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Good morning, and welcome to the FB Financial Corporation's First Quarter 2024 Earnings Conference Call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer; Mr. Michael Mettee, Chief Financial Officer. Also joining the call for the question-and-answer session is Mr. Travis Edmondson, Chief Banking Officer.
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. [Operator Instructions] During the presentation, FB Financial may take -- may make comments which constitute forward-looking statements under federal securities laws. Forward-looking statements are based on management's current expectations and assumptions and are subject to risks and uncertainties.
Other factors may cause actual results to differ materially and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to place undue reliance on such forward-looking statements.
A more detailed description of these and other risks that may cause actual results to materially differ from expectations 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 reconciliation of the non-GAAP measures to comparable GAAP measures is available in the FB Financial's earnings release, supplemental financial information and 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 Mr. Chris Holmes, FB Financial's President and CEO. Please go ahead, sir.
All right. Thank you, Chuck. Good morning, everybody, and thank you for joining us this morning. We always appreciate your interest in FB Financial.
For the quarter, we reported EPS of $0.59 and adjusted EPS of $0.85. We've grown our tangible book value per share, excluding the impact of AOCI, at a compound annual growth rate of 13.5% since our IPO.
We're pleased with our results for this quarter and believe that they show strong progress towards our goal of peer-leading financial performance as we reported an adjusted return on average assets of 1.27% and adjusted PPNR return on average assets of 1.63% and grew adjusted earnings per share by 10% relative to the fourth quarter of 2023 at 12%, relative to the year-ago quarter.
When I provided my outlook for 2024 on our prior call, I noted that the bank was in an enviable position due to our strong balance sheet, the operating foundation with which we've spent the past 2 years [ reinforcing ] and the earnings momentum that we were beginning to experience. I'm even more convicted on those points after our first quarter.
Our capital ratios continue to improve. We now have a tangible common equity to tangible assets ratio of 10% and a total risk-based capital ratio of 15%. The mix of our loan portfolio is trending towards optimal for a bank of our size operating in our growing markets with our construction and development concentration of 83% and a CRE concentration of 255% as a percent of risk-based capital.
Operationally, we're performing well, and there's a cohesive -- a cohesiveness across the team as more direct communication lines have been established between our customer-facing and back office associates. The efficiencies of improved processes and procedures are also beginning to come through as our core efficiency ratio in the first quarter improved by over 500 basis points from the first quarter of last year.
And finally, on our earnings momentum, we saw broad-based positive trends this quarter for net interest income -- I'm sorry, net interest margin, noninterest income and noninterest expense.
On the net interest margin, our increase in the contractual yield on loans held for investment outpaced our increase in the cost of interest-bearing deposits for the second quarter in a row. And our net interest margin was steady at 3.42% versus last quarter's 3.46%.
For fee income, Mortgage had a solid quarter with a pretax contribution of $3.1 million, which is a testament to our expense initiatives because that contribution was on approximately the same amount of revenue as the first quarter of last year, when we had only a $262,000 contribution.
The $11 million in fee income that our Banking segment produced in the first quarter was also strong. And driven by the efficiencies of our operating platform that I mentioned before, core noninterest expense was down 3.3% from the fourth quarter and down over 10% year-over-year. All that led to growth in adjusted pre-provision net revenue of 12.8% compared to the fourth quarter of 2023.
So a strong quarter of operating results that while not at our historical levels of profitability, is trending in the direction that we wanted to. As we look to the remainder of the year, we'll be focused on how we can effectively deploy the capital that we've built in order to create long-term shareholder value.
As we seek to deploy that capital, we always target organic growth first, which was one ingredient that was missing from our performance this quarter. While we're not thrilled with the $120 million contraction in loan balances that we experienced during the quarter, we're comfortable with it as it was driven by $128 million decline in construction lending at a $49 million payoff of one of our very few SNC relationships, as our customer was acquired, which by the way, was a strong relationship with the bank.
As a reminder, we have a bias against SNC lending, but this was one of those very few that meets our criteria of relationship based, in geography with partners that we know. Excluding those two circumstances, we experienced slight growth on the remainder of our portfolio of [ around ] 2% annualized.
We're targeting mid-single-digit organic loan growth for the year as we continue to feel confident about the economic health of our footprint, and we intend to return to our historical 10% to 12% organic growth target in 2025.
To that end, we've hired a handful of seasoned revenue producers across our footprint in the first quarter, and we continually look for additive team members. Given our size and excess capital, our building presence and market share in our metropolitan markets across our footprint, our local authority operating model headed by strong leadership teams and our long-term prospects, we're delivering a strong pitch to relationship managers to come [ join ] our team.
