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FB Financial Corporation  (NYSE:FBK)
Q1 2019 Earnings Conference Call
April 23, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to FB Financial Corporation's First Quarter 2019 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by James Gordon, Chief Financial Officer; and Wib Evans, President of FB Ventures, who will be available during the question-and-answer session.

Please note, FB Financial's earnings release, supplemental financial information and this morning's presentation are available on the Investor Relations page at the company's website at www.firstbankonline.com, and the SEC 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 opened for questions after the presentation.

During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. All forward statements are subject to risk and uncertainties and other facts 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 undue reliance on such forward-looking statements. A more detailed description of these and other risk 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 direct comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in the FB Financial's earnings release. Supplemental financial information and this morning's presentation which are available on the Investor Relations page of the company's website at www.firstbankonline.com. And on the SEC website at www.sec.gov.

I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO.

Christopher T. Holmes -- President and Chief Executive Officer

Thank you, Alley, and good morning, and thanks for joining us on this call to review our results for the first quarter of 2019. We appreciate your interest in FB Financial. On today's call, I'll review the highlights of our first quarter and then I'll turn the call over to James Gordon, our Chief Financial Officer, who will provide additional analysis on our financial results followed by your questions.

I'm happy with the performance by our team with several key accomplishments this quarter, delivering excellent financial results, integrating our branch acquisition, making some hard decisions in mortgage but most of all, serving our customers in the FirstBank way. Our associates are the core strength and will continue to deliver strong returns for our shareholders over the course of time. And for the third straight year, we were included on the list of the best performing community banks in the U.S. between $3 billion and $10 billion in assets by S&P Global Market Intelligence, coming in at number 23 and the only Tennessee bank making the list.

This quarter, we delivered exceptional growth and profitability driven by strong fundamental performance, seasonal growth in deposits and increased yield on earning assets. This performance delivered an adjusted return on average assets of 1.63%, an adjusted return on tangible common equity of 15.7% and an adjusted EPS of $0.66 a share.

There are four things for the quarter that I want to highlight on the call. First, our continued balance sheet -- our continued balance between growth and margin, our mortgage realignment, our credit quality and fourth, our capital management. In addition, I'll give you an update on the recently closed branch transaction and integration.

First, covering our balance sheet growth and margin. We delivered solid loan growth with a 13.2% annualized growth over the fourth quarter, slightly over our long-term target of 10% to 12%. We continue to see strong demand across our footprint, particularly in our metropolitan markets and this quarter's loan growth was driven by our Nashville and Memphis markets.

As we get lighter in the credit cycle, we're being cautious with our growth, but we feel good about our markets and the credits that we're taking on and we will not turn away demand from long-term customers that have demonstrated their credit worthiness over time. Customer deposit growth was a robust 16.5% annualized for the first quarter. This number was enhanced by seasonal increases in public funds deposits of approximately $40 million and mortgage escrow deposits of approximately $17 million. Backing out those numbers, we would have delivered customer deposit growth of around 10.8%. We continue to focus our front line on gathering deposits and hope to see continued improvement on that front over the coming quarters as the first of our maturities from last year's deposit campaign come in.

Our net interest margin excluding the impact of accretion and nonaccrual collections increased to 4.44% this quarter, that was above our guidance of 4.25% to 4.35% for the quarter. At the core of our margin, we largely offset our increased cost of total deposits with a corresponding increase in contractual yields on loans, and then saw some additional lift from loans held for sale and loan fees. We continue to believe that our prior margin range of 4.15% to 4.30% for the last three quarters of 2019 is still a good target, given the impact of the branch acquisition, current rate forecast and anticipated movements in our balance sheet. Our total mortgage operations including our retail footprint had a $700,000 adjusted pre-tax contribution for the quarter, as compared to a $1.8 million loss in the fourth quarter. Earlier in April, we also announced our intent to sell our third-party origination and corresponding origination channels.

Historically, these have been most volatile and been the most relying on the interest rate environment for the productivity. So while we're given up some upside from our mortgage operations when volumes were booming, we believe that we've reduced the downside and hope to have more predictable, replicable results coming from our retail and consumer direct channels going forward.

Exiting the wholesale channels was a difficult decision for us and we're losing teammates that have produced strong results for FirstBank in the past. We're grateful for their contributions and we'll miss working with them every day. However, we've come to the belief that this is the best decision for our company and its future.

