hop out of the queue.

Christopher T. Holmes -- President and Chief Executive Officer

All right, thank you Catherine.

Operator

Thank you. And the next question comes from Jennifer Demba with Truist Securities.

Jennifer Demba -- Truist Securities -- Analyst

Thank you. Good morning.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning Jennifer.

Jennifer Demba -- Truist Securities -- Analyst

Can you remind us what kind of interest fee hit you would expect next year per quarter, should you stay over $10 billion in assets in the fourth quarter?

Mike Mettee -- Interim Chief Financial Officer

Yes. It' about $5 million, between $5 million and $6 million is what it would -- that's what that -- I will refrain. That's what that price control would cost us.

Jennifer Demba -- Truist Securities -- Analyst

Okay. And can you also update us on the CFO search?

Christopher T. Holmes -- President and Chief Executive Officer

Yes. The update is, it is going well and we would expect to conclude that before the end of the year. And we been pleased with how that's going and interest in candidates.

Jennifer Demba -- Truist Securities -- Analyst

Okay. One more question. You mentioned a couple of times, this environment might give you some opportunities in terms of acquisitions. Tell us about what you are interested in at this point? And what kind of timing we would be looking at? How long before you would be comfortable doing another deal?

Christopher T. Holmes -- President and Chief Executive Officer

Yes. We do remain clear that as I have seen the banks like everybody does, sitting around the table that I am sitting at, that we thrilled with our position. But we are also really focused right now internally in making sure that our engine is hitting on all cylinders. Every acquisition that we have done has been really, it's been a financially successful, as we highlighted. We don't talk about this as much as expected and really strategically successful. And we see things about the price of merger and the folks and what we get in terms of critical mass. And I would go back to prior to that same thing with the branch acquisition from Atlantic Capital. And then you go back prior to that and I would say the same thing about that the transaction we did with Clayton. All those really strategic in operating leverage.

And so we are sitting here now and we really want to make sure our organic growth engine is still best, we think, in our markets and among our peers. And so that is absolutely job one, is making sure we get some things right. And that's going to take us a little more time. I suspect we will get hit opportunities, frankly, before we are ready for them. We wouldn't be disappointed if we didn't get an opportunity for three to six months. But I suspect we will and we will have to make the same strategic decisions we always do and we would have to be more than really strategic to us again. We wouldn't do one just because somebody could miss an opportunity. It's got to be one that's strategic for us.

And so that's a lot of wind to say we are happy right now to continue to improve all of our operating metrics organically. And as we move into 2021, we will see what opportunities come our way is really kind of where we sit. I would say we are really happy though with our balance sheet and the strength of our balance sheet. And so financially, I think we sit in a great position.

Jennifer Demba -- Truist Securities -- Analyst

Thanks so much.

Christopher T. Holmes -- President and Chief Executive Officer

Okay. Thanks Jen.

Operator

Thank you. And the next question comes from Stephen Scouten with Piper Sandler.

Stephen Scouten -- Piper Sandler -- Analyst

Hi. Good morning everyone.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning Stephen.

Stephen Scouten -- Piper Sandler -- Analyst

One quick clarifier on the Durbin impact. That solves to $6 million. Was that just the back half 2021 number? Or is that an annualized number?

Christopher T. Holmes -- President and Chief Executive Officer

That's an annual number. So we go in base, assuming that we don't get under $10 billion, I would say, it would be real long shot, but because of some things we are doing to pay off some wholesale funding and it's not completely out of the question, but it's a long shot.

Stephen Scouten -- Piper Sandler -- Analyst

Great. And then on the foodservices credit there, that $25 million our exposure, I guess one question around the reserves. Any specific reserve there? I can't remember if you noted that last quarter. And then if you could touch on the percentage of the reserve for C&I loans? It looks like about 56 basis points versus much higher in the other categories. So I am wondering, what's different for you guys around that portfolio? And what gives you confidence at that lower percentage on that segment?

