FB Financial Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 16, 2024

Key Takeaways

  • FB Financial reported EPS of $0.59 and adjusted EPS of $0.85, with adjusted ROAA at 1.27% and adjusted ROTCPA at 1.63%, reflecting 10% sequential and 12% year-over-year adjusted EPS growth.
  • Capital ratios strengthened further, with tangible common equity to tangible assets at 10% and total risk-based capital at 15%, while a $208 million securities sale and reinvestment added a 3.8% spread pickup for a projected $8 million annual pre-tax benefit.
  • Operational efficiency improved meaningfully: core efficiency ratio is down over 500 basis points year-over-year, core noninterest expense fell 3.3% sequentially and over 10% year-over-year, prompting a lowered banking expense guide to $250–$255 million.
  • Loan balances contracted by $120 million in Q1—driven by a $128 million drop in construction lending and a $49 million payoff—though core portfolio balances grew 2% annualized; management still targets mid-single-digit organic loan growth in 2024.
  • Management’s capital deployment priorities include organic growth via new revenue hires, targeted strategic M&A, and balance-sheet optimization—alongside a reapproved $100 million share repurchase program, with $4.8 million bought in Q1.
AI Generated. May Contain Errors.
Earnings Conference Call
FB Financial Q1 2024
00:00 / 00:00

There are 11 speakers on the call.

Operator

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 Matti, Chief Financial Officer. Also joining the call for the question and answer session is Mr. Travis Edmonson, Chief Banking Officer.

Operator

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 atwww.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's site 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, FB Financial may make comments which constitute forward looking statements under federal securities laws.

Operator

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 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 ks, 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.

Operator

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 ww. 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.

Operator

Please go ahead, sir.

Speaker 1

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.

Speaker 1

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 percent and adjusted PP and R return on average assets of 1.63 percent and grew adjusted earnings per share by 10% relative to the Q4 of 2023 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'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 Q1. Our capital ratios continued to improve.

Speaker 1

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 2 55%, both of those as 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 Q1 improved by over 500 basis points from the Q1 of last year.

Speaker 1

And finally, on our earnings momentum, we saw broad based positive trends this quarter for net interest income 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 Q2 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 $3,100,000 which is a testament to our expense initiatives because that contribution was on approximately the same amount of revenue as the Q1 of last year when we had only a $262,000 contribution. The $11,000,000 in fee income that our banking segment produced in the Q1 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 4th quarter and down over 10% year over year.

Speaker 1

All that led to growth in adjusted pre provision net revenue of 12.8% compared to the Q4 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 $120,000,000 contraction in loan balances that we experienced during the quarter, we're comfortable with it as it was driven by 100 and $28,000,000 decline in construction lending and a $49,000,000 payoff, one of our very few SNC relationships as our customer was acquired, which by the way was a strong relationship with the bank.

Speaker 1

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 Q1 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.

Speaker 1

We expect to continue to moderate our construction and CRE concentration ratios and focus more on operating accounts C and I relationships. We intend to operate in the 75% to 85% range on our C and D concentration and the CRE concentration of around 2 50% 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 share from some larger competitors that continue to be disrupted by M and A and internal changes. Our second priority for deployment of capital is strategic M and A. We're well positioned as a potential partner for smaller banks in and around our footprint.

Speaker 1

We have significant excess capital that should allow us to absorb the interest rate mark prevalent in today's M and 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 3rd 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 $200,000,000 of securities and reinvested the proceeds for a net pickup in spread of 3.8%. With annual pre tax income impact of just under $8,000,000 that's real money that comes with no risk of integration and no further execution risk.

Speaker 1

And we would allocate capital to similar transactions. Additionally, we recently had our $100,000,000 repurchase plan, stock repurchase plan reapproved in order to have that error in our quiver also and we purchased around $4,800,000 worth of stock in this recent 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.

Speaker 1

Now I'm going to turn it over to Michael to give a little more detail on the financial results.

