Q4 2023 FB Financial Corp Earnings Call

Presentation

Operator

Yes, good morning, and welcome to FB Financial Corporation Fourth Quarter 2023 earnings conference. 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 Investor Relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call at this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation.
During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. Forward-looking statements are based on management's current expectations and assumptions and are subject to risk, uncertainties and other factors. It 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 in this morning's presentation, which are available on the Investor Relations page of the Company's website at www.firstbank online.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, and thank 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 close out '23 and enter '24 and what we believe is an enviable position due to three 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 we should be able to continue that momentum into 2024.
From our 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 that 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 to TA ratio. Our regulatory capital ratios are also quite strong when you adjust unrealized losses and regulatory ratios we also rig for the top of the class for those strong capital levels. We are 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 services sources.
On the credit side, we keep a balanced granular diversified loan portfolio with with only a handful of blending relationships over $30 million and non approaching our legal lending limit of over $200 million for a tenant can following the Franklin Financial acquisition, we had a concentration in construction lending, but currently our ADC to Tier one ratio -- I'm sorry, our ADC to Tier one plus ACL ratio is 93% and our CRE ratio is 265%. We've averaged less than five basis points of annual net charge-offs since becoming a public company seven 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 higher level of public funds. And we like sits our Blair 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 redesigned and reinforce 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 statement that he was preparing for the worst and forecast, but the US 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 it grow loans and deposits and organic compound annual growth rates up 15.5% and 16.4% respectively. Over that period. It had completed four of our four acquisitions over four years. That added a total of $5.7 billion in assets. While we had made significant investments along the way, much of our organizational structure and operating process had been reinforced through additional headcount, incremental improvements and tack-on additions prior to our recent rebuild. That structure was beginning to feel like it had been cobbled together reactively and out of necessity, no longer allowed for the proper efficiencies of scale and had led to some expense creep, the risk of sluggish growth environment in the industry is that the industry has experienced over the past several quarters was well-timed for us and we were able to resume we were able to focus on constructing the organizational structure that enables us to properly scale into the future. The overall talent level, a key support functions has increased. While the expense base has shrunk, we've improved accountability and efficiency of interactions between this 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 are utilized. We view this model as a key differentiator 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 two 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 or organic growth, first, strategic M&A. Second, in capital and profitability up and optimization through things like securities, trade, share repurchases and redemption of capital or thinking 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. In 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 2020 forward loan growth will be funded by customer deposit growth. We saw deposit cost cost moderate in the fourth quarter. And while the competitive environment continues to make it difficult to grow deposits. We're encouraged by the positive pricing trends that we saw in the fourth quarter. We remain active in relationship manager, outreach and recruitment focused primarily in 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, our 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 make 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 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 obstacle.
As a reminder on our financial parameters we valued based on their worth in performance rather than our ability to pay.
As we think broadly about the M&A landscape and more specifically about our placement 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 and strong markets, we believe that we have a compelling story for those banks that are interested in.
Moving to our third priority, Michael and his team continue to evaluate opportunities such as last quarter securities trade that improve profitability, optimize capital while limiting any book value dilution.
So to summarize, before I hand the call over to Michael, we spent significant time over the past two quarter laid a solid foundation. We owe them I'm sorry, over the past two years, laying a solid foundation. We've always felt strongly that the value of our local authority Creek community banking model creates value in our footprint. We also feel strongly that that we have the process procedures and 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 will 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 moving pieces to it, so I'll take a minute to walk through our core earnings, we reported net interest income of $101.1 million. Reported non interest income was about $15.3 million. Adjusting for a loss of $3 million at 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 Oreo and securities. Core non-interest 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 non-interest expense was $74.4 million, $63.7 million of which came from banking. All together, 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 seven basis points in the quarter, while contractual yield on loans held for investment increased by nine basis points on the whole yield on earning assets increased by nine basis points. First, cost of interest bearing liabilities increasing by six. This was the first quarter that the increase in yield on assets. It has outstripped the increase on cost of liabilities and the first quarter of growth in net interest income since the third quarter of 2022. And we are optimistic about that inflection, although with fewer days in the quarter. This will be likely be difficult to replicate in the first quarter 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 two point or $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 and 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 that balances increased 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 the 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 rack rate and those for those deposits would reprice is 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 few quarters as public funds build seasonally.
Moving to noninterest income, non-mortgage noninterest income continues to perform that $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 have some expected noise this quarter and as of now, we are unaware of any one-time 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 non-interest expenses of $305 million to $310 million for '24. The caveats for that expense guidance would be that $255 million to $260 million of banking expenses do not include any significant revenue producer hires and then mortgage could tick higher interest rate locks like volumes pickup on the ACL and credit quality credit remained benign this quarter as we experienced four basis points of recoveries, and we experienced net charge-offs of less than one basis point for the year in six of our eight years as a public company, we've had charge-offs of less than 10 basis points. And in four of those years, we've had charge-offs of two basis points or less we had the last of our commercial loans held for sale, leave the balance sheet from close of the Franklin merger to today, we ultimately realized a $7.2 million net gain on that port 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 reduce unfunded commitments for construction loans by 56% or $913 million as well.
Our ratio of construction loans, the bank level Tier one capital plus ACL as 93%, which is just out just outside of our targeted operating range of 85% to 90% related to the decline in construction balances this quarter we did see our multifamily increased as construction projects moved to permanent financing. Our ratio of ACL to loans held for investment increased by three basis points during the quarter to 1.6%, but our 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. Absent a material change in the consensus outlook on capital we have built significant excess capital and now stand at over 12% common equity Tier one 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 outcome for 2024, we feel very comfortable with where we stand to there being 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, base for your interest. And operator, at this point, we'd like to open the line for questions. Michael and myself will be here together kind of this Edmonton is on the phone with us, our Chief Banking Officer. I was unable 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 downtown Nashville. He's even downtown, not so on, but he is with us on the phone. So operator, we'll turn it. We'll open it up questions.

