So we think we’ve got some tailwinds there. And we feel that from folks, frankly, reaching out to us. And so that’s why we’re optimistic. And then on the M&A front, that’s always a thoughtful approach for us because there is a lot of risk in that and there’s a lot of execution risk in that even if the numbers line up, you have to execute at a high level, it is not easy. And so that’s the reason we stay pretty targeted and focused on the things that we think work well for us versus just fielding calls from anything that comes up for auction or any folks that we don’t know already pretty well. And so — but if we get one of those calls, it’s going to be something, if one of those becomes available to us or wants to talk to us, then we’re going to be very, very interested.
And that’s part of the reason we have ourselves in the capital position that we’re in, is so that we can make that happen, even in a time like today, where you’ve got big AOCI marks and you’ve got some things that work against you maybe on your balance sheet.
Stephen Scouten: Yeah, that’s a 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’ve reached or maybe are pretty close to the bottom from an NII perspective on a quarterly basis or maybe said another way? Do you think you can grow NII from this kind of — what was it, about $100 million this quarter? Can you grow off of that base throughout ‘24?
Christopher Holmes: Yeah. 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. We can do that over the next few quarters. But we also have a dose of realism when we do that. And that’s why Michael’s guidance [wasn’t] (ph) overly aggressive. Notice, we haven’t given overly aggressive guidance the last, gosh, probably four quarters or five quarters. You hear us being more optimistic on pretty much everything.
We beat on margin and net interest income, generally, we did that on expenses and non-interest income. And so that’s pretty much the big three. And so we feel pretty good about being able to maintain that and 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.
Michael M. Mettee: Yeah, and Stephen, I just add to that. Certainly the investment portfolio trade benefits, net interest margin kind of back to Feddie’s question, I may not have answered it really well, but I will say, new deposits are still expensive. I mean, so as you grow deposits, it can impede some of your net interest income. Hopefully, you offset that with the loan growth that Chris was just talking about, because you are earning nice-size yields, as we mentioned, 8.3% on new commitments on loans. So the math works if you can find the growth, but deposits are free, I’ll say that. And so there’s a balance in there, and a little bit of an unknown.
Stephen Scouten: Yeah, yeah, no — and that brings up maybe my last question would be kind of, what are you seeing from a mixture 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, you know, not down very much. Do you think we’ve kind of — we’re past a lot of those outflows and do you think the non- interest-bearing deposits maybe can stabilize here around, you know, 20-ish percent of deposits or what do you seeing there from a mix shift perspective?
Michael M. Mettee: Yeah, I think from a — the reality is we went most of the quarter where we were right on the prior quarter number from a mix and end of the quarter dip 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] (ph) it out to. So, you know, that’s probably the floor there, I would hope. But we’re working every day to stay above it. I’ll say that and get those core operating accounts. So it’s remained fairly consistent.
Stephen Scouten: Yeah. Okay. Thanks for –.
Christopher Holmes: Thanks. It’s, you know, we watch it every day and so it’s — you know you guys generally see a point-to-point and like I said it was up most of the quarter Michael’s — and then just I mean literally the last week of the quarter dropped. And then the first week of the new quarter, it’s up. And so right now, it would be up versus where it was at the end of the quarter. 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.
Stephen Scouten: That’s great. Thanks for all the color and I hope you guys keep under-promising and over-delivering. We appreciate it.
Christopher Holmes: Thanks, Stephen.
Operator: The next question will come from Alex Lau with J.P. Morgan. Please go ahead.
Alex Lau: Hi, 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 million to $2 million quarterly expectations in the quarters ahead?
Michael M. Mettee: Yeah Alex, that’s a good question. If you look on, I guess it’s slide 14 or 15, the mortgage slide in the deck, it’s really a function of pipeline growth. So the team did a really good job, actually better than expected, on new rate lock commitments during the quarter. So we had a — call it a $135 million increase in the pipeline, which drives the fair value higher. And some mortgage rights, you recognize the income on a pull-through basis on the rate lock. So that was the driver there. And I also give them credit for continuing the other side, expense management. They’ve done a really good job as well. We talk a lot about banking segment expenses and total company, but they’ve continued to get more efficient, which is certainly a goal and appreciated.
