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 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 risks, uncertainties, and other factors that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks that may cause actual results to materially differ from expectations is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-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 the 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 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.

Hi, good morning, and thank you, Andrea. Thanks everyone for being here this morning. We appreciate your interest in FB Financial. For the quarter, we reported earnings per share of $0.63 and an adjusted earnings per share of $0.77. Our tangible book value per share, excluding AOCI impact, has increased at a compound annual growth rate of 13.8% since our IPO. We finished 2023 and started 2024 in a strong position due to three main factors. First, we have a robust balance sheet; second, we've revamped and strengthened our operating foundation; and third, we've seen a profitability boost after reaching an inflection point in the second half of 2023, which we expect to carry into 2024. Starting with our strong balance sheet, this is based on our capital position, liquidity, credit profile, and diverse loan and deposit portfolios. Capital reflects safety, and maintaining solid capital ratios is always a priority, but it becomes even more critical during uncertain and volatile times. Our tangible common equity to tangible assets ratio is 9.7%, one of the highest in our industry. We hold no held-to-maturity securities, meaning that all our unrealized losses are included in this 9.7% ratio. Our regulatory capital ratios are also strong, and when considering unrealized losses in the calculations, we still rank well. This strong capital base supports our solid liquidity profile, with a loans plus securities to deposits ratio near 100%, currently at 103%. We have access to $7.1 billion in liquidity sources. Regarding credit, our loan portfolio is balanced and diversified with few relationships exceeding $30 million, and none nearing our legal lending cap of over $200 million. After the Franklin Financial acquisition, we had a concentration in construction lending, but currently our ADC to Tier 1 ratio is 93%, and our CRE ratio is 265%. Since going public seven years ago, we've seen average net charge-offs of less than 5 basis points annually, and we remain well-reserved, with an allowance to loans ratio of 1.6%. On the deposit side, we have a focused customer-centric funding base. Although we've had a higher amount of public funds since acquiring Franklin in 2020, we have consciously moved these deposits towards customer funds, reducing public funds by 23% since the fourth quarter of 2022 to approximately 15% of our deposit base. Regarding our redesigned operating foundation, in early 2022, we assessed the economic landscape in anticipation of rising interest rates, a recession, and quantitative tightening. Our outlook was further solidified by Jamie Dimon's comments about preparing for a potential economic hurricane. Even though this crisis did not materialize, we took proactive steps to manage capital, liquidity, and loan concentrations, resulting in the strong balance sheet I described. At the same time, we grew our assets from $3.2 billion at our IPO to $12.7 billion, with loans and deposits increasing at compound annual rates of 15.5% and 16.4%, respectively. Over four years, we completed four acquisitions that added $5.7 billion in assets. While we invested significantly, we also realized that our organizational structure had become fragmented and reactive rather than allowing the efficiency of scale, which led to rising expenses. The challenging growth environment over the past several quarters served as a catalyst for us to build a better organizational structure for future scalability. We have enhanced our talent levels and support functions while managing to reduce our expense base. Our interactions between important functions and relationship managers improved accountability and efficiency, helping us maintain our community banking model rather than adopting a centralized approach. We believe our model is a key factor in enhancing associate and customer satisfaction, facilitating organic growth, and making us a more attractive partner for mergers with smaller community banks. I am pleased to report that we have maintained earnings momentum over the past two quarters. We are enthusiastic about deploying excess capital to enhance profitability, prioritizing organic growth, followed by strategic mergers and acquisitions, and optimizing capital through activities such as securities trades and share repurchases. In the fourth quarter, our loan portfolio grew by $122 million, representing a 5.2% annualized growth rate, even as we reduced construction exposure by $135 million. For 2024, we expect mid-single-digit growth as the economy moderates and we remain selective in high-risk asset types. This growth will be supported by customer deposit growth. We saw a stabilization in deposit costs during the fourth quarter, and while competitive pressures make deposit growth difficult, we are encouraged by the trends observed. We remain active in recruiting relationship managers, primarily within our operational footprint, and are open to adding strong teams in nearby markets. As economic conditions improve, we anticipate returning to our target organic growth rate of 10% to 12%, owing