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FB Financial Corporation (NYSE:FBK)
Q4 2020 Earnings Call
Jan 26, 2021, 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 Fourth Quarter 2020 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mettee, Chief Financial Officer; Greg Bowers, Chief Credit Officer; and Wib Evans, President of FB Ventures, who will be available during the question-and-answer session.

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

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

Robert Hoehn -- Director of Corporate Finance

Thank you, Kate. During this presentation FB Financial may make comments which constitute forward-looking statements under the federal securities law. 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 and 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.

Christopher T. Holmes -- President and Chief Executive Officer

All right, thank you, Robert, and good morning. Thank you all for joining this morning. We appreciate your interest as always in our Company. And as we started thinking about the themes and preparing our comments for this quarter, it really struck me what a significant year 2020 was for our associates and our shareholders. Our team has actually had a really special year and I want to give you a few facts. First on our financials, our adjusted net income for the year was $142 million. This represents adjusted EPS of $3.73 versus $2.83 per share last year or a 31.8% increase. This is an adjusted return on average assets of 1.68% and an adjusted return on tangible common equity of 19.1%.

Those earnings also moved our tangible book value to $21.64 a share, growing over the prior year by nearly 17%, yes, I said nearly 17%. Remember that this growth came after we provided a $108 million for loan losses and increased our allowance to 2.48% of loans, a figure that is among the highest of our peers. Our balance sheet is in excellent shape as we end 2020. In addition to the increase in our allowance, we grew from $6 billion in assets to $11 billion in assets during the year. But rather than this growth stressing our capital ratios, we maintained a tangible common equity to tangible asset ratio of 9.3% and we increased our total risk-based capital ratio from 12.2% to 15.2%, all of this without an equity raise.

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

Finally, we continue to be a great place to work for our associates. Of all the accomplishments of 2020, I'm personally might be the most proud of American Banker recognizing us as one of the top banks to work for, for the first time this year. We've been recognized as a top workplace by the Tennessee and -- the largest newspaper here in Tennessee for the past five years, and it's nice to add national recognition as a superior workplace.

Building on that culture, we've not had a single pandemic-related job elimination and for those associates that were unable to perform their jobs due to branch closures, there was no reduction in pay. And I'd like to think there was never a concern on behalf of our associates that we would do things any other way. So with all that, I think we've had a monster 2020. And I want our team to take a minute to be proud of themselves of what they have accomplished. But after that minute, it's time for us to get back to work because we want to follow that monster year with a fantastic 2021 and 2022.

We go into 2021 with a lot of excitement and optimism because we have a lot of levers that we can pull to build on last year's performance. First, the acquisitions get the headlines, but we're an organic growth company and we pride ourselves on outworking competitors and taking market share. With two acquisitions and COVID last year, we had plenty of distractions. Today we're positioned very well for organic growth in Nashville, Knoxville, Chattanooga, Jackson and Bowling Green, which are all very strong growth markets. We have excellent leadership in place, strong branch delivery networks, good market presence and plenty of room to grow our market shares.

In Memphis, we recently added a new market presence and team of relationship managers. In Florence and Huntsville, we have very little market share. So we can be very aggressive in getting after new business. Two other contributors, we expect the reliable steady slower growth but higher margin contribution that we've come to rely on from our smaller community markets. We will be aggressive in recruiting and hiring additional relationship managers in every part of our footprint. With our culture side of the momentum, there is not a better home for ambitious relationship managers.

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

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

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

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

On the asset side, it's difficult to plan higher-yielding assets, everybody knows. So we're still likely going to lose some yield on our contractual rate on loans, ex-PPP, as long as this rate environment continues. But we think that we still have some good progress that we can make on our deposit cost to offset that. On non-interest expense, we realized our cost savings on the Franklin merger earlier than expected. We realized an additional -- we may realize an additional $1 million to $2 million in annual run rate cost savings in the second half of 2021, but we don't expect additional dramatic improvements in the first half of the year.