Moving to credit, our metrics continue to reflect a benign credit environment and a very strong for the first quarter. We don't have signs in our portfolio of deteriorating credit. We're seeing continued strong employment and job growth, high confidence among business owners and good loan demand in our markets. Speaking briefly on our returns, which are highly connected to the value creation for shareholders in our eyes, we expect to see our return on tangible common equity moving to the mid-to-high teens over the remainder of 2019, following the leveraging of our capital with the branch acquisition. We also continued our current dividend of $0.08 per share and have revised our stock repurchase program amortization to be $25 million in 2019 and $25 million in 2020.

Moving to an update on our branch transaction, we closed on April 5th and converted that weekend. Everything is moving about as smoothly as can be expected with a conversion, and I want to thank our conversion team and our new team members, for all of their work in making sure that we are effectively delivering quality service to our customers.

To-date, we've experienced minimal deposit runoff in line with our expectations and have received very positive feedback from our folks in the field. We've closed four branches in the transaction and are relatively in line with our financial assumptions from the date of the transaction announcement. We'll continue to update you over the coming quarters of combined operations, but so far so good. We're extremely excited about the quality associates and the customers that we've added and the scale that this acquisition provides us in East Tennessee and North Georgia.

So to summarize, we delivered a fundamentally strong quarter with an assess by some seasonal movements, through divestiture of our wholesale mortgage channels and the addition of 10 branches from the Atlantic Capital acquisition, we believe the company continues on a great path for the remainder of 2019 and beyond.

With that overview, now I want to turn the call over to James to review our financial results in more detail.

James R. Gordon -- Chief Financial Officer

Thanks, Chris, and good morning, everyone. Our adjusted diluted earnings per share were $0.66 for the first quarter of 2019. Our results for this quarter reflect the competitive deposit landscape and mortgage environment that we've been experiencing, offset by growth, overall expense control, increased yield particularly on loan fees and loans held for sale and a benign credit environment.

Slide 4 illustrates the underlying fundamental trends of the company's profitability and demonstrates the consistent performance that we are delivering. Our increase in adjusted return on average assets over the years as well as our performance this quarter, served to demonstrate the strength and durability of our core franchises earning power. The sustained level of profitability has been driven by balanced loan growth, margin that remains one of the highest among our peers, expense control and fundamentally sound credit quality.

Slide 5 presents the fundamental elements of our net interest margin, specifically loan yields and fees as well as deposit cost trends. As Chris mentioned, we were above our target range this quarter, mostly due to increased yield on our loans held for sale and loan fee income. We believe that those will demoralize in the coming quarters, with an additional 5 basis point to 10 basis point decline in margin related to the branch transaction. We continue to anticipate being in the 4.15% to 4.30% NIM range for the remainder of 2019. For some detail, the approximately $385 million of loans that we brought in with the branches had a contractual yield of approximately 4.65%, while the approximately $598 million of deposits had a cost of approximately 1.03%. So far we've not been renewing wholesale funds and higher-cost public funds CDs that have interest cost in the 2.25% to 2.30% range, utilizing the excess liquidity from the branch transaction.

We anticipate having some excess interest-bearing cash during the second quarter to provide additional liquidity as we gain a better understanding of the acquired deposits and how they react the ownership change in the current market forces. Swapping the wholesale funds for lower customer funds also gives us greater control over funding costs as we position ourselves for the first of our maturities from last year's third quarter CD campaign coming due in the second quarter.

We continue to feel good about the relative strength of our margin. We're managing our overall cost of funds with the excess funding from the branch transaction and focusing our customer facing associates on gathering deposits. We expect to see any additional organic growth to come at a modest cost in the near term assuming a flat rate environment for the remainder of 2019.

Now moving to slide 6 and as Chris mentioned previously, we produced another quarter of solid loan growth. Our objective remains consistent, profitable and relationship driven growth not merely focusing on hitting a quarterly target, especially given our higher funding costs. We also stayed comfortably within the regulatory thresholds on construction and development and CRE concentration ratios. But we're seeing our C&D concentration increase back toward a 100% of risk based capital next quarter with the capital utilized from the branch transaction.

Overall, we saw a lift in loan pricing this quarter similar to our increase in deposit costs, mostly due to the impact of December's rate hike on our variable rate loans. In the absence of rate hikes, we would expect the yield on our pre-Atlantic Capital portfolio to stay relatively flat for the second quarter and the remainder of 2019. And overall, yield to initially decrease as we add on the $385 million in acquired loans at 4.65%.

