FB Financial - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered steady profitability: diluted EPS $0.84 and adjusted diluted EPS $0.85, with ROAA 1.21% (adjusted 1.23%) and NIM rising 5 bps to 3.55%.
• Revenue was resilient despite two fewer business days; margin expansion was driven by lower deposit costs (-24 bps QoQ) outpacing a 10 bps decline in earning asset yields.
• Consensus vs actual: EPS modest beat (0.85 vs 0.835*), revenue a slight miss ($130.7mm company vs $131.9mm estimate*), reflecting timing effects and day-count; costs rose seasonally (HR/comp).
• Strategic catalysts: mortgage pre-tax contribution improved ($1.5mm) and Southern States Bancshares (SSBK) merger progressing toward a Q3 close; dividend maintained at $0.19/share declared April 30, 2025.

What Went Well and What Went Wrong

• What Went Well
  • NIM expanded to 3.55% on lower deposit costs; “net interest margin was up five basis points… cost of total interest-bearing deposits decreased 24 basis points”.
  • Core deposit stability with improved cost of funds; noninterest-bearing rose QoQ and cost of total deposits fell to 2.54%.
  • Mortgage segment posted positive pre-tax net contribution ($1.5mm) with higher lock volumes; five straight profitable quarters and pipelines ready if rates ease.
• What Went Wrong
  • Noninterest expense increased (~$6mm QoQ) on performance-based compensation and seasonal HR expenses; core efficiency ratio rose to 59.9%.
  • Revenue vs Street modestly light (two fewer days and lower earning asset yields); securities yields improved but day-count and asset yield compression weighed on NII.
  • Credit: annualized NCOs 0.14% (vs 0.47% in Q4) included a notable C&I charge-off; ACL coverage edged down to 1.54% with mix shift away from higher-reserve construction.

Transcript

Operator (participant)

Good morning and welcome to FB Financial Corporation's First Quarter 2025 earnings conference call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer, and Michael Mettee, Chief Financial Officer. Also joining the call for the question and answer session, we have Travis Edmondson, Chief Banking Officer. Please note FB Financial's earnings release, supplemental financial information, and this morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation.

During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. Forward-looking statements are based on management's current expectations and assumptions and are subject to risks, uncertainties, and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks 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 a reconciliation of the non-GAAP measures to comparable GAAP measures is available in 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. Holmes, FB Financial's President and CEO.

Chris Holmes (President and CEO)

All right. Thank you, Drew, and thank you all for joining us on the call this morning. We always appreciate your interest in FB Financial. Before we move into our prepared comments around the first quarter, I'd like to take just a minute to acknowledge the remarkable life of Mr. Jim Ayers. Earlier this month, our former Chairman, for more than 35 years, Jim Ayers, passed away peacefully at his home. Many of you on this call knew Jim professionally as a strong and tough leader. More than that, we knew him as a caring role model, a dear friend, and a relentless entrepreneur. From humble beginnings, Jim began his entrepreneurial journey, shining shoes as a child in his hometown of Parsons, Tennessee. Eventually, he went on to attend the University of Memphis, where he would earn an accounting degree, start his family, and pursue his professional career.

Jim started a nursing home company at the age of 26 that became one of the largest and most successful in that industry, and he'd go on to lead and grow multiple businesses, including his involvement in FirstBank. Jim's success led to a friend, Steve White, approaching him about buying Farmers State Bank. Jim and Steve bought the bank, which had less than $20 million in assets at the time in 1984, with each partner owning 50%. Ultimately, Jim acquired the 50% he didn't own from his partner, and because of Jim's leadership, that single branch bank, through growth and acquisition, transformed into the FirstBank brand that we are today.

While we're now a publicly traded company with $13 billion in assets, few know that our history beckons back to Scotts Hill, Tennessee, where to this day, the Farmers State Bank branding remains because of a handshake deal that the name of the bank would not change in that community and that Jim insisted that we honor that handshake even as we grew. It's principles like this that Jim instilled in his companies and continue to ground FirstBank today. In conclusion, I'd like to honor Jim as an entrepreneur, businessman, friend, and mentor, but most of all, as a person dedicated to excellence and service in all that he did.

For any of you that may not have known or known of Jim, I encourage you to look into the initiatives of the Ayers Foundation, which has already provided for the college education of thousands of students from rural Tennessee communities through the Ayers Scholarship Program. The lasting impact of Jim's life will live on through this program and through the culture of companies like ours. With that, I'll now turn to our usual order of business. A couple of weeks back, on March 31, we announced our planned combination with Southern States Bank. In our announcement call, I discussed how the cultural fit, market opportunity, and financial profile of this combination made a lot of sense. I can say, 15 days later, that our conviction around this deal is stronger today than at the announcement.