to our strong markets in Tennessee, Alabama, North Georgia, and Southern Kentucky. Conversations with fellow bankers indicate potential opportunities for bank combinations in the coming years. Public valuations are improving, and while credit uncertainty remains a challenge for certain banks, we are confident in their credit cultures and portfolios. We do not see this as a major barrier. As a reminder, we assess banks based on their performance rather than our capacity to pay. Looking at the broader M&A landscape, we believe some consolidation is imminent due to the reduced activity over the last 18 months and the growing challenges of running community banks. Given the limited acquirer options that align with our footprint and our operational strengths, we believe our story is compelling to interested banks. Lastly, Michael and his team are continually evaluating opportunities, similar to last quarter's securities trades that improved profitability and optimized capital while minimizing book value dilution. In summary, we have spent considerable time over the past two years establishing a strong foundation. We firmly believe in the value our local authority community banking model provides. We also have the necessary processes, procedures, systems, and team to scale effectively. Therefore, we have structured a balance sheet that positions us to seize our opportunities. I look forward to seeing how our team builds on this foundation in the coming years. Now, I’ll turn it over to Michael for further details 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 as the last loan in our commercial loans 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 non-interest expenses of $80.2 million, adjusting for $4 million of severance, early retirement, and branch closure expenses, and $1.8 million of FTSE special assessments from bank failures earlier this year. Core non-interest expense was $74.4 million, $63.7 million of which came from banking. Altogether, adjusted pre-tax pre-provision earnings were $45.4 million, and banking adjusted pre-tax 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 the cost of interest-bearing deposits increased by 7 basis points in the quarter, while the contractual yield on loans held for investment increased by 9 basis points. On the whole, the yield on earning assets increased by 9 basis points versus the cost of interest-bearing liabilities increasing by 6 basis points. This was the first quarter that the increase in yield on assets has outstripped the increase in the cost of liabilities in the first quarter of growth in net interest income since the third quarter of 2022, and we're optimistic about that inflection. Although there are fewer days in the quarter, this will be likely 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 moving rates, and $1.85 billion of those loans repricing within 90 days of a change in interest rates. As for 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%, which amounts to a combined $550 million maturing through year-end 2024 with a weighted average yield of 3.39%. For December, the 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-in subsequent runoff of public funds than we have in years past. We ended the year with $1.6 billion on balance sheet at year-end and expect that 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 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 rack rate on those deposits set to 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 3.30% to 3.40% range over the next few quarters as public funds build seasonally. Moving to non-interest income, non-mortgage non-interest income continues to perform at $10 million to $11 million range, and we expect that to remain in that band plus or minus the next few quarters. Our non-interest expenses 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 expect 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 2024 would be approximately $255 million to $260 million. We would anticipate mortgage-related expenses of $45 million to $50 million for 2024, and all told, we anticipate total non-interest expenses of $305 million to $310 million for 2024. The caveat to that expense guidance would be that $255 million to $260 million of banking expenses do not include any significant revenue producer hires, and mortgage could kick higher if interest rates pick up volumes. On the ACL and credit quality front, credit remains 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 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 2 basis points or less. We had the last of our commercial loans held for sale leave the balance sheet; from the close of the Franklin merger to today, we ultimately realized a $7.2 million net gain on that portfolio relative to our initial mark. 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 was 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 multifamily increase as construction projects move to permanent financing. Our ratio of ACL to loans held for investment increased by 3 basis points during the quarter to 1.6%, but our provision expense was only $305,000 as a 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've 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 is 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 I are here together, along with Travis Edmondson, our Chief Banking Officer, who was not able to be here in person because we're under the same snowstorm that a lot of folks around the country are experiencing. So, operator, we'll open it up for questions.

