FB Financial - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 GAAP EPS was $0.81 and adjusted EPS was $0.85; total revenue rebounded to $130.4MM as the prior quarter’s securities restructuring loss rolled off, while core efficiency improved to 54.6%.
• Net interest income rose to $108.4MM; NIM slipped 5 bps to 3.50% as FBK held more cash to pre‑fund 2025 loan growth, but cost of total deposits fell 13 bps to 2.70% as indexed and repriced deposits moved lower.
• Credit absorbed a single, previously reserved C&I charge-off; annualized NCOs were 0.47% with ACL at 1.58% of loans, NPLs/Loans improved to 0.87%, and capital remained strong (CET1 12.8%, TCE/TA 10.2%).
• 2025 setup: management guided Q1 2025 NIM to 3.54–3.61% and banking noninterest expense to $64–$66MM; full-year bank expense growth outlook is ~4–5% and targeted loan growth is high single‑digit to low double‑digit, skewing to C&I.
• Subsequent development: FBK raised its quarterly dividend by 12% to $0.19 per share on Jan 29, 2025, underscoring capital strength and earnings durability (potential stock catalyst).

What Went Well and What Went Wrong

• What Went Well
  • Organic growth and funding momentum: core deposits grew 10.8% annualized and loans 5.22% annualized; net interest income increased to $109.0MM (TE) with securities yields +19 bps QoQ from Q3’s repositioning.
  • Operating leverage improved: core efficiency ratio fell to 54.6% (Banking segment 50.2%) on stronger revenue and disciplined expenses; CFO: “Improvement in operating efficiency was a highlight this quarter”.
  • Capital/liquidity strength sustained: CET1 12.8%, TCE/TA 10.2%, on‑balance sheet liquidity $1.64B (12.5% of assets) and diversified borrowing capacity.
  • Management tone: “operating momentum position us well moving into 2025” and “we will continue to build the Company by adding and expanding on core banking relationships”.
• What Went Wrong
  • Margin mixed: NIM dipped 5 bps to 3.50% due to elevated interest‑earning cash while pre‑funding growth; loan contractual yield fell 22 bps sequentially with lower benchmarks.
  • Noninterest‑bearing deposits declined seasonally; mix shift kept deposit beta management in focus despite headline cost of deposits falling to 2.70%.
  • Mortgage banking softened sequentially (to $10.6MM from $11.6MM) amid typical Q4 seasonality, even as the business stayed profitable.
  • Credit headline from a single C&I charge‑off lifted NCOs to 0.47% annualized (management emphasized it was previously reserved and idiosyncratic).

Transcript

Operator (participant)

Good morning, everyone, and welcome to the FB Financial Corporation's 4th Quarter 2024 Earnings Conference Call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer and Michael Matti, Chief Financial Officer. Also joining the call for the question and answer session is Travis Edmonson, 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 conference 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 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. 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 atwww.firstbankonline.com and on the SEC's website at www.sec.gov. I would now like to turn the floor over to Chris Holmes, FB Financial's President and CEO.

Chris Holmes (President and CEO)

All right. Thank you, Jamie, and thank you for joining the call this morning. We always appreciate your interest in FB Financial. For the quarter, we reported EPS of $0.81 and an adjusted EPS of $0.85 per share. We've grown our tangible book value per share excluding the impact of AOCI at a compound annual growth rate of 12.9 percent since our IPO in 2016.

On a full year basis, we reported EPS of $2.48 or adjusted EPS of $3.40 which represents a year over year increase of 13%. Full year pretax pre provision net revenue was $158,700,000 or $217,100,000 on an adjusted basis, which represents a 20% year over year increase. These results were driven by our team's focus on growing core banking relationships covered with our continued focus on balance sheet optimization and managing our expenses. For the full year, we grew total assets by $553,000,000 or approximately 4.4 percent, funded through growth of our core deposit balances of $343,500,000 or about 3.3%. The themes I've emphasized over the past several quarters have circled around the strength of our operating foundation, including our solid capital and liquidity positions, while maintaining our earnings momentum. And this quarter's results reflect the continuation of those efforts.