In the days following our announcement, myself and our leadership team made personal visits to all the Southern States locations where we had the opportunity to meet the great people that underpin the Southern States organization. Since then, our team has established an integration office, formed key work streams, outlined our timelines, and begun collaborations with Southern States counterparts. As we said previously, we still envision a Q3 close, and our teams will be prepared. This announcement rounded out the quarter for our team, where we balanced our attention between the Southern States transaction and continuing to grow and improve our existing FirstBank franchise. For the quarter, we reported EPS of $0.84 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 12.8% since our IPO in 2016.

Pre-tax pre-provision net revenue was $51.1 million, or $52.2 million on an adjusted basis. During the quarter, our team continued to grow organically, focusing on forming new relationships across our markets and deepening current relationships through additional products and services. As a result, loan balances grew by $169 million and at an annualized rate of 7.14%, primarily in focus areas like C&I and owner-occupied CRE, while continuing to decrease construction exposure. At quarter end, we ended with approximately $9.8 billion in loans held for investment. We maintained our returns this quarter, reporting an adjusted return on average assets of 1.23%. Our adjusted return on average tangible common equity of 12.3% is below our internal targets, partially because we're holding a lot of capital.

We ended the quarter with a tangible common equity to tangible assets ratio of 10.5%, a preliminary CET1 of 12.8%, and a preliminary total risk-based capital ratio of 10.5%—I'm sorry, 15.2%. As we grow both organically and through combination opportunities like the one with Southern States, I continue to emphasize the strength of our operating foundation. Our teams and technology are in place to scale, and our financial position—capital, liquidity, credit, earnings—are all on sound footing with positive momentum. With this, we remain poised for any economic environment. Over the past few weeks, we've seen volatile markets with a flood of economic news and policies coming out of Washington. As with any change in administration, we knew that policy changes would impact the broader economic picture. Economic uncertainty has been on the rise, and we're watching and trying to determine impact on our clients and communities just like everyone else.

When faced with uncertainty, we believe two things. First, our mission as an organization remains unchanged, building a better future by serving our customers and communities well, providing a great place to work and grow for our associates, and managing our organization to provide solid returns to our shareholders. While we're classified as a regional bank and we touch five states in the Southeast, our focus remains on our customers and our communities. It's times of uncertainty where our customers need us most and need us most to provide timely service, quality products, and a place of security for their financial resources, and that's what we're going to continue to do. Secondly, we also believe that history shows that times of uncertainty bring great opportunity for those that are disciplined and prepared.

We believe that with a smart, capable team in place, a solid financial foundation, and a favorable geography, our company is poised to advance through any economic cycle. We will, of course, continue to monitor markets, tariff policy, tax rules, regulatory requirements, and we'll react as necessary to steer our company. In times of uncertainty, our playbook is to, first, make sure we understand, second, formulate a plan, and third, to execute. It is through these principles that we'll view the changing landscape in the days to come. Now, to provide a deeper look at the quarter's financial results and some insight into the tactical steps we're taking around the economic uncertainty, I'd like to pass the call over to our Chief Financial Officer, Michael Mettee.

Michael Mettee (CFO and COO)

Thank you, Chris, and good morning, everyone. I'll take a minute to walk through this quarter's earnings and touch on our outlook as we move through 2025. We reported net interest income of $107.6 million and non-interest income of $23 million for the quarter, resulting in solid revenue even with two less days in the quarter. Reported non-interest expense was $79.5 million, or $79.1 million on an adjusted basis, and provision expense came in at $2.3 million for the quarter. All in, reported net income was $39.4 million, or $40.1 million on an adjusted basis. Looking at margin for the quarter, net interest margin was up five basis points on a tax-equivalent basis to 3.55%, which is within our previously guided range.

We saw contractual interest rates on loans decrease nine basis points, while our yield on interest-earning assets decreased 10 basis points to 5.91% as the first quarter included the first full quarter of impact from rate cuts from the prior year. This impact was partially offset by yields on new loan production, which averaged right over 7% the first quarter. On the liability side of the balance sheet, we continued to see benefits from cost of funds management and deposit repricing during the quarter. Our cost of total interest-bearing deposits decreased 24 basis points, reflecting our efforts to manage down brokered and other high-cost deposit balances. We will continue to reprice these portfolios, along with about $600 million in CD deposit balances that are set to renew in the second quarter. Those are at a weighted average rate of about 4.2%.

We have an additional $775 million in the back half of the year at a weighted average rate of 3.8% that will reprice into lower market rates. On a dollar basis, net interest income was down $740,000, largely impacted by the two fewer days in the quarter, which accounted for about $2 million in headwinds, more than offset by the positive margin gains I previously noted. Through 2025, I will reiterate our margin expectation to remain between 3.55% and 3.60% on a standalone basis. Once combined with Southern States, we anticipate solidifying the margin in the upper end of that range. On non-interest income, we remain relatively flat, reporting $23 million, or $23.6 million on an adjusted basis. Mortgage banking benefited from lower market interest rates, which benefited our locked volumes during the quarter when compared to the fourth quarter.

