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spk05: 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 Mati, 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 in this morning's presentation are available on the investor relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will open for questions after the presentation. During the presentation, SB Financial 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 risk and uncertainties. Other factors may cause actual results to differ materially in performance or achievements of SB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many sets of factors of 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.
spk11: 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 59 cents and adjusted EPS of 85 cents. 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 and 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 that we'd spent the past two 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 a construction and development concentration of 83% and a CRE concentration of 255%. Both of those has a percent of risk-based capital. Operationally, we're performing well, and there's 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, no, I'm sorry, net interest margin non-interest income, and non-interest 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 pre-tax 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 non-interest expense was down 3.3%. from the fourth quarter and down over 10% year over year. All that led to growth and 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 want it 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 a $128 million decline in construction lending and a $49 million payoff of one of our very few SNCC relationships as our customer was acquired, which, by the way, was a strong relationship of the bank. As a reminder, we have a bias against SNCC 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 teams. 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 we'll continue to benefit from the influx of corporate relocations that we're experiencing across our footprint. In addition to taking care 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, you likely saw Michael and his team executing one such transaction as we saw just over $200 million of securities and reinvested the proceeds for a net pickup and spread of 3.8%. With an annual pre-tax 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, re-approved 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.
spk10: 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 non-interest 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 Oreo. Core non-interest income was $23.6 million, of which $11 million came from banking. We reported non-interest expense of $72.4 million and adjusting for a half a million of FDIC special assessment expense. Core non-interest 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 nine 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 a 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 in 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 Fund's 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 two 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 in 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 two years. That transaction occurred in the second half of March, so we saw 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 in tangible 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 non-interest income, non-mortgage non-interest income continues to perform in the $10 to $11 million range, and we'd expect it to remain in that band plus or minus for the remainder of the year. Mortgage had a really strong quarter with a total pre-tax 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 to $2 million range for mortgage, depending on seasonal activity and the interest rate environment in any given quarter. Our non-interest expense continued 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'd bring our prior guidance for banking segment expenses down to $250 million to $255 million from our prior range of $255 to $260 million. On the allowance for credit losses and credit quality, credit was mostly a non-event again this quarter as we experienced two basis points of charge-offs. As part of the operational improvements that we've made over the past couple years, our internal analysis on our credit portfolio continued to improve. As such, while our non-performers 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 loan tougher investment increased a further three 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.
spk11: 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.
spk05: Yes, sir. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to listen to our roster. And the first question will come from Fetty Strickland with Jannie Montgomery Scott. Please go ahead.
spk08: Hey, good morning, guys. Good morning, Fetty. Good morning. Just want to start off clarifying on the NIM guidance. Are you expecting that to remain flat, even including that securities restructure impact?
spk10: Yeah, I mean, Fetty, 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 yeah, that kind of 340, 345 range.
spk08: Got it. And also on the funding side, and this was a jump in other borrowings link quarter. Did you guys tap bank term funding before it closed or was that something else?
spk10: Yeah, we actually did that on the last couple of days of 2023. So you didn't see it in your, in the average balances for the fourth quarter. But that's actually what that $130 million issue is for the first quarter. And yes, it was done before it was capped.
spk08: 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?
spk11: Yeah, and Travis, I'm going to let you comment. I'll make a comment. We do have two or three trucking companies that are sizable but long-established companies. Let's see, privately-owned companies and – 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.
spk06: Yeah, 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, and we talked actually about this earlier this year, very good reports from them, and we see no issues.
spk08: Understood. That's helpful. Thanks to the color guys, and congrats on a great quarter. Yep. Thank you. All right. Thanks, Benny.
spk05: The next question will come from Brett Rabattin with Hovde Group. Please go ahead.
spk09: Hey, guys. Good morning.
spk10: Good morning, Brett.
spk09: I wanted to start with the loan growth guidance of mid-single-digit this year, and 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 and construction abatement, does that mean that loan growth this year could also be on a core basis closer to your low double-digit number?
spk11: Yes. So first off on that, concentrate on the concentration. You know, we're at 83% of risk based capital. And we really would think a good spot for us to operate is probably 75 to 85%, something like that. You know, sometimes, and I would support that this way sometimes you could see maybe especially even in in this environment things going lower than some 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 uh we feel pretty good at that level uh same way on the uh 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, you know, we'll be plus or minus on those, but that's kind of the places that we target. Does that answer your question, Brett?