This quarter's earnings resulted in a GAAP return on average assets of 1.14% and a return on average tangible common equity of 11.5%. Our capital position remains very strong as we reported tangible common equity to tangible assets of 10.2% and a preliminary CET1 ratio of 12.8% and a primary I'm sorry, preliminary total risk based capital ratio of 15.2%. Our 4th quarter and full year 2024 results reflect the unique strengths of the company, which continue to distinguish us among our peer group. First among those, we have intentionally built our company with a local market authority model, which allows us to bring a personalized community banking approach to our customers, while still having the size and resources to provide product and technology depth and breadth and top of the line services. While this model is not new in theory, it is unique to banks our size and larger and as a result, we've experienced growth in our customer base and we've seen continued interest from high performing bankers in our region who seek to join our franchise.

2nd, we operate in a highly desirable geography. As the Southeastern United States continues to experience growth, our geography presents an advantage opportunity for organic growth in a wealth of attractive places nearby for de novo expansion. Our capability to capitalize on both metro and community market opportunities throughout our footprint gives us a unique opportunity and allows us to entertain a lot of growth options as the banking landscape evolves. And then lastly, we have an experienced and ambitious leadership team. Our team has the right mix of experience and forward thinking vision that's required to take our company into its next phase of growth.

Our team, which is a relatively younger team compared to our peers, continues to produce results for our customers and shareholders. This history of success by this relatively young team gives us confidence in the staying power of our franchise and the opportunity to generate meaningful long term value. Ultimately, the combination of our business model, our geography, our leadership and our performance track record sets the stage for an ambitious future. So looking into 2025 and what can you expect from us, well, you can actually expect us to do more of the same. Our focus has been and is going to continue to be on deploying capital to grow earnings per share and create long term shareholder value.

That's not changing. Our first priority has been and always will be organic growth. We remain focused on growing organically through both our retail and commercial businesses and in metro and community markets that we serve today and we expanded on that this quarter with the addition of 9 new revenue producing bankers. That's for a total of 32 for the year. We're also continuing to pursue new markets as we aim to take our banking model into markets that are contiguous with our footprint.

Last quarter, we announced our expansion into Tuscaloosa, Alabama and we're pleased to announce this quarter that we are expanding into Asheville, North Carolina. This is our first step into North Carolina and we're pleased to move into this market at a unique time in its history as many there are rebuilding their lives and businesses. The impact of Hurricane Helene on the Asheville community has been devastating and we are ready and eager to bring our expertise and capital resources to this market as it rebuilds. While much of the media coverage has moved on to other stories in the news cycle, our team views Asheville as a permanent part of our story and we look forward to being part of the rebuilding efforts and helping provide the much needed capital investment for this community. In both Asheville and Tuscaloosa, we brought on strong leadership, begun hiring production teams with local roots in those communities and will soon be establishing a physical presence in both of those new markets.

You can expect us to continue doubling down on our value proposition by additional investment in both existing and expansion markets. Our second priority for capital deployment is bank acquisitions. We remain interested in combination opportunities that align culturally, geographically and financially. We believe like many that we're headed into a more accommodative M and A environment and we're prepared when the right opportunities present themselves. We're routinely building relationships with banks that look like us and if they operate in community if they operate a community focused organization, serve both retail and commercial customers, have meaningful market share and fit well with our existing branch footprint.

Lastly, before I pass it over to Michael, I'd love to congratulate our team on another strong quarter and a successful year. When we assess our performance against the ambitious goals that we set for ourselves for 2024, you all have been rock stars and I appreciate every one of you. I look forward to what we can accomplish together in 2025. I'll now hand the call over to Michael to go further into our financial results.

