FB Financial Corp
NYSE:FBK
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
32.4
57.73
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
FB Financial Corp
Earnings Call Analysis
Q4-2023 Analysis
FB Financial Corp
In recent months, the company has built upon a robust balance sheet while preparing for a more uncertain economic environment, foresaw by predictions of an 'economic hurricane' that ultimately did not manifest. The company has demonstrated momentum by reporting resilient profitability even as it strategically redirected focus towards reinforcing its operating foundation. In the context of a transitioning economy, it has made deliberate decisions to optimize its balance sheet, as evidenced by the 23% reduction in public funds since Q4 2022.
Since its IPO in September 2016, the company has impressively grown its assets from $3.2 billion to $12.7 billion. This substantial expansion includes a strategic blend of organic growth and mergers and acquisitions, with four acquisitions adding a total of $5.7 billion in assets. Alongside asset growth, the company has enhanced its key support functions, leading to a stronger talent pool while simultaneously reducing its expense base which positions it for efficient scaling.
With an unyielding commitment to prudent growth, the company has targeted mid-single-digit loan growth by financing selectively. This approach is intended to mitigate risks associated with an economic slowdown. The loan growth is expected to be funded by customer deposit growth, bolstered by favorable deposit pricing trends observed in the fourth quarter. Nonetheless, it acknowledges the competitive environment that makes deposit growth challenging.
The company sketches a threefold strategy for capital deployment: prioritize organic growth, then pursue strategic mergers and acquisitions, and lastly, focus on capital and profitability optimization, including securities trade and share repurchases. This strategy underscores its commitment to ongoing earnings momentum and return improvement.
The company's adjusted pretax pre-provision earnings for the banking segment were reported at $47.5 million. Despite the net interest margin facing pressure, it remains robust at 3.46% due to the increasing yield on loans held for investment. Looking ahead to 2024, the company anticipates total noninterest expenses to range between $305 million to $310 million, with banking segment expenses projected at $255 million to $260 million. Credit quality remains a strong suit, with benign credit conditions and low charge-off rates historically. Moreover, reserve ratios have been stable reflecting confidence in the current economic outlook.
The company maintains a proactive stance on risk management by intensely monitoring deposit concentrations, including those within municipal deposits, public funds, and CDs. This approach extends to mortgage operations which, despite a tough quarter, hold potential for a rebound in the mortgage industry. Mortgage remains a crucial aspect of the company's retail strategy, although it is not a significant component of the next year's projections.
You don't have any saved screeners yet
Good morning, and welcome to FB Financial Corporation's Fourth Quarter 2023 Earnings Conference Call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer; and Michael Mettee, Chief Financial Officer. Also joining the call for the question-and-answer session is Travis Edmondson, Chief Banking Officer.
Please note FB Financial's earnings release, supplemental financial information and this morning's presentation are available on the Investors page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. [Operator Instructions]
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 the FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.
In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release. Supplemental financial information and this morning's presentation, which are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov.
I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO. Please go ahead.
Good morning, and thank you, Andrea. Thank you everybody for joining us this morning. We appreciate your interest in FB Financial. For the quarter, we reported EPS of $0.63 and adjusted EPS of $0.77. We've grown our tangible book value per share, excluding the impact of AOCI at a compound annual growth rate of 13.8% since our IPO.
We closed out '23 and inter '24 in what we believe is an enviable position due to 3 factors: One, we have a very strong balance sheet; two, we've redesigned and reinforced our operating foundation; and three, we have some profitability momentum after hitting an inflection point in the second half of 2023, and believe that we should be able to continue that momentum into 2024. On my first point, our strong balance sheet comes from our capital position, our liquidity position, our credit profile and our granular diversified loan and deposit portfolios. Capital reflects safety, and we've got an imperative to maintain sound capital ratios at all times, but it gets extra attention in times of uncertainty and volatility.
Our ratio of tangible common equity to tangible assets is among the highest of our peers at 9.7%. We keep no held-to-maturity securities so 100% of our unrealized loss on our investment portfolio is reflected in that 9.7% TCE TA ratio. Our regulatory capital ratios are also quite strong. When you adjust unrealized losses at the regulatory ratios, we also rank with the top of the class. So those strong capital levels, we had a comfortable liquidity profile as our ratio of loans plus security to deposits continues to stay near 100% at 103% currently. And we have access to $7.1 billion in available liquidity sources.
On the credit side, we keep a balanced granular diversified loan portfolio with only a handful of blending relationships over $30 million and non-approaching our legal lending limit of over $200 million. For a time, following the Franklin Financial acquisition, we had a concentration in construction lending but currently, our ADC to Tier 1 ratio -- I'm sorry, our ADC, the Tier 1 plus ACL ratio is 93%, and our CRE ratio is 265%.
We've averaged less than 5 basis points of annual net charge-offs since becoming a public company 7 years ago and we remain exceptionally well reserved as our ACL to loans held for investment is 1.6%. And finally, on the deposit side, we have a granular customer-focused funding base. We've had a higher level of public fund that we like since our Franklin acquisition in 2020, but we continue to consciously remix those deposits into customer funds, reducing those public funds by 23% since the fourth quarter of 2022 to around 15% of our deposit base. So a very strong balance sheet.