We expect to continue to moderate our construction and CRE concentration ratios and focus more on operating accounts, C&I relationships. We intend to operate in the 75% to 85% range on our C&D concentration and the CRE concentration of around 250% or less and will not become over-concentrated in those buckets in the name of growth.
We have strong commercial capabilities and a very strong treasury management team and will continue to benefit from influx of corporate relocations that we're experiencing across our footprint in addition to taking share from some larger competitors that continue to be disrupted by M&A and internal changes.
Our second priority for deployment of capital is strategic M&A. We're well positioned as a potential partner for smaller banks in and around our footprint. We have significant excess capital that should allow us to absorb the interest rate mark prevalent in today's M&A. And we have very strong risk compliance and operations, functions that we believe will be able to navigate the current regulatory and operating environment.
Our third priority for capital deployment is improving our balance sheet and earnings through capital optimization transactions. Late in the quarter, as you likely saw, Michael and his team executed one such transaction as we sold just over $200 million of securities and reinvested the proceeds for a net pickup in spread of 3.8%.
With an annual pretax income impact of just under $8 million, that's real money that comes with no risk of integration and no further execution risk. And we would allocate capital to similar transactions.
Additionally, we recently had our $100 million repurchase plan -- stock repurchase plan reapproved in order to have that arrow in our quiver also. And we purchased around [ $4.8 million ] worth of stock in this current quarter.
So to summarize, I'm proud of our team for the results this quarter. Our profitability metrics are trending in the right direction. I feel strongly that we have the team, the platform and the footprint to be able to continue to build on this foundation.
Now I'm going to turn it over to Michael to give a little more detail on the financial results.
Thank you, Chris, and good morning, everyone. I'll first take a minute to walk through this quarter's core earnings. We reported net interest income of $99.5 million. Reported noninterest income was $8 million, adjusting for the loss of $16.2 million related to our securities restructuring trade and about $600,000 on the sale of [ REO ].
Core noninterest income was $23.6 million, of which $11 million came from Banking. We reported noninterest expense of $72.4 million and adjusting for $0.5 million of FDIC special assessment expense. Core noninterest expense was $71.9 million, $59.8 million of which came from Banking.
Altogether, adjusted pre-provision net revenue earnings were $51.2 million, and Banking segment adjusted pre-provision net revenue earnings were $48.2 million.
Going into more detail on the margin at 3.42%, our net interest margin held relatively flat with the prior quarter's 3.46%. Contractual yield on loans held for investment increased by 12 basis points, but those gains were offset by a decline in loan fees of 8 basis points due to a methodology update of our loan fee deferrals.
Going forward, we anticipate loan fees remaining in the same relative band and having less quarterly volatility than we have seen in the past. Meanwhile, our cost of interest-bearing deposits increased by 9 basis points in the quarter.
For the month of March, our contractual yield on loans held for investment was about 6.55% and yield on new commitments in March were coming in around 8.3%. As a reminder, [ 49% ] of our loan portfolio remains floating rate, with $2 billion of those variable rate loans repricing immediately with the move-in rates and $1.8 billion of those loans repricing within 90 days of a change in interest rates.
Of our $4.7 billion of fixed-rate loans, we have $478 million maturing over the remainder of 2024 with a yield of 6.73%. For the month of March, cost of interest-bearing deposits was [ 3.5% ] versus 3.49% for the quarter. As I mentioned on last quarter's call, we now have a significant amount of index deposits that will reprice immediately with a change in the Fed funds target rate. [ Those ] balances stood at $2.9 billion, as of the end of the first quarter.
As Chris mentioned, we are focused on building customer deposits and are continuing to target operating accounts. We also anticipate that public funds will begin to build seasonally over the course of the second quarter and into the third quarter. As we made a focused effort to minimize our reliance on public funds over the past 2 years, that build will be less dramatic for us than it has been in the years past.
And we anticipate our public funds topping out the $1.7 billion to $1.8 billion range in the second and third quarters as compared to the $1.6 billion that we had on the balance sheet at the end of the first quarter.
On the securities portfolio, we sold $208 million of securities with a yield of 2.14% and reinvested the proceeds at 5.94%. And we estimate the earn-back was just a little over [ 2 ] years. That transaction occurred in the second half of March, so we saw a very little benefit from that trade in the first quarter.
We'll continue to look for profitable deployments of capital in order to improve earnings but without sacrificing longer-term growth, intangible book value per share.
With all of those moving pieces, we expect the margin to stay relatively flat over the coming quarters in the absence of any rate cuts as repricing loan yields and rising deposit costs continue to mostly offset each other.
