Q4 2023 SouthState Corp Earnings Call

Hello, and welcome to the South State Corporation Q4, 2023 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session and if you would like to ask a question. During this time simply press star one on your telephone keypad.

I will now turn the conference over to will Matthews. Please go ahead.

William E. Matthews: Good morning, and welcome to South state's fourth quarter 2023 earnings call. This.

Will Matthews: This is will Matthews and I'm here with John Corbett, Steve Young and Jeremy Lucas.

John C. Corbett: John and I will provide some brief prepared remarks, and then we'll open it up for questions.

William E. Matthews: Always a copy of our earnings release and presentation slides are on our Investor Relations website.

William E. Matthews: Before we begin our remarks I want to remind you of the comments. We make may include forward looking statements within the meaning of the federal securities laws and regulations.

John C. Corbett: Any such forward looking statements, we may make are subject to the safe Harbor rules. Please.

Please review the forward looking disclaimer and Safe Harbor language in the press release and presentation for more information about our forward looking statements and risks and uncertainties, which may affect us.

John C. Corbett: Now I'll turn the call over to John Corbett our CEO.

John C. Corbett: Thanks will.

Good morning, everybody. Thank you for joining us.

John C. Corbett: You can see in the earnings release that South state delivered a solid quarter that was consistent with our guidance.

John C. Corbett: High level it was another quarter of steady loan and customer deposit growth with mid single digit growth in both.

John C. Corbett: NIM did a couple of basis points, but it is leveling off.

John C. Corbett: Capital ratios are growing nicely.

John C. Corbett: The end of the year is always a time for reflection.

William E. Matthews: As we look back on 2023, and specifically the turmoil last spring.

William E. Matthews: It was a period that demonstrated the resilience of south state, particularly the resilience of our granular deposit franchise.

William E. Matthews: The resilience of our asset quality and the resilience of the high growth markets, where we operate.

William E. Matthews: The New census report was issued last month, and not surprising, Florida, South Carolina, North Carolina, and Georgia, where all of the top five fastest growing states in the country during 2023.

William E. Matthews: And since the pandemic over a million people have moved to Florida.

William E. Matthews: South State is a company that was forged during the great recession during a decade of rapid consolidation.

William E. Matthews: The culmination of that period was a merger of equals announced four years ago. This month.

William E. Matthews: That significant event in our history was an opportunity to catch our breath and spend a couple of years to retool the guts of the bank specifically in the areas of technology and risk management.

William E. Matthews: Our goal is to strengthen the infrastructure without sacrificing our decentralized and entrepreneurial culture.

William E. Matthews: It was painstaking work that affected every area of the bank.

William E. Matthews: We upgraded 20 different technology platforms and increased our annual technology spend by 76%.

Annual spending on technology in 2024 is estimated to be $68 million more than it was in 2020.

William E. Matthews: On the risk management side, our program has matured to meet the heightened expectations of the OCC, we upgraded with experienced professionals from the big banks and strengthen the three lines of defense.

William E. Matthews: And during the first couple of years, those technology and risk management changes took a toll on our employees and impacted the customer experience.

William E. Matthews: But it was short term pain for long term gain.

William E. Matthews: With a larger bank infrastructure in place our focus pivoted in 2023 to making our employees and customers lives better we needed to refine the new technology. So that it was serving us rather than the other way around.

William E. Matthews: And I think we've been largely successful in.

William E. Matthews: Employee engagement is now back to the top quartile of our peers and we're beginning to leverage the power of the new technology.

William E. Matthews: Now in 2024, as we approach the end of the Covid era, and hopefully a more normal yield curve.

William E. Matthews: We believe we can deliver outsized shareholder returns in the future.

The future that's possible because of the hard work over the last few years, so I'll close by thanking our team for preparing us for this next chapter.

Pass it back to will now to walk you through the details on the quarter.

William E. Matthews: Thank you John.

William E. Matthews: You noted the fourth quarter was a good finish to a year in which south state reported solid performance and soundness profitability and growth while facing a relatively volatile environment.

William E. Matthews: I'll touch on a few details before we move to Q&A.

William E. Matthews: On the balance sheet fourth quarter annualized loan growth of 5% brought our full year growth to 7%.

William E. Matthews: Customer deposit growth, excluding the maturing broker Cds, we didn't replace a 5% annualized approximately matched to loan growth rate.

For the full year total deposits grew 2% with customer deposits essentially flat.

William E. Matthews: <unk> represented 29% of total deposits at quarter end down another percent from 30% last quarter.

William E. Matthews: Leaving us near the levels, we were a pre pandemic for DDA as a percentage of deposits.

William E. Matthews: Turning to the income statement or $3 48, NIM was down two basis points from the prior quarter and consistent with our $3 45 to $3 50 guidance.

William E. Matthews: Loan yields in Q4 were up 12 basis points and deposits were up 16 basis points in line with our 15% to 20 basis point guidance.

This brings our cycle to date loan beta to 36% and our cycle to date deposit beta to 30%.

William E. Matthews: Our net interest income of $354 million was essentially flat with the third quarter.

William E. Matthews: For the full year 2023 margin comparison versus 2022.

20, Three's NIM of $3 63 was 26 basis points higher in 'twenty twos, while the cost of deposits rose from 10 basis points in 2022 to 120 basis points in 2023, and a period of 500 basis points of fed rate hikes not to mention the March crisis.

William E. Matthews: Well, it's been a challenging period in which to manage the financial institution balance sheet I think our margin performance. During this period of rapid change really highlights the value of our core funding base.

Noninterest income was $65 million was down 8 million from Q3.

At 58 basis points of assets was in line with our 55 to 60 basis points guidance.

William E. Matthews: Correspondent revenue was $3 4 million after $12 7 million and interest expense on swap collateral.

William E. Matthews: $16 million in gross revenue down approximately $9 million from Q3.

William E. Matthews: Wealth had a record quarter with revenue exceeding $10 million and we had a strong quarter in deposit fees similar to Q3 in last year's fourth quarter.

William E. Matthews: Mortgage revenue continued to be weak, though our complement our leadership on their performance in this challenged environment.

William E. Matthews: We track various metrics versus the mortgage bankers Association quarterly performance report and our team consistently outperforms the industry in several key metrics.

William E. Matthews: Operating expenses of 246 million, which excludes the $25 7 million for the FDIC Special assessment.

William E. Matthews: We're in line with our expectations and were above Q3 levels due to some of the items, we mentioned in our third quarter call.

William E. Matthews: Looking ahead, we expect NII for Q1 in the mid to high 200, <unk> subject to normal variations in expense categories impacted by noninterest income and performance.

William E. Matthews: With respect to credit we recognized $7 7 million in net charge offs in the quarter, bringing our year to date total to $25 million or nine basis points for the quarter at eight basis points for the full year.

William E. Matthews: Of the year's net charge offs 7 million came from deposit accounts and $18 million from loans for approximately six basis points and loan net charge offs.

William E. Matthews: Our provision expense was $9 9 million for the quarter and $114 million for the year, leaving our ending total reserve to remain approximately flat at 158 basis points of loans.

William E. Matthews: And over the last two years, we've provisioned 196 million against only $29 million and net charge offs. So we built our reserves appropriately under Cecil in advance of potential credit deterioration.

William E. Matthews: For overall asset quality trends Npa's were up $8 million driven by an increase in SBA loan non accruals, which are 75% or more government guaranteed.

William E. Matthews: Special mention loans declined in sub standard loans increased.

William E. Matthews: The increase in over 90 days is due to utility companies storm repair receivables in our factoring business.

William E. Matthews: These typically turns slowly and the majority of these have been collected since quarter end.

Loan past dues were down quarter over quarter.

William E. Matthews: 60% of our <unk> are current on payments in the past to NPA are centered in the SBA consumer and residential portfolios I'll reiterate that we do not see significant loss content in our portfolio.

William E. Matthews: C&I line utilization was up 1% in the quarter and home equity line of credit utilization was down slightly.

We continue to have very strong capital ratios with the CE tier one of 11, 8% or 10, 2% <unk> were included in that calculation.

William E. Matthews: The move down in interest rates caused our <unk> to shrink, helping our ending TCE to grow to eight 2%.