And then the second half of that question, how we think about it going forward, I think, the fourth quarter was probably the seasonal decline, the low point, first quarter better than expected on activity in the marketplace. And we see that kind of evening out here. Typically you’d see that pop in the second and third quarter. Rates have popped up a little bit, and not a little bit, actually a lot, since quarter end, and so that’s moderated a bit. And so we’ll just have to see how that kind of works its way through in total for the interest rate environment.
Christopher Holmes: 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 — it’ll 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.
Alex Lau: Thank you for that. And moving on to credit, regarding your commentary in the press release for the reason to adding to your loan loss reserves, you mentioned being cautious on the economy. And can you explain what asset classes are you more cautious on? And also how does this translate into your net charge off outlook and when this is expected to normalize?
Christopher Holmes: Yeah, So Alex, we’re listening to your boss as a recent — as a little higher. No, we — so, you know, if you look at asset classes, you know, remember, we’ve got – we’re pretty comfortable with our concentrations right now. You know, but we do still have some commercial real estate. Again, we’re not overweighted, but we do have some commercial real estate. We like the way that — that’s distributed among multifamily, among office, among all types of assets there. We also — if you look at our other asset types, we do have a consumer portfolio that comes with 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 can serve — when that goes on the books, we’re generally reserving that at a 5% reserve.
Michael M. Mettee: So yeah, Alex, I just add I mean, the construction bucket you saw an increase there, if you look on page 11 of the deck, and It wasn’t necessarily because there’s problems in the portfolio. It’s just unknown in that CRE multi-family space, which we saw a slight uptick in our funded commitments there, percentage-wise, and now 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. The second half of this question was our charge-off outlook. And I think our commentary in the deck says, hey, we have 10 years, we’ve averaged 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 — if we look through the portfolio you know we would say we’re a bit off, ways off from whatever normal is. If that’s for the industry, 15 basis points to 20 basis points. But we don’t see it yet. But there’s probably something out there from an industry perspective we’re trying to guard against.
Christopher Holmes: Yeah it doesn’t — 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 to actually just a shade under that for 10, if you go over a 10-year average. And remember, we got a manufactured housing portfolio in there, so we’re taking some — we take every single quarter, we take some charge-offs on that part of the portfolio. Think of that, not unlike, say, a credit card piece or something. It’s a consumer piece where you’re just going to have some charge-offs every [month] (ph). And so outside of that we’ve had almost nothing for a decade and we just don’t think that’s normal. We don’t know when normal returns and we don’t know what normal it will look like when it returns. But we count ourselves being prepared. So whenever it does return, we plan to be prepared. So we are prepared.
Alex Lau: 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?
Michael M. Mettee: We had two. We have two — we’ve had two. And they’re both backloaded September and November, So it’s very minimal. I think you are aware we’ve been probably on an outlier in our rate outlook and we — if we can’t forecast credit will probably even worse on interest rates.
Christopher Holmes: We are but I’m going to give Michael and team a little credit because when we built the budget back in August and September, they put two rate cuts back in August and September of 2023. They had two rate cuts, one in September, one in November, back in August of 2023. So we don’t know what’s going to happen but that was certainly not consensus at the time that was built into our budget and we haven’t changed we just we kept it like that.
Alex Lau: Great thanks for answering my questions.
Christopher Holmes: Thanks Alex.
Operator: The next question will come from Matt Olney with Stephens. Please go ahead.
Matt Olney: Hey, good morning. I 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?
Christopher Holmes: Yeah, so bigger banks is, where they’ve come from, and so is — all of them bigger banks Travis I’m trying to think.
Travis Edmondson: So three of the five are bigger banks and two of them – one, they’re both smaller banks.