To my second point, to understand our redesign and reinforced operating foundation, we have to add some context. In the early months of 2022, we took stock of the economic conditions and forecast of higher interest rates, recession and quantitative tightening. Our view of challenges ahead was reinforced when we heard Jamie Dimon's statement that he was preparing for the worst and forecast that the U.S. was facing an economic hurricane. Even though that economic hurricane never materialized, we made some decisions, and we began working on capital, liquidity and loan concentrations to end up with the balance sheet that I just described.
Also at that time, we had grown to $12.7 billion in assets from $3.2 billion at the time of our IPO in September 2016. And have grown loans and deposits at organic compound annual growth rate of 15.5% and 16.4%, respectively, over that period and had completed 4 acquisitions over 4 years that added a total of $5.7 billion in assets.
While we have made significant investments along the way, much of our organizational structure and operating process have been reinforced through additional head count, incremental improvements and tack-on additions. Prior to our recent rebuild, that structure we're beginning to feel like it have been [ cobbled together ] reactively and out of necessity. It no longer allowed for the proper efficiencies of scale and had led to some expense [indiscernible].
The risk of sluggish growth environment in the industry that the industry has experienced over the past several quarters was well timed for us, and we were able to focus on constructing the organization structure that enables us to properly scale into the future. The overall talent level and key support functions has increased while the expense base has shrunk. We've improved accountability and efficiency of interactions between these [ port functions ] and our relationship managers. This has enabled us to maintain our local authority, community banking model rather than moving to the centralized business line model that most banks our [indiscernible] utilized. We view this model as a key [indiscernible] for associate and customer satisfaction, which allows for organic growth and we also believe it makes us a more attractive merger partner for smaller community banks.
And so to my third point, on being able to continue some of the earnings momentum that we've seen in the past 2 quarters, we're excited about the excess capital that can be put to work improving returns and profitability. Our priorities for the deployment of that capital are: Organic growth, first; strategic M&A, second; and capital and profitability optimization through things like securities trade, share repurchases and redemption of capital, third.
Speaking of organic growth. In the fourth quarter, we saw our loan portfolio grow by $122 million, a 5.2% annualized pace even as we reduced our construction exposure by $135 million. 2024, we anticipate mid-single-digit growth as the economy slows and as we continue to be selective in financing certain asset types that we see as being at higher risk in the short term. 2024's loan growth will be funded by customer deposit growth, we saw deposit cost moderate in the fourth quarter. And while the competitive environment continues to make it difficult to grow from deposits, we're encouraged by the deposit pricing trends that we saw in the fourth quarter.
We remain active in relationship manager outreach and recruitment focused primarily on footprint. We are also open to adding strong teams in markets adjacent to our existing footprint. And as the economic environment continues to improve, we'd expect to return to our 10% to 12% organic growth target rate given our exceptional markets across Tennessee, Alabama, North Georgia and Southern Kentucky. Based on what we hear from fellow bankers, there should be good opportunities for bank combinations over the next couple of years. Public valuations are moving in the right direction. And whilst credit uncertainty and interest rate marks remain a hurdle for those handful of banks that draw our attention, we know and are comfortable with their credit cultures and credit portfolios. So we don't view that as a significant option.
As a reminder, on our financial parameters, we value banks on their work in performance rather than our ability to pay. As we think broadly about the M&A landscape and more specifically about our place net landscape, we believe that we're due for some consolidation based on the lack of activity over the past 18 months as well as how much more burdensome and expensive it's becoming to run a community bank. Between the relative lack of acquirers compared to our footprint -- compared to what our footprint has had in the past, our operational platform in strong markets, we believe that we have a compelling story for those banks that are interested.
Moving to our third priority. Michael and his team continue to evaluate opportunities such as last quarter, securities trade that improved profitability, optimize capital while limiting any book value dilution. So to summarize before I hand the call over to Michael, we spent significant time in the past few quarter, laying a solid foundation. We -- over-- I'm sorry, over the past 2 years, laying a solid foundation. We've always felt strongly that the value of our local authority community banking model creates value in our footprint.
We also feel strongly that we have the process, procedures, systems and team in place to scale our model. To that end, we've constructed a balance sheet that should enable us to capitalize on our opportunities. I'm excited to see what our team builds on this foundation over the coming years. And at this point, I'm going to let Michael go into a little more detail on our financial results.
Thank you, Chris, and good morning, everyone. This quarter had a number of [indiscernible], so I'll take a minute to walk through our core earnings.
We reported net interest income of $101.1 million. Reported noninterest income was about $15.3 million, adjusting for a loss of $3 million as the last loan in our commercial loan held-for-sale bucket left the balance sheet and a net loss of $300,000 between sales of [indiscernible] and securities, core noninterest income was $18.7 million, of which $10.2 million came from banking.
We reported noninterest expense of $80.2 million, adjusting for $4 million of severance, early retirement and branch closure expenses, and $1.8 million of FDIC special assessment from the bank failures earlier this year. Core noninterest expense was $74.4 million. $62.7 million of which came from banking. Altogether, adjusted pretax pre-provision earnings were $45.4 million and banking adjusted pretax pre-provision earnings were $47.5 million.