Moving to slide 7. Our customer deposits were $4.3 billion, up 16.5% on an annualized basis from the fourth quarter of 2018. We had a good -- we had good growth this quarter that included seasonal increases of $40.4 million of public funds and $16.7 million in escrow deposits. We can -- while we can continue to see deposit cost move up this quarter, we have an opportunity to reprice the maturing promotional rate CD over the balance of 2019 with approximately $143 million maturing in the third quarter with a rate of approximately 2.55%.

Next, and turning to slide 8. In the first quarter, our total mortgage operations had an adjusted pre-tax contribution of $700,000 when our retail footprint is included. For the quarter, our adjusted total mortgage contribution was approximately 2.7% of the company's adjusted pre-tax income, which is down from 8% in the first quarter of 2018.

Our interest rate lock commitment volume was up slightly over the fourth quarter at $1.3 billion and down from $2.1 billion in the first quarter of 2018. Competitive pricing pressures continue to weigh on both volumes and margins. We believe the sale of our TPO correspondent channels will result in a reduction of approximately 45% of our volume compared to prior periods, with our cost reductions and given that, that those channels have the lowest margins. We have not changed our goal of slightly exceeding 2018's full year performance of $5 million of pre-tax contribution from total mortgage, which will largely come from contributions produced in the second and third quarters, while likely being slightly above breakeven in the fourth quarter. Including this quarter's $1.1 million in restructuring charges, we expect up to $2.5 million in one-time expenses related to the divestiture over the first half of 2019.

Now looking at slide 9. We expect our Banking segment non-interest expenses excluding mortgage related expenses to continue to grow in the mid single-digit range, reflective of growth in additional investments and revenue producers and technology. Excluding our mortgage retail footprint, bank level core non-interest expenses increased approximately $600,000 or 1.8% in the first quarter. Additionally the branch deal will add approximately $2.5 million to $3 million of non -- of quarterly non-interest expenses, not including CDI amortization related to the deal.

Beginning this quarter, we have changed the presentation of our efficiency ratio to no longer exclude the net change in the fair value of our MSRs from the calculation. So prior period ratios are slightly different for the core total and operating segments than previously reported. Our effective tax rate was 23.4% for the first quarter, primarily benefiting from equity awards vesting during the quarter. For 2019, we continue to expect our effective tax rate to be in the 25% range, but lower in Q3 and Q4 due to projected equity compensation vesting.

As shown on slide 10, our asset quality remains sound and provides a strong foundation for our company. Non-performing assets to assets came down a bit for the quarter and the whole of our loan portfolio remains in solid shape. We had lower than expected provision expense this quarter on the back of that sound credit quality, but we will expect those costs to come up slightly over the remainder of the year, closer to the level that we experienced in the fourth quarter of 2018 as net charge offs increase slightly.

Since the first quarter after our IPO, our tangible book value per share as shown in slide 11 has increased by $6.17 or 53.4% to $17.73 driven by our strong financial results and the accretive Clayton Bank's merger. Our capital levels remained strong this quarter, enabling the branch transaction without raising additional capital. With the closing of the transaction, we expect to use $45 million to $50 million in capital related to intangibles created and deal charges, which we expect to drive our total risk based capital ratio down by approximately 200 basis points. We expect our TCE ratio to settle in the 8% to 9% range, immediately following the acquisition with that level of earnings, we expect that we can build that back over the course of 2019.

Now, with that overview, I want to turn the call back over to Chris for closing comments and then we'll open the call for your questions.

Christopher T. Holmes -- President and Chief Executive Officer

Thank you, James. Once again we appreciate your interest in investment in FB Financial. Operator, that completes my remarks for this morning's call. We'd now like to open it up for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We'll take our first question from Catherine Mealor from KBW. Please go ahead.

Catherine Mealor -- KBW -- Analyst

Thanks. Good morning.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning, Catherine.

James R. Gordon -- Chief Financial Officer

Good morning.

Catherine Mealor -- KBW -- Analyst

Wanted to start on mortgage. I think you gave guidance that the -- your bottom line guidance on mortgage really hasn't changed despite the sale of the wholesale piece. Can you help us just on the expense side of it, how much of expense reductions that we could see on the mortgage side this year after that sale?