Speaker 2

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 $99,500,000 reported non interest income was 8,000,000 adjusting for the loss of $16,200,000 related to our securities restructuring trade and about $600,000 on the sale of OREO, core non interest income was $23,600,000 of which $11,000,000 came from banking. We reported non interest expense of $72,400,000 and adjusting for $500,000 of FDIC special assessment expense, core non interest expense was $71,900,000 $59,800,000 of which came from banking. Altogether, adjusted pre provision net revenue earnings were 51,200,000 dollars and Banking segment adjusted pre provision net revenue earnings were $48,200,000 Going into more detail on the margin at 3.42 percent, our net interest margin held relatively flat with the prior quarter's 3.46%.

Speaker 2

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 percent and yield on new commitments in March were coming in around 8 0.3%. As a reminder, 49% of our loan portfolio remains floating rate with 2,000,000,000 those variable rate loans repricing immediately with a move in rates and $1,800,000,000 of those loans repricing within 90 days of a change in interest rates.

Speaker 2

Of our $4,700,000,000 in fixed rate loans, we have $478,000,000 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 $2,900,000,000 as of the end of the Q1. As Chris mentioned, we are focused on building customer deposits and are continuing to target operating accounts.

Speaker 2

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 $1,700,000,000 to $1,800,000,000 range in the second and third quarters as compared to the $1,600,000,000 that we had on the balance sheet at the end of the Q1. On the securities portfolio, we sold $208,000,000 of securities with 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 very little benefit from that trade in the Q1. 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.

Speaker 2

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 $10,000,000 to $11,000,000 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 $3,100,000 which we were very pleased with. For the remainder of the year, we would expect quarterly contributions in the $1,000,000 to $2,000,000 range from mortgage depending on seasonal activity and 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.

Speaker 2

In the core banking segment expense was $59,800,000 for the quarter as compared to $62,600,000 in the Q4 of 2023 $66,800,000 in the Q1 of 2023. At this point, we'd bring our prior guidance for banking segment expenses down to $250,000,000 to $255,000,000 from our prior range of $255,000,000 to $260,000,000 On the allowance for credit losses and credit quality, credit was mostly a non event 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 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 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 percent, but our provision expense was only 782,000 continued decline in unfunded commitments led to $1,100,000 release in reserves on those unfunded commitments.

Speaker 2

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.

Speaker 1

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.

Speaker 1

And operator, at this point, we'd like to open up the line for questions.

Operator

Yes, sir. We will now begin the question and answer session. And the first question will come from Freddie Strickland with Janney Montgomery Scott. Please go ahead.

Speaker 3

Hey, good morning, guys. Just want to start off clarifying on the NIM guidance. Are you expecting that to remain flat even including that securities restructure impact?

Speaker 2

Yes. I mean, Betty, 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 $3.40,000 $3.45 range.

Speaker 3

Got it. And also on the funding side, I noticed there was a jump in other borrowings linked quarter. Did you guys tap bank term funding before it closed? Or was that something else?

Speaker 2

Yes, 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 Q4. But that's actually what that $130,000,000 ish is for the Q1. And yes, was done before it was capped.

Speaker 3

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

Speaker 1

of your peers.

Speaker 3

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?

Speaker 1

Yes. And I will Travis, I'm going to let you comment. I'll make a comment. And then we do have 2, 3 trucking companies that are sizable, but long established companies, let's see, privately owned companies and no is frankly the answer. We haven't seen weaknesses in those clients.

Speaker 1

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.

Speaker 4

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 and we talked actually about this earlier this year, very good reports from them and we see no issues.

Speaker 3

Understood. That's helpful. Thanks for the color guys and congrats on a great quarter.

Speaker 1

Yes. Thank you, Mike. Thanks, Benny.

Operator

The next question will come from Brett Rabatin with Hovde Group. Please go ahead.

Speaker 5

Hey, guys. Good morning.

Speaker 2

Good morning, Brett.