Going into more detail on the margin at 3.46%, our net interest margin held in better than expected as cost of interest-bearing deposits increased by 7 basis points in the quarter while contractual yield on loans held for investment increased by 9 basis points. On the whole, yield on earning assets increased by 9 basis points versus cost of interest-bearing liabilities increasing by [ 6 ] This was the first quarter that the increase in yield on assets has outstripped the increase on cost of liabilities. [indiscernible] 2022 and we are optimistic about that inflection, although with fewer days in the quarter, this will likely be difficult to replicate in the first order of '24.
For the month of December, our contractual yield on loans held for investment was 6.44% and yield on new commitments in December were coming in around 8.1%. 49% of our loan portfolio remains floating with $2 billion in those variable rate loans repricing immediately with the move in rates and $1.85 billion of those loans repricing within 90 days of a change in interest rates. Of the $4.5 billion in fixed rate loans, we have $336 million maturing in the first half of 2024, with a yield of 6.4% and $213 million maturing in the second half of '24 with a yield of 6.37% or combined $550 million maturing through year-end 2024 with a weighted average yield of 6.39%.
For the month of December, cost of interest-bearing deposits was 3.44% versus 3.40% for the quarter. As we focus on exiting some of our more transactional higher-cost public funds in '23 we expect to have less build on subsequent runoff of public funds that we have in years past. We ended the year with $1.6 billion on balance sheet at year-end and expect these balances to increase slightly during the first quarter before they begin their seasonal outflow in the second quarter.
Another evolution in our deposit base is the amount of index deposits that we currently have, which was not a significant number for us in the past. We now have $2.8 billion in deposit accounts that will reprice immediately with a change in the Fed funds target rate. Looking at CDs, we have $694 million at a weighted average cost of 4%, set to reprice in the first half of the year. The current weighted average [indiscernible] rate on those -- for those deposits would reprice in approximately 30 basis points higher than the maturing deposits. We do expect some slight contraction in the margin and are maintaining our prior guidance for the margin being in the 330 to 340 range over the next 2 quarters as public funds build seasonally.
Moving to noninterest income. Nonmortgage, noninterest income continues to perform the $10 million to $11 million range, and we expect that to remain in that band, plus or minus the next few quarters. Our noninterest expense saw the benefit of the actions we took in the third quarter as adjusted banking segment expenses were $63.7 million. As I discussed previously, we had some expected noise this quarter and as of now, we are unaware of any onetime charges to expect in 2024. As I mentioned last quarter, our expectation for banking segment expenses for '24 would be approximately $255 million to $260 million.
We would anticipate mortgage-related expenses of $45 million to $50 million for '24. And all told, we anticipate total noninterest expenses of $305 million to $310 million for '24. The caveats for that expense guidance would be the $255 million to $260 million of banking expenses do not include any significant revenue producer hires and that mortgage could take higher interest rate like volumes pick up.
On the ACL and credit quality, credit remained benign this quarter as we experienced 4 basis points of recoveries, and we experienced net charge-offs of less than 1 basis point for the year. In 6 of our 8 years as a public company, we've had charge-offs of less than 10 basis points. And in 4 of those years, we've had charge-offs of 2 basis points or less. We had the last of our commercial loans held for sale in the balance sheet. From close of the Franklin merger through today, we ultimately realized a $7.2 million net gain on that portfolio relative to our initial mark. And as Chris mentioned, we reduced our outstanding construction balances by 16% or $260 million during the year, and we reduced unfunded commitments for construction loans by 56% or $913 million as well.
Our ratio of construction loans to bank level Tier 1 capital plus ACL is 93%, which is just outside of our targeted operating range of 85% to 90%. Related to the decline in construction balances this quarter, we did see our multi-family increase as construction projects moved to permanent financing. Our ratio of ACL to loans held for investment increased by 3 basis points during the quarter to 1.6% but provision expense was only $305,000 as continued decline in unfunded commitments led to a $2.8 million release in reserves on unfunded commitments. We feel well reserved for the current economic outlook and don't expect material movements in our ratio of ACL to loans, asset and material change in the [ consensus outlook ].
On capital, we have built significant excess capital and now stand at over 12% common equity Tier 1 and have a 9.7% tangible common equity to tangible assets, which puts us solidly positioned. While there's still a broad range of potential economic outcomes for 2024, we feel very comfortable with where we stand should there be any downturn and are increasingly ready to deploy that capital across profitable strategic and financial opportunities as they arise.
I will now turn the call back over to Chris.
All right. Thank you, Michael. And this concludes our prepared remarks. Again, thank you for your interest. And operator, at this point, we'd like to open the line for questions. Michael and myself are here together, Travis Edmondson is on the phone with us, our Chief Banking Officer. He was not able to be here in person because we're under the same snowstorm that a lot of folks around the country are and were snowed-in in the downtown Nashville and he's in downtown [indiscernible]. But he is with us on the phone.
So operator, we'll open it up for questions.
[Operator Instructions] And our first question will come from Catherine Mealor of KBW.
I start with the margin, and it was -- you had some nice kind of positive momentum in the margin this quarter. And totally appreciate the guidance for the first part of the year still coming down a little bit in the [ 330 to 340 range ], just given public funds and kind of movement in the funding base. But I'm just kind of curious more broadly how you [indiscernible] information you gave, Michael, was really interesting. That feels like a bigger number than I appreciated at $2.8 billion. And so -- if you could just kind of walk us through how you're thinking about how quickly your deposit base could respond when you start to see rate cuts and then how you think about the kind of the -- or the loan side. as well, just so we can kind of price in potentially where that margin could go once we start to see [indiscernible] cuts?