With this larger balance sheet and our larger platform and conversion activities behind us now, we feel like we're in a good spot to focus on some operational improvements that should help reduce expense, build productivity gains and avoiding future expenditures. I would expect low to mid single-digit growth to our core bank expenses fourth quarter run rate 2021. On credit, we feel as good about our portfolio as ever. Although deferrals and PPP loans served their purpose in putting our customers back on their feet and we use this opportunity to improve the overall quality of our loan book, we did have one credit that we've been giving you updates on over the last few quarters that we decided to charge down in the fourth quarter. This accounted for 55 of our 58 basis points in net charge-offs and we think we've knit this one in the bud and we got it behind us.

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

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

Greg Bowers -- Chief Credit Officer

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

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

In this case, it was determined that appropriate steps included a charge down related to that loan. As a result, our net charge-offs for the fourth quarter were 58 basis points or $10.4 million, of this $10.4 million, $9.9 million or 55 of the 58 basis points in charge-offs were tied to that one credit. The balance was placed on non-accrual, which accounted for 17 basis points of our 88 basis points in non-performing loans to loans held for investment this quarter. With that, we believe this loan is appropriately marked and rated and our focus will continue to be on its resolution.

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

Hotels remain the hardest hit area within deferrals, no surprise, they are making up 44% of the full deferrals, 41% of the interest-only deferrals. We remain cautiously optimistic about the ultimate resolution for the remainder of that portfolio and are very pleased to see that it has come down so far. The next area that we believe continues to reflect positively regarding our overall portfolio is in what we have called our industries of concern. And as you know we've broken these out each quarter since the beginning of the pandemic. I think you will share our sense of overall improvement here too as you review these slides.

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

Another segment that continues to struggle is restaurants, which we have on slide 16. That's due to the reduced capacity restrictions, especially in our metropolitan markets and overall trends across the geographies. On the whole though, our grid generally continues to be OK, but I'm not recommending that we give them an all clear flag. These shutdowns and reduced capacity limits are a challenge and long-term prospects for the industry remain cloudy. We will share with this as a main, we haven't had various specific issues. For example, we have one customer with the full service operation that recently closed. However, the guarantors that were part of our underwriting are stepping up and performing on the debt.

As we've also noted, on the positive side the quick service segment of the business has fared well. While overall we're cautious about restaurants, we would entertain opportunities for seasoned and well capitalized operators in this segment if it made sense. Lastly, roughly 25% of our other leisure portfolio, slide 17, remains on deferrals. So we have included that disclosure again this quarter. Rather than a systemic issue in that portfolio, it's a handful of loans that comprise roughly 90% of the deferred balances. Those are customers in the industries that remain impacted by the pandemic, but we feel good about our guarantors and collateral in each situation and think that the businesses should bounce back well once the vaccine is widely distributed.

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

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

So for the institutional portfolio, that held-for-sale portfolio, we see positive trends with it continuing to reduce, standing now at half where it was at announcement. It is appropriately marked and our expectation is that it will reduce further from pay-downs, one-off loan sales or selling it in bulk.

Regarding our outlook for 2021, we continue to be cautiously optimistic about trends throughout our markets. The additional government stimulus should continue to be a welcome to assist until the vaccine is successfully distributed and our markets move back to normal. The residential housing market in Nashville and really across our entire footprint is still performing very well and is aided by continued influx of corporate relocations as our new neighbors arrive from California, New York, Chicago and are on to enjoy our lifestyle and business environment here in Tennessee.

And as loan growth continues to pick back up, we will remain vigilant in our underwriting. Our mantra has been and will continue to be long-term profitable growth. So in summary, a few points to highlight. We're still in a pandemic and remain cautiously optimistic. We had a jump in charge-offs due to one specific deal. Deferrals were down, industries have concerns of levels of improvement. The held-for-sale portfolio continues to decline, our overall credit metrics are stable and our reserves are strong.

With that, I'll turn things over to Michael.