William E. Matthews: Our ending TBB per share grew to $46 32.

William E. Matthews: Up $6 23 for the year.

William E. Matthews: During the fourth quarter, we purchased 100000 shares at a volume weighted average price of $67 45.

William E. Matthews: We continue to believe risk weighted asset growth and capital formation rate should be in a range that allows us to continue to grow our regulatory capital ratios and provide us with great flexibility.

Operator, we'll now take questions.

William E. Matthews: Thank you if you have a question. Please press star one on your telephone keypad.

William E. Matthews: One moment. Please for your first question.

Your first question comes from the line of Catherine Mealor with <unk>. Your line is open.

Catherine Mealor: Thanks, Good morning.

Kevin: Morning, Kevin.

Catherine Mealor: I guess you can start with your margin outlook margin came right in line with your guidance for this quarter and just curious how youre thinking about.

Catherine Mealor: Already this year.

Catherine Mealor: And how you're thinking about how <unk> impacts your margin outlook.

Stephen Dean Young: Sure Katherine Steve Thanks for asking the question.

Stephen Dean Young: I have a page that we show every quarter on page 11, the NIM trend.

Catherine Mealor: And as you mentioned it went down from $3 50, or $3 48, two basis points, but within our guidance between $3 45 and 350.

Catherine Mealor: Our deposit cost increased 16 basis points, which was within our guidance of 15 to 20. So.

Catherine Mealor: We think about 2020 for interest earning assets of three forecast and then our deposit beta assumption so.

Catherine Mealor: For interest, earning assets for the full year 'twenty four we're sort of just reiterating the $41 billion, that's sort of what we've thought about for the last several quarters. So we're thinking $2024 1 billion, we start out.

William E. Matthews: The fourth quarter was in the 44 range.

William E. Matthews: So I wouldn't expect that to be much different coming out of the first quarter has some seasonality.

William E. Matthews: As it relates to the second assumption, which is the rate forecast.

William E. Matthews: Moody's consensus, which is what we use shows four rate cuts in 2024. They started in April and then we have four rate cuts in 2025. So you would end the year at four 5% fed funds and 24 and our assumptions.

William E. Matthews: That funds rate of $33 50 by the end of 'twenty five.

William E. Matthews: On our deposit beta page 17, which is.

William E. Matthews: Our cycle to date beta is 30%.

William E. Matthews: And we would continue to expect deposit costs increased similarly in the fourth quarter before we get rate cuts sometime in the second quarter is how we see it though.

Other costs between 170 180 in the first quarter.

Catherine Mealor: I guess based on all of those assumptions, we would expect the full year NIM to average somewhere between $3 45, and $3 55 for the full year 'twenty.

Catherine Mealor: 2024, and we would sort of expect the first half could be in that $3 40 to $3 50 range and the exiting the back half in that $3 50 to $3 60 range. So thats kind of how we're thinking about 'twenty four with those assumptions.

Catherine Mealor: So as we think about 'twenty five and you think about another four rate cuts of 25.

William E. Matthews: Yes, we're thinking as we model it somewhere in that $3 55 to $3 65, Mem range in 2025, depending on how we exit and then just kind of the last point I'll make is.

William E. Matthews: If we kind of play this out.

The forward curve is sort of showing that at the end of 'twenty five we sort of have a three to three 5% fed funds rate and sort of a flatter upward sloping curve.

William E. Matthews: <unk> thousand 26.

William E. Matthews: Look a lot like 2018 2019, when our Nims, we are in the $3 75.

William E. Matthews: 390 range, so anyway, as we kind of think about the short medium and long that sort of how we're thinking about it related to the forecast.

Okay. That's really helpful. I think it certainly we've got 26 guidance this earning season.

Joe: Joe I just wanted to add.

Joe: A lot of that.

David: David This is really helpful.

It's interesting it feels like you just got upward, but I mentioned in your margin and I think I'm curious.

David Smith: How you are thinking about how deposit contemplated that you've got.

David Smith: Okay.

David Smith: So our community to reprice at that yet on the way up even if we get rate. It does feel like your loan yields are still going to be moving up.

Catherine Mealor: Just given the way you're structured there and so are there significant decline in deposit cost throughout all of these assumptions or is it more.

David Smith: As a stabilization in deposit costs, and then get it wrong.

David Smith: What's driving the higher margin, it's just important that that demand on the asset side.

Yes, no thats a good.

David Smith: Good question.

David Smith: Maybe start with asset side, I think we talked about last quarter, but just to reiterate in 2024, we have a little over $4 billion of fixed rate and adjustable rate repricing that are going to happen in 2024, I think in 2025, it's like.

David Smith: $3 3 billion in 2026 3 billion, so healthy amount every year and so.

David Smith: Yeah, those are somewhere in the $4 60 to 480 range.

David Smith: All three of those years, so the kind of fixed in there.

David Smith: As we think about so thats going to be a tailwind assuming the five year treasury doesn't move much slower than three there'll be a spread over that if.

Speaker Change: If you think about the deposit rates.

Speaker Change: Our money market accounts, you've seen a big increase in that over the last two.

<unk> months. Thank you.

Speaker Change: Look in the earnings release, I think our money market accounts went up maybe $3 billion or so and our Cds went up about $2 billion ml and a lot of that was negotiated rates and so in our total portfolio of deposits, we have about a little over $10 billion.

David Smith: Negotiated rates.

Catherine Mealor: Yes, we've given to our team.

Catherine Mealor: They've managed to exception price.

Catherine Mealor: Yes.

Catherine Mealor: Flip side of that we have about $10 billion of floating rate loans about 30% of our loans is floating so you kind of look at both of those and that sort of.

Catherine Mealor: Yes, maybe not perfectly offset each other but that helped.

Catherine Mealor: Cds.

Catherine Mealor: There's another $4 billion eventually will reprice to the front end of the curve overtime and then.

Catherine Mealor: We have securities that are repriced.

Catherine Mealor: Anyway.

Catherine Mealor: The big tailwind to your point.

Catherine Mealor: Is is really trying to manage the floating rate assets versus the negotiated deposits and Cds and then the fixed rate loans over time or sort of your help to margin I don't know if thats helpful. But for how we think about it.

Catherine Mealor: That's very very helpful. All right great. Thank you.

Catherine Mealor: Okay.

Catherine Mealor: Your next question comes from the line of Stephen Scouten with Piper Sandler Your line is open.

Stephen Scouten: Hey, good morning, everyone.

Stephen Scouten: I'm kind of curious.

Stephen Scouten: You mentioned, the DDA percentage will would kind of back down to the pre pandemic level do we think that you can kind of stabilized here at this level or do you expect a little bit more mixed.

Stephen Scouten: Mix shift as we move on maybe prior to potential rate cut.

Stephen Scouten: Steven It is hard to say I think a few quarters ago, we probably would have thought this would be where we end up at <unk>.

Stephen Dean Young: Given that we've seen.

Stephen Dean Young: The decline in that percentage I don't think it's unreasonable to assume that might go down further from here.

Stephen Dean Young: I don't know how much further the pace of that changes.

Mitigated quite a bit the last few quarters, but it's hard to say that we're at the end necessarily but it's hard enough.

Stephen Dean Young: So to Will's point.

Operator: Hello, and welcome to the South State Corporation Q4 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

William E. Matthews: It sort of been a situation, where it's gone down a percent percentage point too.

When does the fed pivot.

It was probably at that point is when all of that changes but.

Operator: After the speaker's remarks, there will be a question and answer session, and if you would like to ask a question during this time, simply press star 1 on your telephone. I will now turn the conference over to Will Matthews. Go ahead. Good morning, and welcome to South State's fourth quarter 2023 earnings call. This is Will Matthews, and I'm here with John Corbett, Steve Young, and Jeremy Luke.

William E. Matthews: Okay.

William E. Matthews: $64000.

William E. Matthews: Okay.

William E. Matthews: Yeah.

William E. Matthews: And how should we think about kind of the provision and reserves moving forward. I mean, obviously you guys have talked about how much you've built relative to net charge offs.