We will now start the question-and-answer session. Our first question will come from Catherine Mealor of KBW. Please proceed.

Thanks. Good morning.

Good morning, Catherine.

Good morning, Catherine.

I start with the margin. You had some nice positive momentum in the margin this quarter, and I can truly appreciate the guidance for the first part of the year, still coming down a little bit in the 3.30% to 3.40% range just given public funds and movement in the funding base. But I'm just curious, more broadly, how you're thinking about how your balance sheet will react when we start to get rate cuts? The index deposit information you gave, Michael, was really interesting. It feels like a bigger number than I appreciated at $2.8 billion. Can you just 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 balance or the loans side as well, so we can potentially price in where that margin could go once we start to see Fed cuts? Thanks.

Yes. Perfect, Catherine.

Good morning.

So yes, the $2.8 billion in index deposits is something that, as Chris mentioned, we've really focused on over the last two years. In years past, we didn't have that lever, and so our deposit cost lagged when rates went down. That's been something we've really prioritized. We are slightly asset-sensitive still, so I would expect if there were material rate cuts, you would see some NIM compression. But we feel like we've taken a lot of that into account. If you think back to 2020 when we saw some pretty large NIM compression with the rapid drop in rates. So we are prepared for that, but we feel like we're in a much better balance. The deposits reprice effectively, and the index loans will reprice as soon as the Fed cuts. A lot of the loan side is either indexed to prime or other treasury rates and takes sometimes 90 days. So it's a slower move down on the loan side. And then of course, for the non-indexed deposits, we have to be very cognizant of moving those down in line with rates 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. Listening to a few of the results on Friday from those banks, they think their costs are going to continue to rise. So 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. We think the index should allow those to move down more quickly than maybe some others. So a little faster rise, but we think 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%, 12% loan growth rate. But what's your outlook near-term for the first part of the year regarding growth, or at least for '24? Kind of how are you thinking about the size of the balance sheet?

Yes, I want to clarify that I did not specify a 10% to 12% loan growth rate. Instead, I mentioned a growth rate of 10% to 12% that includes both loan and deposit growth, as our team recognizes the importance of both for our success. We have sometimes lagged in deposit growth, which is crucial. Regarding your question about growth in the first half of the year, we anticipate it will be slower, projecting mid-single digits. Honestly, we lack confidence in predicting growth for the first half, so we are hopeful for mid-single digits. We do not expect it to exceed that in the early part of the year, but we believe we could gain some momentum in the later part of the year.

Sure. Part of that is because we're still managing our concentrations and, while we're optimistic about the economy, both locally and nationally, we believe it's still important to be cautious regarding concentrations over the next couple of quarters. Great. I totally appreciate that loan and deposit clarification, so really important. Thank you for highlighting that on the recording, I think.

The next question comes from Brett Rabatin of Hovde Group. Please go ahead.

Hey, good morning, Chris and Michael.

Hey, Brett. Good morning.

I wanted to start by discussing the deposit strategy moving forward. Your cost of funds has stabilized, but there's still some variation in the different components away from non-interest-bearing deposits. I understand that public funds have a decision-making process regarding these costs. Can you elaborate on your deposit strategy for this year? It's encouraging to see that you have a significant amount of indexed deposits already repriced lower. However, if you're growing loans at a strong rate, how do you plan to grow deposits accordingly?

Yes, Brett, a couple of things. Growing deposits is a longer-term business proposition, and it's just hard work. I wish I could tell you we had a magic bullet, but we don't. Again, it'll be about growing customer deposits. We often say our balance sheet is not wholesale. It's customers on both the loan and deposit side, so it's hand-to-hand combat. That’s also why when we were answering Catherine's question, we emphasize this all the time. No magic bullets; it's just hard work. But some advantages are that we do have a retail component, as well as a commercial component to that. We are doing some work to really redefine and reinforce our value proposition on that side, and it just takes focus and execution. That's our anticipation for 2024. You mentioned High Circle; we do have banking as a service capability. I don't want to say that’s a strategy we’re counting on 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 funding side. I mentioned the fact that we focus on customer balances. Notice, 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. So all of those strategies come into play, and again, it's not one single thing.

That’s helpful. Michael, you've provided great insights into the multifamily market in Nashville. I've observed some discounting and some free rent months, but perhaps that reflects the strength of the market. I wanted to discuss multifamily housing and your perspective on how that sector will evolve in Middle Tennessee this year.