Moving to noninterest income. Nonmortgage noninterest income continues to perform in the $10 million to $11 million range, and we'd expect it to remain in that band plus or minus for the remainder of the year.
Mortgage turned really strong corner with a total pretax contribution of [ $3.1 million ], which we were very pleased with. For the remainder of the year, we would expect quarterly contributions in the $1 million to $2 million range for Mortgage, depending on seasonal activity and the interest rate environment in any given quarter.
Our noninterest expense continue to see the benefit of operational changes made over the past [ few ] years. And the core banking expense was $59.8 million for the quarter, as compared to $62.6 million in the fourth quarter of 2023 and $66.8 million in the first quarter of 2023. At this point, we bring our prior guidance for Banking segment expenses down to $250 million to $255 million from our prior range of $255 million to $260 million.
On the allowance for credit losses and credit quality, credit was mostly a nonevent again this quarter as we experienced 2 basis points of charge-offs. As part of the operational improvements that we've made over the past couple of years, our internal analysis on our credit portfolio continued to improve.
As such, while our nonperformers have ticked up over the past year and while we're paying close attention there, we feel reasonably confident with the quality of that portfolio, and we feel comfortable that we are very well reserved.
Speaking more to the allowance, our ACL to loans held for investment increased a further 3 basis points during the quarter to 1.63%, but our provision expense was only $782,000 as continued decline in unfunded commitments led to a $1.1 million release in reserves on those unfunded commitments.
On capital, as Chris mentioned, we have developed very strong capital ratios with TCE to tangible assets of 10% and common equity Tier 1 ratio that is now over 12.5%. We continue to balance, retaining excess capital for organic and strategic growth against optimizing near-term earnings through balance sheet restructuring, with the goal of building long-term shareholder value through strong and consistent CAGRs for both earnings per share and tangible book values per share.
With that, I'll turn the call back over to Chris.
All right. Thank you, Michael. To conclude, we're proud of our team for a strong start to the year and for the company that they're building. So that concludes our prepared remarks. Again, thank you to everybody for your interest. And operator, at this point, we'd like to open up the line for questions.
[Operator Instructions] And the first question will come from Feddie Strickland with Janney Montgomery Scott.
Just want to sort of clarify on the NIM guidance. Are you expecting that to remain flat even including that securities restructure impact?
Yes. I mean, Feddie, we think it's going to stay in that same range. I mean you have a little bit of public funds coming in, which is a little bit of an offset, but get that 340, 345 range.
Got it. And also on the funding side, I know there was a jump in other borrowings linked quarter. Did you guys tap bank term funding before it closed? Or was that something else?
Yes. We actually did that on the last couple of days of 2023. So you didn't see it in your -- in average balances for the fourth quarter, but that's actually with that $130 million-ish for the first quarter. And yes, it was done before it [ was capped ].
Got it. Just one last question for me, and I'll step back, I know there's been some weakness in equipment finance, particularly over the road trucking at some of your peers. Am I correct in assuming you have some of that in your trucking equipment finance, maybe in that transportation segment that you break out in the deck? Can you speak to whether you're seeing any weakness there?
Yes. And I will -- Travis, I'm going to let you comment on -- make a comment. And we do have 2 or 3 trucking companies that are that are sizable, but long-established companies, let's say, privately owned companies. And no is, frankly, the answer, we haven't seen weaknesses in those clients. We don't do any just long-term equipment leasing or we don't do equipment leasing in that space, but we do have some trucking clients.
Yes, that's correct, Chris. I mean we have some well-established clients that we've been through several cycles with them. The trucking industry is obviously one that is up and down. But here recently, with our trucking clients, we talked actually about this earlier this year, very good reports from them, and we see no issues.
The next question will come from Brett Rabatin with Hovde Group.
I wanted to start with the loan growth guidance of mid-single digits this year. It's obviously for '25, it's low double digit. Can you guys talk about how much more you expect the construction portfolio to come in here? And then if you're going to have mid-single-digit growth in construction abatement, does that mean that loan growth this year could also be, on a core basis, closer to your double -- low double-digit number?
Yes. So first off on the concentrate -- on the concentration, we're at 83% of risk-based capital. And we really would make a good spot for us to operate. It's probably 75% to 85%, something like that. Sometimes -- and I would support that this way, sometimes you could see maybe, especially even in this environment, things going lower than some may want to go lower than that.
If you look at our geography, you know you actually live in our geography, so you know it well; and the number of long-term clients that we have and the in-migration that continues in our geography, we feel pretty good at that level.