Our mortgage servicing economics improved during the quarter as well, resulting in mortgage banking income being up about $1.8 million. These gains were slightly offset by lower swap fees and other fee-related revenue streams that were impacted by fewer days in the quarter. Looking at expenses, core non-interest expense increased to $79.2 million as compared to $72.7 million in the fourth quarter, resulting in a core efficiency ratio of 59.9% compared to 54.6% in the prior quarter. Compensation expense was higher, in part due to performance-based compensation and seasonally higher HR-related expenses, such as payroll tax and 401(k) match restart, a month of merit, long-term incentive compensation, and incremental increases in other employee-focused benefits. Finally, as we noted last quarter, we had a $2.6 million franchise tax benefit in the fourth quarter, which did not repeat in the first quarter, accounting for almost half of the quarter-over-quarter increase.

Looking forward, we expect our expense range in our banking segment to approximately be $66 million-$68 million in the second quarter. On credit, charge-offs remain higher than historical levels, with an annualized net charge-off rate of 0.14%. This was driven by a credit in the C&I portfolio that was largely reserved for but ultimately charged off during the quarter. In total, our allowance for credit loss balance decreased to $151 million during the quarter, and our ACL to HFI decreased to 1.54% from 1.58% from the fourth quarter. The moving pieces in our allowance include a reserve build due to loan growth, offset by the charge-off, and a shift in portfolio mix from higher reserve construction loans to lower reserve C&I loans. We maintain our baseline scenario as we continue to evaluate the economic uncertainties surrounding tariffs and the ultimate impact on our customers.

As we deal with the changing landscape, we're analyzing specific industries, larger relationships, and ultimately spending time with customers to understand the potential impact on their business. Finally, on capital, we continue to maintain strong capital ratios, including a tangible common equity to total assets of 10.5% and a preliminary Common Equity Tier 1 ratio of 12.8%. Our team continues to look for ways to put our capital to work. For example, during the first quarter, we bought back about $10 million in stock, and we announced the combination with Southern States Bank. After this deal, our capital levels will remain strong and we'll be ready for additional deployment opportunities, with the ultimate aim of delivering consistent long-term growth in earnings and tangible book value for our shareholders. With that, I'll turn the call back over to Chris.

Chris Holmes (President and CEO)

All right. Thanks, Michael, for the caller. To conclude, I'm pleased with our results for the quarter and look forward to keeping you all updated as we move through the combination with Southern States over the coming months. Thank you again for your interest in FB Financial. Operator, at this time, we'd like to open the line for questions.

Operator (participant)

Yes, sir. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. 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 two. At this time, we will pause momentarily to assemble our roster. The first question comes from Stephen Scouten with Piper Sandler. Please go ahead.

Stephen Scouten (Managing Director and Senior Research Analyst)

Hey, good morning, everyone. I guess I would love to touch on kind of loan growth trends, what you're seeing, kind of boots on the ground. Obviously, the markets are telling us one thing about uncertainty. People are getting maybe a little bit more spooked about C&I lending just at a high level. I am wondering if you could give us some color kind of what you're seeing and hearing from your customers, how you feel about continued growth in C&I, and kind of how you're thinking about loan growth for the rest of the year, given all the uncertainty.

Chris Holmes (President and CEO)

Yeah. Hey, Stephen. Good morning, Chris. I would say a couple of things. I'd say at the macro level, and I'm going to let Travis comment because our Chief Banking Officer who's with us this morning. I would say from macro level, you do hear some reticence about major projects and major moves. I think at a little more micro and client level, you generally get, again, some of the same, but to a smaller degree, continuing to move forward with more business as usual, but maybe some aversion to new big projects until there's a little more of a stable path forward. Travis, would you add anything to that on that?

Travis Edmondson (CCO)

Yeah. Yeah, that's right, Chris. Across our geographies, our pipelines actually remain fairly robust. We haven't seen a drastic movement in our anticipated loan activity throughout the rest of this year. Now, that could change based on how all these things land. Every time you read the paper, it's a little bit different. As of today, I think our outlook remains in that high single, low double digits area.

Chris Holmes (President and CEO)

Yeah. True. And good. If we look more near term, we haven't seen a lot of fallout is the fact of the matter on the near term, so the very near term.

Stephen Scouten (Managing Director and Senior Research Analyst)

Got it. Okay. That's very helpful. How about Asheville and Tuscaloosa in particular? I mean, I know it's still really early innings there as you continue to build out kind of in those new markets. What are you seeing there, maybe even anecdotally, and just kind of how you feel about the pace of expansion in those newer markets?