spk09: Yeah, to some extent that's helpful. You know, so if I'm thinking about loan demand, you know, I think we talked about it, maybe some folks are waiting for rates, what have you. And so, you know, a lot of folks are saying demand is not as strong as maybe it might, might end up. Are you, are you expecting demand to pick up that drives, you know, loan growth from here? What, what are you expecting in terms of loan demand and you guys being selective? I saw we got, we're going to get a, a new highest tower downtown with a big new project.
spk11: Yeah, we're not on that one just for the record.
spk09: I know who's on that one. Yeah, it's a big project.
spk11: Yeah, 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, you know, there's a little bit of hope in that, I guess is the way I would put it, because we do see softer demand. But again, I'm 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 a flat footprint. at this point. Travis, would you add any color on that?
spk06: Yeah, I mean, I think that demand has softened compared to 2022-ish, you know, 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. 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 contra from that is not as significant as it has been the last few quarters.
spk09: 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?
spk10: Yeah, it's a good question. It's about $2 million, but it's offset a little bit in the expense side. So it's a net neutral to the P&L. And it's just part of a normal process is 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 million on both sides. So The way I think about that relative to fourth quarter, you know, we're at 99 and a half, so you've been right at 101 and a half-ish on that interest rate. Okay.
spk09: Okay. That's helpful. Thanks to all the color guys. Sure.
spk05: The next question will come from Catherine Miller with KDW. Please go ahead.
spk01: Thanks. 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 to 255. 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, is all of your new hires fully reflected in the guide that Michael gave? And maybe talk a little bit about, you know, places that you're cutting and how you're able to, you know, to cut expenses while you're still ramping up hiring. Thanks.
spk11: Yeah. So as we, last year, as we were planning, you know, And 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 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 eight bankers in our footprint, 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'd hire 50, and our expenses would be outside of that. Don't think we're going to get the chance to hire 50, but we could get the chance to hire four or five. 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.
spk01: Okay, great. And then maybe as a follow-up to just the deferred fees conversation a minute ago, is really the main change in the expense guide related to that fee change, Michael, more so than anything else?
spk10: So partially, I'd say... I'm just 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, yeah, we said this last quarter and you've known us for a while, right, is 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's the loan deferral change, fee deferral.
spk01: Perfect. Great. That's helpful. And maybe just on the buyback, it was great to see you buy back a little bit this quarter. I know you said 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?
spk11: Yeah, I would, you know, part of the buyback is a function of price. And, you know, 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, you know, we'll be active to the extent that we have an approval. And so we'll continue to buy back as long as the stock continues to be discounted in our opinion. We always look at earn back on that capital, those kinds of things, and we stay within certain parameters.
spk01: Great. Okay. Thank you.
spk11: And, Catherine, I'll say one other thing on the expense side that 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 generally tout them on the front end, and we don't generally tout them on the back end, but when we last quarter in our call, we said we had taken $20 million out of the run rate. 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're confident we've got at least that. And so that's partly why we gave a little additional guidance this quarter.
spk01: That makes sense. And, yes, you're right on that. All right. Thank you, Chris.
spk11: All right. Thanks.
spk05: The next question will come from Stephen Scouten with Piper Sandler. Please go ahead. Hey, good morning, everyone.
spk07: Good morning, Steve. 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 liftouts 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 2025.
spk11: Yeah, so when we're talking about organic growth, yeah, 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 bring those on, of course, you bring on the expense first, but 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, you know, 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. 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've got some things that work against you maybe on your balance sheet.
spk07: Yeah, no, that's a helpful color. Appreciate that, Chris. And then as I'm thinking about your guidance here around a flattish NIMH and then still kind of mid-single-digit loan growth for the year. Do you think we have reached, or maybe you're 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? Yeah.
spk11: We think we're at a place where we shouldn't really deteriorate much from here. Growth is going to depend on what – 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. Steven, and we've got some optimism around that, that we can do that over the next few quarters, but 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 four or five quarters, you hear us being more optimistic on pretty much everything. You know, we beat on, you know, margin and net interest income generally. We did that on expenses and non-interest income. And so that's pretty much the big three. And so we feel pretty good about being able to maintain that. 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 pop deposits and we got to grow, uh, just, uh, you know, good core loans at this point.