William E. Matthews: Don't really see material or significant loss content in the book kind of felt like a big directional reversal this quarter.

Maybe what kind of normalized net charge offs for you as you think about your portfolio.

William E. Matthews: John and I will provide some brief prepared remarks, and then we'll open it up for questions. As always, a copy of our earnings release and presentation slides is on our investor relations website. Before we begin our remarks, I want to remind you that comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations. Any such forward-looking statements we may make are subject to the Safe Harbor Rule.

William E. Matthews: Do you think we could see this reserve start to trend down given no significant worsening in the portfolio.

Stephen Scouten: Yes, Stephen I think.

Stephen Scouten: The way I think about it.

Stephen Scouten: R R.

Stephen Scouten: Our charge offs last year were eight basis points.

They have been very low for last several years, but I think it's reasonable to expect a normalize a bit from such a low level and to the extent they do that would impact provision expense. So we did as we highlighted.

William E. Matthews: Please review the forward-looking disclaimer and safe harbor language in the press release and presentation for more information about our forward-looking statements and risks and uncertainties that may affect you. Now I'll turn the call over to John Corbett, our CEO. Thanks, Will. Good morning, everybody.

Stephen Scouten: No.

David Smith: Build our reserve last couple of years.

David Smith: In advance of potential deterioration of the economy, but.

William E. Matthews: Depending on our charge off levels from here that could lead to provision expense to cover those charge offs and depending on whatever else. The model tells us. This.

John C. Corbett: Thank you for joining us. You can see in the earnings release that South State delivered a solid quarter that was consistent with our guidance. At a high level, it was another quarter of steady loan and customer deposit growth, with mid-single digit growth in both. Nim did a couple basis points, but is leveling off. And capital ratios are growing nicely. The end of the year is always a time for reflection. As we look back on 2023, and specifically the turmoil last spring, It was a period that demonstrated the resilience of South State, particularly the resilience of our granular deposit franchise, the resilience of our asset quality, and the resilience of the high-growth markets where we operate. The new census report was issued last month, and, not surprising, Florida, South Carolina, North Carolina, and Georgia were all in the top five fastest growing states in the country during 2023. And since the beginning of the pandemic, over a million people have moved to Florida.

William E. Matthews: As far as normalized charge offs I don't have a good number to estimate.

William E. Matthews: You look back at.

William E. Matthews: Peer group would certainly be higher than what we've experienced.

William E. Matthews: I think it's hard to say for certain that we can hang in there below 10 basis points every year and net charge offs, but be great. If we could.

William E. Matthews: Okay. Good and then just last thing for me maybe.

John: Maybe John this is maybe more your side of the coin here wondering around M&A in this environment. Obviously, I know 23 was a tough year, but you guys fared.

John: Well, so a relatively advantaged currency rates, presumably coming down, making the math a little bit better I'm just kind of wondering how you think about M&A this year and the potential for executing a deal.

John: Yes, sure as I've said previously we're open for business and to your point I suspect that the math is becoming easier with the lower interest rate marks.

Stephen Scouten: Stephen really no change from our prior guidance I mean, our ideal partner, if we were to do something would be.

John C. Corbett: Southstate is a company that was forged during the Great Recession, during a decade of rapid consolidation. The culmination of that period was a merger of equals announced four years ago this month. That significant event in our history was an opportunity to catch our breath and spend a couple years retooling the guts of the bank, specifically in the areas of technology and risk management. Our goal was to strengthen the infrastructure without sacrificing our decentralized and entrepreneurial culture. It was painstaking work that affected every area of the bank.

Stephen: 10% to 10% to a third of our pro forma company.

Stephen: We're in great markets in the southeast and we prefer to double down on our existing high growth markets, but the regulatory environment is a little tough for that right now so.

Stephen: We've updated our population map on page six.

Stephen Scouten: And if we were to do a market extension type of Dod need to be at a similar high growth market like Tennessee or Texas.

Stephen Scouten: But from a capital management standpoint, I think we're in a good spot with excess capital and.

Stephen Scouten: And we've got flexibility to use that capital, we can deploy it and share repurchases, we bought a little bit of shares back in the fourth quarter.

John C. Corbett: We upgraded 20 different technology platforms and increased our annual technology spend by 76%. Annual spending on technology in 2024 is estimated to be $68 million more than it was in 2020. On the risk management side, our program has matured to meet the heightened expectations of the OCC. We have upgraded it with experienced professionals from the big banks and strengthened the three lines of defense. During the first couple of years, those technology and risk management changes took a toll on our employees and impacted the customer experience. But it was short-term pain for long-term gain.

Stephen Scouten: We could do a bond restructure or we get deployed at M&A.

Stephen Scouten: Yes helpful commentary, John Thanks, a lot guys I appreciate the time.

John: You bet.

John: Your next question comes from the line of Michael Rose with Raymond James Your line is open.

Speaker Change: Hey, good morning, everyone. Thanks for taking my questions.

Just wanted to give some comments on slide 12, which is the loan production chart.

Speaker Change: Obviously, it's come down since our very strong.

Speaker Change: 2022.

Speaker Change: Some of that is just your kind of conservative nature, and maybe not wanting to take on other peoples.

Speaker Change: Credits as they move out of the banks, but just given your footprint just just wanted to get some thoughts on.

John C. Corbett: So with a larger bank infrastructure in place, our focus pivoted in 2023 to making our employees' and customers' lives better. We needed to refine the new technology so that it was serving us rather than the other way around.

Speaker Change: Loan growth expectations, as we think about the year where areas that you can maybe.

Speaker Change: Push to push the gas pedal, a little bit and I would assume that some of the CRE portfolios or some areas, where you'd be a little bit more cautious, but I think you had previously kind of talked about.

John C. Corbett: And I think we've been largely successful. Employee engagement is now back to the top quartile of our peers, and we're beginning to leverage the power of new technology. Now, in 2024, as we approach the end of the COVID era and, hopefully, a more normal yield curve, we believe we can deliver outsized shareholder returns in the future. It's a future that's possible because of the hard work over the last few years. So I'll close by thanking our team for preparing us for this next chapter. I'll pass it back to Will now to walk you through the details of the course.

Speaker Change: Mid single digit loan growth rate for next year. So I just wanted to get some context there. Thanks.

John: Yes, Michael it's John.

John: <unk> is very interesting to me on page 12, and we kind of had peak record production.

John: In the second quarter of 2022, and if you think back what happened in the second quarter of 2022, that's when the fed started raising short term interest rates and precipitously after that you've seen.

John: A steady trend downward of production so the fed is getting.

William E. Matthews: Thank you, John. As you noted, the fourth quarter was a good finish to a year in which South State reported solid performance and soundness, profitability, and growth while facing a relatively volatile environment. I'll touch on a few details before we move to Q&A. On the balance sheet, fourth quarter annualized loan growth of 5% brought our full year growth to 7%. Customer deposit growth, excluding the maturing brokered CDs we didn't replace, of 5% annualized, was approximately matched to loan growth. For the full year, total deposits grew 2%, with customer deposits essentially flat.

John: What it wants for 2023, we guided to mid single digit growth for the year and we ended at 7% growth. So given the uncertainty in economies are feel like that's a very appropriate level of growth with where we are in the cycle.

Pipelines for the end of the year are down considerably from where they were at the beginning of 'twenty three down about 25%.

Speaker Change: But even though the pipelines are slowing down Michael Theres kind of an embedded tailwind of the loan growth because with.

Speaker Change: With rates, where they are there is going to be slowing prepayments and there's continuing to be funding of loans that are unfunded debt.

William E. Matthews: DDAs represented 29% of total deposits at quarter end, down another percent from 30% last quarter, leaving us near the levels we were pre-pandemic for DDAs as a percentage of deposits. Turning to the income statement, our 348 NIM was down two basis points from the prior quarter and consistent with our 345 to 350 guidance. Loan yields in Q4 were up 12 basis points, and deposits were up 16 basis points in line with our 15 to 20 basis point guide. This brings our cycle-to-date loan beta to 36% and our cycle-to-date deposit beta to 30%. Our net interest income of $354 million was essentially flat with the third quarter.

