Q4 2022 Independent Bank Group Inc Earnings Call
Greetings and welcome to the independent Bank group's fourth quarter 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Thank heater Perry Executive Vice President and Chief Legal Officer for Independent Bank Group. Thank you you may begin.
Good morning, and welcome to the Independent Bank Group fourth quarter 2022 earnings call. We appreciate you joining us the related earnings press release, and Investor presentation can be accessed on our website at IR Dot I financial dotcom.
I would like to remind you that remarks made today may include forward looking statements.
Those statements are subject to risks and uncertainties that could cause actual and expected results to differ.
We intend such statements to be covered by safe Harbor provisions for forward looking statements.
Please see page five of the tax in the release or page two of the slide presentation for our Safe Harbor statement. All comments made during today's call are subject to that statement. Please.
Please note that if we give guidance about future results that guidance is a statement of managements beliefs at the time of statement is made and we assume no obligation to publicly update guidance.
In this call we will discuss several financial measures considered to be non-GAAP under the SEC's rules reconciliations of these financial measures to the most directly comparable GAAP financial measures are included and not really.
I'm joined this morning by our Chairman and Chief Executive Officer, David Brooks, Our Vice Chairman, Dan Brooks, and our Chief Financial Officer, Paul Langdale at the end of their remarks, David will open the call to questions with that I will turn it over to David.
Thank you and good morning, everyone and thanks for joining the call.
In 2022, we reported full year adjusted net income of 209 $7 million and adjusted earnings per share of $5.02.
Reflecting on 2022.
We're pleased that our results illustrate that the recycled nature of our business model with healthy loan growth strong earnings and excellent credit quality.
We're in four of our nation's strongest markets and we remain encouraged by the economic fundamentals in both Texas and Colorado.
For the fourth quarter.
We reported adjusted net income of $49 $4 million and adjusted earnings per share of $1 20.
During the quarter, we were able to achieve continued loan growth across our markets, while Sam simultaneously, maintaining resilient credit quality metrics.
So deposit costs remain a near term headwind the sustained repricing of our fixed rate book should provide consistent tailwind to the interest income.
As rates remain elevated over time, even as payoffs and paydowns slow.
Notably we entered the quarter with a deliberate focus on achieving better expense discipline.
In pursuit of that objective, we undertook targeted expense reduction initiatives across our business.
To position the organization for it.
Uncertain economic environment.
We will continue to focus on strategically managing expenses into 2023.
<unk> strategic focus on discipline is consistent with our long standing history of confronting macroeconomic challenges early on and conservatively positioning the bank to perform throughout the cycle.
We also announced yesterday that our board of directors declared a dividend of <unk> 38 cents per share and reauthorized, our stock repurchase plan for an aggregate amount of $125 million for 2023.
We believe these capital actions are consistent with our owner led mentality.
Providing consistent returns to our shareholders.
With that overview I'll now.
Now I'll turn the call over to Paul to discuss the financials.
Thanks, David and good morning, everyone as David mentioned full year 2022, adjusted net income was $209 7 million or $5 <unk> per share in fourth quarter. Adjusted net income was $49 4 million or $1 20 per share there were several onetime items during the quarter embedded in the noninterest expense.
It's a line that I'll discuss momentarily.
Net interest income before provision decreased by three 7% or $5 5 million from the prior quarter to 141.8 million, while interest income increased by $16 1 million from the prior quarter funding costs increased by $21 6 million versus Q3. This more pronounced increase in funding costs drove the bulk of the differential.
And net interest income over the linked quarter as the epilepsy raised rates 275 basis points and the last 155 days of the year.
The increase in interest income versus Q3 was driven by floating rate loans repricing as well as net loan growth combined with new production funded during the quarter to replace normal amortization Paydowns and payoffs.
Payoffs and Paydowns slowed modestly in the fourth quarter, but the consistent repricing of maturing loans should continue to provide a sustained tailwind to interest income even as deposit costs are expected to peak shortly after the epilepsy reaches the expected terminal rate.
Our assumptions for modeling NII in 2023 include a peak in the fed funds rate towards the end of the first quarter consistent with the F. O M. C. Dot plot, we expect the fed funds rate to subsequently hold flat through year end in this scenario, our NII line should benefit from sustained fixed rate repricing dynamics throughout the year, even as deposit costs.