Yes. And I'll let Travis jump in here because he is the expert. While we have seen a lot of units absorbed specifically in Nashville in the last 12 months, as you're aware, we have about 20,000 units coming online, and I think it takes a couple of years to absorb that. We’re still seeing positive end migration. The latest count is 96 people a day or something I saw in the business journal. I think it gets absorbed over time, but there’s certainly a lot to absorb, and concessions have picked up for new communities or for communities in general. It's just going to take a bit, and hopefully, that will bring down some of these rent prices for the people moving in. Travis, is there anything you’d add to that?

No, I think that's pretty spot on, Michael. We are worried about 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 lists are not as drastic as they used to be. So people are having a bit of an easier time finding a unit; before, some could be on a waiting list for many months. 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's multifamily, where most of those units are coming on. Overall, we think it's still a healthy area and that multifamily is a healthy asset class, but we're not jumping in to try to do more construction in that arena.

Okay. 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 from his presence that you think is a key point for the FBK franchise in terms of what he has instilled in either management or rank-and-file people.

Yes, Brett, you know, I'd say the list is long. Jim's presence even today, I mean, he is not here in the office every day, but he is absolutely 100% keyed in, included in what goes on with the company. He still owns 22% of the company, so you will find a higher, more respected guy in our eyes in terms of his legacy around here. Like I said, it's a legacy, but it continues today. One thing that he and I used to say to each other all the time was don't get effort confused with results. That was a line we would use a lot toward each other and others in the company. If you look at our performance record for almost a decade before we were a public company, it would still rank very high among a peer group. The DNA of performance and winning is something I would say is Jim Ayers' strongest legacy. At the end of the day, it's all about winning, and that is weaved into the company's DNA and that comes directly from Jim Ayers.

Okay, great. Appreciate all the color.

Thanks, Brett.

The next question comes from Thomas Wendler of Stephens. Please go ahead.

Hey, good morning, everyone.

Hey, Tom.

Good morning, Thomas.

Last quarter we saw C&D balances contract in line with your guidance down to the 93% capital you highlighted earlier. Can you give us any more color on your expectations for C&D moving forward into 2024 and any other concentrations you're managing?

Yes. Travis, I'm going to let you come in here. I'm going to make just a couple of comments. We have numerous concentration management metrics beneath the headline metrics that become public. I'll mention a couple: C&D. Michael made some reference to the fact that we would like to manage that down closer to the 85%, where it might be up to 90%. It's at 93%, so we view that as a manageable range right now. Similarly, our overall CRE, sitting at 265%, we would like to manage that down just a bit from where we are, targeting around 250% or less. We're managing several other categories; we pay attention to hospitality within CRE, which we don't want to get too high right now. We've discussed multifamily, and we're watching that concentration closely. Furthermore, we manage a few of the ones that come to mind, such as rent to own, where we have specific concentration limits. Michael or Travis, do either of you have any additional thoughts?

The only other comment is we monitor multiple concentrations internally. The ones gaining a lot of headlines currently are office and multifamily, which we just discussed. We're within our tolerances internally on those, so we don't have a hard stop, but we are being very mindful every time we get a request in those categories. Chris alluded to ADC, and he did a good job explaining that. We still have a ways to go in reducing our exposure to ADC; we're likely targeting a range of 75% to 85% over the next few quarters, and we intend to stay there. So there won't be significant growth in that category over the coming quarters.

Yes, Tom, I would say that the other side of the balance sheet receives less external attention. We are continuously monitoring our deposit concentrations, including those related to municipal deposits, public funds, and CDs. There is a significant internal focus on the detailed composition of our deposit base that Chris mentioned and our relationships, so managing concentration applies to both sides of the balance sheet.

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

I would add that we consider our strong risk management approach to liquidity significant because 2023 was a year where we emphasized granularity repeatedly in my prepared remarks. We see this as an important risk mitigation strategy, ensuring diversity in both our loan and deposit portfolios. We manage this closely and are confident in our position should market fluctuations occur.

Thank you for that. And then just one more from me moving over to mortgage. I appreciate the visibility is usually pretty poor. But can you give us an idea of how you're thinking about mortgage in 2024?