Yes. Perfect. So the $2.8 billion in index deposits is something, as Chris mentioned, kind of the balance sheet over the last 2 years that we've really been cognizant of. And years past, we didn't have that lever. And so our deposit cost lagged when rates went down. So that's been something we've really focused on.
We are slightly asset-sensitive still. So I would expect if there were material rate cuts that you would see some NIM compression, but we feel like we've taken a lot of that staying out if you think back to 2020 when we saw some pretty large NIM compression with a rapid drop in rates. So we are prepared for that, but we feel like we're a much better balance. Deposits reprice effectively, the index once will reprice as soon as the [ Fed cuts ]. A lot of the loan side is either indexed to prime or to show some other treasury rates, and they take sometimes 90 days. So it is a slower move down on the loan side. And then, of course, for the non-index deposits, we have to be very cognizant of moving those down in line with rates from a management perspective as well.
I would just add 1 other point. Remember, we were probably faster to rise on deposit costs than some others, especially the bigger, national and super regional banks. And listening to a few results on Friday from some of those banks, they think their costs are going to continue to rise. Part of our index was a value play for customers, but it's also a play that we thought they were going to rise anyway, and we think that index should allow those to move down a little more with a little more speed than maybe some others. So a little faster rise, but we take a little faster drop on the deposit side.
And then in terms of growth, I know, Chris, you mentioned at some point, you think you'll return to that 10% to 12% loan growth rate. But what's your -- I know the crystal ball target of the timing. But just as you kind of see your pipeline and the outlook near term, where do you think the growth looks like maybe for the first part of the year or at least for '24 kind of how are you thinking about the size of the balance sheet?
Yes. So -- and I'll say this before, I'm [indiscernible] here Catherine, but no, I did not say 10% to 12% loan growth rate. I said 10% to 12% growth rate. And I'd make that sort of wise crack because I specifically took the word loan out of that for our whole team because that growth rate has to be both loan and deposit growth rate ultimately for us to be successful. And so we're thinking both sides of the balance sheet when we say that 10% to 12%. And we've lagged sometimes on the deposit side, but that's an important -- really important metric for us. But specifically to your question.
On the loan side -- or I'm sorry, on -- in terms of growth in the first half of the year, probably going to be a little slower. That's -- we're saying mid-single digits. Frankly, we're not [indiscernible] confident 1 way or another and what growth is going to look like in the first half of the year. So we're kind of projecting mid-single digits, and we're hopeful that, that will be the case. We don't think it will be higher than that in the early part of the year, but we think the later part of the year, actually we could pick up some momentum as where our head is. And part of the -- Sure. Part of that is because we're still doing a little bit of really managing our concentrations and have a -- still -- while we're optimistic and we actually think good things about the economy, both locally and nationally, we think it's still time to be really prudent actually in concentration over the next couple of quarters as we think the economy gains state throughout the year.
I totally appreciate that loan and deposit clarification. So really important to thank you for highlighting that.
It's important for us. I'd reinforce it to our team, seems like daily. So I want to just make sure we reinforce it to everybody. It's an important metric for us.
The next question comes from Brett Rabatin of Hovde Group.
I wanted just to start off with the deposit strategy from here. Your cost of funds has leveled out, but you're still having some [indiscernible] in the various components away from noninterest-bearing DDA. And I know that the public funds have been a decision process with what those costs. Can you maybe talk about -- I saw the High Circle Partners announcement this morning. Can you maybe talk about your deposit strategy this year. And as Catherine noted, it's great to see that you've got quite a bit of index deposits or reprice lower. But maybe if you're growing loans at a good pace, how do you grow deposits at a similar level?
Yes, Brett. [indiscernible] Deposits is a longer-term business proposition, and it's just hard work. And so that's what -- that -- I wish I could tell you we have a magic bullet, we don't. We do -- it will be growing customer deposits. We say often, our balance sheet is not wholesale, it's customers on both the loan and deposit side. So it's hand-to-hand combat. And that's also why when we're answering [indiscernible] question that we emphasize it all the time. So no magic bullet. It's just we do have -- but some advantages, we do have a retail component as well as a commercial component to that.
We are doing some work to really redefine, reinforce our value proposition on that side and just takes focus and execution. And so that's what we anticipate in 2024. You mentioned High Circle. We do have banking as a service capability. I don't want that -- I don't want to -- for us, that's perhaps different than some others. We really weigh into that as opposed to dive into that. It's not a strategy that we really even are counting on from a, let's say, from a budget projection standpoint. But we have the capability, and that's a lever. We try to keep levers on the deposit side and the funding side. I mentioned the fact that we focus on the customer balances. Notice, we do -- as you know, we do very little on the wholesale side. That's always a lever to help us sort of even out our loan growth, but it's never a long-term play for us. And so all of those strategies come into play on the deposit side. Again, that's not 1 single thing.
Okay. That's helpful. And then, Michael, you've been helpful with the multifamily market here in Nashville, and I've seen some discounting, but in some free rent months, but perhaps that's actually healthy just kind of given the strength of the market. Wanted just to talk a little bit about multi-family and just how you see that space playing out for Middle Tennessee this year?