Wilburn J. Evans -- Presiident

Yes, Catherine. This is Wib and so both of these third-party channels are obviously not our heaviest expense, but they are also our lowest margins. So I don't -- I won't give you an exact number on that, but our expense range would be somewhere in the 15% to 19% range of our total expenses on a run rate. And on the revenue side it would be probably in the 18% to 22% range.

Catherine Mealor -- KBW -- Analyst

Okay. And may be another way to ask it, how should -- is there a different way to think about what the mortgage efficiency ratio should look like once these pieces are backed out? Or is that -- has changed...

Wilburn J. Evans -- Presiident

Yes. We don't know exactly, what that's going to look like. I would tell you that it's going to come down. Our efficiency ratio has been a bit, as you know higher than what we would like. And so I would think that number is going to be down in that 89% to 90% range.

Catherine Mealor -- KBW -- Analyst

Okay. That's helpful. Thank you. And then on the share buyback, Chris, you mentioned that, you're kind of splitting the buyback between this year and next year. As we think about how active you may be in the half that you're thinking for 2019, is that price sensitive or are you comfortable now that ACBI is closed and you past that acquisition that you'll be active in the market pretty soon after earnings? Or does that depend on where the price goes?

Christopher T. Holmes -- President and Chief Executive Officer

Yes, it's price sensitive. It is price sensitive and if you remember, when we announced the buyback, we hadn't announced the branch transaction yet. And so there is a reason for those, dividing the 50 into 25, to 19.25 and to 20, was again we used some excess capital. But we didn't raised any capital when we announced the branch transaction. And so that's the reason for the split and then it will be price sensitive. So we may or may not be in the market just depending on what the price is.

Catherine Mealor -- KBW -- Analyst

Okay. That's helpful. Great. Thank you. I'll jump out. Congrats on a great quarter.

Christopher T. Holmes -- President and Chief Executive Officer

Thanks, Catherine.

Operator

We'll take our next question from Peter Ruiz from Sandler O'Neill. Please go ahead.

Peter Ruiz -- Sandler O'Neill -- Analyst

Yes, thanks. Congrats on a nice quarter guys.

Christopher T. Holmes -- President and Chief Executive Officer

Thank you Peter.

Peter Ruiz -- Sandler O'Neill -- Analyst

Just wanted to maybe follow-up on the buyback. I guess, how are you guys thinking about the $25 million this year relative to maybe, what the opportunities and discussions are looking like on the M&A front. I feel like, maybe previous commentary kind of lean toward maybe continuing to pursue, other capital deployment opportunities. So are you kind of seeing maybe this discussion shift a little bit, so that maybe the buybacks are a little bit more attractive or any puts and takes there?

Christopher T. Holmes -- President and Chief Executive Officer

Yes. We think about opportunities for capital, buyback is not necessarily our highest and best use, just like we deployed it, when we've made the branch acquisition. We'll continue to look for ways to get the highest return. And so we'll continue to look on the M&A front. That's a relatively active market especially in smaller banks, that being said, you've seen us be patient and disciplined on that front, you'll continue to see us be patient and disciplined on that front. And so we're not looking to run out and we're kind of waiting for opportunities to come to us. But that's it -- but that's certainly, generally a higher, a better use. That being said, we're going to have the buyback there. We'll be able to deploy it, especially if we felt that our stock price was not appropriately reflected in the marketplace. It gives us a tool there to utilize the capital appropriately. So that's really the way that we look at.

Peter Ruiz -- Sandler O'Neill -- Analyst

Okay. And then maybe on the loan growth. Just, obviously continue to surpass that longer term guidance. And I know, you're not necessarily looking for the quarterly target, but are you kind of seeing any changes on the pay down front, have pay downs eases, what's the competition looking like in your markets right now?

Christopher T. Holmes -- President and Chief Executive Officer

Yes. Good question. And actually, you did hit on something -- we actually had some relatively significant pay downs in the quarter, and had some fees related to that from some early pay offs. I think that's not unique to us. I think that's going on in the marketplace. But again, we continue to have strong demand across the footprint. We're fortunate to be in -- most people know, Nashville is a great market and so there continues to be strong demand in Nashville. There is but, there's also we're in other great markets. And so one of the things, we've been really pleased with over the last couple of years is how the other markets have really become real contributors on the growth in both loans and deposits. And so that's something that if you kind of look at our timeline and look at our balances over the last several years, the last three or four years, you've seen that that really be a change in the makeup of our company. So we're getting demand from all around.