Travis Edmondson (CCO)

Yeah. Hey, this is Travis again. We feel really good about both those markets. Tuscaloosa has gotten off to a real strong start. The team down there has already brought on a lot of key relationships. The Asheville team, with all that they've been through second half of last year, they had more important things to worry about, getting their families back situated. We are starting to see that pick up too throughout the first quarter. We expect a lot of momentum to continue in both those markets throughout this year.

Michael Mettee (CFO and COO)

Yeah. Stephen, I'll just add to that. Yeah, that's Michael. We did hire nine new revenue producers in the first quarter. Those are two places where we've continued to add talent. It appears, and we're hearing that that momentum will continue as we grow there. We are very, very positive on Tuscaloosa and Asheville and the opportunity.

Stephen Scouten (Managing Director and Senior Research Analyst)

Yeah. Okay. That's all I'd like.

Chris Holmes (President and CEO)

I would just say.

Stephen Scouten (Managing Director and Senior Research Analyst)

Oh, sorry.

Chris Holmes (President and CEO)

Hey, I'd just add one last point. In both of those markets, we didn't jump at the first opportunity. We had to go there. In each of those, we've entertained opportunities before, but the quality of the people makes all the difference in the world. We are really pleased with our teams there. We have, in both of those places, entertained opportunities before we actually pulled the trigger.

Stephen Scouten (Managing Director and Senior Research Analyst)

Got it. Got it. That new hire activity is helpful. I think if I'm looking at my notes correctly, you had nine new revenue producers in the fourth quarter as well, maybe like 32 for the year last year. Is that kind of a ratable pace at this point, or does that slow with the Southern States merger, or do you kind of just continue to add personnel given all the excess capital and the desire to kind of continue to build the franchise?

Chris Holmes (President and CEO)

Yeah. No, we do not want that to slow. If anything, we want it to gain momentum. I made reference in our call. I think I may have used this phrase on the call. I know I used it internally. We have to walk and chew gum at the same time. We want to continue to add in our existing markets as we add new markets through the combination with Southern States. We will aim to continue that pace.

Stephen Scouten (Managing Director and Senior Research Analyst)

Okay. Great. And one just point of clarity. With the share of purchase, I mean, it looks like if I'm doing the math right, you bought back stock around $48 in the quarter. Obviously, unfortunately, it's trading a bit lower than that today. And if I'm doing the math right, you have maybe $73 million left in that authorization. How should we think about the potential aggressiveness at these levels with the deal pending?

Chris Holmes (President and CEO)

We have the capital, and we want to and we do have $73 million. As you said, we've got about $73 million remaining on the authorization. When we think the stock is undervalued, then it's going to make sense for us to be in the market. I would think of it as if we think the stock is undervalued, then we're going to be in the market.

Stephen Scouten (Managing Director and Senior Research Analyst)

Great. Thanks so much for the call. Appreciate the time, as always.

Chris Holmes (President and CEO)

All righty. Thanks, Steven.

Stephen Scouten (Managing Director and Senior Research Analyst)

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

Brett Rabatin (Director of Research)

Hey, guys. Good morning.

Chris Holmes (President and CEO)

Morning, Brett.

Brett Rabatin (Director of Research)

Morning. I want to start off with the balance sheet. Last year, you started off the year kind of in the same way, where the balance sheet overall was kind of flattish in the first half of the year, and then the growth really took off in the back half of the year. With the deal pending, it kind of looks to me like you're managing the deposit costs. Obviously, you'll have some liquidity with the deal. You used some during the quarter with cash balances lower. Should we expect Q2 to be similar, and you guys are kind of just managing deposit costs until the deal closes, or should we expect stronger balance sheet growth irrespective of the transaction?

Michael Mettee (CFO and COO)

Yeah, Brett. Good morning. I guess the quarter did look a lot like last year in the way that I do not even equate the quarter front half, back half. Most of the loan growth occurred in March, really. Had a lot of payoffs early in the quarter. There was no reason to kind of be overfunded on some of the higher-cost deposits. We paid down brokered by about $50 million. We will continue to manage as we have been, balancing liquidity, margin, growth. As Travis mentioned, our pipelines are pretty strong, which means we always say the same thing internally and externally. We have got to continue to grow core relationships and deposits. That is what we are out focused doing every day is trying to get operating accounts and core customers.

If there are people willing to pay what we consider to be above market on deposits, that is kind of excess interest or hotter money, then it does not always make sense for us to hold on to them if you can fund cheaper. That is the way we approach it. Our markets, customers up about 9%-10% in the quarter. Some of that more corporate-type deposit activity was what balanced us out to flat. It is managing the balance sheet. We will continue to do that as we go into the combination, but also just part of our ethos.