Michael Mettee (CFO)

Thank you, Chris, and good morning, everyone. I'll first take a minute to walk through this quarter's earnings and touch on our outlook for 2025. We reported net interest income of $108,400,000 for the quarter, reported non interest income was $22,000,000 or $24,200,000 on an adjusted basis after adjusting for approximately $2,200,000 in non reoccurring facilities related charges during the quarter. Non interest expense was $73,200,000 and provision expense came in at $7,100,000 All in reported net income was $37,900,000 or $39,800,000 on an adjusted basis. On a full year basis, we reported net interest income of $416,500,000 reported non interest income was $39,100,000 or $95,600,000 on an adjusted basis.

Full year non interest expense was $296,900,000 or $294,900,000 on an adjusted basis and provision expense came in at $12,000,000 All in, our full year reported net income income was $116,000,000 or $159,300,000 on an adjusted basis. Looking at margin for the quarter, net interest margin was down a couple of basis points to 3.5%, which was within our previously guided range, impacted by a 4 basis point drag due to carrying excess interest bearing cash during the quarter. We saw contractual interest rates on loans decreased 22 basis points and our yield on interest earning assets decreased 19 basis points to 6.01%, due in large part to the decrease in overall benchmark interest rates. On a dollar basis, net interest income was $2,400,000 on a higher net asset base in the quarter, largely due to growth in loans and interest earning cash balances. An increase in securities income of $1,000,000 also contributed to the overall increase due to the 1st full quarter of benefit from the recent securities repositioning from the 3rd quarter.

The securities yield was somewhat impacted by the change in benchmark rates, but still resulted in the increased yield of 19 basis points. On the liability side, we executed on targeted deposit repricing in line with market interest rates, as we aim to prudently manage our cost of funds in the shifting interest rate environment. Cost of interest bearing deposits decreased 21 basis points to 3.37% in the quarter, bringing down our cost of total deposits to 2.7%. As Chris referenced previously, we continue to prioritize organic deposit balances as our means to growing our business with core deposit balances up 10.8% on an annualized basis in the quarter. Brokerage deposits remain a small percentage of our deposit balance and that will continue.

We anticipate that a portion of these higher cost deposits will run off over the next year if market interest rates decline as reflected in the 9.7% decrease noted this quarter. In 2025, we'll continue to focus on growing both sides of the balance sheet, as Chris mentioned, and we expect our net interest margin to land between 3.54% and 3.61% in the Q1. Moving to adjusted non interest income, we reported core non interest income of $24,200,000 during the quarter, which reflects a slight increase over the previous quarter. Amidst a seasonal slowdown in mortgage, the company maintained strong fee income levels through our investment services and swap fees in the Q4. Looking at expenses, over the past few years, we've made investments in our team and technology as we prepare for our next phase of growth as a Company.

As we move into 2025, we're prepared to capitalize on that investment. Our expense strategy in 2025 is to align capital investment directly with revenue opportunities to drive increased profitability for the organization, such as new banking teams, business units are taking opportunities to enhance the customer experience. In the quarter, core non interest expense decreased to $72,700,000 as compared to $76,200,000 in the 3rd quarter, resulting in a core efficiency ratio of 54.6% compared to 58.4% in the prior quarter. The decline in non interest expense was concentrated within the banking segment, resulting in a banking segment core efficiency ratio of 50.2% compared to 54.1% in the prior quarter. The decrease was primarily attributable to adjustments in our short term incentive expense as we rightsize our accrual to close the year in a one time franchise tax benefit recognized in the Q4. In 2025, we're expecting to grow banking expenses at about 4% to 5% as we continue to grow the business and execute on our near and long term vision. Specific to the Q1 of 2025, we anticipate banking non interest expense to land in the range of $64,000,000 to $66,000,000 On credit, our charge off levels were elevated this quarter, driven by the full charge off of a single previously reserved C and I relationship totaling $10,500,000 We discussed this relationship in our Q2 call when we established this specific reserve.

It's a credit and the services industry that underwent a series of challenges specific to licensing and employee fraud, which ultimately led to bankruptcy. These circumstances were specific to the borrower and not an indication of anything deeper or systemic within the loan book. As we communicated in the 2nd quarter call and as expected, we did reach a resolution on this credit by year end. The charge off drove a decrease in our overall ACL and non performing loans to total loans ratio during the quarter. Absent the impact of this relationship, our 4th quarter annualized net charge off rate was approximately 3 basis points, which is more in line with our normal run rate.