Speaker 5

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 in construction abatement, does that mean that loan growth this year could also be on a core basis closer to your low double digit number?

Speaker 1

Yes. So first off, concentrate on the concentration, 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 sometime 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.

Speaker 1

If you look at our geography, you know our 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, you know, will be plus or minus on those, but that's kind of the places that we target. That makes does that answer your question, Brett?

Speaker 5

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?

Speaker 5

I saw we get we're going to get a new highest tower downtown with a big new project.

Speaker 1

Yes, we're not on that one just for the record.

Speaker 5

I know who's on that one. Yes, it's a bit, it's a big project actually.

Speaker 1

Yes, 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.

Speaker 1

We do but again I'm kind of repeating myself here, but we do 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, is that would you add any color on that?

Speaker 4

Yes. I mean, I think that 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 out to relationships and not transactions. And so that's part of it as well. And we will continue to do that.

Speaker 4

And we will have some more runoff on ADC, but we're getting to the point now on ADC and CRE, we will start replacing it with more relationships. So we just hope that the contra from that is not as significant as it has been in the last few quarters.

Speaker 5

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.

Speaker 2

It's a good question, it's about 2,000,000 dollars but it's offset a little bit in the expense side. So it's a net neutral to the P and L. And it's just part of a normal process as 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's a couple of 1,000,000 on both sides. So the way I think about that relative to Q4, we're at 99.5%, so you've been right at 101.5% ish on that interest.

Speaker 5

Okay. That's helpful. Thanks for the color guys.

Speaker 1

Sure.

Operator

The next question will come from Catherine Mealor with KBW. Please go ahead.

Speaker 6

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 $250,000,000 to $255,000,000 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?

Speaker 6

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? Thanks.

Speaker 1

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 higher and some investments. And so, it was a thoughtful cut process. Now I will add to that, 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.

Speaker 1

We'll take them any time and so that could adjust it some if let's say we got a chance to hire 50 this quarter, we 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 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.

Speaker 6

Okay, great. And then so then maybe as a follow-up to just the deferred fees conversation, I mean, it was really the main change in the expense guide related to that fee change, Michael, more so than anything else?

Speaker 2

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 we said this last quarter and you've noticed for a while, Rod, 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.

Speaker 6

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 it's organic growth first and then buyback and maybe M and A after that when that comes back.

Speaker 6

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?

Speaker 2

Yes, I

Speaker 1

would part of the buying back is a function of price and when you're really when you feel like your stock is discounted, feel like it's a good buy. And so I'd say that's an impacting factor. And then M and A would probably be the other impacting factor. Otherwise, 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 their opinion.

Speaker 1

We do we always look at earn back on that capital, those kinds of things and we stay within certain parameters.

Speaker 6

Great. Thank you.

Speaker 1

And Catherine, I'll say one other thing on the expense side that just to kind of put maybe an exclamation point of one of Michael's comments, especially when it comes to things like expense initiatives. We don't generally we don't generally tie them on the front end and we don't generally tie them on the back end. But we but when we last quarter in our call, we said we'd taken $20,000,000 out of the run rate. And again, you've known us a long time. So you ought to know that it's going to be $20,000,000 or more whenever we say on a call that it's going to be $20,000,000 that means we've got we're confident we've got at least that.

Speaker 1

And so that's partly why we gave a little additional guidance this quarter.

Speaker 6

That makes sense. And yes, you're right on that. All right. Thank you, Chris.

Speaker 1

All right. Thanks.

Operator

The next question will come from Stephen Scouten with Piper Sandler. Please go ahead.

Speaker 7

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 and 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?

Speaker 1

Yes. So the on the

Speaker 2

we're doing when we're talking about organic growth, yes, part

Speaker 1

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.

Speaker 1

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 and A front, 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.

Speaker 1

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 got big AOCI marks and you got some things that were against you maybe on your balance sheet.

Speaker 7

Yes. That's helpful color. 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're have reached or maybe you're pretty close to the bottom from an NII Can you grow off of that base throughout 2024?