Chris Holmes (President and CEO)

Yeah. I would just add one thing to that, Brett. There is always, as you know, I mean, there are always numbers moving underneath the surface. We try to bring that to light on calls like this. If you looked at actually our core customer numbers on deposits, they would actually be pretty good for the first quarter. If we can, but we also, as Michael said, we were able to take some higher-cost stuff and just let it go, frankly. That was not really what we will call core customer. They were deposits, but they were not really price-based versus core customer.

If we continue, which we anticipate we will, to have that good core customer through adding customers and growing balances, then we would see a little more, actually, I'll call it total asset balance sheet growth in the second quarter as opposed to just in the back half of the year. We do want to do that. As Michael said, an important point, hey, we did not really see the loan growth come in until March. We are monitoring the pipelines. We kind of knew what was going to happen there. It was okay with us to have a little bit less of some high-cost stuff that went out in the first quarter that netted to an okay growth number. Underneath, we were actually pretty happy with it.

Brett Rabatin (Director of Research)

Okay. That's great color on that. The other question I wanted to ask was just around construction. I think this is the first quarter in at least the last four or five that you've actually had an increase in commitments to construction. It worries me a little bit that Nashville wants as many hotel rooms as they do to host the Super Bowl, but we'll see how that plays out. Just wanted to hear what you guys thought on the increase in construction commitments and just if you think there's opportunities in that particular bucket from here.

Chris Holmes (President and CEO)

Yeah. We're still on our concentration ratio of about 64%. We're still in good shape there from an overall risk standpoint. That does not bother us. Remember, not all of our construction comes in also Knoxville and Chattanooga and Dalton and Birmingham. It's kind of spread around. Nashville continues to be the strongest geography in our region, but we're watching some of the same things that you talk about. We have not booked hosting the Super Bowl yet, but we're hopeful. We are, I guess, the way we would be envisioning it would be we think about our hospitality concentration number overall. We manage that. It's certainly within our range in terms of concentration. The hospitality space, especially in certain markets, is one that we watch carefully, including, frankly, Nashville right now. There's a ton of supply.

If you've noticed on sales of hotels recently, they seem to have kind of capped out, and they're kind of actually backing off a little bit on cost per door, things like that. We're watching those and not adding a lot to that hospitality concentration right now. I can think of one deal that we do have. It's actually not in Nashville, but it's with, and this is what we're going to look at more than anything. It's with a customer that we know well. We've done tons of transactions with, and they guarantee it, and we're happy as a clam to get to do it. Okay. That one happens to not be in Nashville.

Brett Rabatin (Director of Research)

Okay. Great. Appreciate all the color.

Chris Holmes (President and CEO)

Thanks, Brett.

Michael Mettee (CFO and COO)

Thanks, Brett.

Operator (participant)

The next question comes from Russell Gunther with Stephens. Please go ahead.

Russell Gunther (Managing Director)

Hey, good morning, guys.

Chris Holmes (President and CEO)

Good morning.

Michael Mettee (CFO and COO)

Russell.

Russell Gunther (Managing Director)

On the margin, so the legacy FPK near-term outlook, one, could you just let us know what you're contemplating from a Fed cut and shape of the curve perspective in there? The second part, the kind of Pro Forma NIM guide around 360. Does that consider plans to liquidate the target securities portfolio and either reinvest higher or pay down borrowing?

Michael Mettee (CFO and COO)

Hey, Russell. Good morning. Yeah. Travis mentioned that every time we pick up the newspaper, the economic outlook changes. I actually do not read the newspaper. I use electronic stuff to track the economy. Yeah, I use X, I guess.

Chris Holmes (President and CEO)

Those are not so subtle. Not so subtle.

Michael Mettee (CFO and COO)

No, we're more advanced. I just want to say we're more advanced than the paper newspaper. But we're not smart enough to predict rates. At least I'm not. What we have in the model is basically two rate cuts, which is what we've had the whole year. I would say we were expecting steepness in the yield curve, and over the past two weeks, it's inverted, uninverted. We're playing right along with whatever's happening right now. From a forecast perspective, we haven't changed from the beginning of the year because just like on tariffs, whether we're picking up the newspaper or turning on the TV, it's like chasing ghosts at this point. We expect more status quo deposits to reprice, lower loans reprice modestly lower as well. That's why we're pretty stable in our margin outlook. Obviously, the economy is kind of a wild card.

The combined entity, like I said, we're on the high end. The prior question was really about liquidity and gaining some liquidity and maintaining that. We're kind of playing that by ear as the economy plays out. There's certainly room to liquidate the investment portfolio and reinvest. We'd love to reinvest right in loans, not in bonds. Not a whole lot of wholesale funding to pay down, but there's some upside there. Some of the, I'll call it conservatism in the guide is we don't know what's happening while we're on this call globally from an economic basis. We'll just keep doing what we're doing.