Question and Answer Session

Operator

(Operator Instructions) Catherine Mealor, KBW.

Good morning. That won't go into them because there was a margin and it was utilized on kind of the momentum in the margin this quarter and up. You can truly 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 on kind of movement in the funding base. But I'm just curious more broadly, how you're thinking about how your balance sheet will react if when we start to get on rate cuts and the index deposit information you gave, Michael was really interesting that feels like a bigger number than I appreciated at $2.8 billion. And so could you 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 balance or the the loan side as well, just so we can kind of price in potentially where that margin could go once we start to see Fed cuts?

Good morning, Catherine. So when they be at the $2.8 billion in index deposits is something, as Chris mentioned, kind of the balance sheet over the last two years that we've really been cognizant of years past, we didn't have that lever. And so our deposit cost lagged when rates went down. So So that's been something we've really focused on. We are at slightly asset-sensitive still. So I would expect if if there were and material rate cuts that you would see some them compression but we feel like we've taken a lot of that staying out. And if you think back to 2020, when we saw some pretty large TAM compression with a rapid drop in rates. So we are prepared for that. But we feel like we're a much better balanced the deposits reprice effectively. Some of the index loans will reprice as soon as the Fed cuts and a lot of the loan side is either indexed to prime or to some some other treasury rates and they take sometimes 90 days. So it is a slow slower move down on the on the loan side. And then of course, for the nine index deposits, we have to be very cognizant of moving those down in line with rates and from a management perspective as well.

Hey, Catherine, I would just add one other point. Remember, we were probably faster to rise on deposit costs than some others, especially the bigger national and super regional banks of listening to a few of the results home Friday from some of those banks, they think their their costs are going to continue to rise for one part of our index was a value play for customers, but it's also a play that that we thought they were going to raise any way. And we think that index should allow those to move down a little more was a little more speed than maybe some other, so to too low fast rise, but will take a little faster drop element 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.
What's your I know it's a crystal ball 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 on or at least for '24, kind of how are you thinking about the size of the balance sheet?