Prevent present, a near term challenge.
The overall yield on interest, earning assets jumped from 430% in the third quarter to 467% in the fourth quarter, an increase of 37 basis points.
The core average loan yield net of accretion and PTP income was 5.0% to 1% in the fourth quarter up 39 basis points from 462% in the third quarter.
The total cost of all deposits was 112 basis points in the fourth quarter compared to 57 basis points in the third quarter, an increase of 55 basis points.
The cost of all interest bearing liabilities was 181 basis points in the fourth quarter up from 102 basis points in the third quarter, an increase of 79 basis points.
Slide 20 shows we have been successful in playing both defense and incremental offense and our core deposit book maintaining branch deposit balances. Despite a slight shift of noninterest bearing balances to interest bearing balances.
Year to date fluctuation in specialty verticals is mostly a function of managing liquidity need strategically in the current interest rate environment.
Posit competition remains intense as we near the fed funds terminal rate and we will continue to remain nimble and opportunistic in funding the balance sheet.
<unk> are likely to continue to be a headwind near term to near term NII growth until the terminal rate has reached.
Still over the medium term our loan book should continue to serve as a tailwind even after deposit costs peak provision.
Provision for credit losses was $2 8 million for the fourth quarter and looking ahead. We are budgeting for provision that represents about 1% of net loan growth. This assumes all else being held equal in the CSO model and no material changes to the macroeconomic forecast another model factors.
Noninterest income decreased by $2 3 million compared to the third quarter, which was mostly driven by lower net revenue from our mortgage warehouse mortgage businesses due to lower mortgage volumes across the industry as well as lower other income for.
For the first quarter, we expect mortgage fee income to remain flat at current levels.
Adjusted noninterest expense was $88 3 million for the fourth quarter, which was down approximately 386000 from the linked quarter adjusted noninterest expense excludes approximately $10 4 million of onetime charges related to the targeted expense reduction initiatives undertaken during the fourth quarter.
Of this $7 1 million is related to severance and accelerated stock vesting and $3 3 million is related to the write off of certain assets related to discontinued technology projects as well as the termination of a correspondent banking relationship.
The fourth quarter's expense reduction initiatives will help us achieve our goal of holding the quarterly expense run rate flat through 2023.
As we enter the new year, we remain focused on strategically managing the expense line and we will explore additional opportunities to realize savings over the coming quarters.
Slide 22 shows consolidated capital levels over time, all capital ratios, including the TCE ratio increased slightly from the linked quarter and capital levels remain well above regulatory well capitalized minimums. These are all the comments I have today, so with that I'll turn the call over to Dan.
Thanks, Paul.
Loans held for investment increased to $13 6 billion in the fourth quarter up from $13 3 billion in the linked quarter.
Loan growth, excluding mortgage warehouse and PPP loans totaled $320 million.
496% annualized for the quarter.
New production during the quarter was well distributed both geographically and by product type and we continue to underwrite with the same discipline that has guided us through past economic cycles.
Average mortgage warehouse purchase loans decreased to $97 1 million in the fourth quarter down from $402 2 million in the prior quarter.
Volatility in interest rate increases more broadly have resulted in decreased demand.
<unk> volumes and shorter hold times across the mortgage industry.
Our expectation is for this business to remain flat at current levels through early 2023.
Credit quality metrics saw a notable improvement during the quarter with several large commercial credits achieving final resolution with minimal losses.
Total nonperforming assets decreased to $64 1 million or three 5% of total assets at quarter end.
Other real estate owned was flat at $23 9 million during the quarter.
Net charge offs totaled just two basis points annualized during the quarter.
Our loan book continues to be bolstered by a multi decade history of strong underwriting as well as the underlying strength of our markets in Texas and Colorado.
Even so we are continually stressing our portfolio for the impacts of higher rates and mindful of the evolving macroeconomic situation.
Currently we remain very confident in the strength of our underwriting and the ability of our borrowers to navigate the current environment.
And we remain ever vigilant.
Against emerging risks in the economy as we enter 2023.
These are all the comments I have related to the loan portfolio. This morning, so with that I'll turn it back over to David.