Russell Gunther (Managing Director)

Yep. No, I fully understand and appreciate the color in your guys' thoughts there. Maybe then switching gears to fee income and the mortgage banking outlook, you addressed the somewhat stronger performance this quarter.

How are you guys thinking about that in Q2 relative to the Q1 result and then the impact that might have on the aggregate non-interest expense guide for Q2?

Michael Mettee (CFO and COO)

Yeah. Actually, I'm glad you brought mortgage up. We're pleased with their performance. We're not expecting a great first quarter given where rates were and housing and affordability. Strong quarter from a, what we'll call an operating basis, made money on the pure origination basis. Then servicing, we had less loans refinanced or pay off. That helped on servicing income as well. The volatility helped with kind of hedge performance. Early April, I'd say we were off to a pretty good start when the ten-year went down below four, a lot of momentum. It slowed a little bit, but pipelines, Travis mentioned pipelines on the commercial side.

Spent some time with some of our originators on Sunday, and they said, "Hey, our pipelines, people are just waiting ready to go if rates move lower." A lot of volatility of 100 basis points in rate range and mortgage in two weeks, which could dampen some of that enthusiasm, would dampen if it stays in the upper sixes. There are five straight quarters of profitability, actually probably a little bit longer than that. We expect that to continue. We'd love to see similar performance, but it's also very economically dependent. For the NIE guide in total, we kind of think about it, right, as we'll take additional non-interest expense, right, in mortgage as long as we're getting that efficiency ratio in the mid-80s. We'd love to be low to mid-80s. Got a little bit of work.

Chris Holmes (President and CEO)

Low to mid-80s on mortgage.

Michael Mettee (CFO and COO)

On mortgage. Thank you. Clarifying point. That NIE will go up. It's generally why we point to banking is because that's a little bit of a wild card because it follows revenue.

Russell Gunther (Managing Director)

Got it. Okay. Thank you, Michael. Just last one for me, sort of on your charge-off expectations for the year. Last couple of quarters have been really credit-specific. Just curious as to line of sight you have going forward. If there were to be negative surprises or weakness related to the current macro volatility, where would you be most concerned about that showing up in your book?

Chris Holmes (President and CEO)

Yeah. I'll go for a couple of things. I'd say we expect the year to actually be probably a little less than where we started the year in the first quarter. We've historically, if you go back, gosh, about 11 or 12 years, we've historically been a little less than where we are. Looks like that would be kind of where we'd stay for the year, would be a little below where we were in the quarter. The second part of your question on where we would expect things, where we've seen things has really been on the C&I front as opposed to more on the real estate front. That's probably continues to be the case. We've seen a real estate bump or two, but they've just been things that we needed to work through as opposed to things that had any charge-off or lost content to them. That's been the case.

Travis Edmondson (CCO)

Yeah. Just to give some color around the charge-off this quarter, that's a company that we've been working with for over eight years. They got into a bad contract and a long lawsuit, and they've been very forthcoming with their issues. We've worked with them. It just came time where we needed to charge off the credits. Overall, our NPAs and NPLs both improved this quarter. We're seeing some positive trends. I would just echo Chris, we don't expect elevated charge-offs through the remainder of the year from where we were in the first quarter.

Michael Mettee (CFO and COO)

Yeah. Travis and I talk about this a lot, but 14 basis points on a kind of industry-wide is, I'd say, pretty good work by your team. Elevated at 14.

Chris Holmes (President and CEO)

That's what I was going to take note of, the fact that Travis used the word elevated with 14 basis points. That's kind of if that's any indication.

Russell Gunther (Managing Director)

Yeah. No, I understand. I appreciate you guys taking my question.

Chris Holmes (President and CEO)

Thanks, Russell.

Operator (participant)

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

Catherine Mealor (Managing Director)

Thanks. Good morning.

Chris Holmes (President and CEO)

Good morning.

Michael Mettee (CFO and COO)

Yeah.

Catherine Mealor (Managing Director)

I just want a follow-up question on expenses. You kind of came into the high end of the range that you gave last quarter, Michael. I feel like for the full year, you had been talking about a 4%-5% kind of growth rate. If we look at the range of expense guide that you gave for next quarter and just bring that for the full year, it looks like we're now at around a 9% or so growth range. I am just kind of curious where that higher expenses is coming from. I'm assuming it's just from the hires that you've continued to have. I am just curious if that does anything to kind of forward-thinking on efficiency. With that higher expense level, I'm assuming we should assume revenue comes pretty quickly with it.

Just kind of curious what's maybe changed since last quarter. Thanks.