Our total ACL balance at year end was $152,000,000 or 1.58 percent of loans held for investment. Partially offsetting the decrease mentioned was a reserve build of $7,000,000 primarily due to new allowance on loan growth and updates in our reserve modeling. On capital, we continue to maintain very strong capital ratios, including an equity to total assets ratio of 11.9 percent and a preliminary CET1 ratio of 12.8%. As Chris mentioned, our team remains focused on the deployment of that capital to deliver consistent long term growth in earnings intangible book value. With that, I'll now turn the call back over to Chris.

Chris Holmes (President and CEO)

All right. Thanks, Michael, for the color. To conclude, we're pleased with our quarterly and full year results, and we're proud of the progress that we've made as a company over the past year. We believe we're poised for a strong year in 2025 and look forward to sharing that progress with all of you. Thank you again for your interest in FB Financial.

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

Operator (participant)

Ladies and gentlemen, at this time, we will begin that question and answer session. And our first question today comes from Stephen Scouten from Piper Sandler. Please go ahead with your question.

Stephen Scouten (Managing Director)

Hey, good morning, guys. I guess, if we could talk a little bit about the new hires, just a little more detail there. I know you said there were 9 this quarter and that's 32 on the year. And I think you'd called out 5 mortgage producers maybe elsewhere in the presentation. So can you maybe just give us a feel for maybe the disciplines of those hires that you're bringing on in terms of where they're focused and kind of what you would think would be a viable target for next year if you continue to bring in new people?

Chris Holmes (President and CEO)

Yes. In general, what we're talking about is, I would call them core P and I frontline bankers. I mean, it's we as you know, we're not complicated as an organization. And so there's not a lot of it's a pretty direct number in terms of what we call a relationship manager or a producer. And it's a sort of an elite titling group in our organization. So I'd say it's pretty much core C and I, frontline bankers.

What else is in there besides that, either Travis or Mike?

Travis Edmondson (Chief Banking Officer)

No, I think that's the majority of it. And also, it's pretty diverse geographically as well. It's not where we've had in this quarter a lift out of 9 in one location. It's just pretty diverse of geographies.

Michael Mettee (CFO)

Yes, that's right. And as we think about 2025, we don't set a target that we're going to go out and hire 42 revenue producers. It's more about opportunities, finding the right fit. These things take years to recruit the right people to fit what we do. And so they kind of come to you as they come to you.

And that's what happened in the mortgage area and then some of the people we've added in the East. We've been recruiting for a while and then we added a couple in Nashville as well as we build out that team. And I would say this about, as we look forward to 'twenty five and beyond, recruiting is a never ending process. You have to do it every day. And so the reason you notice we didn't use to mention that very much, but we mentioned AmEx is because we are getting a lot of inbound opportunities and we expect that to continue and perhaps maybe even gain more momentum as there's disruption in the market. And so I would tell you that we're pretty optimistic based on just conversations that we're having around our geography.

Stephen Scouten (Managing Director)

And is that optimism around hiring what seems to give you more optimism around growth coming up into this year? Are there other signs that you're seeing that leads to kind of this optimism? And as you guys talked about in the release, building deposits now for what you expect to be a ramp up in growth here next year?

Chris Holmes (President and CEO)

Yes. So as we look forward and Q4, which is not traditionally the most robust quarter and we had a net loan growth of 5.2%. As we've talked about through this year, there's a little bit of what we anticipate next year from that hiring of folks. And then there's just the normal, I'd say, what I'll call normal organic growth of our geography, which is an advantage geography, which I talked about in the prepared remarks. So it's that and it's less it takes a little bit of time for those folks as they come on to really begin to bring volume and especially if they have some type of something that restricts their calling.

We abide very strictly by those when we have those when those are in place. And so but we do have some folks that have been here for now close to a year and we really expect them to those folks to really begin to be the ones that hit the stride. And so that's a portion of the growth, but it's not totally dependent on that. We expect our existing roster of relationship managers to be out acquiring accounts as well.