Yes. And I'll let Travis jump in here because he's the expert. But while we have seen a lot of units absorbed, specifically in the last 12 months, as you're aware, and I'm pretty much everybody on the call, I'm sure, although you're local, we've got about 20,000 units coming online. And so I think it takes a couple of years to probably absorb that. Still seeing the positive in migration. I think the latest count is 96 people a day or something that's what I saw in the business journal. So I think that it gets absorbed over time, but they're certainly a lot to absorb, and concessions have picked up, I think, for new communities or 4 communities, just going to take a little bit and hopefully bring down to these rent prices, I would say for the people moving in.
Travis, is there anything you'd like add to that?
No, I think that's pretty spot on, Michael. We are worried about the absorption, but we're not super worried about it. There's a lot of new units coming on, but they seem to be absorbing at a normalized pace. The waiting list are not as drastic as they used to be. So people are having a little bit easier time finding a unit before some people could be on waiting list for many, many months. So there's still some demand out there, but we're keeping a close eye on it, especially in downtown Nashville. We don't have a whole lot of exposure to downtown Nashville multi-family, where most of those units are coming on. So overall, we think it's still a healthy area. We still think multi-family is a healthy asset class, but we're not jumping in to try to do more construction in that arena. So.
Okay. One last quick one. I'm finishing up Jim [indiscernible] book, which is really good. And I was curious just culturally, if there's anything from his presence that you think is a key point for the FBK franchise in terms of what he's instilled in either management or rank in file people?
Yes, Brett, let's say, the list is long. And Jim's presence even today, I mean he's not here in the office every day, but he is absolutely 100% keyed in including to what goes on with the company. He still owns 22% of the company. And so you will find a higher more respected guy in our eyes in terms of his legacy around here. And I said it's a legacy, but it continues today. His presence continues today.
Here's one, but just off the cuff response to your question, it's funny, I was thinking of this quote. Just this morning, one of the things that he and I used to say back and forth to each other all the time was, don't get effort confused with results. And that was a line we would we would use a lot towards each other and towards others in the company. And if you go back to our performance -- our financial performance, we usually talk about our financial performance post the IPO because it's all -- that's all on the record and documented and it's -- when you're a private company, it's less so. So -- but if you look at our performance record for almost a decade before we were a public company, it would have still -- it would have ranked very, very high among a [indiscernible]. And so that [ DNA ] performance and winning is the one thing I would say that is Jim's strongest legacy is at the end of the day, it's all about winning. That's weaved into the company's DNA, and that comes directly from Jim [ Ayers ].
The next question comes from Thomas Wendler of Stephens.
Last quarter, we saw [ C&D ] balances contract in line with your guidance down to the 93% of capital you highlighted earlier. Can you give us any more color on your expectations for C&D moving forward into 2024? And maybe any of the other concentrations you're managing?
Yes. Travis, I'm going to let you comment. I want to make just a couple of comments is, we've got, I don't know, dozens of concentration, management metrics beneath the headline metrics that become public. And the one -- a couple I'll comment on C&D. Michael might actually make some reference to -- we'd like to manage that down closer to, say, the 85%, where maybe up to 90%, it's at 93%. So we view that as just for our sort of risk tolerance and risk appetite that we would -- we manage it down just a little bit from where it is but it's in a very manageable range right now.
Same way on overall CRE. We're at 265%. Again, we would manage that down just a little bit from where we are. We'd be down 250% or less or so. Just again, just very manageable from where we are, but we'd like to manage each of those down just a little bit. And then we manage a couple of the ones that just come to -- all of the major asset classes, but even within those, I think about managing hospitality within CRE, I think about which we don't want to get to at right now. We talked about multi-family. We're watching that concentration fairly closely. And then I think it goes all the way down to concentration in things like rent to own and things like that where we have some specific concentration limits.
And so Michael or Travis, any one of you have any other comment on that?
The only other comment I would add is that we do watch multiple concentrations internally obviously, the ones that are getting a lot of the headlines right now, which is office and multi-family, which we just talked about. Those are high on our list. We're within our tolerances internally on those. And so we don't have a hard stop, but we'll be very mindful of any time we get a request in those categories. And then Chris alluded today, you see the really good job explaining that. So we still have a ways to go in reducing our exposure to [indiscernible] probably in that 75% to 85% range is where we want to be over the next few quarters. And frankly, we would want to see there. So no significant growth in that category over the quarters.
Yes. Tom, I'd say on the other side of the balance sheet, it's less focused externally. We have deposit concentrations that we're constantly monitoring as well around municipal deposits, public funds, CDs, type stuff like that. So a lot of focus internally on that granular deposit base that Chris talked about and relationships. And so it goes for both sides of the balance sheet when you're managing concentrations.
That was a lot of great color. I really appreciate that.
Sure. The other thing I would say is just a point of commentary is -- we consider that a really strong risk management on the liquidity side because where you -- 2023 was -- and we talk about -- I think I used the word granular, maybe 3 times in my prepared comments. But really, we're thinking loans and deposits there. But we view that as a really strong risk mitigate is the granularity of both those loan and deposit portfolios. And so we actually manage that quite closely because -- we think, again, that's a really strong risk mitigant, and it's a really big liquidity advantage for us if things we experienced things like we did in March of '23 again. And with the way that money moves today, again, we like our position.