So and I'm I'll say this before I am joking here, Catherine, but no, I did not say 10% to 12% loan growth rate asset 10% to 12% growth rate and I'd make that sort of widespread because as specifically took the word loan out of that for our whole team because that growth rate has to be moved 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, that 10% to 12% and we lag sometimes on the deposit side. But that's an important, a really important metric for us.
But specifically to your question, so on the on the loan side or I'm sorry on on in terms of growth in the first half of the year coming a little slower that what we're saying mid single digits, frankly, the we're not terribly confident one way or another. And what growth is going to look like in the first half of the year. So we're 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 we could pick up some momentum is where our head is fixated anymore. And part of that is because we're still doing a little bit of really managing our concentrations and have a still while we're we're optimist and we actually think good things about the economy, both locally and nationally. We think it's still tend to be fairly prudent or can't really prove it actually will concentrations over the next next couple of quarters as we and we think that can be gained steam throughout the year.

And I totally appreciate that loan and deposit some clarifications are really important to thank you for highlighting that you quoted.

I think it will support for us to reinforce it directly. Seems like valuations are a little looser. We reinforce at Airbus it's important. It's an important metric for us.

Operator

Brett Rabatin, Hovde Group.

Hey, good morning, Michael and thereabout. I wanted just to start off with the deposit strategy from here, your cost of funds is leveled out, but you're still having some creep on the various components away from non-interest 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 highest Circle Partners announcements and this morning 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 how do you grow deposits at a similar?

Yeah, Brett, a couple. Couple of things that are growing. Deposits is a longer term business proposition in Italy. And it's been it's just hard work. And so that's what when that I wish I wish I could say we had a magic bullet. We go. We do it will begin it will be on it will be growing customer deposits. As we say often, our balance sheet is not wholesale. It's customers on both the loan and deposit side. So it's it's hand-to-hand combat. And that's also why we have a numerator and Katherine's question that we emphasize it all the time. So there's no magic bullet. It's it's just we do have some advantages. We do have a retail component as well as a commercial company component to that, we our doing some work to really redefine reinforce our value proposition on that side. It just just takes focus and execution. And so that's what we anticipate in 2024.
You mentioned a hash circle. We didn't have banking as a service capability. I don't want that I don't want to move for us. That's perhaps different than some others. We really wade into that as opposed to dive into that. It's not a strategy that we really even counting on from a, let's say, from a budget projection standpoint. But we have the capability and that's a lever. We tried to keep the levers on the deposit side and the funding side, I mentioned the fact that we focus on the customer balances notice. We do it. 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, is not one single thing.

That's helpful. And then, Michael, you've been some helpful with the multifamily market here and here in Nashville, and I've seen some discounting, but and some free rent months, but perhaps that's actually healthy just kind of given the strength of the market. I wanted just to talk a little bit about multi-family and just how you see that space playing out for Middle Tennessee this year?

I'll let Travis jump in here because he's the expert. But yes, while we have seen a lot of units absorbed specifically in that on the last 12 months, as you're aware, and I'm pretty much everybody on the call, I'm sure, although your local we had about 20,000 units coming online and so and I think it takes a couple of years to probably absorb that still stay in the positive in-migration in Africa, the latest count, 96 people a day or something for us on the Business Journal. So I think that that gets absorbed over time, but there certainly are a lot to absorb and concessions have picked up, I think for new communities are four communities. I am just going to take a little bit and hopefully bring down some of these rent prices, I would say for for the people movement and Travis is there anything you'd add to that?

No, I think 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 on 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, you know, some people could be on waiting lists for many, many months. So they're still some demand out there. But we're keeping a close eye on it, especially downtown Nashville. We don't have a whole lot of exposure to downtown National Multifamily where most of those units are coming on. So overall, we think it's still a healthy area. We still think multifamily is a healthy asset cost, but we're we're not jumping in to trying to do more construction in that in that arena.