Michael Mettee -- Chief Financial Officer

Thank you, Greg, and good morning everyone. My prepared remarks today will focus on margins, mortgage, CECL and an update on the financial impact of the Franklin merger. Starting first with margins, we are seeing the decline in contractual yield on loans beginning to slow. Excluding PPP loans, our December contractual yield was 4.48% compared to 4.53% for the fourth quarter and 4.54% in the third quarter. New originations in the fourth quarter of a weighted average rate of around 4.15% and we would expect to continue to lose a few basis points per quarter on the contractual yield going forward.

Meanwhile, our cost of interest-bearing deposits was around 59 basis points in December compared to 53 basis points for the quarter. We have $314 million in CDs coming due in the first quarter with a weighted average cost of around 151 basis points and the sheet rates on those deposits are currently 41 basis points. In the second quarter, we have an additional $308 million with a current rate of 124 basis points and a sheet rate of about 40 basis points. So for the past few quarters we've managed to keep around 60% of our maturing deposits at rates around 5 to 10 basis points above with the rate sheet would indicate and we expect those trends to continue.

We also believe that we have continued room to lower our cost of money market accounts and think that next quarter we should be able to pretty much match reductions in our contractual loan rate with decline in our deposit costs. We also continue to make strong progress in paying down non-core deposits and borrowings. Last quarter we discussed $571 million in non-core funding from the Franklin merger that we felt would leave the balance sheet in the fourth quarter. We were successful in exiting $362 million of that $571 million and the remaining $200 million in wholesale funding is a money market relationship that we ended up keeping and we actually marked that at a cost of approximately 35 basis points. We expect to keep those on our balance sheet until the contractual obligation ends in 2024.

In addition to the $362 million in legacy Franklin funding, we paid down $100 million in legacy FirstBank federal home loan bank advances. As noted, the prepayments early on that federal home loan bank advances is around $4.5 million and we had no federal home loan bank funding remaining on our balance sheet as of year-end. Looking forward, we have an additional $50 million in non-core money market accounts that are scheduled to leave the balance sheet in the first quarter and another $20 million expected to leave in April. We also intend to redeem Franklin's legacy subordinated debt, $40 million of which becomes callable after March 31 and $20 million of which is callable after June 30. Both of those tranches are on the balance sheet in a marked cost of around 5%.

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

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

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

We would like to congratulate the team for a record year and continued robust earnings. Additionally on fee income, we received relief on the interchange reduction associated with crossing $10 billion assets for the year, so that planned $3 million in reduced revenue that we had expected in the second half of 2021 will now be delayed until 2022. On CECL, we went to 100% baseline scenario. The change in the forecast compared with the slightly changing mix in our loan portfolio was responsible for approximately $17 million in reserve release. In order to adjust for what our ACL committee determined, it was too little of the model of allowance on our C&I portfolio, we adjusted our qualitative factors on the C&I piece, which resulted in an approximately $8 million in additional allowance on that portfolio, offsetting some of the model decline in reserves.

Those along with a few other moving parts, including charge-off resulted in the net $3 million release that you saw in our provision expense this quarter. If the vaccine is more broadly distributed and the economic forecast continue to improve, we believe that it's likely that we'll see further reserve releases over the coming quarters. The extent of those releases will depend heavily on how our outlook for our local economy changes. Finally, I'll finish with an update on the purchase accounting related to our Franklin Financial merger. We experienced an additional $9.5 million in merger charges in the quarter. While we could have an additional $2 million to $3 million of charges in the first quarter, all significant merger expenses are now behind us and you should see a relatively clean non-interest expense line going forward.

We also saw an increase of goodwill of $10.7 million with the majority of the increase related to the new mark on a $200 million in non-core money market funding that I referenced earlier. With these merger charges and additional goodwill, we have to make the transaction while that being roughly neutral to tangible book value per share. Spending a second on cost savings, I would point you to the other non-interest expense line item in our banking segment income statement disclosure on page 13 of the financial supplement. This quarter, there is the $4.5 million FHLB prepaid affiliate embedded in that line item. Excluding that, the banking segment other non-interest expense was $52.9 million with our first full quarter of Franklin included. This is about $12.5 million more than we were running prior to the Franklin second quarter of 2020 and indicate we've already hit our 30% cost saving target on the Franklin synergy merger.