Speaker Change: That we made in 2021 'twenty two so our guidance really hasn't changed we think mid single digit growth for reasonable.

Speaker Change: And until rates decline.

Speaker Change: But where do we see that growth for.

Speaker Change: For us we've seen a considerable amount of residential real estate growth in 'twenty, three and we're getting a nice coupon for that growth and there's just more people moving into our markets than there are homes available. So I feel good about those credits from a from a.

Speaker Change: Asset quality standpoint, CRE activity has been very low in 'twenty three with the raise in the rise in rates.

Speaker Change: You might see a little pick up there in 24 with the five year Treasury down as much as it is and then we've just got a continuous push on the C&I middle market space. So that's an area that we're leaning into so hope that's helpful. Michael.

William E. Matthews: For the full year 2023 margin comparison versus 2022, 23's NIM of $363 was 26 basis points higher than 22's, while the cost of deposits rose from 10 basis points in 2022 to 120 basis points in 2023 during a period of 500 basis points of FedRide hikes, not to mention the March crisis. Well, it's been a challenging period in which to manage a financial institution's balance, but I think our margin performance during this period of rapid change really highlights the value of our core funding base. Non-interest income of $65 million was down $8 million from Q3, and at 58 basis points of assets, was in line with our 55 to 60 basis points cut. Correspondent revenue was $3.4 million after $12.7 million in interest expense on swap collateral for $16 million in gross revenue, down approximately $9 million from Q3. Wealth had a record quarter with revenue exceeding $10 million.

Michael: Very much so and then maybe just one for Steve I think you stepped out in correspondent this quarter was a little bit greater than what.

Steve: What some of us were kind of expecting.

Michael: There is typically a kind of a seasonal rebound in the in the first quarter can you just kind of walk us through the dynamics there and I think you had previously kind of talked about.

Steve: <unk> to average assets kind of in the.

<unk> 55 to 65 basis point range any reason to think that that might be different as we progress through the 2020 for.

Steve: Sure Thanks, Mike for.

Steve: For the question.

Steve: Yes.

Steve: On page 31 is our fee income percentage you can see that there were $65 million. This quarter 58 basis points of average assets and of course that was within our guidance. We said the low end of the $55 to $65 eight in the fourth quarter, just with what we saw.

William E. Matthews: And we had a strong quarter and deposit fees, similar to Q3 and last year's fourth quarter. Mortgage revenue continues to be weak, though I'll compliment our leadership on their performance in this challenged environment. We track various metrics versus the Mortgage Bankers Association Quarterly Performance Report, and our team consistently outperforms the industry in several key metrics. Operating expenses of $246 million, which excludes the $25.7 million for the FDIC Special Assessment.

Steve: Yes.

Steve: We're just kind of reiterating the same guidance for 2024, and we would sort of expect.

Steve: Noninterest income to average assets to be in the 55 to 65 basis points for the full year, it's going to start on the lower end of the range like the.

Steve: Like we had in the fourth quarter for the first half of the year and probably the upper end of the range in the back half of the year.

William E. Matthews: We're in line with our expectations, and we're above Q3 levels due to some of the items we mentioned in our third quarter call. Looking ahead, we expect NIE for Q1 in the mid- to high-240s, subject to normal variations in expense categories impacted by non-interest income and performance. With respect to credit, we recognized $7.7 million in net charge-offs in the quarter, bringing our year-to-date total to $25 million, or nine basis points for the quarter and eight basis points for the full year. Of the year's net charge-offs, $7 million came from deposit accounts and $18 million from loans, for approximately six basis points in loan net charges. Our provision expense was $9.9 million for the quarter and $114 million for the year, leaving our ending total reserve to remain approximately flat at 158 basis points of loan.

Steve: Reasoning for that is sort of the yield curve normalizing and sort of our interest rate sensitive businesses like mortgage and correspondent. They just perform better when things are a little bit more normal.

Steve: From that perspective, so as.

Steve: As you kind of take that into 2025, yes, we would expect our noninterest income to average assets to return to that 60% to 70 basis points, which was approximately the 2022 level. So the way I kind of think about the variability in margin and our kind of our interest into the businesses as we need a little bit more yield curve.

Steve: <unk> for those things to sort of get back to I'll call it more normal levels.

Steve: How we're thinking about it and like you mentioned.

Steve: Corresponded with the.

Steve: In mortgage although mortgage was probably less volatile at this point, but correspond it I don't think that probably if you think about the fixed income business until they start cutting rates, that's probably not going to improve a lot our interest rate swap business.

William E. Matthews: And over the last two years, we've provisioned $196 million against only $29 million in net charge-offs. So we built our reserves appropriately under CECL in advance of potential credit deterioration. For overall asset quality trends, NPAs were up $8 million, driven by an increase in SBA loan non-accruals, which are 75% or more of government guarantees.

Steve: Of the lack of loan volume in the industry in the fourth quarter, probably in the first quarter, it's probably not going to ramp to the towards the back half of the year as rates stabilize.

William E. Matthews: Special mention loans declined, and substandard loans increased. The increase in over 90s is due to utility company storm repair receivables in our factoring business. These typically turn slowly, and the majority of these have been collected since quarter after. Loan past dues were down a quarter over... Sixty percent of our MPAs are current on payments. The past two NPAs are centered in the SBA consumer and residential portfolio.

Steve: Very helpful. And then maybe if I can just squeeze one more in for Jon just just reflecting on your comments at the beginning of the call Rab technology costs I think I was struck by how much the spend is increasing.

Jon Smith: Three years' time, or four years' time up $68 million as you think about going forward just conceptually any larger technology products are re halls that you need to do or is it just more around the edges, because thats a pretty big lift in costs in a couple of years. Thanks.

William E. Matthews: I'll reiterate that we do not see significant loss content in our portfolio. C&I line utilization was up 1% in the quarter, and home equity line of credit utilization was down slightly. We continue to have very strong capital ratios with a CE Tier 1 of 11.8% or 10.2% if AOCI was included in the calculation. The move down in interest rates caused our AOCI to shrink, helping our ending TCE to grow to 8.2%. Our ending TVV per share grew to $46.32, up $6.23 for the year. During the fourth quarter, we purchased 100,000 shares at a volume-weighted average price of $67.45.

Jon Smith: Yes sure.

Jon Smith: I think our motto for 2023 was building a better bank and really was focused on the customer experience the employee experience.

Jon Smith: And getting feedback from our team had to take friction out of the technology for 2024, its kind of finish the drill as is the theme and it's really the technology and process improvements that were already put in place. The last couple of years, we just want to complete those projects, so theres really not Michael.

Jon Smith: New significant technology platforms that we've got in the queue to update so I think the bulk of our.

Jon Smith: Technology spending increases is in the rearview mirror I mean, there is always going to be growth in that category, but nowhere near the level. We've seen the last few years.

Operator: We continue to believe risk-weighted asset growth and the capital formation rate should be in a range that allows us to continue to grow our regulatory capital ratios and provide us with great flexibility. The operator will now take questions. Thank you. If you have a question, please press star 1 on your telephone keypad.

Jon Smith: Yeah. Michael This is Steve the only other comment I would make is remember when we did the.

Steve: Moh back four years ago that was one of the main reasons, we did it there was investment.

And technology that we needed to make and so we used use that period as an opportunity to take cost out of certain areas and reallocated to the technology and so that's sort of been the story of the last several years.

Operator: One moment, please, for your first question. Your first question comes from the line of Catherine Mealor with KBW. Your line is open. Thanks. Good morning. Good morning, Catherine.

Michael: Makes sense, thanks for all the color.

Michael: Your next question comes from the line of Brandon King with JMP Securities. Your line is open.

Catherine Mealor: To start with your margin outlook, the margin came right in line with your guidance for this quarter, and I'd just curious how you're thinking about the margin for this year, you know, maybe, and how you're thinking about how rate cuts impact your margin outlook. Thanks. Sure, Catherine. It's Steve.

Michael: Hey, good morning.

Hi, Brennan.

Michael: Hey.

So I appreciate the near term guidance on expenses, but are you expecting expenses to kind of stay in that similar range throughout the year or what kind of growth rate or.