One last quick one. I'm finishing up Jim Ayers book, which is really good. And I was curious, just culturally, if there's anything, you know from his presence that you think is a key point for the FBK. franchise in terms of what is instilled in either management or rank-and-file people?

Yes, Brett, from that, I'd say the list is long and Jim's presents even today. I mean, he's not here in the office every day, but he is absolutely a hundred percent key deal included. And what goes on with the Company still owns 22% of the company. And two, you will find a higher, a higher, more respected perhaps in a more respected guy in our eyes in terms of his legacy around around here. And I said it's a legacy, but it continues today. His presence continues to that. Some, you know, here's what it is. It just an 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 still don't get effort confused with results and now was that a land we would have done, we would use it a lot, you know, towards each other and towards others in the Company and see 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 you know what your private company has lesser. So but if you look at our performance record for it is almost a decade before we were a public company, it would have still that would have ranked very, very high among our peer group. And so that that DNA of performance in winning is the one thing I would say that there is Jim Ayers, strongest legacy is at the end the day. It's all about winning that weaved into the company's DNA. And it comes directly from generics.

Operator

Thomas Wendler, Stephens.

Good morning, everyone. At our result last quarter, we saw the 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 your C&E moving forward into 2024 and maybe any of the other concentrations you're managing?

Yeah, Travis, I'm going to let you comment. I'm going to make just a couple of comments is we've got some room in total, though dozens of concentration of management metrics beneath the headline metrics that that become public. There was a couple of comment on C and D our micro, but actually made some reference to we'd like to manage that down closer to say 85% were maybe up to 90% to 93%. So we view that as just for our sort of risk tolerance and end up risk appetite that we would manage it down just a little bit from where it is, but it's at a very minimum merit, very manageable rate right now. Same way on the overall CRE were at T. 65, and we would manage that down just a little bit from where we are, we'd be down to 50 or less or So just again, just the it's 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 us that, you know, for all of the major asset classes. But even within those I think about managing of hospitality, hospitality within CRE, I think about it, which we don't want to get too out right now. We are talking about multifamily. We're watching that, that concentration fairly closely on. And then I think it goes all the way down the concentration in things like rid of old and things like that, where we have some some specific concentration limits into Michael or Travis, when do you have any other comment on that?

The only other comment I would have is that we do watch multiple concentrations internally. Obviously, the ones at the bottom there. Again, a lot of the headlines right now, which is office and multifamily, 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 would be very mindful and anytime we get a request in those categories.
And then Chris alluded to the IDC did a really good job explaining that. So we still have a ways to go and reducing our exposure to ADC from. We're probably in that 75% to 85% range is where we want to be over the next few quarters. And quite frankly, we would want to stay there. So no significant growth in that category coming quarters.

Yeah, Tom, I'd I'd say on the other side of the balance sheet and gets less focus externally, we have deposit concentrations that we're constantly monitoring as well around municipal deposits, public funds.
Yes, CD types and 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 concentration.

That was a lot of great color. I really appreciate that.

The other thing I would say is it just it just appointed commentary is we consider that a really strong risk management on the liquidity side because of where you are. But when we look at 2023 was a was a when we talk about I think I used the word granular, maybe three times in my prepared comments, but we'll have been really, I think, in loans and deposits there both arm, we we view that as a really strong risk mitigation 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 really big our liquidity advantage for us in things like we experienced things like we did in March of 23 again, and with the way that the way that money moves today. Again, we like our we like our position.

Thank you for that. 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. I'll obviously, Mortgage had a tough fourth quarter, specifically in a year kind of fell off. Volume was off a cliff, but 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 and mortgage should be a huge contributor in 2024. We also don't expect mortgage to lose money and there's there are some benefits there.
Yes, 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 at retail earlier. We think mortgage is very important pieces of the retail story and something that is a critical product. And I think brighter days are ahead for the mortgage industry. But yes, the whole industry is not out of the woods yet, and we'll see how the how things develop with prime rates, but also affordability within the industry, so which is a challenge in most of our markets.