spk10: Yeah. And, uh, Stephen, I was added that the, uh, yeah, certainly the investment portfolio trade benefits, net interest margin kind of back to Betty's question. I may not have answered it really well, but yeah, I will say, uh, deposit and new deposits are still expensive. I mean, so as, as you grow deposits, it can, it can impede some of your net interest income. Hopefully, you know, you offset that with the loan growth that Chris was, was just talking about, because you are earning nice size yield, as we mentioned, 8.3% on new commitments on, on loans. So it, The math works if you can find the growth, but deposits aren't free, I'll say that. And so there's a balance in there and a little bit of an unknown.
spk07: Yeah, yeah. No, and that brings up maybe my last question would be kind of, what are you seeing from a mixed perspective at this point in time? It looks like, I mean, this quarter, the non-interest-bearing deposits on an end-to-period basis were, you know, not down very much. Do you think we've kind of, you know, we're past a lot of those outflows. And do you think the non-exferring deposits maybe can stabilize here around, you know, 20-ish percent of deposits? Or what do you see in there from a mix shift perspective?
spk10: Yeah, 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 then end of the quarter, it dipped down. We're back slightly up this quarter, you know, 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 I proform it out to. So, you know, 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. Yep. Okay. Well, thanks for all.
spk11: So, say all that to say, I think we're right in a zone where we're going to be fairly stable where we are when it comes to the non-interest barrier.
spk07: That's great. Thanks for all the color, and I hope you guys keep under-promising and over-delivering.
spk11: We appreciate it. Thanks, David.
spk05: The next question will come from Alex Lau with JP Morgan. Please go ahead.
spk04: Hi, good morning.
spk05: Good morning.
spk04: 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 to 2 million quarterly expectations in the quarters ahead?
spk10: Yeah, 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. So the team did a really good job, actually better than expected on new rate lock commitments during the quarter. So we had to call it $135 million increase in the pipeline, which drives the fair value higher. And so with 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, you know, 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 we think about it going forward, I think, you know, 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 evening 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.
spk11: One of the reasons that's a little bit hard to forecast is 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 be 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.
spk04: Thank you for that. 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?
spk11: Yeah, so Alex, we're listening to your boss as a reason to go a little higher. If you look at asset classes, remember, 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 the way that that's distributed among multifamily, among office, among all types of assets there. We also, you know, if you look at our other asset types, we do have a consumer portfolio that comes with our manufactured housing portfolio. Our manufacturer housing division, that manufacturer 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.
spk10: Yeah, Alex, I just add, I mean, the construction bucket, you saw an increase there. If you look on page 11 of the deck, and again, It wasn't necessarily because there's problems in the portfolio. It's just unknown in that CRE multi-family space, which we saw a slight uptick in our funded commitments there percentage-wise, and now we're just trying to hold it flat given all the noise in the quarter 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 and around the footprint. The second half of this question was our charge-off outlook. And I think our commentary in the deck says, hey, we have 10 years. We've averaged five 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, you know, we would say we're a bit off, ways off from whatever normal is 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.
spk11: Yep. It's a tough one, and Michael highlighted something that we've been highlighting. I mean, we've averaged five basis points of charge-offs to actually just a shade under that if you go over a 10-year average. And remember, we've got a manufactured housing portfolio in there, so 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. It's a consumer piece where you're just going to have some charge-offs everywhere. And so outside of that, we've 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.
spk04: Thank you for that. And just a follow-up on the NIM guidance, what do you assume for your rate cut outlook for this year?
spk10: We had two. We have two. We've had two. And they're both back-loaded, like September and November, so it's very minimal. I think you all are aware we've been probably an outlier in our rate outlook, and if we can't forecast credit. We're probably even worse on interest rates.
spk11: 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 two rate cuts back in August and September of 23. They had two rate cuts, one in September, one in November, back in August of 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 kept it like that.
spk04: Great. Thanks for answering my questions.
spk05: Thanks, Alex. The next question will come from Matt Olney with Stevens. Please go ahead.
spk02: Hey, good morning. 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 uh, you know, what type of bank they came from, uh, what geography, uh, and just how many, and then taking a step back on the loan growth guidance, just, just how much of the mid single digit guidance for this year, um, is driven by those new hires.
spk11: Yeah. So, um, bigger banks, uh, is, uh, where they, they've come from. And so, uh, Is all of them bigger banks? Travis, I'm trying to think.