Thanks, Dan as we entered 2023, we continue to be very encouraged by the strength and resilience of our markets across Texas, and Colorado, and we have been pleased to see sustained demand for high quality business from our longtime customers even as the F. O M. C approaches the expected terminal rate.
This sustained board demand combined with our strategic focus on the disciplined management of our expense base helps.
Helps fuel our continued pursuit of through cycle performance and healthy growth our priority remains to deliver value to our shareholders by running a high performance purpose driven company dedicated to serving our customers and communities each day.
Thanks, again for taking time to join US today, we'll now open the call to questions operator.
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Our first question comes from the line of Brad Millsaps with Piper Sandler. Please proceed with your question.
Hey, good morning.
Good morning, Brett.
Alright, thanks for thanks for taking my questions maybe.
Maybe Paul wanted to start with the margin and net interest income.
You've kind of offered a lot of color there on kind of how you guys are thinking about it just you know maybe bigger picture do you think.
Most of the significant margin compression is behind you and is there a chance that you could start to see maybe NII begin to trend up maybe in the back half of the year based on.
Some of the fixed rate asset repricing have just kind of wanted to get a better sense of it.
How are you thinking about the trajectory of the NIM and NII as you move through 'twenty three.
That's exactly the right way to think about it Brad as we went into the fourth quarter. We were really trying to play incremental defense and offense in the deposit book. So if you look at page 20 in our slide deck, we were really focused on ensuring we were able to grow those branch deposit balances, even though we knew there would be a bit of remix from noninterest bearing to interest bearing.
We were successful in doing that and preserving our contingent liquidity options going into 2023. So as we look through the directionality of NIM in 2023, we expect it to bottom out at current levels flat to down just a couple of basis points for the first quarter and then we should see that dramatic inflection in the second quarter accelerating through.
The third quarter as those fixed rate repricing dynamics should offer us some significant lift in NIM for the year.
Thank you and just maybe as my follow up on on the fixed rate loan repricing.
Where are you seeing those new loans and those loans reprice too in terms of a rate just wanted to kind of get a sense of the potential pick up and you know maybe David or Dan how are those new rates you know maybe impacting.
Loan demand out there in terms of you know what I think you've sort of guided to seven eight ish percent type loan growth just kind of curious what.
How the how those rates are impacting appetite out there.
Sure Brad This is David I'll.
I'll talk about it from a high level, we're seeing rates come on in the mid Sevens Upper Sevens now in the Pea.
Current a current environment.
And you know we.
We expect that will slow.
The fed will likely accomplish their purpose is slow and the economy. So that's kind of in our thinking that.
Overall loan growth will slow a bit.
As we head into 2023 here.
One of the things and I think you're alluding to and I'll, let Dan speak to this but did you one of the challenges will be if their loans in the low fours rolling to the mid sevens or upper sevens or eights.
Fed continues on here.
Then you know that may that might pose one off challenges for certain borrowers in cash flows and things I'll, let Dan speak to the credit aspect of it.
Hey, good morning, Brad Yeah, I think really I would think about it. This way you know conservative underwriting on the front end is really the best defense against that risk and so we have put material interest rate shock tests and our underwriting even.
Four years ago when rates were in the fours and now they're rolling up for maturity, but we're looking at every credit that's maturing this in the next year.
And stressing in four impact on higher rates are really looked at those has been that we see very few issues for the few credits where our conversation will be required we will do what we always have and we will get in front of it with our borrowers early on.
Okay.
Great I'll hop back in the queue. Thank you.
Hey, Thanks, Brett it's Brad.
Thank you. Our next question comes from the line of Brady Gailey with <unk>. Please proceed with your question.
Hey, Thanks, good morning, guys.
More break.
So if loan growth is going to slow a bit here.
What does that mean for 2023 or are we thinking more of like a mid single digit level potentially for this year.
Well.
Its seasonal as well so it's a little tricky to try to.
Forecast I think 6% to 8% guidance. We gave you know at the end of the third quarter still looks about right to us for the entire year, but it may be a little slow here in the first quarter. Just you know a lot of people are looking around here trying to figure out what their plan is for.
For 2003, we've got good demand and good pipeline, but I expect based upon what we know today Brady that we probably start out with a mid single digit here in the first quarter and then you know accelerated a little bit you know.
A little bit emphasis on little too you know in that six seven maybe 8% range and there's a wide range of possibilities for 2023, and what happens with the economy and you know as we've said over and over again and I don't want to.