Same way on the just commercial real estate concentration. We think that 250% is a pretty fair and risk thoughtful rate concentration level for us. And so that's where we -- those are targeted, will be plus or minus on those, but that's kind of the places that we target. Does that answer your question, Brett?
Yes, to some extent, that's helpful. So if I'm thinking about loan demand, I think we talked about it, maybe some folks are waiting for rates, what have you. And so a lot of folks are saying demand is not as strong as -- maybe it might end up.
Are you expecting demand to pick up that drives loan growth from here? What are you expecting in terms of loan demand and you guys being selective? I saw we get -- we're going to get a new highest tower downtown with a big new project.
Yes. We're not on that one, just so you know.
I know who's on that one. yes, its a big project.
We're not on that one, just for the record. And so, yes, demand is softer. I'd say, generally across the board, it's softer. It's not -- it hasn't evaporated, but it's softer. And so when we look out and we go mid-single digits for the year, there's a little bit of hope in that, I guess, is the way I would put it because we do see softer demand.
We do -- but again, kind of repeating myself here, but we still do see some demand. And it comes from all parts of our footprint, not just Middle Tennessee, but we're seeing it in North [ Georgia ]. We're seeing it in Alabama. We're seeing it in East Tennessee. And so we're seeing it in all those places. We have a steady flow from West Tennessee, which is a legacy footprint. And so that's kind of flat at this point. Travis, would you add any color on that?
Yes. I mean I think the demand has softened compared to 2022-ish when everybody was growing gangbusters. We still see a lot of opportunities, but we've continued to be disciplined in going after relationships and not transactions. And so that's part of it as well. And we will continue to do that.
And we will have some more runoff on ADC, but we're getting to the point now on ADC and CRE where we'll start replacing it with more relationships. So we just hope that the contrary from that is not as significant as it has been in the last few quarters.
Okay. That's helpful. And then my other question, Michael, was just around the loan fees and the change there. How much did that, dollar-wise or margin, impact the quarter relative to 4Q?
Yes. It's a good question, Brett. It's about $2 million. But it's offset a little bit on the expense side. So it's a net neutral to the P&L. And it's just part of a normal process, you look through your cost originate, your loan durations. And so we modified some of our amortization, and so that pushes some of the fee recognition, but it was a couple of million on both sides. So the way I think about that relative to the fourth quarter, we're at 99.5%. So you'd been right at [ 101.5-ish ] on that interest income.
The next question will come from Catherine Mealor with KBW.
I want to ask on expenses. I know that you've lowered the expense target for the core bank, Michael, just by a little bit to $250 million to $255 million. But I know that -- Chris, you also mentioned that you had hired a few revenue producers this quarter.
And so just kind of curious on the give and take there as all of your new hires fully reflected in the guide that Michael gave, and maybe talk a little bit about places that you're cutting. And how you're able to cut expenses while you're still ramping up hiring?
Yes. So as we -- last year, as we were planning -- and we -- as you know, we underwent some fairly significant expense reductions last year, but we also planned through that for some hires on the revenue side and some hire in some investments. And so it was a thoughtful cut process.
Now, I will add to that, though, Catherine, we say to our leadership team and to our managers, we say, when we have a chance to get a bankers in our footprint, we'll take them, we'll do it regardless of the expense environment. We'll take them any time. And so that could adjust it some.
Let's say, we got a chance to hire 50 this quarter, we hire 50, and our expenses would be outside of that. I don't think we're going to get the chance to hire 50, but we could get the chance to hire 4 or 5. And that might impact us a little bit, but it wouldn't have a huge impact because we've got some of that built into our plan.
Okay. Great. And then -- so then maybe as a follow-up to just the deferred fees conversation a minute ago, was it really the main change in the expense guide related to that fee change, Michael, more so than anything else?
So partially, I'd say it was a quick math, right? If you go down, it's probably 50% of it or so, was the fee change. And then part of it is, we said this last quarter, and you've known us for a while, we're going to deliver and then talk about it.
And so we continue to try to be mindful of those expense numbers and getting better about it every day through the management process. So a little bit of it's over delivery, and then a little bit of it is the loan deferral change -- fee deferral.
Okay. Perfect. Great. That's helpful. And maybe just on the buyback. It was great to see you buyback a little bit this quarter. How -- I know you said you -- it's organic growth first and then buyback and maybe M&As after that when that comes back. But is it fair to think as we move through the rest of the year as organic growth remains slow, that you'll continue to be active in the buyback really kind of until growth comes back? Or how do we think about that balance?