Steve: Thanks for asking the question. You know, we have a page that we show every quarter. On page 11, it's the NIM trend. And as you mentioned, it went down from 350 to 348, so two basis points, but within our guidance between 345 and 350, our deposit costs increased 16 basis points, which was within our guidance of 15 to 20. As we think about 2024, you know, it's interest-earning assets, its rate forecast, and then our deposit data assumption. So, you know, for interest-earning assets for the full year 24, we're sort of just reiterating the $41 billion. That's sort of, you know, what we've thought about the last several quarters. So we're thinking 2024, $41 billion. We start out. I think the fourth quarter was in the 40.4 range.

Michael: Do you think is a good base case assumptions.

Brandon King: Yes, Brandon.

Brandon King: Thanks, Steve.

Brandon King: For the full year I think around that $1 billion number is about what we would expect at this point there of course.

Steve: There are some components of compensation etcetera that fluctuate with revenue volumes as some of the fee businesses in particular that if that turns out differently than we expect does could move up or down but.

Brandon King: For the full year I think consensus is right around $1 billion and that feels like a pretty good spot based on what we see today.

Brandon King: Okay.

And on fees.

Brandon King: With the CFPB overdraft proposal are you considering any potential changes to your overdraft policies.

Steve: So I wouldn't expect that to be much different coming out of the first quarter, some seasonality. As for the second assumption, which is the rate forecast, the Moody's Consensus, which is what we use, shows four rate cuts in 2024. They start in April, and then we have four rate cuts in 2025, so you would end the year at 4.5% fed funds in 2024, and on our assumption, you would hit the fed funds rate at $3.50 by the end of 2025.

Brandon King: And I guess, if not what could be the potential impact if it does go into effect.

Steve: Yes, Brian this is Steve.

Steve: We made some changes.

Steve: To be 15 to 18 months ago.

We aren't contemplating any new changes I know there was a new.

Steve: Paper that came out a few days ago, but as I understand it.

Steve: The earliest that would be approved as an October 25. So I think it's probably just too early and of course, we're thinking about it but but we haven't run the math on any any effect that would have on us for sure but anyway, that's kind of how we're thinking about it.

Steve: On our deposit data, page 17, which is our cycle-to-date data, is 30 percent. And we would, you know, continue to expect deposit costs to increase similarly in the fourth quarter before we get rate cuts, you know, sometime in the second quarter, is how we see it. So deposit costs between $170,000 and $180,000 in the first quarter.

Steve: Okay.

Steve: And then lastly on deposit pricing and OCD is continuing to be a headwind near term, but could you.

Steve: Can you quantify or give some context around near term CD re pricing and then as youre looking and doing the numbers when it could turn into a tailwind maybe either in 2024th.

Steve: So, I guess, based on all those assumptions, we would expect the full-year NEM to average somewhere between 345 and 355 for the full year in 2024. And we would sort of expect the first half to be in that 340 to 350 range, and the exiting the back half in that 350 to 360 range, so that's kind of how we're thinking about 2024 with those assumptions. You know, as we think about 25, and you think about, you know, another four rate cuts in 25, we're thinking, as we model it, somewhere in that 355 to 365 NIM range in 2025, depending on how we exit. And then just kind of the last point I'll make is, you know, if we kind of play this out, and the forward curve is sort of showing that, you know, at the end of 25, we sort of have a three to three and a half percent set funds rate and sort of a flatter upward slipping curve.

Steve: Sure.

Steve: Yes, I think we have about $4 billion of Cds, I think 90% of that roughly come due in 2024.

Steve: We have a fair amount coming due in the first quarter I want to say, it's not quite half.

Steve: But it's a fair amount so.

Steve: As we think about repricing Cds.

Steve: Cds by nature of retail Cds are generally pretty short in nature.

Steve: We retooled our couple of our retail products.

Steve: To continue to shorten those up but.

Steve: At the end of the day.

Steve: <unk> only make up 12% of our total deposits. So it'll it'll be a little bit of a tailwind I think the exception price are negotiated rates on the money market is probably the place we put more liability sensitivity as we've thought about it.

Okay.

Steve: You know, 2026 would look a lot like 2018-2019 when our NIMS is in the 375, maybe 390 range. So anyway, as we kind of think about the short, medium, and long term, that's sort of how we're thinking about it. That's really helpful. I think it's the first time I've gotten 26 guidance this earnings season. If you want 28, we can go there too. I love it. I love it!

Taking my questions.

Steve: Thank you.

Steve: Your next question comes from the line of Samuel Varga with UBS. Your line is open.

Samuel Varga: Hey, good morning, everyone.

Steve: Yes.

Samuel Varga: I wanted to go back to the margin discussion just for a little bit just to clarify on the obviously I'm not thinking too far into the 2009, which takes guys, but just to clarify youre assuming that the.

Samuel Varga: The mid to longer end of the curve is.

Steve: David, this is really helpful. And it's just, it's interesting. It feels like you've just got upward momentum in your margin, and I think, I'm curious about how you are thinking about how deposit costs play into that. I mean, you've got such an opportunity to reprice assets, you know, on the way up. Even if we get rate cuts, I feel like your loan yields are still going to be moving up, just given the way you're structured there. And so, are there significant declines in deposit costs throughout all these assumptions? Or is it more kind of a stabilization in deposit costs, and then really what's driving the higher margin is just upward momentum on the asset side? Yeah, no, it's a good, good question.

Samuel Varga: Staying flattish levels.

Samuel Varga: The steepness of the curve.

Samuel Varga: If you look at the Moody's consensus forecast I believe.

Samuel Varga: Today the.

Samuel Varga: All of that five year, part, which is where we put a lot of our assets is somewhere in the 4% range I want to say by the end of 'twenty five it's in that three 5% range give or take a sort of a flat curve by the time they cut rates.

Samuel Varga: And so on so that's sort of our assumption.

Samuel Varga: For for rates, we don't see.

Samuel Varga: Yes.

Samuel Varga: If the five year part of the curve.

Samuel Varga: Went up to 5% of course are repricing would be stronger.

Samuel Varga: We might have other issues.

Steve: So maybe start with the asset side. I think we talked about that last quarter. But just to reiterate, you know, we in 2024 have a little over $4 billion of fixed rate and adjustable rate repricings that are going to happen in 2024. I think in 2025, it's like 3.3 billion and in 2026 to 3 billion. So you know, it's a healthy amount every year. And so, you know, those are somewhere in the 4, you know, 460 to 480 range for all three of those years. So they're kind of fixed in there.

Speaker Change: The five year goes down to 3% next year, then there is probably other rate issues, but anyway. That's how material was saying that for the end of 'twenty five Steve centers at the end of 'twenty. Four is the Moody's consensus is a little higher than that and it's a little higher than that somewhere between $3 50, and 375, I think and then that by the end of 25% on three five.

Speaker Change: Yes.

Speaker Change: As you know at the end of October I think when we had our earnings call I think the five year Treasury Moody's consensus is more like four five so it does move around for sure. So we'll find out for sure.

Steve: You know, as we think about, so that's going to be a tailwind, assuming that the five-year Treasury doesn't move much lower than three. There'll be a spread over that. If you think about the deposit rates, you know, our money market accounts, you've seen a big increase in that over the last 12 months. I think if you looked in their earnings release, I think our money market accounts went up maybe $3 billion or so, and our CDs went up about $2 billion. And a lot of that was negotiated rates.

Speaker Change: Got it. Thank you that's very helpful. And then in terms of the down betas.

24.

Speaker Change: What sort of assumptions do you have there for deposit betas.

Speaker Change: Yes, let me, let me take a bit of a longer term view because theres always a lag again all of this but from our experience and from our modeling as.

Speaker Change: As I think about.

Speaker Change: Our beta is I would say on the down beta is about 20% total so for instance, if.

Steve: And so in our total portfolio of deposits, we have about a little over $10 billion of negotiated rates that, you know, we've given to our team to – that they've managed to get an exceptional price on. You know, on the flip side of that, we have about $10 billion of floating rate loans; about 30% of our loans are floating. So you kind of look at both of those, and they sort of, you know, they're floating.

Speaker Change: Yes.