Say it AD Nauseum, maybe we do but you know the markets. We're in should give us some installation right, even if it's a pretty difficult overall economic slowdown.
We still kept our loans will grow and then it just becomes a magnitude of how much.
Okay, Alright, and then the decisions that were made on the expense base.
What was the impact of those things like how much annualized expenses were taken out of the bank.
So Brady this was really a prerequisite for us to meet our expense guidance of holding expenses flat from that run rate. So if you think about expenses heading into 2023, I would expect them to remain in that $89 million to $90 million per quarter range and this was a crucial part of heading.
The off some of the expense headwinds, we're going to have in terms of increased FDIC assessment and things like that in 2023.
Okay.
Should we expect you guys to consider continued.
Changes in the expense base or do you feel kind of good with where expenses are at this point.
We're going to continue to look across the footprint for opportunities to have targeted reduction of expenses I wouldn't expect anything programmatic like we did in the fourth quarter, but obviously as we as we navigate what David mentioned is shaping up to be a very uncertain economic environment, we want to be really mindful and disciplined about managing the <unk>.
Expense based on an ongoing basis.
Alright, and then so the 125 million of buybacks.
Docs at one nine a tangible book value.
Tangible common equity is kind of in the high 7% range do you expect to be.
Active on that 125 this year.
They make a lot of that depends Brady on what happens with the markets and the economy and the stock prices, but we'll be opportunistic and continue to look for opportunities to buy our stock at attractive prices.
I would say that.
Obviously, we're all watching to see what's going to happen capital is precious we do like the way our balance sheet as held up with tangible equity as you mentioned still in the upper seven that's quite different than a number of banks in our peer group.
You have.
Three handles and four handles on their tangible capital ratio. So we do think we've got some room and we will be opportunistic, but we're not anxious to give away capital in this environment either.
Alright, and then last question for me is just I know you guys have been focused on improving the profitability profile of the bank any color on that.
Where you would like to get ROA or ROE your efficiency ratio or whatever metrics, you're focused on and any color on.
What's the targeted profitability ratios are for independent.
Sure.
Again.
Question, I guess, we answer and I'll quit saying it and then it Brady, but every question when he answers you in light of everything we don't know about 2023 to come in and so are our discussion around here, it's been about being nimble in everything we do from expense base to growth too.
The credit side all of that just being nimble watching what is coming our way and reacting accordingly.
But.
You asked the question last quarter and I appreciated it which is.
You guys have historically been a high a high performing bank your numbers right now wouldn't fit in that category and what are you going to do about it that's not exactly how you asked it but it was.
I think the answer is.
Brady, we you can't.
You can't turn a ship on a dime so to speak so we've been undertaking the things that we believe will return us to the kinds of metrics that we want to be at that we have traditionally been at.
So I would expect that our return on tangible common equity to be mid teens and up you know.
From there.
And our <unk> to be in the $1 <unk> and one <unk> and rising.
We won't be there in the first quarter of this year given the continued.
Pressure on deposit rates and things, but I think when you get to the back half of this year of Brady those are the kinds of numbers come third quarter fourth quarter, we should be able to generate given our base economic assumptions of you know what's going to happen this year.
So I think.
If you had a ROA and the 100, Twenty's and one thirties and returns on tangible equity in the 15 to 18 range that would be where we've been traditionally where we expect to be back to buy new this year.
Okay, great. Thanks for all the color guys.
Yes, Thanks, Brad.
Yeah.
Thank you. Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking my questions. Just wanted to go back to slide 20 I appreciate the.
Color here, but the the loan to deposit ratios extra warehouses.
Is creeping up there a little bit.
Can you walk us through in more specific detail some of the strategies I know theres, a push pull with the non primary sources.
Of deposit funding, but can you just update on some of the initiatives you have in place and maybe.
Maybe if you change incentive structure, just anything that you're doing more specifically on the deposit side.
Kind of balance.
That loan or deposit ratio with the funding needs as you continue to grow.
Sure. Thanks for the question Michael I will say this we were very deliberate in the fourth quarter about preventing runoff in our core deposit book and we were successful in doing that and defending with rate some of our core deposit relationships that we've had as it relationship bank. We're always keen to make sure that if we have to pay for deposits, we're paying it to our customer.