Yes. I would -- part of buying back is a function of price. And when you really -- when you feel like your stock is discounted, you feel like it's a good buy, and so I'd say that's an impacting factor. And then M&A would probably be the other impacting factor. Otherwise, we will be active to the extent that we have an approval. And so that -- so we'll continue to buy back as long as the stock continues to be discounted in our opinion.
We do -- we always look at earn-back on that capital, those kinds of things, and we stay within certain parameters. And Catherine, I'll say one other thing on the expense side, just to kind of put maybe an exclamation point on one of Michael's comments, especially when it comes to things like expense initiatives, we don't [ really tap ] them on the front end, and we don't [ really tap ] on the back end.
But we -- but when we -- last quarter in our call, we said we've taken $20 million out of the run rate. Then again, you've known us a long time, so you ought to know that it's going to be $20 million or more. Whenever we say on a call that it's going to be $20 million, that means we got -- we're confident we've got at least that. And so that's partly why we gave a little additional guidance this quarter.
That makes sense. And yes, you're right on that.
The next question will come from Stephen Scouten with Piper Sandler.
Chris, I want to remember, when you talk about organic growth first, that does, if I remember correctly, include kind of these new hires and any team lift-outs and such that might occur? And so I want to confirm that. And then kind of if you could talk about how you're seeing that versus M&A opportunities today, given the rate environment, earn-back on securities and such, and kind of how you think that might play out through this year and maybe even into '25?
Yes. So the -- on the -- we're doing -- when we're talking about organic growth, yes, part of what we're thinking about there is bringing on new people and new teams and the opportunities there and the capital that, that takes. When you -- when folks -- when you bring those on, of course, you bring on the expense first. But if you -- if it pays off in the way that you always anticipate it will, whenever you make those moves, it's a very good return on capital, relative to just about anything we can do.
And so that's always what we are looking to do. And we feel like there's some tailwinds. We've got some tailwinds when it comes to that. Right now, with kind of where the company sits from a size standpoint, from some other disruption in the market, from our value proposition for associates that are looking for good long-term places to be, so we think we've got some tailwinds there. And we feel that from folks, frankly, reaching out to us. And so that's why we're optimistic.
And then on the M&A front, we -- that's always a thoughtful approach for us because there is a lot of risk in that, and there's a lot of execution risk in that. Even if the numbers line up, you have to execute at a high level, it is not easy.
And so, that's the reason we stay pretty targeted and focused on the things that we think work well for us versus just fielding calls from anything that comes up for auction or any folks that we don't know already pretty well.
And so that -- but if we get one of those calls, it's going to be something -- if one of those becomes available to us or wants to talk to us, then we're going to be very, very interested. And that's part of the reason we have ourselves in the capital position that we're in, is so that we can make that happen even in a time like today, where you've got big AOCI marks and you got some things that work against you maybe on your balance sheet. So...
Yes. No, that's helpful color. I appreciate that, Chris. And then as I'm thinking about your guidance here around a flattish NIM and then still kind of mid-single-digit loan growth for the year, do you think we have reached or maybe are pretty close to the bottom from an NII perspective on a quarterly basis? Or maybe said another way, do you think you can grow NII from this kind of -- what was it, about $100 million this quarter? Can you grow off of that base throughout '24?
Yes. We think we're at a place where we shouldn't really deteriorate much from here. Growth is going to depend on what the -- growing NII from here, it does -- some of that depends on what happens on the asset side and how much we can grow the asset side. Of course, rates are always -- none of us know what's going to happen, but that's -- we're asking ourselves the same question, Stephen.
And we've got some optimism around that, that we can do that over the next few quarters. But we're also -- we also have a dose of realism when we do that. And that's why Michael's guidance wasn't overly aggressive. Notice, it hasn't been -- we haven't given overly aggressive guidance the last, gosh, probably 4 or 5 quarters. You hear us being more optimistic on pretty much everything. We had -- we beat on margin in net interest income, generally, we did that on expenses and noninterest income.
And so that's pretty much the big 3. And so -- and we feel pretty good about being able to maintain that. And then -- and so now we're thinking about how we build that. And like I said, some of that comes from growth and growth in the right spots. We've got to continue to grow relationship-based deposits, and we got to grow just good core loans at this point.
Yes. And Stephen, I just add to that. Certainly, the investment portfolio trade benefits net interest margin, kind of back to Feddie's question, I may not have answered it really well. But I will say, deposit -- new deposits are still expensive. I mean so as you grow deposits, it can impede some of your net interest income. Hopefully, you offset that with the loan growth that Chris was -- we're just talking about because you are earning nice-size yields, as we mentioned, 8.3% on new commitments on loans.