Stephen Scouten (Managing Director)

Got it. Okay. Yes, that makes sense. And then maybe just lastly for me sorry, yes.

Chris Holmes (President and CEO)

I would say one other thing there, because you mentioned the deposit side. We have bulk up on deposits and I say bulk up, that's probably the wrong term. We continue to grow at a measured pace on the deposit side. If you'll notice our loan to deposit ratio has shrunk some. And so as we look into next quarter in anticipating loan growth, but we also have some potentially maturing deposits at some higher cost that could that we may or may not retain depending on the relationship.

I would say they're not core relationship deposits, but their relationship, but maybe not core relationship deposits. And so we're also managing through that say in the Q1 or so.

Stephen Scouten (Managing Director)

Makes sense. Nice to have that flexibility. Just the last thing for me maybe is your comments around M and A, Chris. I know kind of in the past, you've talked about maybe needing to have some patience around deals because you don't if you could get more than one deal approved a year or what that timeline might look like. But we just saw one deal get approved in less than 3 months, so some decent size.

So does what you're seeing and hearing, does it lend you to be slightly more aggressive and think about, okay, if it's a might be a B plus deal, not an A plus deal, but I might still go after it in this kind of environment? Does it change your mindset there at all?

Chris Holmes (President and CEO)

Yes, it does shape our view and changes it somewhat from where it was in much the way you alluded to. I think under the previous regulatory leadership that was in place, I mean, you were looking at one deal in an 18 month period. And so I think you had to be quite judicious about what you got into because the opportunity cost could be great. And I think as long as you don't get yourself over your skis, and I think that's an important point, as long as you don't get yourself over your skis and acquisitions, you can certainly do that. And I think as long as you manage it well, I think your regulatory agencies are going to work with the parties that want to do a transaction in a more constructive way.

And so that all remains to be seen. But as you said, we just saw a deal get approved fairly quickly. I think that was Federal Reserve transaction, I think was regulated there, but we saw it get approved relatively quickly. And hopefully, that's a sign of things to come because that timing, as you know and as folks that have done those transactions before, that length of time, that approval time is risk, is just additional risk on the transaction. And so, in a shorter time, it improves the risk picture.

Operator (participant)

And our next question comes from Brett Rabatin from Hockett Group. Please go ahead with your question.

Brett Rabatin (Managing Director & Head of Equity Research)

Hey, guys. Good morning.

Michael Mettee (CFO)

Good morning, Brett.

Brett Rabatin (Managing Director & Head of Equity Research)

Wanted to start on credit. And I'm sure you guys saw locally that Wheelock sold the OVAC Tower, Phillips Plaza and Parkway Towers at pretty significant discounts. And obviously, the common theme there seems to be age of building. And so I know office is only about 4% of the portfolio. But just wanted to see if you guys had any thoughts on office in Nashville, any aged properties and if you guys had any kind of median or average age for the portfolio for you guys and just how you see the commercial real estate market here?

Chris Holmes (President and CEO)

Yes, Brett. Good question. And we did see that and we couldn't miss it. So we did see that. We did have 2 transactions that took place to office transactions where they took place at a loss, where they sold the buildings at a loss.

Both of them were bought some time ago, I think even pre COVID maybe, they were bought pre COVID. One of them is substantial loss. But I think that's I think you have to look at a couple of things there, Brett. First, I think fundamentally, I think the first question is, man, does that mean that we need to be questioning where Nashville is economically or Middle Tennessee, let's say, because that's the market we zeroed in on with these transactions. And so is there something going on there fundamentally?

I would say the answer to that is no. And I'll tell you, one, a lot of the things that have caused Nashville to have this growth momentum, those things are still in place. In migration still occurs. The corporate relocation pipelines are still solid. The inquiries are still solid with the chamber and the ECD.

And so those things are still quite positive. And that's what's driven a lot of the growth. On those two particular properties, 2 of those property, I think the 2 that you talked about the sold or loss, and I don't know if you mentioned this one, but there was a third that sold in suburban Nashville also at auction. Every one of those were older properties. 2 of those, the first two you mentioned were Center City properties or downtown properties that were older buildings that had some occupancy issues.