Speaker Change: Is that kind of run the math on where a five 5% fed funds rate and over the next couple of years they cut it to three five or 200 basis points.

Speaker Change: You would expect.

From our peak, maybe 40 basis points of pressure to be believed coming back.

Speaker Change: By 2026 nanometer, let's talk about $20 six but it is a bit of a linear ramp and it takes time to do it.

Steve: Yeah, maybe not perfectly offset each other, but that helps. You know, CDs are, there's another $4 billion that will eventually be priced to the front of the curve over time. And then, you know, we have securities that'll reprice. So, anyway, you know, I guess the big tailwind, to your point, is really trying to manage the floating rate assets versus the negotiated deposits and CDs. And then the fixed rate loans over time are sort of your help to margin. I don't know if that's helpful, but that's how we think about it. Yep. Yeah, that's very, very helpful. All right, great. Thank you. Your next question comes from the line of Stephen Scouten with Piper Sandler. Your line is open. Hey, good morning, everyone.

Speaker Change: But that would be really consistent if you kind of look back at our history of.

Speaker Change: 20% beta, but theres always a little bit of a lag in that first couple of rate cuts.

Speaker Change: That makes sense and then just a quick one do you happen to have the spot interest bearing deposit costs or December year end.

Speaker Change: No.

Speaker Change: Don.

Speaker Change: Not here in front of me Fortunately.

Speaker Change: Alright, no problem. Thanks for answering my questions I appreciate it.

Speaker Change: You bet.

Speaker Change: Your next question comes from the line of Russell Gunther with Stephens. Your line is open.

Speaker Change: Hey, Good morning, guys. Just a couple of quick clarify at this point, the 20% down data.

Stephen Scouten: I'm kind of curious, you mentioned the DDA percentage, Will, would kind of back down to the pre-pandemic level. Do we think this can kind of stabilize here at this level, or do you expect a little bit more makeshift as we move on, maybe prior to potential rate cuts? You know, Stephen, it's hard to say.

Youre contemplating that through the cycle and that would compare to the update of roughly 30% did I hear that right.

Russell Gunther: That's right.

Russell Gunther: Okay and that would be.

Russell Gunther: Total consolidated debt.

Russell Gunther: Yes, Okay excellent understood. Thank you and then.

William E. Matthews: I think a few quarters ago, we probably would have thought this would be where we ended up. It's, you know, given that we've seen, you know, continued decline in that percentage, I don't think it's unreasonable to assume it might go down further from here. I don't know how much further, you know, the pace of that change has, you know, moderated quite a bit in the last few quarters, but it's hard to say that we're at the end necessarily, but it's hard to know. Yeah, and to Will's point, I mean, it's sort of been a situation where it's gone down a percent, a percent point, too, you know, And probably at that point is when all that changes. That's the $64,000.

Russell Gunther: Just lastly, as you guys kind of balance you mentioned the potential for a bond restructure versus buying back stock.

Russell Gunther: Kind of walk us through the thought process there and then if you could confirm.

Russell Gunther: Any potential buyer restructure that would get done would be.

Russell Gunther: Likely accretive to that NIM guidance for 2004.

Steve: Sure Steve.

Steve: We've talked about that on the call I think it was last quarter, we talked about it and I think it's the same same kind of calculus. So it's really just trying to think about our uses of capital.

William E. Matthews: I think we talked up to maybe 10.

William E. Matthews: More than 15% of our portfolio restructure and.

William E. Matthews: Obviously, we'd be thinking about it in terms of.

William E. Matthews: Okay, and how should we think about kind of the provision and reserves moving forward? I mean, obviously, you guys have talked about how much you've built relative to net charge-off. I think Will said you don't really see material or significant loss content in the book.

William E. Matthews: Earn back period less than three years Thats, how we would think about it.

William E. Matthews: As a lever we're thinking about what were kind of just back to positioning the balance sheet thinking about the future.

If rates come down we are thinking about liability sensitivity, a little bit and we want to think about how to position.

William E. Matthews: So it kind of felt like a big directional reversal this quarter. Maybe what's the kind of normalized net charge-off for you as you think about your portfolio and, Do you think we could see this reserve start to trend down given no significant worsening in the portfolio? Yes, yes, Stephen, I think the way I think about it, you know, our charge-offs last year were eight bases. They've been very low for the last several years, but I think it's reasonable to expect they will normalize a bit from such a low level, and to the extent they do, that would impact provision expense.

If rates do fall how to best position all the balance sheet and of course that takes time to do it but we've been thinking about it for the last couple of quarters, certainly we want to think about it for the next four or five so.

William E. Matthews: That's from a perspective of the bond restructure its certainly something on the table to your point.

William E. Matthews: No.

William E. Matthews: It is a lever if they continue to have higher rates.

William E. Matthews: Our NIM has some pressure.

Speaker Change: Way that beacon can level set it.

Speaker Change: But that's just on the restructure on the capital side.

William E. Matthews: So we did, as we highlighted, build our reserve the last couple of years in advance of potential deterioration in the economy. But, you know, depending on our charge-off levels from here, that could lead to preventing expenses to cover those charge-offs. And depending on whatever else the model tells us. As far as normalized charge-offs are concerned, I don't have a good number to estimate. I mean, if you look back at the peer group, it'd certainly be higher than what we've experienced. But I think it's hard to say for certain that we could hang in there below 10 basis points every year in that charge-off. But it'd be great if we could.

Speaker Change: No.

Speaker Change: With the 11 eight CET, one that does give us the luxury of considering more than one option.

Speaker Change: And certainly share repurchases are.

Speaker Change: Our use of capital that we think about as well and where we sit today based on our forecasted risk weighted asset growth.

Speaker Change: And the capital formation rate.

Speaker Change: If we don't do any of those things youre going to see that.

Speaker Change: CET one continue to climb from there so we like the flexibility we've got with our capital position today and Youll continue to think about all of those options we mentioned.

Speaker Change: That's great guys I appreciate you taking my questions. Thank you.

John C. Corbett: Okay, good. And then just last thing for me, maybe to John, this is maybe more your side of the coin here, wondering around, you know, M&A in this environment. Obviously, I know, 23 was a tough year, but you guys fared phenomenally well. So relatively advantageous currency rates, presumably coming down, making the math a little bit better. I'm just kind of wondering how you think about M&A this year and the potential for executing a deal. Yeah, sure.

Speaker Change: Your next question comes from the line of Gary Tenner with D. A Davidson your line is open.

Thanks, Good morning.

Speaker Change: I wanted to ask about.

Kind of the earning asset mix through 2024, you talked about I think flattish, earning assets from the fourth quarter level.

Speaker Change: With what looks like somewhere in the range of a 1 billion and a half of net loan growth. So from a from a funding perspective of that loan growth. What are the cash flows projected on the securities portfolio for the year and how lean would you run cash as youre thinking about kind of a remixing of assets on the balance sheet a little bit.

John C. Corbett: As I've said previously, I mean, we're open for business. And to your point, I suspect that the math is becoming easier with the lower interest rate marks. But Stephen, really no change from our prior guidance. I mean, our ideal partner, if we were to do something, would be We're in great markets in the southeast, and we prefer to double down in our existing high-growth markets, but the regulatory environment's a little tough for that right now. So we've updated our population map on page six.

Speaker Change: Sure.

Speaker Change: I guess Thats really I don't think its changed a whole lot as you think about if we have mid single digit loan growth Thats I don't know $1 5 billion something like that.

Speaker Change: We have our securities portfolio.

Russell Gunther: <unk> off somewhere depending on rates 700, $800 million a year, so that would imply that you have about.

John C. Corbett: And if we were to do a market extension type of deal, it would need to be in a similar high-growth market like Tennessee or Texas. But from a capital management standpoint, I think we're in a good spot with excess capital. And we've got flexibility to use that capital. We can deploy it in share repurchases. We bought a little bit of shares back in the fourth quarter. We could do a bond restructure, or we could deploy it through M&A. Yeah, helpful commentary, John. Thanks a lot, guys. I appreciate the time.

Russell Gunther: 2% to 3% deposit growth.

Assumptions built in there and we think it is slow and the front end it probably ramps in the back end if you think about.