And so I think, I may have made this statement last quarter, I've certainly made it before, that's a fairly comfortable and controlled growth rate for us. And so we anticipate keeping it in that range. Again, it could be just like this quarter it could be a little above, it could be a little below. But demand continues to be strong, and we continue to be able to absorb the pay offs and continue in that 10% to 12%, in this case 13% range. And so we think that, that's, we're still comfortable with that.

Peter Ruiz -- Sandler O'Neill -- Analyst

Great. Thanks so much.

Christopher T. Holmes -- President and Chief Executive Officer

Thanks, Peter.

James R. Gordon -- Chief Financial Officer

Thanks Peter.

Operator

We'll take our next question from Alex Lau from JP Morgan. Please go ahead.

Alex Lau -- JP Morgan -- Analyst

Good morning.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning, Alex.

Alex Lau -- JP Morgan -- Analyst

Hi. So I wanted to touch on deposits. So now that the fed is on hold with rate hikes, are you seeing any easing on deposit pricing competition in your markets?

Christopher T. Holmes -- President and Chief Executive Officer

Yes. Actually, it's not as stressed as it was, it has eased somewhat, from say third and fourth quarters. We still see some one-off rate promotions and we hear about some rate -- some rates out there, that just don't make any sense to us. But I'd say just in general, if you're talking about our markets, we've seen it, we have seen the competition moderate some as, I think particularly the outlook. If you now look at the outlook for the rest of the year and it looks like, there's the projections are not more rate hikes and some would project maybe a cut even later the year or sometime next year. So I think as folks look out in the future, we've seen competition become less intense.

Alex Lau -- JP Morgan -- Analyst

Great. Thanks for that.

Christopher T. Holmes -- President and Chief Executive Officer

Thanks, Alex.

James R. Gordon -- Chief Financial Officer

Thanks, Alex.

Operator

(Operator Instructions) And we'll take our next question from Jennifer Demba from SunTrust. Please go ahead.

Stephen Stone -- SunTrust Robinson Humphrey -- Analyst

Hey guys it's actually Steve on for Jennifer.

James R. Gordon -- Chief Financial Officer

Good morning, Steve.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning, Steve. I thought Jennifer's voice changed.

Stephen Stone -- SunTrust Robinson Humphrey -- Analyst

No worries. You guys mentioned being a little more cautious with growth here. What does that entail? It doesn't seem to be affecting kind of your loan growth numbers, but are there any certain segments you don't want to lend to? Or is it more based on kind of the borrower or customer relationship?

Christopher T. Holmes -- President and Chief Executive Officer

Yes. A little both. Projected borrower or customer relationship, we see some things where, maybe you would have -- some things maybe you would have done that you -- in certain times, but when you look out and you think, the economy could be slower in 2020 or 2021, and maybe you either don't do or you do in a smaller way. You do focus on your long time good customers, you want to make sure you have capacity. You know we've got a lot of long time really strong customers that we've done business with for decades, and you want to make sure that you get the capacity to serve them, would be a couple of adjustments.

And then the other one would be maybe on -- would be on particular segments. There are some things that that tend to be a little more sensitive to the cycle in some areas that you would -- where you begin to be a little more selective. And so you know all the typical things construction, multifamily, some other pieces of our balance sheet where we've got some specific customers that may have a specific niche but you know from history that niche is going to be a little more sensitive to the cycle that you also may be -- that you may be looking at and reducing your exposure or beginning to limit your exposure. I wouldn't say -- I wouldn't really say anything like are we reducing our exposure but maybe limiting it moving forward.

James R. Gordon -- Chief Financial Officer

And I think the other thing to put in there is really not so much for credit but as the funding side of it, given what incremental cost of funding where it is today relative to loan yields, on a overall basis or relatively flat particularly with the -- where the curve is positioned. You've got to -- we're being a little bit cautious on the growth and what pressure that to put on there within range. I think there's plenty of activity to do more but you need to balance that against the credit and the funding side of our balance sheet.

Stephen Stone -- SunTrust Robinson Humphrey -- Analyst

Perfect. Thanks. And then unfortunately, I have to ask you, but any thoughts on seesaw implementation here, any thoughts on kind of day one in backyard or I know it's a tough one to put numbers on so far?