Greg Bowers -- Chief Credit Officer

Yes. Good morning. This is Greg. I would just direct us to the CECL numbers that we have got in here as far as the ACL specific on the reserves just in general on those. That's how we measure that.

Christopher T. Holmes -- President and Chief Executive Officer

Yes. And look for second half.

Mike Mettee -- Interim Chief Financial Officer

Hi Stephen. It's Mike. C&I percentage, we did see some improvement there quarter-over-quarter. I think the stimulus played into the performance in that. And kind of the loss expectations, we will see how that looks going forward. But that segment has certainly been buoyed

Stephen Scouten -- Piper Sandler -- Analyst

Okay. So most small business, maybe with PPP loans affiliated with this?

Mike Mettee -- Interim Chief Financial Officer

They will try, yes. On that first part. So nothing specific other than what our CECL calculation would cause us to a little bit of an increase because of the rating and that kind of thing. But nothing specific other than that.

Stephen Scouten -- Piper Sandler -- Analyst

Okay. Great. And then you guys have noted the possibility to use the liquidity to have some higher cost funding and some of the non-core items from FSB. Beyond that, it looks like you still have a lot of excess liquidity. So I am wondering, how you think about additional initiatives there? Whether it would be reducing securities book or anything else that might move the needle a little bit more there on the food side?

Christopher T. Holmes -- President and Chief Executive Officer

Yes. There is a little of a dilemma there because we do pride ourselves on having a really strong funding side of our balance sheet that really helps our profitability. I think it really helps our stability and helps our margin and helps a lot of things. But today, there is some elevation in the deposit numbers that's not real because of the liquidity several bankers available to everybody because of PPP and the relief that folks have gotten. And so that's all going on at the same time where as we put these two balances together, we are looking at some wholesale funding. So we are pretty rapidly trying to pay that down.

And then we are thinking about the investment portfolio possibly it could grow but of course your yields aren't great. And so you may have picked up a little bit from the tone. And this was pre-pandemic. But we had, in our markets, we have begun to see some things from both a credit perspective on the loan side, both a credit perspective and a pricing perspective, it wasn't tracking to it. And so we absolutely are 100% open for business, even growing the business, but probably at a slower pace than we have. I would expect to see us be more aggressive. Again, we have got the Franklin transaction behind us. We have a team of A-players there and I would expect us to see those folks be more aggressive as we move out into 2021. And so that's another strategy.

Stephen Scouten -- Piper Sandler -- Analyst

Perfect. Super helpful. Maybe one last thing, maybe very high level. I think some one said maybe you guys weren't necessarily seeing the economic reopening that was almost indicated by the improvement in August and Moody's numbers. But the flipside of that, as I would think you are still seeing pretty strong population inflows. I think all of us are hearing about zero tax state, population growing in states with zero percent tax rates and migration from the Northeast and so forth. So I am wondering, just anecdotally, if you can tell us what you are seeing in your markets and if you are seeing any significant influence on that phenomenon?

Christopher T. Holmes -- President and Chief Executive Officer

Yes. We really are. Stephen, good question. And we get asked that very often, especially from the investors in the Northeast, that particularly in New York and other places. But we are seeing our job growth has just continued to be really strong in our markets, particularly Nashville would be the leader there. We are seeing technology companies make investments and move significant numbers of folks here. Amazon has a big presence. And so we are really seeing those numbers begin to pick up again. GM just announced really big, $2 billion investment in their assembly facility in Spring Hill, which is a Nashville suburb. All three of the states assembly plants now are assembling electric vehicles. So folks are making big investments here. And so it's actually quite good.

And then I will give you a couple from just the residential side continues to almost to defy logic. It has been so remarkable. And then just pure anecdotally from somebody who lives here, the number of folks, if they are migrating that you just hear, buying homes up and when they are moving either from the West Coast from Chicago or from the New York area, New York, New Jersey, Connecticut, they are buying big homes here. And so we are seeing that. I mean it's just a constant dinner party topic. So we are seeing a lot of it.

Stephen Scouten -- Piper Sandler -- Analyst

Got it. That's super helpful Chris. Thanks so much guys. I appreciate it and congrats on a really good quarter.