All right. Thank you for that. It sounds good.

I will add just one thing on mortgage. Two things two or three things. One, we had a good quarter. We felt like a pretty good, pretty good, pretty solid foundational quarter in spite of more digital mortgage did not have a habit to 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 thing that we recognize that we don't talk about it, Matt, is we'll we don't give any net interest income credit we don't give any and any credit for that part of our business or what happens to net interest income, which that's that, that's that that distorts 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 of the origination bond because it doesn't take doesn't take much capital, and it has a significant upside. And as Michael said, from a retail standpoint, we think it's a 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 more factory. We really don't have much at all in our our projections for next year in, but we will also our target, we will make sure we ensure against any downside. And so that's how we're viewing it as well, and we're stepping forward here.
All right. Those are my questions that you guys and good quarter.

Operator

Alex Lau, JPMorgan.

Following up on the questions come in 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?

Yes, yes, yes. Yes, good question. It'll be perhaps slightly front-loaded, but I'd say just slightly front-loaded because like so that is 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 a weapon. 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 gradual.

And Alex, than ours yet you have to kind of phenomenon there IGF as they go from unfunded, those balances are reduced in either that creates a release from the unfunded bucket mania migration on the ACR thoughts as you go from us construction reserve of net 2.5%, 3%, call it a multi-family or CRE bucket. While those balances go up, you can if you stay in that kind of weighted one 60 range, but it creates a little bit less impact. And so add to Chris's point, it will be gradual, but that's that's where you see some of that relief 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.

And Travis, do you want your take and will add some color.

Sure. Good morning out there are C&I loans and move this quarter were just kind of one-offs there is no no pattern for anything we've seen. And we still see just normal course loans moving in and out of the classified assets moving into special mention move and out upgrades downgrades. And so it's still pretty normal out there. And what we're seeing in credit quality and in fact, the one credit we talked about last quarter, that's got a lot of positive momentum. And so that one is trimming where it probably won't be an issue in the coming months. If everything were cautiously optimistic, if everything keeps going the way it is so no systemic issues that we're seeing right now is just continual portfolio management. You always have one or two that you're worried about.

Thank you. And one follow-up question on NIM and NII, you mentioned moving back to a 330, 340 range and also some optimism on in an inflection point in I&I, maybe in the second quarter, what are you assuming for the rig KIRK scenario?

Yes, that Alex will probably it's a little bit of an outlier in the way we think about rates because we don't see a whole lot of impetus to lower rates. And that's watching CNBC this morning and they're talking about the forward rate curve, a fee of a slightly larger financial and patient access and I was talking about it at Davos agenda. And yes, they had four price down and four in 25. And so we kind of think about it and basically status quo in our kind of budgeted numbers.
And would I just expect to see, as Chris mentioned, needing when you need deposit growth deposit growth, we've got a great 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 and net interest margin comes from just composition of that.
Yes, that the forward curve has been wrong for the last two years. And so we've been we're slightly less conservative there.

Yes, we could have about four to down in the second half. But 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 base you are. But we again, we don't see the moves down that 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.

Operator

Stephen Scouten, Piper Sandler.

Hey, good morning, everyone. A statement for you. So what's worth even less than your view on rates would be my view on rates, but I'm I'm with you, I don't really see what the forward curve is telling us today. That said, if we could see more cuts in '24 and '25, can you help frame up the potential for what the mortgage business could return on it from a profitability standpoint today in an upside scenario. So obviously, it's a very different business than it was in '21. When we last had probably a pretty robust market there.