Yes, Tom. The mortgage segment faced a difficult fourth quarter, and specifically in the year, we saw volumes drop significantly in the last couple of weeks of the year, even though interest rates were lower. We've seen mortgage activity return in the first couple of weeks of January. We don't expect mortgage to be a huge contributor in 2024. However, we also don’t expect mortgage to lose money. There are benefits to held-for-sale pipelines that produce interest income. It's a core part of the company. Chris discussed retail earlier. We think mortgage is an important part of the retail story and something critical to our business. I think brighter days are ahead for the mortgage industry, but the whole industry is not out of the woods yet, and we will monitor developments regarding interest rates and affordability, which is a challenge in our markets.

Tom, I want to add one more point about mortgage. We had a strong quarter despite some challenges in the mortgage segment. We evaluate performance across all areas of our business, including mortgage, without any exceptions. It's consistently reviewed, just like every other part of our operations. One aspect we acknowledge, but don't often talk about, is that we do not account for net interest income from mortgage, which slightly affects our profitability forecasts. The origination segment requires very little capital and has significant potential. Our retail strategy includes this area, and we see promise in it.

All right. Those were my questions. Thank you, guys, and a good quarter.

Thank you.

Thanks, Tom.

The next question comes from Alex Lau of J.P. Morgan. Please go ahead.

Hi, good morning.

Good morning, Alex.

Good morning, Alex.

Following up on the question about the reduction of construction concentration and the impact on 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 we're at 93%. We don’t want to go up from here, and you could see a little more front-loading. We will gradually work it down from here. So you could see a little more front loading, but again, once we get down to the 85% range, you'll see it become much more gradual.

Yes. Alex, you have two phenomena at play. As they go from unfunded, those balances are reduced, which creates a release from the unfunded bucket, and then you have migration on the ACL side. So as you transition to a construction reserve of 2.53% to a multifamily or CRE bucket, while those balances grow, you stay in that weighted 1.60 range, which creates less impact. So again, it will be gradual, and that's where you see some of that release coming from.

Thank you. And then my follow-up question. Can you give some color on the C&I loans that moved into non-accrual this quarter? Are these idiosyncratic? Or is there any trend that you'd highlight there?

Yes. Travis, do you want to take that? I can add some color?

Sure. Good morning, Alex. The C&I loans that moved this quarter were just kind of one-offs. There was no pattern or anything we've seen. We still see normal course loans moving in and out of classified assets, moving into special mention, and upgrades, downgrades. It is still pretty normal out there in terms of credit quality. The one credit we talked about last quarter has a lot of positive momentum. We are cautiously optimistic that it won't be an issue in the coming months if everything keeps going as it has. No systemic issues that we're detecting right now, it’s just continual portfolio management, and you always have one or two that you're concerned about.

Thank you. And one follow-up question on NIM and NII. You mentioned moving back to that 3.30%, 3.40% 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. You know, Alex, we're probably a little bit outlier in the way we think about rates because we don't see a whole lot of impetus to lower rates. I was watching CNBC this morning, and they were discussing the forward rate curve. The CEO of a slightly larger financial institution was speaking at Davos and they had four cuts priced in for 2025. We consider it basically status quo in our budgeted numbers and expect to see, as Chris mentioned, needing – when you need deposit growth, you have deposit growth, we've got to grow core relationships. We believe in a fair customer value proposition, and so we think that includes paying interest on deposits. That's where that lower net interest margin comes into play as well as the composition. The forward curve has been wrong for the last two years, and we’re slightly less conservative regarding that.

Yes. We could experience a couple of downticks in the second half. It’s just our view, and it’s worth less than the view you might’ve gotten from CNBC this morning from a larger bank CEO. Again, we don't foresee the moves down that are being forecasted; perhaps a couple in the second half of the year is our outlook moving forward.

Great. Thanks for answering my questions.

Thanks, Alex.

Thanks, Alex.

The next question comes from Stephen Scouten of Piper Sandler. Please go ahead.

Hey, good morning, everyone.

Hi, Stephen.

Good morning.