And so and if you notice, they were out of town, they were acquired by a fund from out of town that may not have had the best knowledge coming in. And so I see those as being not unusual. By the way, they weren't financed locally either. And then on the suburban one, that one sold it's sold at auction, but at a very small loss to the entity that financed it, well under $1,000,000 in terms of their so the lender got out on that one. And by the way, on the flip side, the same week that those two sold at auction, there was another property that sold at a record $2,870 per square foot, a 26,000 square foot building on Broadway that sold for $75,000,000 And so, like all like any market, I think you have to go in with your especially when you're in the real estate business, you need your eyes wide open and ours is no different.

Brett Rabatin (Managing Director & Head of Equity Research)

Okay. But to the question, and I saw that on Broadway, that was interesting price. But the question I had was, those to me seem to be outliers, but they also seem to indicate that maybe properties that were 35, 40 years old might have an issue. So the question was, it sounds like you're saying you don't really see anything commercial real estate wise, but just was curious if you guys had an average or median age for your office portfolio for the buildings?

Chris Holmes (President and CEO)

Yes. We don't have that right here at our fingertips. And remember, our office portfolio, we don't do in any of our markets, we don't do much center city type office financing. And so we don't have a lot of comparable to what was what sold here at a discount.

Brett Rabatin (Managing Director & Head of Equity Research)

Okay. The other question I wanted to ask was around the margin. Maybe Michael and just talking about the improvement in the Q1 and my suspicion is that a large part of it could be driven by a reduction in liquidity, I. E. Using some cash to fund loans.

Just wanted to hear maybe Michael, if that's the case, any other thoughts on what would drive the margin in the Q1? And then just as you guys see it for the full year, so I mean the Fed is not changing interest rates, just to keep it static, if you guys can kind of outrun the local deposit market that's still pretty robust?

Michael Mettee (CFO)

Yes, Brad, you nailed it. It's loan to deposit ratio. Chris mentioned that earlier, we're down 85%. So as we either deploy some of the excess liquidity or as Chris mentioned, if we have higher cost deposits that we don't renew or they run off at their non core relationship, that could be a boom to margin. And also, we like stability in the interest rate environment, right.

So we tend to perform better as an institution and kind of more methodical moves in rates. And the team has done a good job as rates have gone down on the deposit side. Keep in mind, half of our loan portfolio is floating, so it happens within 90 days. You get a little bit of a peak down in interest rates on the loan side. And so as things stabilize, yield curve steepens, we think we'll see some margin expansion.

Operator (participant)

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

Russell Gunther (Managing Director)

Just wanted to follow-up on the loan growth discussion earlier. You guys have a lot of good proof points around an optimistic 2025. I think in the past, you've talked about being able to accelerate the growth rate into the double digits. I'm just wondering if that's still the case or if the backup in rates puts a little caution on that. How are you seeing that transpire over the course of the year?

Chris Holmes (President and CEO)

Yes.

So, as we look into 2025, we see some continued good things and some continued momentum and we're looking at that low double digit, high single digit, high single digit, low double digit type of loan growth rate is what we're targeting. So far that feels good. And it's never easy, but so far it feels pretty good and that's what we're going to continue to target.

Russell Gunther (Managing Director)

Understood. Okay, great. And then switching gears a bit, you guys are in a very comfortable excess capital, excess reserve position. You touched on the pickup in organic growth as well as the potential to put that to use via M and A in 2025. You've also been opportunistic in 'twenty four around securities repositionings and the buyback.

So how are you thinking about those levers or is it kind of capital build mode for M and A?

Michael Mettee (CFO)

Yes. You noticed, we didn't necessarily mention that on restructuring and buybacks, but they're always on the table. We like the first two options that Chris talked about as better capital deployment, which is no change from what you've heard us say. But we really think those will materialize here in 2025. So we'll be opportunistic on securities restructuring and or on share buybacks if they don't materialize as quickly.