spk06: So three of the five are bigger banks and two of them, they're both smaller banks.
spk11: Got it. So combination of both. And no, we're not, I guess that's one data point when we're saying, when we're talking about business coming on or mid- mid-single-digit type growth, that's a contributor, but it's not the contributor. 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.
spk02: Okay. And Chris, following up there, you mentioned before the bank is always opportunistic in terms of new hires, depending upon what's out there. How would you just characterize the opportunity set now for bringing over new talent on the production side?
spk11: I think there's never been a better time for us because we, 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 got. We're always talking to folks, as is everybody else, by the way, meaning you're doing business with folks and you're out in the market. 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 Travis is nodding affirmative and giving me a thumbs up on that. So I think he would say the same thing.
spk02: Okay. That's a great color, Chris. And then I guess going back to the M&A discussion, I'm curious what you're, what you're hearing and what you're, what you're seeing from, from that point of view. And it's been, it's been a quiet 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.
spk11: Yeah, sure. I'll take that sort of back into that question and then go back to the front end. Strategic priorities for us would be, you know, culture always comes first. first and so we want to look we want to look at things that are similar to look look for for places that are similar to us in their way of thinking and then secondly we really are interested in deposit side of the balance sheet we love those legacy deposit bases we have you know about half of our deposit basis retail and so we we love a retail component if they have it so and then Geographically, we don't mind. 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. Those are things that we consider. Of course, you're always going to look at the financial side. The financial side has to work for it to go anywhere. That's strategically. 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 the overall environment. The overall environment, you know, I think there's a lot of interest out there in the environment. And I think that 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 looking forward and 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 decided they want to have a deeper conversation about 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 there 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.
spk02: Okay. All right, guys. Well, I appreciate the great commentary and great quarter. Thank you.
spk11: Thanks, Matt. Appreciate it, Matt.
spk05: The next question will come from Steve Moss with Raymond James. Please go ahead.
spk03: Good morning.
spk10: Hey, Steve. Good morning.
spk03: Good morning, Ed. Maybe just going back to credit here, I know it's a small increase, but just curious as to what drove the increase in MPAs this quarter and just wondering if that was also related to the increase in the reserves for construction.
spk06: Yeah, good morning, 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, you know, 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 changes. over the last year, year and a half, 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.
spk10: 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 where risk may lie in the economy. NPA increases certainly impacts your reserve calculation, but that wouldn't be the driver of the increase, the major driver.
spk03: Okay, that's helpful. And then in terms of the office portfolio, I'm just curious here, You know, I see the disclosures here on page nine of the deck are helpful. You know, but with the class B and C portfolios, 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 rentals? Just curious how to think about those occupancy rates and credit performance.
spk06: Yeah, 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 quite frankly, we underwrite it to a lower occupancy rate for that very reason.
spk03: Okay. Great. Appreciate that. And then in terms of the, with regard to balance sheet restructuring, you guys did pull the curious transaction here late in the quarter. It sounds like you have an appetite for doing additional transactions. Just curious, you know, if you could quantify like how much more you're looking to do or kind of, you know, I know we've had a lot of moving rates and maybe that has changed the dynamic here versus a few weeks ago.
spk10: Yeah, 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. Yeah, it's really a balance and priorities like Chris mentioned. And there's 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 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 one, 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... It's a daily discussion.
spk11: Yeah. Steve, I'll just add, if you look at our metrics, man, easily the one that is the most maddening to me 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, you know, and so we're very thoughtful before we take any dilution to tangible book value, as Michael said in his comments. This had a 2.1 year earn back on it, and so we'll do that. 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 And as Michael said, we don't think about anything, including restructuring the entire portfolio, and we could easily do that and not endanger our capital ratios. But we'll think about all that, but we're pulling the trigger to the things that clearly make sense, and we're trying to figure out, hey, how do we get a better return on our tangible common equity right now? We'll take any suggestions, too, by the way.
spk03: All right. Well, I appreciate all the color. Thank you very much, guys.
spk11: Okay. Thank you. Thanks, Abe.
spk05: This concludes our question and answer session. I would like to turn the conference back over to Mr. Chris Holmes for any closing remarks. Please go ahead.
spk11: 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 to get additional color. But we always appreciate your interest in FB Financial. And we will talk to you again next quarter. Thank you.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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