And we're taking care of them that being said, we have incentivize the teams with very explicit deposit goals heading into 2023, it's an all hands on deck approach in terms of ensuring that everyone is focused on making sure that we keep our costs down on the deposit side of the house as much as.
<unk>.
Our expectation heading into the first quarter is that as the fed hits. The terminal rate, we will see the deposit cost pressures abate and we'll be able to especially as the curve points a little bit further down in both the brokered and the FHL be arena as we'll be able to selectively take some different tenors.
Positive there, we obviously want to keep the deposit book short, but we're going to be opportunistic in using the significant capacity we have in both the broker to specialty and the other wholesale verticals in order to maximize our rate outlook on deposits for 2023.
Okay. That's helpful. And then just maybe separately just on the on the loan growth.
Outlook.
Obviously, keeping the guide just about the same but it does seem from the color on that.
Maybe things are going to get a little bit more challenging just with rates. Since you mentioned David in the core is going up to the seven or eight how much of the the <unk>.
Growth is kind of intentionally maybe pulling back a little bit just just given uncertainty in the economy or is it is it truly just rates moving a lot higher than your customers may be looking for alternative options out there for for funding there their own growth and then.
Just just separately if you can just give us an update I know this has been a multiyear process, but where do you stand on some of the C&I initiatives. It looks like growth was.
Double digit annualized, but if you back out the where our energy loans.
It looks to be a little bit softer so I know a lot in there, but just any color would be great. Thanks.
Thanks, Michael.
Remember all the questions embedded in that question. So you may have to help me.
Remember some of them but.
Yes the.
We believe overall at the highest level the amount of economic activity and the amount of deal flow is going to slow it is already slowing.
Deals.
Some producing real estate investments don't pencil as well at 8% as they do it for.
So.
That's going to be a bit of a drag the positive.
<unk> of that has been.
The payoffs and refinancings and sale of assets and all of that have slowed. So therefore, we don't have the payoff headwind that we had.
Last couple of years, so we won't have to generate as many loans.
Net that mid.
Slide 878% that we expect for the year.
So that should be it at a high level.
We continue to be committed to.
Diversifying our balance sheet, you mentioned the energy loans, we think that's a positive.
For us, we're seeing great opportunities there.
Sure only about 4% of.
She only about 4% of our.
The overall loan book and energy. So we think that's an area that can continue to grow a little bit as we go forward.
And we'll continue to look at other lines of business, but it's not.
It's not as easy as just.
It's not as easy to snap your fingers and making it happen, but yes, we're committed to continue to diversify our lines of business, but your other one comment.
Michael was embedded around are we intentionally.
Being cautious in the answer to that is yes in this environment heading into the uncertainties ahead Ah.
There's no easy button here and as a longtime shareholders and owners of this company we've been running for 35 years, and we're not going to start in our 35th year 36 year here looking for an easy button to go Oh gosh, let's.
Let's go hire a team and book a bunch of this kind of alone or this kind of alone.
We are.
And obviously, our credit sizes being lower generally our hold sizes being well lower than our peer averages.
These are things that are core to our credit philosophy and risk management philosophy, and we're not going to change that in our 36 year and yes, there are avenues Michael out there.
Which some banks may take where you can go a lot of really big loans or you can get into lines of business that you haven't been in historically and we just think thats a uniquely bad thing to do at this point in the cycle. So we're not going to be doing those kinds of things, we're going to be growing our loan book with our customers and our markets and continue to watch our risk.
Okay, Great and maybe one last one for me I'm going to I'm going to try I don't think youre going to answer it but.
I know you guys are involved.
In the Stanford Group litigation, which another bank in the southeast just settled just wanted to get any comments from you see if there is any update.
<unk> for one of the classes is set for February 27th.
Again, I think your comment, but I thought I'd try thanks.
Hey, Thanks for the question Michael.
We don't comment on pending litigation as you know.
But we always assess what's in the best interest of our company and our shareholders as I said a moment ago.
There are details and specific on this specific cases, you asked about in our normal publicly scope disclosures and filings and you can read up on that as well and we will continue to update that accordingly.
Great. Thanks for taking my questions.
Yeah.
Thank you. Our next question comes from the line of Brett Robinson with Hub Group. Please proceed with your question.