Christopher T. Holmes -- President and Chief Executive Officer

Yes, Steve, Come on man, you can ask, go ahead.

James R. Gordon -- Chief Financial Officer

We're just open, Congress will intervene. That's our strategy. Only kidding. You know we obviously it'll be an impact. I think some of the moving parts to that we're still -- we're beginning in the -- this quarter we'll begin actually able to run parallel, start to have a better feel of that. By the end of the third quarter or so, but I think we'll be in line with most people in the community bank. I think the -- our allowance methodology was closer in some respects with a five year look back which is probably within our average loan maturity or average loan life. So, while it will have some impact. It will -- we think it will be in line with others. But not in -- it shouldn't be an outlier and of course the other piece is the doubling up of impact of acquired non-PCI loans. That adds a little bit of a doubling impact although that that portfolio right now continues to come down over the course of the year before implementation. So we'll see how that rolls through, because we continue rolling -- rolling those maturities into the allowance each quarter to take care of that. So, I think the hard part to predict is what it does to the provisioning going forward. The initial adoption, I think is going to be within reason but the ability to manage the provision post adoption is probably the most concerning part about it depending on how your portfolio moves in a particular quarter or period and how that could drive the provision.

Stephen Stone -- SunTrust Robinson Humphrey -- Analyst

Okay. Thanks, guys.

Christopher T. Holmes -- President and Chief Executive Officer

Thanks, Steve.

James R. Gordon -- Chief Financial Officer

Thanks.

Operator

(Operator Instructions) We'll take our next question from Daniel Cardenas from Raymond James. Please go ahead.

Daniel Cardenas -- Raymond James & Associates, Inc. -- Analyst

Good morning, guys.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning, Daniel.

Daniel Cardenas -- Raymond James & Associates, Inc. -- Analyst

Just a couple of questions. In terms of dollar amount, I mean what was the impact on pay downs in Q1? And then, as I think as it relates maybe can you help what impact it had on the margin, excuse me, trying to work down to a core margin for you guys?

Christopher T. Holmes -- President and Chief Executive Officer

So, I would say, we don't track every pay down. But, I would say there were three or four larger ones that were probably in that $30 million plus in the aggregate that contributed. If you look at loan fees they contributed quarter-over-quarter about 9 basis points, probably half of that growth was from some of those pay down fees.

Daniel Cardenas -- Raymond James & Associates, Inc. -- Analyst

Okay. Great.

Christopher T. Holmes -- President and Chief Executive Officer

But we'd expect the overall, the loan fees to come back in as I said in my comments to the levels that we were experiencing in 2018 on average. They were a little bit lower in the fourth quarter. So that we totally do it quarter-to-quarter. And we do track gross in net growth and net payoffs, but we had as James said approximately three -- actually three that were in the aggregate were in the $30 million range.

Daniel Cardenas -- Raymond James & Associates, Inc. -- Analyst

Good, good. And then your credit metrics are good very manageable. But maybe some color on watch lists trends. What that looks like perhaps on a linked-quarter basis as well as the year-over-year basis? And if there's anything out there that's causing you concern right now?

Christopher T. Holmes -- President and Chief Executive Officer

Yes. So our watch list actually continues to be stable. And so when we look at our -- the internal metrics that we -- that aren't publicized, they all actually continued to be quite stable. You'll remember back in the fourth quarter we had one loan that was just over $5 million and that went on non-accrual, still on non-accrual. So that number jumped up some related to one loan, other than that the number continues to perform fairly well. And that -- then by the way that loan is better than it was. And so we -- the underlying metrics from classifieds to watch list to pass dues actually continue to be good.

We worry about a new scene in the market, we worry about a one-off coming up, you can always be -- always say that, you can always be subject to some one-off. And we worry about that. But frankly when we look at the metrics and we try to highlight things that are going to be problems, we're not seeing cause for alarm. You hear us, hopefully you hear us, I mean as we say, I said earlier my comments we're closer to the end of the cycle. We don't know where that's coming but we're on guard for that. And so we're watching. We're trying to be really diligent there in watching all of those metrics. And other than a one-off here or one-off there, like we had in the fourth quarter, we're seeing continued strength.