So what's worse, an even less favorable view on rates compared to you guys, but I’m with you. I don't really see what the forward curve is indicating today. If we saw more cuts in 2024 and 2025, can you help frame the potential profitability for the mortgage business today in an upside scenario? It's obviously a very different business than it was in 2021 when the market was robust, so just trying to think how to frame that up.

Yes, Stephen, I believe there is pent-up demand especially among first-time home buyers. The difference between 6% and 8% mortgage rates is significant, and we might see some refinancing activity as a result. Many people are hesitant to sell and give up their 3% or 4% mortgages. I see potential for growth. Although I don't expect a $25 million or $30 million contribution from mortgages this year, as we've mitigated many risks, we are on a path to improvement. If rates decrease enough, we could see better margins and a contribution in the high-single-digit to low-double-digit range, as there are still many interested buyers in our markets who are relocating. Our main focus is on building our businesses and retail origination, with around 85% of our loans going towards purchases, which will create refinancing opportunities in the future for those customers.

Thanks. Great.

Yes, Stephen, I think also a couple of things. The business has thinned out and will thin out even further both from independent mortgage companies and some of the largest banks that have exited. I think it creates a spot for both larger regionals and smaller regionals, and that's a reason we analyze. We ask ourselves why we should stay in the business, and the answer is yes. There is upside in the market, along with some pinup purchase demand; so as rates stabilize and possibly drop, that feeds the purchase demand, improving the outlook. When you get six or eight rate cuts, even if it's two years away, that acts as a catalyst for the refinance market, likely providing robust activity once rates decrease. That’s other reasons; our retail segment plays a significant role in this. We have high expectations for that side, which contributes to our net interest income, and we like all those areas.

Yes, that sounds good. I'm curious; you noted your kind of second priority from a capital strategy standpoint is M&A. If you stack rank those, you also mentioned the local decision-making process versus a centralized approach, which is a great benefit to you. Is there a point where you think you do a couple more deals and get to a certain size where you're no longer able to maintain that structure? Or is that integral to how you think about running the bank, irrespective of size moving forward?

Yes, that is an insightful question, Stephen. We're pretty emphatic about the answer. It's integral to how we run the bank. When we talk about spending two years taking a step back to evaluate our structure, efficiency, and scalability, that is the right way to run the bank. We're continually contemplating every day how to scale further, incorporating risk considerations. There are not only credit risks, which might be the most traditional concern, but we also focus on compliance and reputational risks. We are very thoughtful about how we continue to design for the long-term. If we pursue an acquisition that adds, say, $2 billion or $3 billion in assets, and then another one that adds two and three, or another one that adds five, we believe that our model remains the model, and we see that as essential. This is a significant competitive advantage for the types of institutions we'd like to partner with, and they typically have some retail density along with a robust deposit side. Deposits are central to us, and we've designed it accordingly; good question, and it reinforces our commitment to the model.

That's great. Helpful. Lastly, this is a high-level question, and you may not have an answer for it, but the market seems to have gotten the Banking segment wrong for much of the last half of 2023. It was woe is me, and then we saw this huge run since November. I'm curious from a broad perspective, has there been anything that surprised you positively, whether it’s continued credit performance or customer acceptance of higher loan rates? As you survey your markets and the business, has there been any notable surprises to the positive or negative?

Yes, I'll give maybe a point or two and Michael and Travis, feel free to jump in. One particularly stands out: as we went through the challenges of 2023, the two biggest issues in my mind were the failures in March or the failures of Silicon Valley, Signature, and First Republic. Our customers transcended any concerns about our institution's safety; we prepared extensively with messages and materials to show our safety and soundness. Yet the confidence our customers exhibited in us was also a significant positive surprise. Furthermore, as rates have climbed and treasury interest rates have risen against deposit account rates, our willingness to engage with customers on that issue was a surprise, resulting in effective conversations instead of customers taking their money elsewhere. We're back to a situation in which we fairly assess value in our value proposition and our customers understand that, which has been another positive.

Yes, Stephen, I would say while it may not have surprised us, it certainly has unexpectedly proven the resilience of the community banking system, which contrasts with the headlines surrounding the sector in March and April. We've been steadfast with our offerings and maintain the confidence of our customers throughout that period. In fact, we hear from customers regularly that they still believe in us, reinforcing that our model of local decision-making has created value. So while it may not be surprising to us, it's been a positive development for the community banking sector.