So those are some details on all the various moving pieces. But the end result was, as it have been for the past few quarters for us, exceptionally strong profitability with adjusted pre-tax, pre-provision return on average assets of 3.43% and adjusted return on average assets of 1.95%. We expect to remain in the lead financial performer and we look forward to updating you over the coming quarters.

Christopher T. Holmes -- President and Chief Executive Officer

All right. Thanks, Greg and Michael for that color. I'd like to quickly discuss a few other changes that we announced during the quarter and then I'll open the line up for questions. First, we removed the interim tag from Michael's title. We had many applicants interested in the position including several good friends of the Company. For that reason, we hired an outside advisor to take us through an objective process and Michael overwhelmingly proved to be the right person to be our CFO.

Michael is a rising star in the industry. He has spent nine years with the bank and he has been extremely impressive in each role that he's held with us. The only regret is that because of COVID many of you haven't been able to spend any time with him. As soon as we can safely travel, we will rectify that and you'll see why we are excited about our team and our direction. We look forward to his leadership elevating the finance function to a new level for us.

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

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

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

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Catherine Mealor of KBW. Please go ahead.

Catherine Mealor -- KBW -- Analyst

Thanks, good morning.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning, Catherine.

Catherine Mealor -- KBW -- Analyst

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

Michael Mettee -- Chief Financial Officer

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

Christopher T. Holmes -- President and Chief Executive Officer

Yeah. And Catherine, I'll give just a slight bit of color on that because we did some real study and counsels multi-parties on that and had some conversations with the regulatory agencies. And if you go back to when we announced the deal in January of '20, we even laid the thoughts back then of the fact that we very well may -- but we knew that there would be some shrinking of the balance sheet because of wholesale funding and some other things. And so we felt like we had a path even then to be under $10 billion at the end of 2020 and then comes COVID, then comes PPP, then comes all the funding and so balance sheets are elevated, are sort of high for all the banks, and so there was an announcement by agencies that they would provide some relief on those basing asset threshold, including this one.

And so because we were a little bit of an unusual circumstances, we had some dialog there and it looks like that we do qualify. We have to actually be excluded from the exemption as I understand it and it looks like we will not be excluded.

Catherine Mealor -- KBW -- Analyst

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

Michael Mettee -- Chief Financial Officer

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

Catherine Mealor -- KBW -- Analyst

And given some of the movement on the interest rate marks, is there a period where it could be actually negative?

Michael Mettee -- Chief Financial Officer

I don't think --

Catherine Mealor -- KBW -- Analyst

-- be more than amortization?

Michael Mettee -- Chief Financial Officer

I don't -- it's certainly -- it's not impossible but it's not likely.

Catherine Mealor -- KBW -- Analyst

Got it, OK. All right, thanks for the color. Great quarter.

Christopher T. Holmes -- President and Chief Executive Officer

Thanks, Catherine.

Operator

Our next question is from Stephen Scouten of Piper Sandler. Please go ahead.

Stephen Scouten -- Piper Sandler -- Analyst

Hey, good morning everyone.

Michael Mettee -- Chief Financial Officer

Good morning, Stephen, hope you're well.

Stephen Scouten -- Piper Sandler -- Analyst

I'm doing very well, thank you. So I'm curious maybe first and foremost where if you guys have given kind of any guidance around where you think the loan loss reserve could eventually normalize in a CECL world. I mean obviously there is more noise in yours than maybe some of your other peers given the FSB acquisition and the absolute level is still extremely high. I'm just wondering how you're thinking about that assuming of course that kind of the economic improvements and vaccine trends we've seen continue.