Speaker Change: Qt and all that stuff if they end up.

Speaker Change: Bringing that back I would imagine that liquidity in the system would get better in the back half.

Speaker Change: So so just to make sure I was clear our average our expected average for the year of earning assets is $41 billion.

John C. Corbett: You bet. Your next question comes from the line of Michael Rose with Raymond James. Your line is open. Hey, good morning, everyone.

<unk>.

Speaker Change: It will start out a little lower than that of course and up a little higher than that based on those assumptions.

Michael Edward Rose: Thanks for taking my questions. Hey, I just wanted to get some comments on slide 12, which is the loan production chart. You know, obviously, it's come down since a very strong, you know, 2022. I know some of that is just your kind of conservative nature and maybe not wanting to take on other people's loans as they move out of the banks.

Speaker Change: Okay I appreciate that and then just with the commentary.

Speaker Change: A press release with the reduction in brokered deposits.

Speaker Change: Also with the brokered balances are at year end.

I don't have that in front of me, but I think it's around 700, 720, <unk> $720 million or so.

Speaker Change: We've really brought that down.

Michael Edward Rose: But just given your footprint, just wanted to get, you know, some thoughts on, you know, loan growth expectations as we think about the year, where areas that you can maybe, you know, push the gas pedal a little bit. And I would assume that some of the CRE portfolios are some areas where you'd be a little bit more cautious. But I think you had previously kind of talked about, you know, a mid-single-digit loan growth rate for next year. So just wanted to get some context there.

Speaker Change: During the March.

David Smith: Banking situation, we took it up a $1 billion to just to make sure that we have plenty of liquidity fortress balance sheet and a source that's run off a quite a bit over the year as I think about.

David Smith: 2020.

David Smith: For.

David Smith: At least in the first half.

David Smith: I think we will replace those and potentially grow it a little bit, but it'll be somewhere in that range. Historically, we run about 3% of average deposits, so it'd be about $1 billion somewhere in that.

John C. Corbett: Thanks. Yeah, Michael, John, that graph is very interesting to me on page 12. And we kind of had peak record production in the second quarter of 2022. And if you think back, well, what happened in the second quarter of 2022?

David Smith: $500 billion five range I don't know somewhere in there is typically how we run it ending on rates.

John C. Corbett: That's when the Fed started raising short-term interest rates, and precipitously after that, you've seen a steady trend of production decline. So the Fed is getting what it wants. For 2023, we guided for mid single-digit growth for the year, and we ended up with 7% growth. So given the uncertainty in the economies, I feel like that's a very appropriate level of growth with where we are in the cycle. Pipelines for the end of the year are down considerably from where they were at the beginning of 23, down about 25%. But even though the pipelines are slowing down, Michael, there's kind of an embedded tailwind of loan growth because with rates where they are, there's going to be slowing prepayments, and there's continuing to be funding of loans that are unfunded that we made in 2021-22. So our guidance really hasn't changed.

David Smith: Great. Thanks very much.

David Smith: There are no further questions at this time I will turn the call to John Corbett for closing remarks.

Alright, I know you guys have had a busy morning with a lot of calls so thank you for joining us if we can provide any other clarity on your models don't hesitate to give us a ring and I hope you have a great day.

John C. Corbett: This concludes today's conference call. We thank you for joining you may now disconnect your lines.

[music].

John C. Corbett: Sure.

John C. Corbett: [music].

Yes.

John C. Corbett: Yeah.

John C. Corbett: We think mid-single-digit growth is reasonable until rates decline, but where do we see that growth? For us, we've seen a considerable amount of residential real estate growth in 2023, and we're getting a nice coupon for that growth. And there are just more people moving into our markets than there are homes available, so I feel good about those credits from an asset quality standpoint. CRE activity has been very low in 2023 with the rise in rates.

John C. Corbett: Okay.

John C. Corbett: Okay.

John C. Corbett: [music].

John C. Corbett: Okay.

[music].

John C. Corbett: You might see a little pickup there in 2024 with the five-year treasury down as much as it is. And then we've just got a continuous push on the C&I middle market space, so that's an area that we're leaning into. So I hope that's helpful, Michael. Very much so.

John C. Corbett: Yes.

John C. Corbett: [music].

John C. Corbett: Sure.

Steve: And then maybe just one for Steve, I think to step down and correspondent, this quarter was a little bit greater than what some of us were kind of expecting. I know there's typically kind of a seasonal rebound in the first quarter. Can you just kind of walk us through the dynamics there? And, you know, I think you had previously kind of talked about a fee to average assets kind of in the 55 to 65 basis point range. Any reason to think that that might be different as we progress through 2024? Thanks.

Steve: Sure, thanks Mike for the question. Yeah, you know, on page 31 is our fee income percentage. You can see that there were 65 million this quarter, 58 basis points of average assets. And of course, that was within our guide, we said the low end of the 55 to 65 range in the fourth quarter, just what we saw. Our, you know, we're just kind of reiterating the same guidance for 2024. We would, you know, sort of expect a non-interest income to average assets to be in the 55 to 65 basis points for the full year. It's going to start on the lower end of the range, And the reasoning for that is just sort of the yield curve normalizing, and sort of our interest rate-sensitive businesses like mortgage and correspondent, they just perform better when things are a little bit more normal from that perspective.

Steve: So, you know, if you kind of, you know, take that into 2025, we would expect our non-interest income on average assets to return to that 60 to 70 basis points, which was approximately the 2022 level. So the way I kind of think about the volatility and margin and our kind of interest-sensitive businesses is that we need a little bit more yield curve normalization for those things to sort of get back to, I'll call it, more normal levels. So that's kind of how we're thinking about it. And like you mentioned, correspondent with the, and mortgage, although mortgage is probably less volatile at this point, but correspondent, I don't think that, you know, if you think about the fixed income business, until they start cutting rates, that's probably not going to improve a lot. Our interest rate swap business Because of the lack of loan volume in the industry in the fourth quarter, probably in the first quarter, it's probably not going to ramp up toward the back half of the year as rates stabilize. Very helpful. And then maybe I can just squeeze one more in for John.

John C. Corbett: Just reflecting on your comments at the beginning of the call around technology costs, I think I was struck by how much the spend has increased in, you know, three years' time or four years' time, up $68 million. As you think about going forward, are there any larger technology products or rehauls that you need to do, or is it just more around the edges? Because that's a pretty big lift in cost over a couple years.

John C. Corbett: Thanks. Yeah, sure. I think our motto for 2023 was building a better bank. It really was focused on the customer experience, the employee experience, and getting feedback from our team on how to take friction out of the technology.

John C. Corbett: For 2024, it's kind of finish the drill. And it's really the technology and process improvements that have already been put in place the last couple of years. We just want to complete those projects.

John C. Corbett: So there's really not, Michael, any new significant technology platforms that we've got in the queue to update. So I think the bulk of our technology spending increases is in the rear view mirror. I mean, there's always going to be growth in that category, but nowhere near the level we've seen in the last few years. Hey, Michael, this is Steve.

Steve: The only other comment I would make is that when we did the MOE back four years ago, that was one of the main reasons we did it. There was an investment in technology that we needed to make. And so we used that period as an opportunity to take costs out of certain areas and reallocate them to technology.

Steve: And so that's sort of been the story the last. Makes sense. Thanks for all the color.

Brandon King: Your next question comes from the line of Brandon King with Truist Securities. Your line is open. Hey, good morning. Hi, Brandon.

Brandon King: Hey, so I appreciate the new term guidance on expenses, but are you expecting expenses to kind of stay in that similar range throughout the year or any kind of growth rate or what do you think is a good base case assumption? Yeah, Brandon, thanks.

William E. Matthews: I'd say for the full year, I think around that billion-dollar number is about what we would expect at this point. There are, of course, some components of compensation, etc., that fluctuate with revenue volumes, and some of the fee businesses, in particular, that if that turns out differently than we expect, those could move up or down. But for the full year, I think consensus has us right around a billion dollars, and that feels like a pretty good spot based on what we see today. OK. And in all of this, with the CFPB overdraft proposal, are you considering any potential changes to your overdraft policies? And I guess if not, what could be the potential impact if that does go into it? Yeah, Brandon, and Steve, you know... We made some changes maybe 15 to 18 months ago. We aren't contemplating any new changes. I know there was a new paper that came out a few days ago, but as I understand it, the earliest that would be approved is October 25.