Speaker 7

Can you grow off of that base throughout 2024?

Speaker 1

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.

Speaker 1

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 beat margin and net interest income generally. We did that on expenses and non interest income. And so that's pretty much the big three.

Speaker 1

And so 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.

Speaker 2

Yes. And Stephen, I'll just add to that. Yes, certainly the investment portfolio trade benefits, net interest margin kind of back to Eddie'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.

Speaker 2

Hopefully, you offset that with the loan growth that Chris was just talking about because you are earning nice as yields as we mentioned 8.3% on new commitments on loan. So 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.

Speaker 7

Yes. Yes. No, 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 non interest bearing deposits on an end of period basis were not down very much. Do you think we've kind of passed a lot of those outflows?

Speaker 7

And do you think the non interest bearing deposits maybe can stabilize here around 20 ish percent of deposits? Or what are you seeing there from a mix shift perspective?

Speaker 2

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 form a 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.

Speaker 2

So it's remained fairly consistent.

Speaker 1

Yes. It is.

Speaker 7

Okay. Thanks for all.

Speaker 1

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. And then just I mean, literally the last week of the quarter dropped and then 1st 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.

Speaker 1

And so, I 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 bearing.

Speaker 7

That's great. Thanks for all the color and hope you guys keep under promising and over delivering. We appreciate it.

Speaker 1

Thanks. Thanks, David.

Operator

The next question will come from Alex Lau with JPMorgan. Please go ahead.

Speaker 8

Hi, good morning. Good morning. 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 $1,000,000 to $2,000,000 quarterly expectations in the

Speaker 1

quarters ahead? Yes, Alex, that's a good question. I mean,

Speaker 2

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 $135,000,000 increase in the pipeline which drives the fair value higher. And yes, so mortgage rights, you recognize the income on a pull through basis on rate lock. So that was the driver there.

Speaker 2

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 going appreciated. And then the second half of that question, how we think about it going forward, I think the Q4 was probably the seasonal decline, the low point, 1st 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.

Speaker 2

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.

Speaker 1

Yes. 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 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.

Speaker 8

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 does it is expected to normalize?

Speaker 1

Yes. So Alex, we're listening to your boss as recently, still a little higher. We So if you look at asset classes, remember, we've got again, we're pretty comfortable with our concentrations right now, but we do still have some commercial real estate. Again, we're not over weighted, 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.

Speaker 1

We also if you look at our other asset types, we do have a consumer portfolio that comes with our manufactured housing our manufactured housing division, 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, we conserve when that goes on the books, we're generally reserving that at a 5% reserve.

Speaker 2

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 now are just trying to hold it flat given all the noise in the quarter kind of nationally. Brett's question mentioned that the big projects here in Nashville, those aren't ours, but just being cautious on any type of contagion in and around the footprint.

Speaker 2

The second half of this question, 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 we were if we look through the portfolio, we would say we're a bit off ways off from whatever normal is as that for the industry 15 to 20 basis points. But we don't see it yet, but there's probably something out there an industry perspective we're trying to guard against.

Speaker 1

Yes. It's a tough one. And Michael highlighted something that we've been highlighting. I mean, we've averaged 5 basis points of charge offs, Jack, just a shade under that for 10 if you go over a 10 year average. And remember, we got manufactured housing portfolio in there.

Speaker 1

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. 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.

Speaker 1

But we count ourselves being prepared. So whenever it does return, we plan to be prepared. So we are prepared.

Speaker 8

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?

Speaker 2

We had 2, we have 2, we've had 2 and they're both back loaded except timber November. So it's very minimal.

Speaker 1

I think you all

Speaker 2

are aware, we've been probably an outlier in our rate outlook and we if we can't forecast credit, we're probably even worse on interest rates.

Speaker 1

We are, but I'm going to give I can give Michael and team a little credit because when we built the budget back in August September, they put 2 rate cuts back in August September of 2023. They had 2 rate cuts, 1 in September, 1 in 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 just we kept it like that.