Yeah.
Hey, guys good morning.
Hey, Brett good morning.
What are the first circle back to fee income and.
You mentioned that you think are mortgage banking will be flat in the first quarter wanted to see.
One if you're thinking.
Obviously, the market is hoping for a pivot.
We'll see but wanted to see if it's passed that you felt like there could be some optimism for that to maybe pick up a little bit and then also.
The decline in the other bucket due to the correspondent piece.
If that had fully run its course or if there could be any additional atrophy related to that and then if you can just basically saw any other opportunities to maybe.
Have have growth in fee income lines of business.
Let me say from a high level, let Paul comment on some specifics bread of your question, but at a high level.
Our view of the mortgage business right now is that it's hitting its lows and will linger there for a prolonged period of time.
<unk> and assumptions, we don't have any increase or acceleration in 'twenty. Three obviously, you know that would be great for everyone. If it if it happened, but in our decision making in the fourth quarter of last year about around our cost base included our view that it was going to be a very.
Difficult year in mortgage we've got great teams running both of those businesses and we feel good about it long term, but we think it's going to be very hard in 2003 and may be longer and until we see real evidence that.
There's some environment that will allow a return to normal kind of volumes, we don't bake that in any of our forecasts in terms of the correspondent and specific things.
Things you asked about I'll, let Paul comment.
Yeah, Bret that was just a one time charge related to the suffering of a correspondent banking relationship that won't recur in future quarters and as far as the other fee income items, we expect them to remain relatively stable over the coming quarters.
Okay.
And then wanted to make sure I understood.
Kind of the flavor so to speak of the commentary around the cost of funds from here and it sounds if I'm if I'm getting it right. It sounds like you feel like you are.
Maybe taken some.
Big chunk of the paint so to speak in and what it took to keep deposits keep relationships on balance sheet and maybe the deposit beta so to speak.
Might slow on a relative basis going forward.
Is that a fair assessment that you feel like you've taken some of the lion's share of the pain in terms of the.
The cost of funds increase and maybe any thoughts on how we should think about that.
Deposit beta from here.
Sure Brett we've been very deliberate in making sure that we play defense in our core customer base and consistent with our history as a relationship bank that's been a focus of ours.
There's still going to be continued pressure on deposit costs to near term until the fed hits the terminal rate. Our expectation now is that once the fed hits the terminal rate, we should see some significant abatement of pressure on deposit costs that help us in the back half of the year.
Okay fair enough.
And then maybe a question for Dan.
You guys mentioned.
You look at the commercial real estate loan portfolio I think I think a lot of investors are worried about commercial real estate and maybe theres a couple of credits to think about.
From a loan repricing perspective, but you'll get in front of wanted us to here.
If you look at slide I think it's 17 your credit has historically been much better than peers.
Wanted to hear maybe what you might worry about in terms of the environment.
Maybe not even your loan portfolio, but just the environment around commercial real estate, if it's if it spreads if its something else if that's not.
Change in rates, what's the big factor, you're kind of concerned about for the environment.
Yeah, Brett Great question I think in general let me say it this way it might help you as you think about certain asset classes.
That we think are under pressure and we will continue to be under pressure this year.
Industrial spec office those may seem a bit obvious to you, but I would say there's been a lot of that activity in the last couple of years and as a rule. We just stayed away from that type of lending.
Keeping with our core core principles.
Yeah, Yeah, I would say in general.
People are watching certainly occupancies.
The office space I think.
Rents.
Certainly continued to be pretty solid it seems on the multifamily side. So I don't think there are any primary concerns there that we're seeing.
But in general I think we're just continuing to be very vigilant about stressing our portfolios for the rate increases and then mindful about what could happen.
Downturn.
I think oh.
General again, our structure with our granular book, which has limits exposure on any individual credit in the way we've underwritten those with the same standards, we have over the last three decades I think.
Positions us as good as we can be and we're watching that.
Very good about our portfolio of the present and continuing to monitor what that would look like.
I guess, that's where I would answer that for you.
I would say at a high level.
Brett This is David at a high level Brett.
One of the things as we thought about these loans rolling five years and you know that we're under written that 4% interest rates.
One of the things that has really helped in our markets.