But at this point, we're certainly focused on organic opportunities and then M and A secondly. Got it.

Russell Gunther (Managing Director)

Okay, great. Last one for me. Appreciate the commentary on the core expense growth rate within the commercial bank. How are you thinking about expenses within the mortgage vertical and any improved efficiencies there?

Michael Mettee (CFO)

Yes. First of all, we've got 4 straight quarters of positive mortgage contributions. So 2024 wasn't exactly an easy year in the mortgage business. So proud of the kind of the turnaround they had there. And we expect them to continue to improve.

We want to be better than the market. With regard to mortgage, we expect to be better operators. And so we would expect them to continue to improve in 2025 in that efficiency ratio. I don't think the overarching housing market and interest rate market is going to allow for just blowout years in mortgage, but that's okay. We've taken a lot of the peaks and valleys out of mortgage and expect to operate more efficiently in 2025 than we did in 2024 and we operated more efficiently in 2024 than we did in 20 3.

Operator (participant)

And our next question comes from Catherine Mealor from KBW. Please go ahead with your question.

Catherine Mealor (Managing Director - Equity Research)

Thanks. Good morning.

Michael Mettee (CFO)

Good morning, Catherine.

Catherine Mealor (Managing Director - Equity Research)

Just one follow-up on the margin. I want to see if you could talk a little bit about deposit cost. And I think one thing that we're trying to figure out as an industry is just what deposit, I think deposit betas have been a lot better for everybody so far. But as we start to see better growth in 'twenty five, what happens to deposit costs as growth becomes stronger? And so just kind of curious maybe as you put on new deposits, where those average costs are and how you're kind of thinking about deposit costs over the course of 'twenty five? Thanks.

Michael Mettee (CFO)

As you kind of alluded to it, still competitive, right, Especially in some of these higher growth markets, it's expensive to move deposits. We actually also saw a little bit of a shift into some interest bearing from non interest bearing late in the quarter where people were taking advantage of rates. So even though you'd have thought that would have happened earlier. So still pretty aggressive. We're still in we're seeing CDs kind of in some of our markets still above 4.5%.

And we're not putting on CDs at that rate, but we're seeing that competitively in the kind of Middle Tennessee area. It's not quite as bad here as we're seeing in some more of our community markets. But you're going to have to be in that 80%, 90% of Fed funds to get new deposits. And so that's where we expect it to come on. We know that they're not going to come on much cheaper than that.

So it will be a competitive year when you're trying to grow relationships and deposits and we've got to work both sides of the balance sheet.

Catherine Mealor (Managing Director - Equity Research)

Great. But then on the flip side with loan pricing, would you say that you still are seeing expansion in your net new margin just given where you're seeing loan pricing and expectations for growth to be better?

Michael Mettee (CFO)

Yes, it's expansion, I'd say it's holding pretty steady. We're seeing kind of 7.20 ish on new loan origination. And so if you think about that, it's in that kind of 350 basis point to 400 basis point margin spread, not margin, spread range. So loans also are competitive. As things have slowed a tad bit and for I guess modestly slowed and makes loan growth and loan pricing a little bit more aggressive as well.

So that's why I mentioned we have to work both sides of each relationship, make sure we get the deposits and the loans. But so far, loan yields have kind of held in there. The steepening of the yield curve can create some challenges as to how competitors price, if they're priced off the short end or the middle of the curve. And so we've got to maintain our discipline with regard to that as well.

Catherine Mealor (Managing Director - Equity Research)

Great. And then maybe one more on the margin, just kind of holistically, if we are in a kind of higher let's say if the Fed doesn't move rate, so we're kind of in a higher for longer rate environment. Do you believe that you can still see continued expansion throughout the next couple of years?

Michael Mettee (CFO)

Yes, I think we should see expansion of a basis point or 2 a quarter, right? If you just naturally repricing the balance sheet. And so it's not going to be gangbusters, but we'll move modestly higher over time.