Christopher T. Holmes -- President and Chief Executive Officer

Yeah, so I won't comment first, Stephen, [Indecipherable] going to be much more global and Michael would comment too because I agree with what you're saying. I mean, certainly, it looks high relative to peers and -- but trust us, we have a very defined process that we've laid out with both consultants and outside auditors and so we have a lot of dialog around it. And so it is -- it does -- so we agree, it doesn't appear high and we will -- record saying, but I would be careful making sure I say this is the right way. I do not think that we'll have that level of losses by a long shot. And I think every single CEO, all those calls you listen to would probably say the same thing. Based on our experience, thus far with CECL, but we were following the process. And so, as you could see in this quarter, it told us that we need some release. We are not going to be expressed, it tells us that and some more heading forward but we haven't -- I have heard, actually people that have great respect for, other CEOs, some other CEOs talk about, maybe we'd like to keep it around 3% or we'd like to keep it around X percent or whatever, we're shying away from that, we're not -- we're just following the process and see where it takes us at this point. As we get more and more confident quarter by quarter, we will probably gain an absolute. Just before we will probably exercise a little more qualitative input than we have been, but that's kind of where we are today. Mike?

Michael Mettee -- Chief Financial Officer

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

Stephen Scouten -- Piper Sandler -- Analyst

Yep, that all makes a lot of sense. And I guess maybe a follow-up to that is, maybe at the end of the day and my view it's all capital, just you're putting it in a different bucket, but let's say it moves back into maybe core capital, if you will. How do you think about share repurchases because even apart from loan officer releasing as I see it, you should build capital internally at a very rapid pace.

Michael Mettee -- Chief Financial Officer

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

Stephen Scouten -- Piper Sandler -- Analyst

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

Christopher T. Holmes -- President and Chief Executive Officer

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

Stephen Scouten -- Piper Sandler -- Analyst

Great. Makes sense, well, congrats on a really good quarter and a great year.

Christopher T. Holmes -- President and Chief Executive Officer

All right. Thanks so much, Stephen. We really appreciate it.

Operator

The next question is from Matt Olney of Stephens. Please go ahead.

Matt Olney -- Stephens -- Analyst

Hey, great. Good morning, guys.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning, Matt.

Matt Olney -- Stephens -- Analyst

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

Michael Mettee -- Chief Financial Officer

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

Matt Olney -- Stephens -- Analyst

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

Christopher T. Holmes -- President and Chief Executive Officer

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

And so -- but we did -- you are -- but you're exactly right. Both of you are exactly right. We worked extraordinarily hard to get it done. And so we did get some expense out earlier than we modeled on the front end, which is good for all of the shareholders and everybody. And so we think we're pretty good for the next few quarters. We may have an opportunity as we get some more efficiency to ring a little bit out at the end because we -- when we put those targets out there and we'd like to beat them and we're kind of equal at this point, but we want to do it at some point in 2021 and do even better than we modeled. And so that's the reason I say we're not anxious to jump back into something on the acquisition front. We never say never, but it's not something we're out searching for and that we've said -- we said what we said about the expense side.

Michael Mettee -- Chief Financial Officer

Yeah. And Matt, it's Michael. Just to layer into that a little bit, the back half, say, one of the challenges with COVID is office space. And so we have some leases that we think we will exit later in the year that can help with some of that back half saves. And then that single-digit growth in expenses, low single-digit growth, really, I mean, if we assume the world can open back, Chris mentioned travel a little bit, we look forward to being back in front of our customers, our clients and build our business, and then as we've gone over $10 billion and Chris mentioned all the things that maybe don't get the headlines, some of that is -- we will have some internal investments that they can lead to some expense growth, again with minimal and we think we can kind of run it, but that's kind of what that comment was about, low to mid.

Matt Olney -- Stephens -- Analyst

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

Christopher T. Holmes -- President and Chief Executive Officer

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

Matt Olney -- Stephens -- Analyst

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

Michael Mettee -- Chief Financial Officer

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

Matt Olney -- Stephens -- Analyst

Okay, that's great, thanks for the commentary. Nice quarter.