I mean, I think there's there's pent-up demand out there specifically for first time homebuyers of people, it's 6% mortgage rates, a lot different than us than the [8%]. And so you can see some refinance activity. There's very likely if you kind of read all the publications that are people that have been waiting to move because I don't want to get out of a 34% mortgage. So I think there's upside as you mentioned, Al, I don't think you have a $25 million, $30 million mortgage contribution year because we, as Chris said, taken a lot of the downtime 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 the revenue here and looking to buy houses. So we're 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 and building business that way in the purchase market.

I think I think also a couple of things. The business has been out and will thin out even further from both independent mortgage companies, but also some of your largest banks that net that have exited. And I think it actually create a pretty nice spot for a couple of the larger regionals and the smaller regional both. And so I think I think that's the reason we we analyze, as I said earlier, hey, why are we in the business and do we need to be in the business? The answer is yes, we do think there's upside. And so so if you think also about there's some pent-up purchase demand. So as well 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 six or eight rate bumps down when that does eventually happen, even if it's two years from now that bids are 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 and that again, when you add to it our retail side, which we think it's important to and you add to it the fact that we it's difficult to grow net interest income. We like all those pieces of it.

Yes, that sounds good. I'm curious, you noted your second priority from a capital strategy standpoint. Is it kind of M&A if you stack rank those, but you also noted that 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 of more deals we get to a certain size where you're no longer able to have that structure? Or is that kind of Integral how you guys think about running the bank irrespective of size moving forward?

Yeah, 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 a spin in two years to take a step back and really cannot evaluate our structure, evaluate our efficiency, evaluate our scalability. We think that's the right way to run the bank and so we've thought about when we're thinking about every day with what would have finished a scalability and we do them, we think about risk also, you know, there's a it's not only credit risk, which has perhaps most the most traditional risk type of risk that we think about when we think about compliance risk, we think about from a reputational risk all of those, those those things with that model. And so we've been very thoughtful in how we continue to design it and for the long term. And so we did the E&O look, if we do an acquisition that adds a lot of debate and assets to the Company or and then another one that adds another two or three and then another one that adds five, we think the model is still going to be small, and we think that's important and we think it's a we think it's a very significant competitive advantage for the types of institutions that we'd like to partner with. And we think we'd like to partner with us because they are typically going to have some retail density to ARM a big deposit side again through is really key to us, and we think that's that important. And so we've designed it to continue that model.
A good question, one that we ask ourselves all the time one, that just reinforces our commitment to the model.

And then maybe just lastly for me, and this is kind of super high level and you may not have an answer for this, but I know the market seems to have gotten the banking segment wrong throughout a lot of the last half of '23, right it was well as new always me. And then all of a sudden we got this huge run-up in November. I'm just kind of wondering at a high from a high level business perspective, has there been anything that surprised you and 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 all?

I'll give a maybe a figure to and Michael, both Travis you guys to chime in if there's something one thing is as we went through the challenges of 2020-23, where of the two biggest mobile to virtual ones were the failures in March and are the failures in the early half of the year of Silicon Valley signature are referred from public. The fact Mary, as 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 are our customers. It was almost like wait I know you're safe and I know I'm in a good spot so that that that was a big positive surprise, I would say in the same with that, I'd say what's been a positive surprise is as rates have gone up and if treasuries have have have have really the interest rates or interest or that you can earn on treasury versus maybe a deposit scale. Again, the willingness of customers to have a conversation about that. Instead of you just found another milestone.
And. we go back to I think there's Catherine's question and some others about how we and we really think about that fairness of value as a part of our value proposition and customers. I understand that, and that's been a that's been a positive for us.

You had I mean not a surprise as Stephen, but I think maybe a surprise to the industry at the downfall, the community banking system, which resolves all over the news headlines in March, April, we actually, as Chris mentioned, were steadfast in the other quarter, and I think that that's been proven out. In fact, we hear from customers all the time, but I still believe.
And really back to your other question, the model, the local decision making the serving of the customer, let's say so not a surprise to us, but maybe a surprise to the aforementioned CNBC crowd a little bit less share.