And then just one more for me. Moving over to mortgage. I appreciate the mortgage visibility is usually pretty poor. But can you give us an idea of how you're thinking about mortgage in 2024?
Yes, Tom, obviously, mortgage had a tough fourth quarter, specifically in the year, kind of fell off volume-wise, of the [indiscernible] the last couple of weeks of the year, even though the rates were a bit lower. We've seen mortgage kind of come back to life here in the first couple of weeks of January. We don't expect mortgage to be a huge contributor in 2024. We also don't expect mortgage to lose money. And there are some benefits to the held-for-sale pipeline spits off interest income. So there's some other benefits. But it's a core piece of the company.
Chris talked about retail earlier, we think mortgage is a very important piece of the retail story and something that is a critical product. And I think brighter days are ahead for the mortgage industry, but the whole industry is not out of the woods yet, and we'll see how things develop with rates, but also affordability with the industry, which is a challenge in most of our markets.
Tom, I want to add just 1 thing on mortgage. Two things -- 2 or 3 things. One, we had a good quarter. We felt like a pretty solid foundational quarter in spite of mortgage. Mortgage did not have a good quarter and so when we look at it, there are no sacred cows in any part of our business, including mortgage. So it stays under constant analysis, again, just like all the other parts of our business.
One of the things that we recognize and we don't talk a lot about it, we don't give any net interest income credit. We don't give any any credit for that part of our business and what happens to net interest income, which that -- starts the profitability picture just a little bit -- it's a business that doesn't take a lot of capital outside of the mortgage servicing rights. The other part -- the origination part of the business doesn't take much capital. And it has a significant upside. And as Michael said, from a retail standpoint, we think it's key customer acquisition part of our go-forward retail strategy. And so as we look into next year, we think that we don't have a lot -- as a matter of fact, we really don't don't have much at all in our projections for next year, and -- but we will also -- we will make sure we insure against any downside. And so that's how we're viewing it as we're stepping forward.
The next question comes from Alex Lau of JPMorgan.
Following up on the comment around reduction of construction concentration and looking at the impact of your provision forecast, do you expect this to be front loaded in the year or more gradual throughout the year?
Yes, it's a good question. It will be perhaps slightly front-loaded, but I'd say just slightly front-loaded because like I said, where we are, we're at 93%, we don't want to go up from here. And so you could see a little more front-loading and we'll gradually work it down from here as well. So you could see a little more front loading. But again, once we get down in the 85% range, you'll see it begin to be much more, [indiscernible].
Yes. And Alex, you have 2 kind of phenomenon there, right? You have the -- as they go from unfunded, as those balances are reduced, that creates a release from the unfunded bucket. And then you have migration on the ACL side. So as you go from a construction reserve of 2.53% to, call it, a multi-family or CRE bucket, while the balance is going to -- you can -- you stay in that kind of weighted 160 range, but it creates a little bit less impact. So to Chris's point, it will be gradual, but that's where you see some of that release coming from.
And then my follow-up question. Can you give some color on the C&I loans that moved into nonaccrual this quarter? Are these idiosyncratic? Or is there any trend that you would highlight there?
Travis, do you want to take that and I'll add some color?
Sure. The C&I loans have moved this quarter were just kind of one-offs. There was no pattern or anything we've seen. And we still can see just normal course, loans moving in and out of the classified assets moving into special mention moving out, upgrades, downgrades. So it's still pretty normal out there in what we're seeing in credit quality.
In fact, the 1 credit we talked about last quarter, that's got a lot of positive momentum. And so that one is trending where it probably won't be an issue in the coming months. And if everything we're cautiously optimistic if everything keeps going the way it is. So no systemic issues that we're seeing right now. It's just continual portfolio management and you always have 1 or 2 that you're worried about.
And one follow-up question on NIM and NII. You mentioned moving back to the 330, 340 range and also some optimism in an inflection point in NII, maybe in the second quarter. What are you assuming for the rate curve scenario?
Yes. Alex, we're probably a little bit of an outlier in the way we think about rates because we don't see a whole lot of [indiscernible] to lower rates. And I was watching Tim, [indiscernible] this morning and they were talking about the forward rate curve, a CEO of a slightly larger financial indication. I was talking about it at [ Davos ]. And they had 4 priced in and 4 in [indiscernible] So we kind of think about it as basically status quo in our kind of budgeted numbers. And would just expect to see, as Chris mentioned, needing -- when you need deposit growth, you have deposit growth, we've got to grow core relationships. But we also believe in a fair customer proposition, value proposition. And so we think that that includes paying interest on deposits. So that's where that lower net interest margin comes from and just composition. But the forward curve has been wrong for the last 2 years. And so we've been -- we're slightly less conservative there.
Yes. We could have a bump or 2 down in the second half. Again, just our view and it's worth less than then as Michael said, the view that you could have gotten on CNBC this morning from a much larger but -- thanks to you. But we -- again, we don't see the moves down that are being forecasted and we could get a couple in the second half of the year is more our view as we think about moving forward.
The next question comes from Stephen Scouten of Piper Sandler.