Thinking about the markets that we're in and the in migration of people, whether it's office or multifamily or professional office buildings.
The demand and the rents have increased materially in the last five years. So the cash flows that we underwrote five years ago are much higher today in almost every property and that goes to our philosophy do a high quality property in great locations in great markets.
It just hasnt risen if you will with the tide of the economic activity in our market. So that's making it actually much better than we had feared maybe six months ago. As we began the process one Oh gosh.
Underwriting re underwriting these credits so so the great markets. We're in and also Dan and his team have done a great job of avoiding kind of the heart.
Hot idea and so spec industrial.
Office warehouse that kind of space has been across the country around every airport in everything given what's going on with Amazon and delivery and and and all of that has been built by the tens of millions of square feet and look where we're a little cautious around that as an example, we think there could be some.
And that if we have a significant economic slowdown so we just have not.
That's the barn, so to speak on any one asset class multifamily is graded strong here, but even then you have to be cautious not to overbuild submarkets within these good market. So it was the kinds of things, we think about and talk about.
Okay. That's really helpful. Thanks, so much.
Okay.
Thanks, Brett.
Thank you. Our next question comes from the line of Brandon <unk> with <unk> Securities. Please proceed with your question.
Hey, good morning.
Brent area.
Morning.
So yes could you please talk a little more about your confidence and your assumption is that deposit rates will peak soon after a fed pause.
In particular in environment, where we could be in a higher for longer rate environment that could still be loan growth there and a lot of your competitors are still fighting and scratching for deposits.
Sure Brandon and then back to what I had mentioned on a previous answer to a question we were deliberate in getting in front of the rate increases. So we wanted to make sure we could retain our core deposit relationships those relationships that we've had for sometimes upwards of three decades.
And the way that we did that is we were very focused on making sure. We paid a higher rate as the fed was hiking not waiting for the noise. After that that hit the terminal rate and then as you mentioned scratching and clawing and trying to play our hand to hand combat for deposits against our competitors are trying to take our customers. So we've been more generous on the front end.
With deposit increases for those core customers with the expectation that once the fed does hit and hold at the terminal rate that that should provide us some alleviation of pressure on deposit rates as we continue to see that higher for longer environment that you mentioned.
Okay.
Does that also are you also assuming that.
Kind of a good nod DDA noninterest bearing mix stays constant from here or are you also assuming kind of a mix shift from noninterest bearing to interest bearing as well.
We're expecting a very slight mix shift in our forward forecasting.
But it's not very meaningful.
Okay. Okay.
And then a question on expenses.
Far as how you evaluate the expense run rate going forward, how do you feel about kind of your current head count.
And do you still see potentially room for there to get more efficient going forward.
Look I think costs Brandon are going to be on everyone's plate in 2023.
So everyone's going to be you know our industry has been through a unique time, where for PPP revenues to liquidity in the system keeping interest rate deposit costs down etcetera. We've had a season here the last two or three years, where.
Costs haven't people who've been able to invest as we have in our infrastructure and building out business lines and things like that but we're entering a time now where.
If we're going to have an economic slowdown rates are going to level out at a higher level.
Then the only other lever that financial institutions are going to have or lose their cost base and so we took a hard look at hours in the fourth quarter and trying to position ourselves for what.
To be nimble and be able to react to what could come our way in 2023 I think other.
Banks will do similarly.
As the rates level out here in the second quarter.
Quarter.
I think our head count is.
Where we needed to be invested in a lot of businesses. We have the best teams out customer facing teams, we've ever had and we're going to take great care of our customers, we're going to grow with our customers in our markets and we'll invest in our more people as we see the need to do it.
So we're.
But I think right now we're.
We're right, where we need to be in.
Looking good here as we go into 'twenty three.
Okay. Thanks for taking my questions.
Thanks Brent.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad.
Our next question comes from the line of Matt Olney with Stephens Inc. Please proceed with your question.
Thanks, Good morning.
Good morning wanted go back to the outlook for the NII and I appreciate all the comments on the funding on the other side you've mentioned the loan repricing tailwind that should provide some offsetting benefits.
Any more color you could give us on how quickly. This book will turn just trying to appreciate why this would be a.
Offsetting some of the funding headwinds as you move into I think you said <unk> 23 in the back half would offset some of the headwinds. Thanks.