So the math works, if you can find the growth. But deposits are free, I'll say that. So there's a balance in there and a little bit of an unknown.
Yes. And that brings up -- maybe my last question would be kind of what are you seeing from a mix shift perspective at this point in time? It looks like -- I mean this quarter, the noninterest-bearing deposits on an end-of-period basis were not down very much.
Do you think we've kind of -- we're past a lot of those outflows? And do you think the noninterest earning deposits maybe can stabilize here around 20-ish percent of deposits? Or what are you seeing there from a mix shift perspective?
Yes. I think from a -- the reality is we went most of the quarter where we were right on the prior-quarter number from a mix. And end of the quarter, it dipped down. We're back slightly up this quarter, above.
And so that 20% marker is something that I keep pointing back to, when I think about our combination with Franklin Financial back in 2020. That's where it pro forma-ed out to. So that's probably the floor there, I would hope. But we're working every day to stay above it, I'll say that, and get those core operating accounts. So it's remained fairly consistent.
Yes. Thanks, I was going to say, it's -- we watch it every day. And so it's -- you guys generally see a point to point. And like I said, it was up most of the quarter Michael's and then just -- I mean, literally the last week of the quarter, dropped. And then the first week of the new quarter, it's up.
And so right now, it would be up versus where it was at the end of the quarter. And so I say all that to say, I think we're right in the zone where we're going to be fairly stable where we are, when it comes to the noninterest bearing.
The next question will come from Alex Lau with JPMorgan.
I want to start off with Mortgage. Can you talk about what drove the positive contribution from the change in fair value of loans and derivatives in the quarter? And how do you think about this contribution to the $1 million to $2 million quarterly expectations in the quarters ahead?
Yes Alex, that's a good question. If you look on -- I guess, it's Slide 14 or 15, the Mortgage slide, in the deck, it's really a function of pipeline growth. The team did a really good job, actually better than expected, on new rate lock commitments during the quarter.
So we had a, call it, $135 million increase in the pipeline, which drives the fair value higher and some mortgage rights, you recognize the income on a pull-through basis on rate lock. So that was the driver there. And I also give them credit for continuing the other side, expense management, they've done a really good job as well.
We talk a lot about Banking segment expenses and total company, but they've continued to get more efficient, which is certainly a goal and appreciated.
And then the second half of that question, how do we think about it going forward? I think the fourth quarter was probably the seasonal decline, the low point, first quarter better than expected on activity in the marketplace.
And we see that kind of even-ing out here. Typically, you'd see that pop in the second and third quarter. Rates have popped up a little bit and -- not a little bit, actually a lot since quarter end. And so that's moderated a bit. And so we'll just have to see how that kind of works its way through in total for the interest rate environment.
Well, the reason that's a little bit hard to forecast is what -- the first part of what Michael said is you've got that mark-to-market on your pipeline. And so as your pipeline is getting bigger, generally, that's going to go [ maybe ] a positive for you. As your pipeline goes smaller, generally, that's going to be a negative for you. And our pipeline was a little bigger at the end of the quarter.
And moving on to credit, regarding your commentary in the press release for the reason to adding to your loan loss reserves, you mentioned being cautious on the economy. And can you explain what asset classes are you more cautious on? And also, how does this translate into your net charge-off outlook? And when this is expected to normalize?
Yes. So Alex, we're listening to your boss as recent -- a little higher. We -- so if you look at asset classes, remember, we've got -- we're pretty comfortable with our concentrations right now, but we do still have some commercial real estate.
Again, we're not overweighted, but we do have some commercial real estate. We like our -- we like the way that that's distributed among multifamily, among office, among all types of assets there.
We also -- if you look our other asset types, we do have a consumer portfolio that come with our manufactured housing, that manufactured housing division, one we like a lot and performs well for us. But we reserve heavily, especially on the consumer side of that. Actually, when that goes on the books, we're generally reserving that at a 5% reserve. So...
Yes. Alex, I'd just add, I mean, the construction bucket, you saw an increase there, if you look on Page 11 of the deck. And it wasn't necessarily because there's problems in the portfolio. It's just unknown in that CRE multifamily space which -- we saw a slight uptick in our funded commitments there, percentage-wise. And that are just trying to hold it flat, given all the noise in the quarter, kind of nationally.
Brett's question mentioned the big projects here in Nashville, those aren't ours, but just being cautious on any type of contagion in around the footprint.
And yes, the second half of this question, right, was our charge-off outlook. And I think our commentary in the deck says, "Hey, we had 10 years, we've averaged 5 basis points per year." We're off to a pretty decent start there.