So what's worse even less than your view on rates would be my view on rates, but I'm with you, I don't really see what the forward curve is telling us today. That said, if we did see more cuts in '24 and '25, can you help frame up the potential for what the mortgage business could return from a profitability standpoint today in an upside scenario? Because obviously, it's a very different business than it was in '21 when we last had probably a pretty robust market there. So just trying to think about how to frame that up.
Yes, Stephen, I think there's pent-up demand out there, specifically for first-time homebuyers. People -- 6% mortgage rate is a lot different than the 8%. And so you could see some refinance activity. They're very likely if you kind of read all the publications that -- there's people that have been waiting to move because they don't want to get out of a 3% or 4% mortgage. So I think there's upside.
As you mentioned, I don't think you have a $25 million, $30 million mortgage contribution year because we've as Chris said, taken a lot of the downside off the table has been a process. And so with that, you take some of the upside off. But I think you could certainly see margin return to a respectable level and have a high single-digit, low double-digit kind of mortgage contribution if rates move down far enough because there's still a lot of people that want to be in our markets, and they're moving here and looking to buy houses. So we're a purchase-oriented retail origination shop, about 85% of our loans are purchased, which does create refinance opportunities down the road with those customers, but our focus is on building business that way in the purchase market.
Yes, Stephen. I think also a couple of things, the business has thinned out and will thin out even further from both -- in [indiscernible] companies, but also some of your largest banks that have exited. And so I think it actually creates a pretty nice spot for, I'll call it, the larger regionals and the smaller regionals, both. And so I think that's a reason.
We analyze, as I said earlier, hey, why are we in the business? And do we need to be in the business? And the answer is yes. We do think there's an upside. And so if you think also about -- there's some pent-up purchase demand. So as rates -- as rates stabilize and maybe even move down just a little bit, that probably kicks up the purchase demand, which is -- which improves the outlook. And then if you get 6% or 8% rate bumps down when that does eventually happen even if it's 2 years from now, that -- that's a catalyst for the refinance market, which which will probably kick in, in a significant way once you get to that level of rate decreases. And so that's that, again, when you add to it our retail side, which we think it's important too and you add to it the fact that we -- it's a contributor to our net interest income, we like all those pieces of it.
Yes. That sounds good. Okay. Curious, you noted your kind of second priority from a capital strategy standpoint is kind of M&A if you just [indiscernible] those, but you also noted the local decision-making prowess versus a centralized approach being a great benefit to you, which I would agree -- is there a point where you think, hey, we do a couple more deals we get to a certain size where you're no longer able to have that structure? Or is that kind of integral to how you guys think about running the bank irrespective of size, moving forward?
Yes. Again, insightful question, Stephen. And we're pretty emphatic on the answer. It's integral to how we run the bank. And so when we talk about spending 2 years to take a step back and really kind of evaluate our structure, evaluate our efficiency, evaluate our scalability, we think that's the right way to run the bank. And so we thought about -- and we're thinking about every day because we're not finished scalability, and we think about risk also. There's not only credit risk, which has perhaps the most traditional risk -- type of risk that you think about, but we think about compliance risk, we think about reputational risk, all of those things with that model. And so we've been very thoughtful in how we continue to design it for the long term. And so we do think, look, if we do an acquisition that adds on $3 billion in assets to the company or -- and then another 1 that adds another 2 or 3 and then another 1 that has 5. We think the model is still going to be the model. And we think that's important. And we think it's a very significant competitive advantage for the types of institutions that we'd like to partner with and we think would like to partner with us because they're typically going to have some retail density to them, a big deposit side. To gain deposit is really key to us and we think that's important. And so we've designed it to continue that model. A good question, 1 that we ask ourselves all the time and 1 that just reinforces our commitment to the model.
That's great. Helpful. And then maybe just lastly for me, and this is kind of a super high level, and you may not have an answer for this, but the market seems to have gotten the banking segment wrong throughout a lot of the last half of '23, right? It was as well as [indiscernible] me and then all of a sudden, we got this huge run since November. I'm just kind of wondering from a high-level business perspective, has there been anything that surprised you to the upside, whether it's continued credit performance, customers' acceptance of higher loan rates. And just kind of as you look at your markets in the business, anything that's kind of been a surprise either to the positive or the negative?
Yes. I'll give maybe a thing or 2 and Michael and Travis, you guys chime in if there's -- One thing is as we went through the challenges of 2023, where -- the 2 biggest -- the 2 biggest were ones were the failures in marks or the failures in the early half of the year of Silicon Valley, Signature, [indiscernible]. The fact matter is our customers didn't -- never wavered in terms of confidence in our institution. And so we prepared like crazy with messages and with materials to show our safety and soundness. But our customers -- it was almost like a, I know you're safe. I know I'm in a good spot. And so that was a big positive surprise.
I would say, in the same with -- I'd say what's been a positive surprise is as rates have gone up and if treasuries have really -- the interest rate [indiscernible] earn on treasury versus maybe a deposit account again, the willingness of customers to have a conversation about that instead of you just [indiscernible] money is gone. And we -- going back to -- I think it was Catherine's question and some others about how we -- we really think about that fairness of value as a part of our value proposition and customers understand that, and that's been a positive for us.