Steve: So I think it's probably just too early. And, of course, we're thinking about it, but yeah, we haven't run the math on any effect that would have on us for sure. But anyway, that's kind of how we're thinking about it. Okay. And then lastly, on deposit pricing, I know CDs continue to be ahead in the near term, but could you potentially quantify or give some context around near-term CDP pricing, and then, as you're looking and doing the numbers, when could that potentially turn into a tailwind, maybe either in 2024 or 2035? Sure. This is Steve.

Steve: I think we have about $4 billion in CDs. I think 90% of that will roughly come due in 2024. We have a fair amount coming due in the first quarter. I want to say it's not quite half of what we need, but it's a fair amount. So as we think about repricing, we're just – CDs, by nature, retail CDs are generally pretty short in nature, and we retooled a couple of our retail products to continue to shorten those up. But at the end of the day, CDs only make up 12% of our total deposits, so it'll be a little bit of a tailwind. I think the exception price or negotiated rates on the money market is probably the place to start, with more liability sensitivity as we've thought about it.

Brandon King: Okay, thanks for taking my questions. Thank you. Your next question comes from the line of Samuel Varga with UBS. Your line is open. Hey, good morning, everyone.

Samuel Varga: I wanted to go back to the margin discussion just for a little bit, just to clarify on the, obviously, I'm not digging too far into the 25 and 26 guides, but just to clarify, you're assuming that the mid to longer end of the curve is staying flattish at current levels, so there's a steepness to the curve? Yeah. If you look at the Moody's consensus forecast, I believe that, you know, today, the five-year part, which is where we put a lot of our assets, is somewhere in the 4% range. I want to say by the end of 25, it's in that 3.5% range, give or take, so sort of a flat curve by the time they cut 8 rates, and so on.

Samuel Varga: So that's sort of our assumption for rates. We don't see, you know, if the five-year part of the curve went up to 5%, of course, our repricing would be stronger, but, you know, we might have other issues. And if the five-year goes down to 3%, you know, the next year, then there's probably other rates. Anyway, that's how it works. But you were saying that for the end of 25, Steve. So there at the end of 24, is Moody's Consensus a little higher than that, isn't it? It's a little higher than somewhere between 350 and 375, I think.

Steve: And then by the end of 25, it's around three and a half. So, yeah, that's, as you know, at the end of October, I think when we had our earnings call, I think the five-year Treasury Moody's Consensus was for like four and a half. So, you know, it does move around for sure. We'll find out for sure. Got it. Thank you. That's very helpful. And then, in terms of the down betas for 24, what sort of assumptions do you have there for deposit down betas? Yeah, let me take a bit of a longer-term view, because there's always a lag in all of this. But, you know, from our experience and from our modeling, as I think about our betas. I would say on the down betas, it's about 20% total. So for instance, if... You know, you have, you have.

Steve: I kind of run the map on where a 5.5% set funds rate and over the next couple of years, they cut it to 3.5 or 200 basis points. You would expect... From our peak, maybe 40 basis points of pressure, you know, to be relieved coming back by 2026. And I know I'm not supposed to talk about 2026, but it is a linear ramp, and it takes time to do it. But that would be really consistent if you kind of look back at our history. It's 20% data, but there's always a little bit of a lag in that first couple.

Steve: And just a quick one, do you happen to have the spot interest-bearing deposit costs for December or year-end? No, we don't. Not here in front of me.

Steve: Alright, no problem. Thanks for answering my questions. I appreciate it. You're up. Your next question comes from the line of Russell Gunther with Stevens. Your line is open. Hey, good morning, guys. Just a couple quick clarifications at this point: the 20% down beta. You're contemplating that through the cycle, and that would compare to the update of roughly 30. Did I hear that right?

Russell Gunther: Yep. That's right. Mm-hmm. Okay. Very good. And that would be total. Total. Total. Yeah, okay, excellent, understood. Thank you.

Steve: And then, just lastly, as you guys kind of balance, you mentioned the potential for a bond restructure versus buying back stock. Just kind of walk us through the thought process there. And then, if you could confirm, any potential bond restructure that would get done would likely be accretive to that NIM guidance for 2015.

Steve: You know, we talked about that on the call. I think it was last quarter that we talked about it. And I think it's the same kind of calculus. It's really just trying to think about our uses of capital. I think we talked up to maybe a 10, you know, more than 15% of our portfolio restructuring, and, You know, obviously, we'd be thinking about it in terms of an earn back period of less than three years. That's how we would think about it. It's a lever.

Steve: You know, we're thinking about what we should do, you know, kind of just back to positioning the balance sheet, thinking about the future. You know, if rates come down, we are thinking about liability sensitivity a little bit, and we want to think about how to position, you know, if rates do fall, how to best position all the balance sheets. And, of course, that takes time to do, but we've been thinking about it for the last couple of quarters. Certainly, we want to think about it for the next four or five. So, that's from a perspective of the bond restructure. It's certainly something on the table, and to your point of, you know, It's a lever if they continue to have higher rates, and, you know, our NIM is under some pressure. That's a way that we can level it, but that's just on the restructuring on the capital side. Yeah, and, you know, as you noted, I mean, with the 11.8 CET1, that does give us the luxury of considering more than one option, and certainly share rate purchases are a user's capital that we think about as well.

William E. Matthews: And, you know, where we sit today based on our forecasted risk-weighted asset growth and capital formation rate, you know, if we don't do any of those things, you're going to see that CET1 continue to climb from there. So we like the flexibility we've got with our capital position today and will continue to think about all those options we mentioned. That's great, guys. I appreciate you taking the time to answer my questions. Thank you. Your next question comes from the line of Gary Tenor with D.A. Davidson

Your line is open. Thanks, good morning. I'm going to ask about the kind of earning asset mix for 2024. You talked about, I think, you know, flattish earning assets from the fourth quarter level, with what looks like somewhere in the range of a billion and a half of net loan growth. So from a funding perspective of that loan growth, what are the cash flows projected from the securities portfolio for the year? And, you know, how lean would you run cash as you're thinking about kind of remixing the asset side of the balance sheet a little bit? Sure. You know, I guess this really hasn't changed a whole lot.

Steve: As you think about, you know, if we have mid-single-digit loan growth, that's, you know, I don't know, $1.5 billion, $1.6 billion, something like that. You know, we have our securities portfolio that's running off somewhere, depending on rates, you know, $700 million, $800 million a year. So that would imply that you have about, you know, 2% to 3% deposit growth assumptions built in there. You know, we think it's slow in the front end, it probably ramps up in the back end. If you think about, you know, QT and all that stuff, if they end up, you know, bringing that back, I would imagine that, you know, liquidity in the system would get better in the back half. But, Our, you know, if we start out a little lower than that, we'll, of course, end up a little higher than that based on that. Okay, I appreciate that.

Steve: And then just with the commentary in the press release about the reduction in broker deposits. Tell us what the brokered balances are at your end. Yeah, I don't have that in front of me, but I think it's around 700, 720, so I think 720 million or so.

Steve: Yeah, we've really brought that down over the, you know, during the March banking situation. We took it up a billion too, just to make sure that we had plenty of liquidity on the Fortress Balance Sheet, and then, of course, that's run off quite a bit over the year. You know, as I think about 2020,

Steve: For you know, at least in the first half, I certainly think we'll replace those and, you know, potentially grow it a little bit, but it'll be somewhere in that range. You know, historically, we run about 3% of average deposits. So, you know, I'd be about a billion somewhere in that.

I don't know, somewhere in there is typically how we run it, depending on race. Great, thanks very much. There are no further questions at this time. I will turn the call over to John Corbett for closing remarks. All right, I know you guys have had a busy morning with a lot of calls, so thank you for joining us. If we can provide any other clarification on your models, don't hesitate to give us a ring, and I hope you have a great day.

John C. Corbett: This concludes today's conference call. We thank you for joining us. You may now disconnect your lines. Thank you for joining us.