Speaker 8

Great. Thanks for answering my questions.

Speaker 2

Thanks, Alex.

Operator

The next question will come from Matt Olney with Stephens. Please go ahead.

Speaker 9

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 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?

Speaker 1

Yes. So bigger banks is where they've come from. And so is that right all of them bigger banks, Travis? I'm trying to think.

Speaker 4

So 3 of the 5 are bigger banks and 2 of them 1 is they're both smaller banks.

Speaker 1

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.

Speaker 1

Our folks have been with us for decades.

Speaker 9

Okay. And Chris, following up there, you mentioned before the bank is always opportunistic in terms of new hires depending upon kind of what's out there. How would you just characterize the opportunity set now for bringing over new talent on the production side?

Speaker 2

Yes.

Speaker 1

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 got.

Speaker 1

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. Yes.

Speaker 1

Travis is nodding affirmative and given me a thumbs up on that. So I think he would say the same thing.

Speaker 9

Okay. That's great color, Chris. And then I guess going back to the M and A discussion, I'm curious what you're hearing and what you're seeing from that point of view. And it's been a quiet few months, obviously, but there was a M and A deal announcement last night. So it's a good reminder that there is still some M and A.

Speaker 9

I'm curious kind of what you're hearing and seeing and just remind us of your strategic priorities when it comes to M and A.

Speaker 1

Yeah, sure. I'll take that sort of back end of that question and then go back to the front end. Strategic priorities for us

Speaker 9

would be

Speaker 1

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 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 a retail component if they have it.

Speaker 1

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. And so those are things that we consider. Of course, you're always going to look at the financial side. The side.

Speaker 1

The financial side 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 the overall environment. The overall environment, I think there's a lot of interest out there in the environment.

Speaker 1

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 look 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 said they want to have a deep conversation about partnering. And so I think there's a lot of that going on. I think it's hard.

Speaker 1

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.

Operator

Okay.

Speaker 9

All right, guys. Well, appreciate the great commentary and great quarter. Thank you.

Speaker 2

Thanks, Matt. Appreciate it, Matt.

Operator

The next question will come from Steve Moss with Raymond James. Please go ahead.

Speaker 10

Hi, good morning.

Speaker 1

Hi, Steve. Good morning. Good morning, Steve.

Speaker 10

Good morning. Ed, maybe just going back to credit here, just like 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?

Speaker 4

Yes. Good morning, Steve. The increase in NPAs was like you noted slide and it's really just the normal churn of the portfolio. We had

Speaker 9

several additions, but we

Speaker 4

also had several 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, 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.

Speaker 4

And that's also probably attributed to us being more timely as a recognition of loans that we need to really pay attention to.

Speaker 2

Yes. 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 lie in the economy. NPA increases certainly impacts your reserve calculation, but that wouldn't be the driver of the increase, the major driver.

Speaker 10

Okay, that's helpful. And then in terms of the office portfolio, just curious here, 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 rentals?

Speaker 10

Just curious how to think about those occupancy rates and credit performance?

Speaker 4

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 quite frankly, we underwrite it to a lower occupancy rate for that very reason.

Speaker 10

Okay, great. Appreciate that. And then in terms of the with regard to balance sheet restructuring that you guys have pulled the Sirius 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 few weeks ago?

Speaker 2

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 and 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, 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.

Speaker 2

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.

Speaker 1

Yes. Steve, I'll just add. If you look at our metrics, man, 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 a 2.1 year earn back on it and so we'll do that.

Speaker 1

And when 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 could easily do that and not endanger our capital ratios. And so but we'll think about all that, but we'll pull the trigger to the things 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 as it is. And so we'll take any suggestions too by the way.

Speaker 10

All right. Well, I appreciate all the color. Thank you very much guys.

Speaker 1

Okay. Thank you. Thanks, Dave.

Operator

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.

Speaker 1

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.

Speaker 1

And we will talk to you again next quarter. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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