Catherine Mealor (Managing Director - Equity Research)

Okay, great. And then maybe just one other question, just away from the margin on just growth. As you think about hitting high single digit to low double digit growth in 'twenty five, are you seeing more opportunities in C and I versus commercial real estate? If you could just kind of help us talk about where you're seeing more pipeline opportunities today? I think the 10 year is making us nervous that CRE growth may not be as robust this year, but just kind of curious what you're seeing from your customers.

Travis Edmondson (Chief Banking Officer)

Yes. Good morning. This is Travis. We're seeing growth opportunities in both, honestly. We have concentrated more on the C and I space over the last 12 months.

And going forward, we have some room in the CRE bucket, but we're not going to go over any regulatory thresholds. So we don't really have a headwind there, but we're not going to grow gangbusters there. We will see some marginal growth in the CRE portfolio. But we're getting a lot of good opportunities. We're really taking care of our existing relationships in those areas.

But the net new relationships are primarily coming from the C businesses.

Chris Holmes (President and CEO)

Catherine, this is Chris. And Travis, I think it would be fair to say, we see a lot actually of CRE relationships that we just don't pursue. Correct. So I say, I'm sorry, we see a lot of CRE opportunities, I mean, relationships that we just don't pursue because we are trying to maintain a certain distribution of the portfolio and not get overly concentrated in any one area. But there's still a lot of CRE out there to be financed that we're frankly not able to take advantage of some of that. And so we're just because we're trying to make sure we strike the right balance.

Operator (participant)

Our next question comes from Steve Moss from Raymond James. Please go ahead with your question.

Steve Moss (Director)

Most of my questions have been asked and answered here, but just want to follow-up, just clarification on credit here. With the loan that was charged off, you guys mentioned the specific reserve. Was that specific reserve for ahead of this quarter or was that the driver of the provision this quarter?

Travis Edmondson (Chief Banking Officer)

The specific reserve for the charge off was prior quarters.

Chris Holmes (President and CEO)

Yes, back in the Q2, most of that was established in the Q2.

Steve Moss (Director)

Okay. So then the bridge this quarter was a mix of growth and other credit specific reserves maybe?

Michael Mettee (CFO)

No, it was loan growth, yes. And then marginally worse economic forecast. We generally moved baseline and got modestly worse, which was the reason for that.

There wasn't any other specific credit that drove it higher.

Chris Holmes (President and CEO)

And there was a little bit of cleanup on that charge off as well. It was not material amount, but there was a little bit of cleanup on that charge off, whereas it was slightly over that specific reserve, but that was a lesser piece of that provision.

Steve Moss (Director)

Okay, great. And then just one more thing on in terms of margin sensitivity here, we'll see where the Fed goes for the upcoming year. But just kind of curious where your balance sheet is positioned today for additional Fed rate cuts, whether we get 1, 2 or more than that, just how you think about the margin?

Michael Mettee (CFO)

Yes, we're slightly asset sensitive, Steve. Again, sticking in this range or no rate cuts is fine with me.

We have a steepening yield curve, which should benefit at least the balance sheet, makes a little bit tougher on the mortgage side, but well positioned, slightly asset sensitive. Today and it changes especially here recently every 24, 48 hours, we think there probably will be a couple of rate cuts this year, but we got them kind of back half of the year as we see how things develop. Wouldn't be surprised if they're 0. So, yes, we got to be able to operate no matter what the Fed does and we expect to do so.

Chris Holmes (President and CEO)

So, we would feel pretty good if it stayed where it was. But if we got surprised and rates really went down in an imprecurring way, Keep in mind, we've got a we have a tough lever with the mortgage capability that would probably get ramped up significantly. And so we so that's part of the position.

Operator (participant)

And ladies and gentlemen, at this time, we're at the end of today's question and answer session. I'd like to turn the floor back over to Chris for any closing comments.

Chris Holmes (President and CEO)

Thanks, Jamie. And I would just like to say thanks once again to everybody for joining us on the call. We always appreciate your interest. We appreciate your participation. And we will look forward to joining again next quarter. Thank you.

Operator (participant)

And ladies and gentlemen, with that, we'll be ending today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.