We debate this internally all the time as to what normal is and when that's going to return. And so if we look through the portfolio, we would say we're a bit off, ways off from whatever normal is, is that for the industry, 15 to 20 basis points. But -- we don't see it yet, but there's probably something out there from an industry perspective, we're trying to guard against.
Yes. It's a tough one, and Michael highlighted something that we've been highlighting. I mean we got -- we've averaged 5 basis points charge-offs, it's actually just a shade under that for 10 -- if you go over a 10-year average.
And remember, we got a manufactured housing portfolio in there. So we're taking some -- we take every single quarter, we take some charge-offs on that part of the portfolio. Think of that -- not unlike, say, a credit card piece or something. So it's a consumer piece, where you're just going to have some charge-offs every quarter.
And so outside of that, we had almost nothing for a decade. And we just don't think that's normal. We don't know when normal returns, and we don't know what normal it will look like when it returns. But we count ourselves being prepared. So whenever it does return, we plan to be prepared. So we are prepared.
And just a follow-up on the NIM guidance. What do you assume for your rate cut outlook for this year?
We had 2. We have 2, we've had 2, and they're both backloaded, except September and November. So it's very minimal. I think you are all aware, we've been probably an outlier in our rate outlook. And we -- if we can't forecast credit, we are probably even worse on interest rates.
We are, but I'm going to give Michael and team a little credit because when we built the budget back in August and September, they put to rate cuts back in August and September of '23. They had 2 rate cuts, one in September, one and November; back in August '23. So we don't know what's going to happen, but that was certainly not consensus at the time that, that was built into our budget. And we haven't changed. We've just -- we've kept it like that.
The next question will come from Matt Olney with Stephens.
Just want to go back to the discussion around the new hires that you made, I think you touched on it briefly. But any more color on what type of bank they came from, what geography and just how many? And then taking a step back on the loan growth guidance, just how much of the mid-single-digit guidance for this year is driven by those new hires?
Yes. So bigger banks is where they've come from. And so that -- all of them bigger banks...
So 3 of the 5 are bigger banks and 2 of them -- 1 is -- they're both smaller banks.
Got it. So combination of both. And no, we're not -- I guess, that's one data point when we're saying -- we were talking about business coming on or mid-single-digit type growth. That's a contributor, but it's not the contributor. It's not -- it's one piece of the organic growth picture. Some of that is taking share and growing -- our own folks [ growing ] their business. Our folks have been with us for decades, so...
Okay. And Chris, following up there, you mentioned before the bank is always opportunistic in terms of new hires, [ opinion ] kind of what's out there. How would you just characterize the opportunity set now for bringing over new talent on the production side?
Yes. I think there's never been a better time for us because we've -- in terms of our positioning to do that. If you consider size, we're big enough that we can hire from bigger competitors and they can get their business done here. Our model, which is heavy on local authority, is one that is experienced bankers really like.
And I think we're seeing that just from the number of inbound calls that we get. We're getting more inbound calls than we traditionally get. We're always talking to folks. It's just -- as is everybody else, by the way. I mean -- meaning you're doing business with folks and you're out in the market. So you -- we always see other bankers. But there seems to be, for whatever reason, a few more now that have made an indication that they would be looking to move.
Travis is nodding affirmative and giving me a thumbs up on that. So I think he would say the same thing.
Okay. That's great color, Chris. And then I guess going back to the M&A discussion, I'm curious, what you're hearing and what you're seeing from that point of view? And it's been a quite a few months, obviously, but there was a M&A deal announcement last night. So it's a good reminder that there is still some M&A. I'm curious, kind of what you're hearing and seeing? And just remind us of your strategic priorities when it comes to M&A.
Yes, sure. I'll take that sort of back into that question and then go back to the front. Strategic priorities for us would be -- culture is -- always comes first. And so we want to look at things that are similar to -- look for places that are similar to us in their way of thinking.
And then secondly, we really are interested in the deposit side of the balance sheet. We love those legacy deposit bases.
We have -- about half of our deposit base is retail. And so we love retail component if they have it. So -- and then geographically, we don't -- we're pretty good in smaller markets as well as metropolitan. So we don't mind if there's a smaller market component to it, which is sometimes where you will find that retail-type base.
And so those are things that we consider. Of course, you're always going to look at the financial side, and the management has to work for it to go anywhere. So that's strategically. And then geographically, we're looking contiguous to our geography, in geography. And contiguous to our geography is strategically what we look for and what we think about.