Michael Mettee (CFO and COO)

Good morning, Catherine. You're quick on the modeling, I guess.

Catherine Mealor (Managing Director)

There were a lot of questions before me, so I was able to do a little work.

Michael Mettee (CFO and COO)

Note to self. Yeah, we were on the higher end. A little bit of that, or most of it, was kind of compensation-related things that kicked in. The clock starts on expenses on day one at midnight. The revenue is coming later in the quarter, so we expect that operating leverage to pick back up. There are a couple of lumpy things in the first quarter that led to the miss. Yeah. We had a pretty good year in 2024, so proud of that. That leads to higher payroll taxes in the first quarter and some RSU awards that we have a little quirk that gets expensed in the first quarter. That lumpiness kind of comes out through the rest of the year, which enables us to perform at a more normal expense base.

We have hired, as already mentioned on the call, a significant amount of revenue producers. You just said it. There is a lag there, which can push our expense base higher. 9% would not be something that would be digestible in this room. It would be on the lower end of that, I think, if you are looking at 5%-7% range, 5%-6%. Certainly slightly higher. We have invested a lot in our employees, our associates, and we are happy about that. We think it is deserved, but there are a couple of things that were a bit higher this quarter that we will get back in line.

Catherine Mealor (Managing Director)

Okay. That's helpful. Do not take this $66 million-$68 million run right into next quarter and then grow that. We might even kind of see that come to the lower end of the range when you get to the back half of the year.

Michael Mettee (CFO and COO)

That's right. It's more about stability in that number than a growth off that number.

Catherine Mealor (Managing Director)

Okay. That's great.

Michael Mettee (CFO and COO)

That makes sense.

Catherine Mealor (Managing Director)

That's helpful. Yep. It definitely does. Okay. That's great. I think you touched on this a little bit earlier too, but just on the growth piece, can you help us just kind of think about the risk of CRE paydowns as we get to the back half of the year and how sensitive you think that is to the ten-year and kind of any large payoffs you see kind of ahead that may offset some of the new origination growth that you're seeing?

Michael Mettee (CFO and COO)

Yeah. So paydowns, and I'm kind of thinking about it all the way through 2026, we're probably roughly 20%-25% of the book matures. Yeah, I'll call it in the next, what is that, 19 months or so, 18 months. Should reprice higher, actually. We have seen some really good activity on, which we take as a positive, although it moves off the balance sheet. In the first quarter, we had some elevated payoffs. Chris mentioned multifamily. We had some things go to the permanent market when rates dipped. I'd say actually when it dipped below 4.50-ish, down in that 4.25 range. So we did see elevated payoffs, but that's opportunity for us. We've got really strong relationships. Chris mentioned the construction one. These are reoccurring customers. So while they may go to the permanent market, generally, we're in the driver's seat for the next deal.

That is a positive. The CRE piece of it, our credit team, every month we get a report, and they are looking at individual credits and their reprice risk and debt service ratios and making sure that everything still cash flows. I will let Travis opine, but we have not seen anything of concern, and we have been able to overcome kind of the payoff side with growth as well. We expect that to continue, but I will let Travis.

Travis Edmondson (CCO)

No, well said. No, we do expect to continue to see just the cycle of our business, right? Where we bring on a project, the project goes to the permanent market, which is a good thing for our overall health of our borrowers. We do not expect much change over the next 18 months with that.

Catherine Mealor (Managing Director)

Okay. Great. Thank you. Our condolences to Mr. Ayers, family and friends. I've really enjoyed working with him over the years, and he does leave an incredible legacy. Appreciated your comments at the start of the call, Chris. Thanks.

Chris Holmes (President and CEO)

All right. Thank you so much, Catherine.

Operator (participant)

The next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Christopher Marinac (Director of Research)

Hey, thanks. Good morning. Chris, it's been two weeks since our last call with you, and all of this external noise. I'm just curious to what extent this may or may not influence kind of how you think of the reserve and future quarters. I appreciate the detail in the slides about how you allocate. I'm just kind of curious if that is going to lead to behavior change for you or even what you see your customers doing these next several months.

Chris Holmes (President and CEO)

Yeah. It's been two weeks, but it feels like two months, maybe even two years, given all that's transpired. Remember, we add to that, in our case, the loss of Mr. Ayers and all that goes around that. It has been a very eventful two weeks. You're sort of a tired crew sitting around the table this morning. Michael, I might let you comment on how we think of that.