Christopher T. Holmes -- President and Chief Executive Officer

Thanks, Matt.

Operator

The next question is from Alex Lau of JP Morgan. Please go ahead.

Alex Lau -- JPMorgan -- Analyst

Hi, good morning.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning, Alex. Hope you are well.

Alex Lau -- JPMorgan -- Analyst

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

Christopher T. Holmes -- President and Chief Executive Officer

Yeah, Alex, we got Wib Evans who is with us who runs our ventures, including mortgage and I'll let Wib and Michael talk about that.

Wilburn J. Evans -- President, FirstBank Ventures

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

Alex Lau -- JPMorgan -- Analyst

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

Christopher T. Holmes -- President and Chief Executive Officer

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

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

Alex Lau -- JPMorgan -- Analyst

Thank you.

Christopher T. Holmes -- President and Chief Executive Officer

Sure. The next question is from Brock Vandervliet of UBS, please go ahead.

Brock Vandervliet -- UBS -- Analyst

Good morning, guys.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning, Brock.

Brock Vandervliet -- UBS -- Analyst

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

Michael Mettee -- Chief Financial Officer

Hi, Brock, it's Michael. Yeah, I think if you look on slide 7, we have the 3.42% there, circle, that's kind of indicative of where new originations came out in the fourth quarter, obviously saw a decline there from third quarter and second quarter where capacity was at a really big constrain. As Wib mentioned, we're still seeing a better compression in there. It's hard to go back to '19 or '18 because we were different channels. So we're in retail consumer direct business and sales, normalized be probably slightly to below that number whereby in June comments here, but I think you still have some room to move down, but you're not going to -- should not return to the 2.27% number that you see in the fourth quarter of '19. And we -- as we laid out our plan for the year we can play a role it moving down some, basically throughout the year as there gets to be a little more capacity in the system.

Brock Vandervliet -- UBS -- Analyst

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

Christopher T. Holmes -- President and Chief Executive Officer

Yeah, it's -- I'd say we did -- normal will probably look different. We -- so our mortgage business is, we like it for a few reasons. One of the reasons is that we can learn some things, they had work from home folks more than any other part of our business. They've had more of that than any of the part our business for a long time and they would measure -- and key is you've got maybe measure productivity and they get really strong productivity on certain things be at home. What we've been able to also see that in some other parts of our business. And so I think being able to put more better measurement around some productivity areas that we have not previously measured is one area that we're focused on because, again, that improves efficiency, improves sort of work-life balance and I think it improves employee morale overall. And so that's something that we are thinking about it. I'd say that's probably the biggest one. It is and -- but the ripples from that as you said can be office space, can be branch space. There's a lot of talk about branch consolidations and we'll have a little bit of that, but we won't have that much because we're in a number of communities. And so we're going to keep a presence in those communities. A lot of those communities only have one branch anyway. And so, and frankly the cost of that is much less than most people understand. So we may have a little bit of that, but we'll probably end up in a position where our -- actually, we will have some small branch consolidation, but there won't be a lot of that for us because if we did have a lot of that we'd be out in the immediate -- and our presence in our MSAs is relatively new. And so we don't have anywhere near the legacy branch network of some of our older bigger competitor.

Brock Vandervliet -- UBS -- Analyst

Yeah. Okay, great, thank you very much.

Christopher T. Holmes -- President and Chief Executive Officer

All right, thanks, Brock. [Operator Instructions] And next question is from Ammar Samma of Raymond James. Please go ahead.

Ammar Samma -- Raymond James -- Analyst

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

Christopher T. Holmes -- President and Chief Executive Officer

Yeah, so -- Ammar, I'm looking there at Greg and I'll comment and invite him to comment as well. On the first part of your question, we haven't sold any. It's been just loan paying off. And so we haven't had any sales at this point. And then in terms of what happens, we would sell individual loans, we sell in bulk what we -- paying on to it, if we had to sort of say, so we would sell individual loans, but we're not fire sellers, because we don't have to be, we have the advantage of know more about what's in the portfolio and we've got two very capable guys that are managing it, and so we -- but it's not core to our business.