Sure Matt Thanks for the question as David Echo Athene that David spoke to there are a lot of potential outcomes for the broader economy in 2023, and obviously the macroeconomic picture is going to influence the payoff and paydown trends, but that being said we have a.
Bulk of our book as those fixed rate five year CRE loans.
And the contractual maturities for those will continue to provide a tailwind even in an environment with subdued payoffs or paydowns as we look back on the fourth quarter, we did see payoffs and paydowns slow a little bit some of that is typically a seasonally slower Q4 that we see but some of it is a slowing in paydowns more broadly.
Our expectation is to see some blend of the <unk> and <unk> rates on a go forward basis from a payoff and Paydown perspective. So we are optimistic that we will continue to have a pretty good lift from the repricing of those fixed rate loans, especially as contractual maturities happen over the course of the next four to eight quarters.
Okay I appreciate that Paul and then I guess, David in the past you've talked about the bank's goal of achieving the positive operating leverage every year and looking to 2023 is that still a reasonable goal.
This operating leverage given the macro headwinds that you're facing in the industry is facing.
We believe it is.
Matt given again everything we know today, we believe it is we think our cost.
We've got a very good handle on our cost structure now.
And we will continue to look as Paul said for ways to incrementally improve.
We're taking a hard look at all of our contracts in.
All of those things that you would expect to bank like ours do.
Going basis. So we will continue to look for things like that.
That would be helpful. I guess as we as we fight that there are so many things as Paul mentioned from FDIC two contracts.
Actual increases in pricing and things like that and obviously.
Increases merit pay increases.
Greece's to our teams in all of that.
Creating the headwind. So we tried to get ahead of it in the fourth quarter by you added some cost reductions across the company and then positioning ourselves to hold the line here if you will in 2023, but.
It's a continued not only focus of ours Matt.
Matt, but it's a commitment we have to our shareholders to continue to improve.
The operating leverage of the company.
Okay I appreciate that David and then I guess lastly for.
Credit question for Dan.
I think there was a sale of a non accrual loan in the fourth quarter, but I appreciate.
Just any comments you have on.
The market appetite for loan purchases and how did the pricing of that loan so compared to the appraised value.
Yeah. Good question as you noted there we did have an opportunity to move out to.
Nonperforming credits large ones large for us anyways.
We tend to have small ones, which is a good thing.
But we also had some additional small ones and one of those was an a note sale. It was an energy loan in particular.
I would say the.
Percentage of discount, which I think is what youre really looking for there is going to depend on the asset right real estate assets of yourselves and those notes could be different than C&I assets, where others are and I would say relative to the value that we saw on that in the balance on it it was a slight discount.
Really off of what we would've expected at that point.
I'm certain that other banks may be looking at or have done the same things and.
Again, depending on the asset class and the condition of the credit it's very much depends on those variables when you're trying to determine that.
Got it.
Okay. Thanks, guys.
Okay. Thanks, a lot Matt.
Thank you. Our next question is from the line of Matt Robinson with Huntington. Please proceed with your question.
Yes.
One follow up on that repricing of loans question I think last quarter, you originated $326 million of commercial real estate and had $950 million reprice.
Paul do you happen to have those numbers, maybe for the fourth quarter and I think that's fair.
A report or the CRE portfolio.
Years duration was just curious if that was still kind of on an effective number.
And those are the duration assumptions that we're using as far as repricing is concerned the bulk production in Q3 was higher than it was in Q4.
I don't have the exact number off the top of my head, Brad, but I would estimate that it was about 20% last again some of that is seasonality and some of that was an additional slowing of prepayments as defense printed out the forward curve our expectation, though is for the future forward rate of the fixed rate repricing to be somewhat blended.
Between what we saw in Q3 and Q4.
Okay.
Thanks I appreciate it.
Thank you, ladies and gentlemen that concludes our question and answer session.
I'll turn the floor back to Mr. Brooks for final comments.
Yes.
I appreciate everyone being on the call today, and the active back and forth I feel really.
Incrementally positive as we enter 2023, I think we're well positioned.
Versus sour or.
Our operating leverage versus our ability to continue to grow the company and and I think we're well positioned for whatever happens in <unk>.
Excited to take on the challenges ahead, thanks, everyone for being on today and I hope everyone has a great day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.