Yes. One more surprise: the deposit insurance remains antiquated. While it's not a total shock, it has been a disappointment that we cannot get momentum behind modernizing it. The deposit insurance system truly needs reform. The system itself operates as a mutual insurance company structure where banks are both customers and funders, and while we're somewhat barred from doing much with it through regulation and laws, I’m surprised we cannot advance any discussions regarding how deposits are insured.

Yes, yes. I second that plea. I agree with you. Thanks, Chris.

All right. Very good. Thanks, man.

The next question comes from Feddie Strickland of Janney Montgomery Scott. Please go ahead.

Hey, good morning, gentlemen.

Good morning, Feddie.

Good morning.

Just wanted to ask a clarifying point to kick off on the public funds flows. It sounds like that was deliberate that they were lower than what we would normally see this quarter. Will we see still some flow in the first quarter? And then, going forward, the impacts 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, good morning. It's Michael. Definitely deliberate in the fourth quarter and really going forward. I kind of put in a plug for deposit concentration and deposit management. We have many solid relationships on the public fund side, so I don't want that to get lost. The priorities lie with local municipal relationships. Some other financial institutions have been paying fed funds plus on excess interest, which we just were not willing to do on those public funds. Additionally, there are state-funded insurance deposit rates that are rather high right now, so some municipalities are doing what's best for their taxpayers and are choosing to move some of their funds over there. I expect first quarter will see some of that flow higher; it will still be there, but we are actively managing that to be a much smaller impact on our 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 broker deposits as part of your funding base moving forward? I mean, do we see those decline all the way to zero, or is there some small degree that stays on the balance sheet as a sort of asset-liability management tool?

Yes. The way we use broker deposits is notable; they went down this quarter. We do not use broker deposits to fund our loan growth. For us, it's a vehicle we will use to lower our overall cost of funding when we see value in that funding channel. You'll see it go to zero from time to time. In fact, if you reviewed the last five years, you would see it sit at zero periodically. We don’t utilize it to fund growth; as we view it as one more funding source to minimize overall funding costs, so that explains our usage.

Got it. That makes sense. And one last quick one for me; I think I pegged a 57% core bank or bank efficiency excluding mortgage this quarter. I believe last quarter we discussed the potential to move that to mid-50s on the core bank’s efficiency. Do you still think that's achievable in 2024, even with all these moving parts?

Yes, we do. I think that's potentially achievable. The key lies in revenue generation; we will continue to manage expenses closely and tightly throughout 2024. We always want to make sure we're doing that. Thus, it’s a bit dependent on revenue, what happens with margin, and what occurs with some of our other revenue sources, including mortgage growth.

Got it. Thanks for taking my question.

Appreciate it, Feddie.

The next question comes from Steve Moss of Raymond James. Please go ahead.

Good morning, guys.

Hi, Steve.

Good morning.

Just following up on loan pricing; what are you seeing for new and renewals regarding C&I and CRE loans these days?

Yes, Steve, it's Michael and Travis, jump in whenever. New loan commitments are coming in above 8%. I think we were around 8.10% in December. Many customers have adjusted to the new normal, which indicates loan pricing remains robust. This trend has persisted in the second half of the year. While we expect longer-term treasuries to decline, they haven't impacted loan pricing significantly, which generally leans more toward the short end of the curve. Travis, did you have anything to add?

No, I think that’s spot on.

Okay, that's helpful. And curious, Chris, you spoke earlier about M&A and your expectations for transactions to increase in the next 12 to 18 months. Has the pace of discussions picked up since October and November?

No, it has not. As a matter of fact, there haven't been many discussions; in the last few months, we haven't seen a pickup at all. We haven't seen a rise in conversations, particularly in our space.

Okay, great. Well, most of my questions have been asked and answered so really appreciate all the detailing here.

All right, Steve.

Thanks, Steve. Thank you.

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 look forward to a great 2024. Thanks, everybody.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.