Hey, Steve, and I got one more, I guess, surprise that deposit insurance remains at and maybe it's not a surprise, but this is a plea deposit insurance remains antiquated would be a surprise that it's not a surprise because we have trouble getting anything out of Washington, but you do the deposit insurance system needs to be reform and there needs to be some thoughtful folks there that change how deposit insurer. And at the end of the day, that side of the FTSE ventures, big insurer. So that FERC is a big mutual insurance company with the banks that are the customers and therefore the orders and the funders of that. And we regulatory from a from a provider by law and regulation for kind of barred from doing much with it, but it's a surprise that we we just can't get any momentum to to modernize it. So yes, the FX for a second, naturally happy to read it right. Very good placement.

Operator

Feddie Strickland, Janney Montgomery Scott.

Good morning, gentlemen. I just wanted to ask a clarifying point to kick off on the public funds flow. So it sounds like that was deliberate, but they were a little lower. And what we would normally see this quarter will we 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, very good morning. It's Michael. Definitely deliberate in Q4 and really going forward that I kind of put in a plug for deposit concentration, deposit management, where 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 were, yes, these are strong customers where we really focused in on some of the more transactional, higher interest kind of excess funds. There's a couple of things going on there. You have some some other financial institutions were still paying and Fed funds plus on some of those deposits, which we just were not willing to do on excess interest. And then yes, there are some state funded insured deposit rates that are actually pretty high right now. And so some of those is just better for those municipalities.
Yes, they're doing what's best for their taxpayers. And so they move some funding over there. I would expect first quarter, right, you had taxes coming in and 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 to be fair to everyone, shareholders and institutions in the and our customers. So I expect that to flow up. We're we're really working on that very 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 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 zero? Or is there some a small degree that maybe stays on the balance sheet as a sort of asset liability management tool?

Yes. So to the weather, we use broker deposits, if you noticed, they were down this quarter and we we use we do not use brokered deposits as a as that, but to fund our loan growth, okay, for us, it is 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 that's why you will see it go to zero from time to time. And you that matter fact, if you went over the last five years, you weren't pre Franklin transaction, you would have seen it sit at zero for long periods of time. And so on so we don't use it. We view it as we don't use it to fund growth. We use it as one more funding source to basically lower our cost of overall funding and that's why we're in and out of it from time to time.

Got it. That makes sense. And one last quick one for me. Just I think it pegged to 57% core bank fish for bank-specific ex mortgage this quarter. Last, I think last quarter we were talking about potentially getting down in the mid 50s on the core bank on efficiency. Do you still think that's potentially achievable in 2024 even with all these moving parts?

Yes, we do actually think it's particularly acute. Why even though the key is what happens on the revenue side, we're going to continue to monitor and manage the expenses very closely and tightly throughout 2024. And frankly, every day always if we want to make sure that we're doing that and to it's a little bit dependent on the revenue side, what happens with the margin on what happens with, you know, some of our other income short other revenue sources like mortgage for us.

Operator

Stephen Moss, Raymond James.

I wanted to just follow-up here on a couple of things that maybe just curious of your query on loan pricing. Just curious what you guys are seeing for new and renewals with regard to in IA and CRE loans these days?

Yes, it's Michael and Travis, you jump in here whenever, but new loans commitments coming out and about over 8% still. I think we're about [8%, 10%] in December. So I wouldn't discount was asking earlier about surprises for the year as 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 has been a positive been 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 hasn't 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 that's helpful. And then 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 has no active matter fact, they probably that's a discussion. I say it was up what were the you did have the holidays and not a lot of discussion to two for us anyway, gatekeeper man, this is research of one here. You will hear from others as we go throughout earnings season, but we haven't seen a pickup on really up to be just I mean, this guy like CMT pickup and conversation.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Chris Holmes for any closing remarks or I thank you all very much for joining us.

We again, we always appreciate your interest and support, and we will look forward to a great 2024. Thanks, everybody.

Operator

The conference has now concluded. Thank you for attending today's presentation, and you may now.