James R. Gordon -- Chief Financial Officer

And basically every one of the categories from fourth quarter to first quarter, were down around $5 million, whether it is PCI classifieds watch, past dues, I think we're in the lowest level I think they have been in two plus years since we acquired the Clayton Bank. So everything is on a very positive basis now. It's a moment-by-moment deal on some of those but nothing -- nothing out in the ordinary, but they are all down and only up slightly year-over-year, so.

Daniel Cardenas -- Raymond James & Associates, Inc. -- Analyst

Okay, good. And then last question for me then I'll step back. On your pro forma TCE ratio, kind of that 8% to 9% is that at the lower end of your comfort range or would you be willing to take that number down lower, if you found the right transaction?

James R. Gordon -- Chief Financial Officer

Yes, that is our comfort range. If we had the right transaction, we might go below that for some limited period of time, and then bring it back. As you see given just the return numbers, we generate capital fairly quickly. And so for the right transaction, it wouldn't bother us to take it down from there. But on a steady state basis, we'd like to see it in that range.

Daniel Cardenas -- Raymond James & Associates, Inc. -- Analyst

All right, great. Congrats on a good quarter, guys.

Christopher T. Holmes -- President and Chief Executive Officer

Thanks, Daniel.

James R. Gordon -- Chief Financial Officer

Thanks, Daniel.

Operator

We'll take our next question from Tyler Stafford from Stephens Incorporated. Please go ahead.

Tyler Stafford -- Stephens Inc -- Analyst

Hey. Good morning, guys.

Christopher T. Holmes -- President and Chief Executive Officer

Good morning, Tyler. How are you doing?

Tyler Stafford -- Stephens Inc -- Analyst

Good. Hey, I apologize I just hopped on. So I apologize if you guys discussed this already. Can you just talk about given the TPO and the correspondent channel exit. What you'd expect from a kind of new blended gain on sale margin going forward? And then, any expense offset that we should be thinking about as a result of the exit of those two channels?

Christopher T. Holmes -- President and Chief Executive Officer

Wib will answer that Tyler.

Wilburn J. Evans -- Presiident

Yes. So Tyler here's what we would be thinking. Obviously, those are our two lowest margin channels. And so the guidance that we've given previously on our consumer direct and our retail channels would hold up as we go forward and once we get these transactions closed. And so those numbers range up in the 3.50% range, 3.25% to say 3.50% on the retail front, and probably 1%, I'll call it 1.50% to 1.80% probably on the consumer direct front. And so as we look at a blended number, our Consumer Direct generates a little bit more volume as does our retail group and we're still looking at somewhere north of 3 billion in total production on an annualized basis going forward out of those two channels.

Tyler Stafford -- Stephens Inc -- Analyst

Okay. Got it. Thanks for that. And then, just I guess part B to that any -- did you guys discuss already the expense offsets? I may have missed that.

Christopher T. Holmes -- President and Chief Executive Officer

Yes, we did. And...

Tyler Stafford -- Stephens Inc -- Analyst

Okay.

Christopher T. Holmes -- President and Chief Executive Officer

We're looking on expense side somewhere in I'll call it 15% to 18% range of our total expenses. And on the revenue front 18% to 22%.

Tyler Stafford -- Stephens Inc -- Analyst

Okay. I'll hop out. Thanks, guys.

Christopher T. Holmes -- President and Chief Executive Officer

All right. Thanks, Tyler.

Operator

And we have no further questions, I would now like to turn the call back over to Chris Holmes for any additional remarks.

Christopher T. Holmes -- President and Chief Executive Officer

Okay. Thank you very much. We appreciate everybody joining us for the call. And again, we appreciate your interest in the company and we look forward to continued success for all of us. Everybody have a great day. Thanks. Bye.

James R. Gordon -- Chief Financial Officer

Thanks. Bye.

Operator

And that concludes today's conference. Thank you for your participation. You may now disconnect.

Duration: 43 minutes

Call participants:

Christopher T. Holmes -- President and Chief Executive Officer

James R. Gordon -- Chief Financial Officer

Catherine Mealor -- KBW -- Analyst

Wilburn J. Evans -- President, FB Ventures

Peter Ruiz -- Sandler O'Neill -- Analyst

Alex Lau -- JP Morgan -- Analyst

Stephen Stone -- SunTrust Robinson Humphrey -- Analyst

Daniel Cardenas -- Raymond James & Associates, Inc. -- Analyst

Tyler Stafford -- Stephens Inc -- Analyst

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