Yes. I mean -- not a surprise to us, Stephen, but I think maybe a surprise to the industry. The downfall the community banking system, which was all over the news headlines in March, April. We actually, as Chris mentioned, we're steadfast in the other corner, and I think that, that's been proven out. In fact, we hear from customers all the time that they still believe and really back to your other question, the model, the local decision-making, the serving of the customer, so not a surprise to us, but maybe a surprise to the aforementioned [indiscernible] grew a little bit. But yes.
Stephen, I got one more. Surprise. That deposit insurance remains -- and maybe it's not a surprise, but this is a plea. Deposit insurance remains antiquated would be a surprise that it's not surprised because we have trouble getting anything out of Washington. But the deposit insurance system needs to be reformed and there needs to be some thoughtful folks that change how deposits get insured. And at the end of the day, that side of the FDIC, the insurance side of the FDIC is a big mutual insurance company with the banks that are the customers and therefore, the owners and the funders of that. And we -- regulatory from by law and regulation, we're kind of borrowed from doing much with it. But it's a surprise that we just can't get any momentum to modernize it. So, Yes.
The next question comes from Feddie Strickland of Janney Montgomery Scott.
Just wanted to ask a clarifying point to kick off on the public funds flow. So it sounds like that was deliberate that they were a little lower than what we would normally see this quarter. Will we see still some flow in the first quarter? And then it sounds like going forward, the impact from public funds should be a little lower, just as you said, you're prioritizing some more of the relationship public funds. Is that right?
Yes, Feddie, this is Michael. Definitely deliberate in the fourth quarter and really going forward, I kind of put in a plug for deposit concentration, deposit management. We have a lot of really solid relationships on the public fund side, so I don't want that to get lost, and we have actual core deposit relationships where -- these are strong customers.
Where we really focused in on is some of the more transactional, higher interest kind of excess funds. There's a couple of things going on there. You have some other financial institutions, we're still paying [ Fed funds ] plus on some of those deposits, which we were not willing to do on excess interest. And then there's some state-funded insurance deposit rates that are actually pretty high right now. And so some of those is just better for those municipalities. They're doing what's best for their taxpayers. And so they moved some funding over there.
I would expect first quarter, right, you got taxes coming in, you still see some of that flow higher in the first quarter. So you'll still see it, but we are managing it just like we manage all of our other relationships and trying to be fair to everyone, shareholders and institutions and our customers. So expected to flow up. We're really working on that been a much smaller impact to the overall deposit base.
Understood. That's helpful. And kind of along the same line of questioning, I think, Chris, you may have briefly mentioned this earlier, but can you talk about how you view brokered deposits as part of your funding base going forward? I mean do we see those decline all the way to 0? Or is there some small degree that maybe stays on the balance sheet as a sort of asset liability management tool?
Yes. So the way that we use brokered deposits, if you noticed, they were down this quarter, and we use -- we do not use brokered deposits as -- to fund our loan growth, okay? For us, it's a vehicle that we will use to maybe lower our cost -- our overall cost of funding at different points when we see some value in that particular funding channel. But that's why you will see it go to 0 from time to time. And you -- as a matter of fact, if you went over the last 5 years, if you went pre-Franklin transaction, you would have seen it sit at 0 for long periods of time. And so -- so we don't use it -- we view it as -- we don't use it to fund growth. We use it as 1 more funding source to basically lower our cost of overall funding.
[indiscernible] Potentially achievable in 2024, even with all these moving parts?
Yes, we do actually think it's potentially achieveable. The key is what happens on the revenue side. We're going to continue to manage the expense very closely and tightly throughout 2024. And frankly, every day always. We want to make sure that we're doing that. And so it's a little bit dependent on the revenue side, what happens with the margin what happens with some of our other income source -- other revenue sources like mortgage price.
The next question comes from Steve Moss of Raymond James.
Just following up here on a couple of things. Maybe just curious where -- on loan pricing, I'm just curious what you guys are seeing for new and renewals with regard to C&I and CRE loans these days?
Yes, Steve, it's Michael. And Travis, you jump in here just whenever. But new loan commitments coming in about over 8% still. I think we're about [indiscernible] in December. So when [indiscernible] was asking earlier about surprises for the year, we did -- we have seen our customers adjust up to the new normal, which is 8% plus on loans and commitments. And so that has been a positive in that way for the better part of the back half of the year for sure and we continue to see that. Even though kind of longer-term treasuries have come down, it has an adjusted kind of loan pricing, the way we see it, which is typically more towards the short end of the curve. So Travis, anything you'd add to that?
No, I think that's spot on.
Okay. That's helpful. And then just curious, Chris, you spoke earlier in the call about M&A and your expectations for transactions to increase over the next 12 to 18 months. Just curious, has the pace of discussions picked up here since October, November?
No, it does not. As a matter of fact, if anything probably less discussion, I'd say, over the in holidays and not a lot of discussions. So for us anyway, keep in mind, this is a research of 1 here. You'll hear from others as we go through our earnings season. But we haven't seen a pickup really to be just -- I mean, that's going like you see it, we haven't seen a pickup in the conversation.
This concludes our question-and-answer session. I would like to turn the conference back over to Chris Holmes for any closing remarks.
All right. Thank you all very much for joining us. Again, we always appreciate your interest and support, and we will look forward to a great 2024. Thanks, everybody.
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.