Christopher T. Holmes -- President and Chief Executive Officer

Thank you. We appreciate it, Steve.

Operator

Thank you. And the next question comes from Kevin Fitzsimmons with D.A. Davidson.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Hi. Good morning guys.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning Kevin.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Chris, given you spend a lot of time on the reserve and appreciate all the detail and given the strength of the ratio at this point and given that the calculations led to some releases in this quarter, I mean is it fair to say that barring no big changes in economic metrics or expectations that the bulk of the reserve build is behind you and you guys could potentially be growing organically? And not necessarily adding to the preserve over the next few quarters?

Christopher T. Holmes -- President and Chief Executive Officer

Yes. I think it's fair. We said consistent, I think it's a pretty good characterization and we said fairly consistently that we have not varied too greatly from pretty straight numbers and we own from our secret calculations. And so we haven't had undue influence of qualitative factors. And I understand different banks doing it differently. That's been our approach. And that's led us to allowance number that's the highest among our peers, I think. If not the highest, it's certainly among the highest. And so, yes, I think it's fair to say that even as we look at it, we go, wow, surely we can't need all that as we look at in the cycle. Now, we quickly follow that up with, hey, it could get worse than we expect. But you know, it could be election turmoil, it could be all kinds of things that cause us to take a conservative approach. But I think you characterized it, we wouldn't, unless something really changed in the economic outlook, we wouldn't see it going up from here, unless there was something that really changed.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Okay. Great. That's very helpful. And on the institutional loan book from FSB, the decision to put that into held for sale, was that -- I know originally that was the plan to look to sell that portfolio in short order and then it was decided to step back and take some time. So was there a decision process on whether to keep that in the held for investment portfolio? Or did the decision to go to held for sale imply that you saw more of a short term opportunity to be able to sell those?

Christopher T. Holmes -- President and Chief Executive Officer

Yes. Good question. And I would start by telling you, it's been a conversation as late as yesterday afternoon and that's when it went held for sale. And so you characterized it again, you characterized it exactly right. Initially, we just looked like we are going to sell that. Then as we went through, we looked at it at as you know, back in March, in April, we were thinking, boy, will we be able to sell that. And then as we then moved into here lately, we have taken the approach of, it's nice to have options with it. And therefore we are letting some folks look at it. But as I said before, they are going to need to come strong because it's a performing portfolio in today's world that's got a yield on it that's north of 5%. And those aren't easy to find. And so, we are going to fire sale it. But if somebody comes strong, then we may let it go. And so it's a constant topic.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Okay. Great. And one last one. Understandably there is a number of moving parts in terms of what you all are doing on the balance sheet and things moving off, things moving on. So taking may be a step back, looking from a bigger picture, can you give some top level expectations on what could see the core net interest margin doing? What you cold see the reported net interest margin doing? And let's say, on a ex-PPP forgiveness basis over the next two to three quarters? Thanks.

Christopher T. Holmes -- President and Chief Executive Officer

Yes. Kevin, yes, we appreciate the question. But really, we are just not prepared to do that right now because of exactly what you mentioned. There has been a lot of moving parts and pieces. And so we try to put out some of the parts and pieces but we wouldn't want to go beyond that at this point. As we move into the quarter and we do some investor meetings and we put out a deck, we may update the deck and put out some additional information later. But at this point, we don't want to any further on what we expect on the margin next quarter.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Okay. Totally understand. All right. Thanks guys.

Christopher T. Holmes -- President and Chief Executive Officer

All right.

Operator

Thank you. And our next question comes from Alex Lau with JPMorgan.

Alex Lau -- JPMorgan -- Analyst

Hi. Good morning.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning Alex.

Alex Lau -- JPMorgan -- Analyst

So following two consecutive quarters of record mortgage contribution, when you think about driving pre-provision net revenue growth in 2021, what are the main levers you are thinking of offsetting some potential mortgage headwinds? And can you drive positive growth in the upcoming year?