And then the first part of that question was with overall environment. The overall environment, I think there's a lot of interest out there in the environment. And I think the interest is driven by -- it's a harder operating environment. And it's a harder operating environment and it's a harder regulatory environment.
And I think as teams look forward, maybe they're -- look forward in going -- this looks like it might not be much fun over the next couple of years, and they were thinking about what their options were or are, and they decide they want to have a deeper conversation by partnering.
And so I think there's a lot of that going on. I think it's hard. One of the things that I'm not sure everybody considers is there are fewer buyers, there are fewer qualified buyers today than they traditionally have been for a lot of reasons. But some of those are -- again, when you start to look at banks that have the size to be able to do it and get regulatory approval, I think that weeds out buyers.
And then once a buyer gets tied up, they might not be able to do anything for a year or more. And so I think all of those things create an environment where there's a lot of dialogue going on.
The next question will come from Steve Moss with Raymond James.
Maybe just going back to credit here, just -- I know it's a small increase, but just curious as to what drove the increase in NPAs this quarter? And just wondering, if that was also related to the increase in the reserves for construction?
Yes. Steve. The increase in NPAs was, like you noted, slight, and it's really just the normal churn of the portfolio. We had several additions, but we also had several upgrades coming out of it. And we don't see anything systemic, but we haven't gotten the all-clear sign, as our Chief Lending Officer, Greg Bowers, tells us; quite frequently.
And then we talk about it in our earnings release, we put in some infrastructure over the last year, 1.5 years specifically around the second line of defense. And quite frankly, we just have more eyes on our portfolio than we have in years past. And that's also probably attributed to us being more timely as a recognition of loans that we need to really pay attention to.
And Steve, it's not directly responsible for the increase in the construction bucket. I mean that's just a function of the model and the -- where risk may line the economy. In NPA, increases certainly impacts your reserve calculation. But that wouldn't be the driver of the increase, the major driver.
Okay. That's helpful. And then in terms of the office portfolio, just curious your -- I see the disclosures here on Page 9 of the deck are helpful. But with the Class B and C portfolio, I see that weighted average occupancy in the 70s. Just curious, is that kind of normally where they come on? Or is that kind of an effect of just lower office rental? Just curious, how to think about those occupancy rates and credit performance?
Yes. Usually in the B and especially the C, a lot of those relationships are value-add, where people buy maybe underperforming office buildings and use their expertise to get them more performing. So the occupancy is a little bit lower. And frankly, we underwrite it to a lower occupancy rate for that very reason.
Okay. Great. I appreciate that. And then in terms of the -- with regard to the balance sheet restructuring that you guys have pulled the serious transaction here in the quarter, it sounds like you have an appetite for doing additional transactions. Just curious, if you could quantify like how much more you're looking to do or kind of -- I know we've had a lot of moving rates, and maybe that has changed the dynamic here versus a few weeks ago.
Yes, Steve, it's a lot less exciting than it was a few weeks ago. We're glad we did it when we did it, I'll say that. Yes, it's really a balance in priorities, like Chris mentioned, and those organic opportunities first. And then if we can find the right partner, you want to make sure that capital would look good in that combination.
And then, yes, so we kind of show, "Hey, we could restructure the entire portfolio and still be at 11.5%, 11.6% on a common equity Tier 1, be well above, well capitalized ." So we could do it, and it would be quite accretive to EPS, and we look at it. I'll tell you, we look at it every day. We've looked at the entire thing. But it's a matter of [ priorities ] and then balancing what opportunities may be out there. And so it's a daily discussion.
Yes. Steve, I'll just add. If you look at our metrics, I mean easily the one that is the most maddening to me and -- is our return on tangible common equity, not because our earnings are really poor, but because we're sitting on so much tangible common equity.
And so we are thinking every day about how to deploy that. We hate diluting our tangible book value. And so we're very thoughtful before we take any dilution to tangible book value, as Michael said in his comments, with this had [ 2.1 ] year earn-back on it. And so we'll do that.
And we -- and that's the way that we think about those transactions, we're weighing that dilution versus how much accretion we get on it. And as Michael said, we will think about anything, including restructuring the entire portfolio, and we can easily do that and not endanger our capital ratios.
And so -- but we'll think about all that, but we will pull the trigger to the things that clearly makes sense, and we're trying to figure out, "Hey, how do we get a better return on our tangible common equity right now" is -- and so we'll take any suggestions, too, by the way.
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Chris Holmes for any concluding remarks. Please go ahead.
All right. Thank you all for joining us today. Really appreciate the questions. And I'm sure we'll be speaking to some of you additionally for -- to get additional color, but we always appreciate your interest in FB Financial. And we will talk to you again next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.