And so for the right price, we've got it leased. And so -- I might sound like I'm negotiating to get to do more but that -- we're not fire seller. Greg, you want to add anything to that?

Greg Bowers -- Chief Credit Officer

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

Christopher T. Holmes -- President and Chief Executive Officer

Yeah, it's -- but it's a mixed bag also because they are private equity type and unfortunately with those types you don't get a lot of heads up or something go south and you don't have a lot -- you parachute, it's an animal, it's something goes south, and so that's the reason that's not core to us. But so far we've had good luck with them and we want that to continue.

Ammar Samma -- Raymond James -- Analyst

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

Christopher T. Holmes -- President and Chief Executive Officer

Yeah. We have seen seem and we do expect to do some PPP -- we're already doing some PPP going into [Indecipherable].

Ammar Samma -- Raymond James -- Analyst

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

Christopher T. Holmes -- President and Chief Executive Officer

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

Ammar Samma -- Raymond James -- Analyst

Okay, understood. That's it from me. Thanks, guys, and congrats on a strong quarter.

Christopher T. Holmes -- President and Chief Executive Officer

All right, thank you. Appreciate it.

Operator

The next question is from Jennifer Demba of Truist Securities, please go ahead.

Jennifer Demba -- Truist Securities -- Analyst

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

Christopher T. Holmes -- President and Chief Executive Officer

Yeah, Jennifer, we've talked about the one charge-off that had really a new rule, I guess, in fact on our charge-off ratio for the quarter. This will past for. We don't have anything thing -- and we talked about that for the past three quarters. So we've been watching it. We don't have anything to announce there like that or we'd be talking about it. I mean, our whole strategy is to be quick into sizes, if we have any issues, we want our people to be quick in the sizes so that we can make sure we deal with a variable very hand on straight up way, it's good for us and good for our client. And so we don't have anything that we're aware of.

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

Greg Bowers -- Chief Credit Officer

No, I think the key point is that specific deal should not be viewed as a proxy for the health of our portfolio. Another touch point I guess that we look at is credit quality of sub-standard -- how the sub-standards are acting, those were up $5 million quarter-over-quarter. So it's actually still in line with the year-end 2019. As we look at it, I guess, lastly we will follow NPAs closely and they were up 9 basis points quarter-over-quarter, but actually down year-over-year, I guess, 4 basis points.

Our ORE and other assets from foreclosure and repossessions, they were up $176,000 plus or minus for the quarter. But if you look at it year-over-year, that's down from $11.5 million to about $7.5 million and as you all know, everybody on the phone, you gotta take that in a light also we've added $2.7 billion plus or minus in loans over that time period. So, I agree with you, Chris. You can take the risk out of an uncertainty out of this, but you can plan and prepare for it and that's what we think we've done well, as Michael pointed out that reserves -- significant, pretty strong.

Jennifer Demba -- Truist Securities -- Analyst

Thank you so much.

Christopher T. Holmes -- President and Chief Executive Officer

Thank you, Jennifer.

Operator

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

Christopher T. Holmes -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Robert Hoehn -- Director of Corporate Finance

Christopher T. Holmes -- President and Chief Executive Officer

Greg Bowers -- Chief Credit Officer

Michael Mettee -- Chief Financial Officer

Wilburn J. Evans -- President, FirstBank Ventures

Catherine Mealor -- KBW -- Analyst

Stephen Scouten -- Piper Sandler -- Analyst

Matt Olney -- Stephens -- Analyst

Alex Lau -- JPMorgan -- Analyst

Brock Vandervliet -- UBS -- Analyst

Ammar Samma -- Raymond James -- Analyst

Jennifer Demba -- Truist Securities -- Analyst

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