Michael Mettee (CFO and COO)

Yeah. Good morning, Chris. It's interesting. We've debated this pretty heavily internally. The Moody's model, we're using Moody's Baseline, actually, in the first quarter had economic improvement, right? There wasn't any tariffs loaded into things. There was a lot of noise. We stuck with Baseline, but we made sure that we felt like the ACL was appropriate for the risk we knew about at the time. Again, as Travis mentioned, man, every time you start looking at a portfolio and start going down a path, you see the next news flash that says, "Yeah, that's off." The benefit of our banking model in our style of banking is we spend a lot of time with our customers. Our relationship managers are in contact with our customers a lot.

We are spending a lot of time focused on the individual credits and relationships and industries to try to figure out what that should look like. On top of that, with Southern States, we have a very similar balance sheet profile, fixed and floating. The combined entity looks very good. We have some credit mark in there that brings their ACL up to ours. We should be appropriately reserved there as well as we kind of wait to see what happens. It is a minute-by-minute kind of exercise at this point. We hope that we get some more consistency as we kind of look forward.

Chris Holmes (President and CEO)

Yeah.

Michael Mettee (CFO and COO)

Hey, Chris, can I—I'm going to add just one thing to that. As we think about it, we build our balance sheet. One of our—or I guess even dropping back further than that, a key part of our value proposition, frankly, is just peace of mind. We want to make sure our customers and our associates have that so that we look at volatility or potential—I won't use the R word, but potential challenges down the line as, frankly, times of opportunity. We look at our—if you look at where our capital is, if you look at where our reserves are, if you look at the granularity of our balance sheet, and you look at the geographic diversity of our balance sheet, all of that makes for a very high degree of stability, especially in rocky times.

You will see us continue to keep all of those things in force, especially over the next couple of quarters as we are working through. You will see us continue to maintain a pretty high capital level, high levels of reserve. You will see us intentionally do that, maintain those at least through the next couple of quarters.

Christopher Marinac (Director of Research)

Great. Thank you both for that, color. I guess my only follow-up just is I know it's early, but if you think of a range of outcomes, is it possible that customers want to build more lines of credit with you and/or tap those as we head into the next few months?

Chris Holmes (President and CEO)

Yeah. I think absolutely it's possible.

Travis Edmondson (CCO)

Yeah. It's very possible, but our utilization on our lines year to date has been very stable compared to historical numbers. That is a possibility that we're keeping an eye on.

Christopher Marinac (Director of Research)

Sounds good. Thank you all. I appreciate it.

Chris Holmes (President and CEO)

Thanks, Chris.

Michael Mettee (CFO and COO)

Thanks, Chris.

Operator (participant)

Again, if you have a question, please press star, then one. The next question comes from Steve Moss with Raymond James. Please go ahead.

Steve Moss (Managing Director)

Good morning.

Chris Holmes (President and CEO)

Good morning.

Steve Moss (Managing Director)

Just following up on Michael's comments from earlier with regard to loan pricing, it sounds like in terms of loan yields going forward here, I mean, with the expectation of Fed rate cuts, those will be coming down. Just curious, where are new loans coming on the books these days?

Michael Mettee (CFO and COO)

Hey, Steve. Good morning. Yeah. They're coming on around between 7%-7.10%, kind of on average. I think—we have this conversation internally a lot—with rates coming down, that means a lot of things, right? Generally, that's on the short end. If you get some steepness in the curve, you price off the belly of the curve, you should see some stability in there. We've certainly seen rates come down on new production with all the Fed rate cuts. We're in those low sevens today on a kind of combined basis.

Steve Moss (Managing Director)

Okay. Great. I guess just in terms of any—it sounds like you guys are not willing to or not looking to hedge the balance sheet in any way, just maintain kind of the fixed and floating rate position that you guys have versus putting on swaps or anything synthetic to maybe make yourselves liability sensitive or anything of that nature.

Michael Mettee (CFO and COO)

Yeah. Actually, that's a great question because we talked about this yesterday. I talked to our treasurer last night about it. Because we're constantly evaluating, right, the cost-benefit of that, generally for us, the cost of hedging has outweighed the benefit. We got to manage our deposit side of the balance sheet and our loan side. Our team does a pretty good job of that, especially in periods of stability. We can have margin expansion. Hadn't been that stable lately globally. There's a lot of noise, I think, as Chris said. Underneath the water here, it's been pretty stable with discipline on loan and deposit pricing, and the team's doing a good job. For now, we're not putting on any hedges, but we do evaluate it constantly as to when it would be appropriate to do it.

Steve Moss (Managing Director)

Okay. Great. That's everything from me. Really appreciate all the color there. Thank you very much.

Michael Mettee (CFO and COO)

Thanks, Steve.

Chris Holmes (President and CEO)

Very good. Thanks, Steve.

Operator (participant)

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

Chris Holmes (President and CEO)

All right. Thank you all very much for joining us today. We always appreciate your interest, and we look forward to getting into the second quarter. We look forward to reporting again in another three months. Everybody have a great day. Thanks.

Operator (participant)

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