Christopher T. Holmes -- President and Chief Executive Officer

Yes. So if you think about where we are from a pre-tax pre-provision revenue number and you look at the fact that we have had a pre-tax pre-provision ROA of well north of 3%. And by the way, most of our peers are hoping to get north of 2% and falling short. And so, we are looking at it as though we have sort of a perfect storm of events that has created mortgage results that are not going to be repeated. And we would be more shocked than anybody, in fact, matter of fact, last quarter, I think we had said something like we wouldn't expect the same performance in the next quarter. But it was even better.

And so nobody is more shocked about that than we are. So as we look at 2021, we are really focused on that core earnings of the bank. And so, our core quarter earnings of the mortgage, we have got a huge refinance help in this year. Let's say that rates go it projected, we would expect another quite strong year. Our previous, Wib, I think our previous record contribution for mortgage was $17 million on an annual basis and we did of $38 million this quarter, OK.

Wilburn J. Evans -- President of FB Ventures

That's right.

Christopher T. Holmes -- President and Chief Executive Officer

And so, no. we never say never. And we set high goals and we have been pretty good at achieving them. But I would hate to set the expectation that we duplicate this mortgage year next year. Matter of fact, I would we won't set that expectation. We are going to be focused on how we grow the margin. We will be focused on how we continue the momentum in mortgage, understanding the volumes are going to be less and the margins are going to be less, is the way we see it. But you know, we still expect to have peer-leading and industry-leading profitability in terms of our return on capital, in terms of our growth numbers and in terms of well, really those two measures in terms of our growth, in terms of our capital and in terms of our EPS growth.

Alex Lau -- JPMorgan -- Analyst

Thanks for that. And then just could you speak about the building momentum into 2021 from your regional presidents? How comfortable are you returning toward that prior long term loan growth target of 10% to 12%? Or has that target changed with the Franklin merger? Thank you.

Christopher T. Holmes -- President and Chief Executive Officer

That long term target hasn't changed, especially with the Franklin merger because they have, again, strong, they are in the strongest markets with the strongest bankers. And so we certainly wouldn't want to put reins on those guys because they do a great job. And so we wouldn't see the Franklin merger impacting it. And we would see long term that continuing to be good strong goal for us.

I would say, the first half of 2021, right now actually we see some real momentum heading into 2021. But I would also say that there is some economic uncertainty headed into the first half. And so that bears on our thinking a little bit works as we are thinking about 2021. But I actually, again, taking our markets and where we are, we see momentum heading into it, we see excitement among our people heading into it, coming off what's been a challenging year. And so we think that's a good long-term target. Not sure what it will be in exactly the loan growth goal yet for 2021. But we do see a lot of momentum.

Alex Lau -- JPMorgan -- Analyst

Thanks for taking my questions.

Christopher T. Holmes -- President and Chief Executive Officer

Yes. Alex, the one thing I would mention there is, we do have a new team in Memphis. And so they are growing off a lower base. But they are really doing a great job of bringing some things on there in that market. So we have got some events like that too that should help whenever we look at the overall growth for the company.

Alex Lau -- JPMorgan -- Analyst

Got it. Thank you.

Christopher T. Holmes -- President and Chief Executive Officer

All right.

Operator

Thank you. And that does conclude the question-and-answer session. So I would like to turn the floor to Chris Holmes for any closing comments.

Christopher T. Holmes -- President and Chief Executive Officer

Thank you very much everybody for being on the call. Thanks for the questions. And we appreciate you joining us. Again, we are wrapping up a great quarter and we are looking forward to the fourth. So everybody have a great day. Thanks.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Robert Hoehn -- Director of Corporate Finance

Christopher T. Holmes -- President and Chief Executive Officer

Greg Bowers -- Chief Credit Officer

Mike Mettee -- Interim Chief Financial Officer

Wilburn J. Evans -- President of FB Ventures

Catherine Mealor -- KBW -- Analyst

Jennifer Demba -- Truist Securities -- Analyst

Stephen Scouten -- Piper Sandler -- Analyst

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Alex Lau -- JPMorgan -- Analyst

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