Q4 2023 Independent Bank Group Inc Earnings Call

Operator: Greetings. Welcome to Independent Bank Group's 4th quarter, 2023 earnings call.

Operator: At this time, all participants are in listed 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 from your telephone keypad. Please note, this conference is being recorded.

Ankita Puri: On the outside of the conference, over to Ankita Puri, EVP and chief legal officer. I'm sure you may now begin. Good morning and welcome to the Independent Bank Group's 4th quarter, 2023 earnings call. We appreciate you joining us.

Ankita Puri: The related earnings press release and investor presentation can be accessed on our website at ir.financial.com. 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 5 of the text in the release or page 2 of the slide presentation for our safe harbor statement.

Ankita Puri: All comments made during today's call are subject to that statement. Please note that if we give guidance about future results, that guidance is a statement of management's beliefs at the time the 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-gap under the SEC's rules. Reconciliation of these financial measures to the most directly comparable gap financial measures are included in our release.

Ankita Puri: 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, and with that, I will turn it over to David. Thank you, Enkita.

David Brooks: Good morning, everyone, and thanks for joining the call today. Fourth quarter earnings total 14.9 million dollars worth 36 cents per diluted chair, excluding the one-time impact of the 8.3 million dollar FDSD special assessment and other one-timers are adjusted. Fourth quarter earnings were 25.5 million dollars or 62 cents per diluted chair. During the quarter, we were pleased to see the continuation of healthy organic core lung growth, which came in seasonally strong at 11 percent annualized, as pin-up demand from our release ship borrowers drove origination tire.

David Brooks: For the four-year lung growth total 4.2 percent, this healthy growth will help support NII on a billing-board basis and was driven by the needs of our core customers across growing Texas and Colorado economists. Credit quality remains excellent with low non-performing assets, and net charge-offs totaling just one basis point annualized for the second quarter in a row. And our capital ratio is into the quarter and healthy position with the tier one capital ratio at 9.93 percent, the total capital ratio at 11.57 percent.

David Brooks: Notably, our TCE ratio strengthened to 7.55 percent as of December 31st and we grew tangible book value by 5.8 percent to $32.90 per share. With that overview, I'll now turn the call over to Paul to get more details on the financials.

Paul Langdale: Thanks David and good morning everyone. As David mentioned, net income for the quarter was 14.9 million, which includes 8.3 million related to the FDSD special assessment and 4.8 million of Oreo-related charges that Dan will discuss in more details. Hill.

Paul Langdale: Adjusted income for the quarter was $25.5 million or $0.62 per diluted share, compared to $32.6 million or $0.79 per diluted share in the linked quarter. Net interest income was $106.3 million in the fourth quarter, compared with $109 million in the linked quarter. Our NIM for the quarter was impacted several basis points more than expected by the incremental loan growth during the quarter, as we carried higher amounts of marginal liquidity to support the loan fundings.

Paul Langdale: Encouragingly, we saw the positive cost peak during the quarter, and we have started to reprise some of our marginal liquidity downward as broker rates have moved meaningfully lower. Of the $2.5 billion of broker funds noted on slide 20, the weighted average rate is 5.36%. Approximately 1.8 billion of the broker portfolio is in CDs, while the remainder is in money market funds tied primarily to an index. Of the CDs, 1.3 billion will mature by the end of May, and currently we are reprising these new broker CDs below 5% on an all-in basis.

Paul Langdale: As soon as the Fed moves, the index broker funds will move in tandem as well. Additionally, the overwhelming majority of our public funds book is index to Fed funds, which will move immediately with rate cuts. We have almost 2.1 billion in promotional CDs, 1.1 billion of which are 5.5% APY 6 month promotional CDs with a weighted average life of between 3 and 4 months. Beginning today, we have reduced the renewal rate on these 6 month CDs to 5.15% APY consistent with the market, which it also helps drive expenses down.

Paul Langdale: In addition to our enhanced liability sensitivity, which will be reflected in our IRR and one-year gap disclosures, we also expect to continue repricing our fixed rate loan portfolio upward. Our modeling indicates steadily expanding earning asset yields over the course of the year in both flat and down rate scenarios. We anticipate that these factors acting in concert will allow us to grow NIM and NII from quarter to quarter throughout 2024 and beyond.

Paul Langdale: Total borrowings were just 621.8 million at December 31st, a slight increase from the linked quarter. Still, borrowings remain at a low level relative to earlier in 2023. Additionally, we may explore utilizing BTFP during the first quarter to replace higher cost FHLB advances as one-year OIS has evolved favorably to FHLB rates.

Paul Langdale: The substantial contingent funding capacity available to us in low level of borrowing utilization strengthens our balance sheet against any subsequent shocks and positions us well to capitalize on sustained growth in earning asset yields. We recorded a provision of 3.5 million for the fourth quarter, which supported the net growth we experienced during the quarter despite an improvement in the MEVs in the CISO model. Going forward, we expect provision that represents about 1% of loan growth. This is of course dependent on all else being held equal in the CISO model, which could of course be impacted by further changes to the macroeconomic forecast or specific reserves.

Paul Langdale: Adjusted non-interest income was 12.4 million for the quarter, down slightly from adjusted non-interest income of 13.4 million for the linked quarter. Adjusted non-interest expense totaled 83.8 million for the quarter, up from 81.3 million in the linked quarter. Going forward, I expect non-interest expense to be between 85 and 86 million for Thank you for all the comments I have today.

Dan Brooks: So with that, I'll turn the call over to Dan. Thanks, Paul. Court loans held for investment, excluding mortgage warehouse loans increased by 383.6 million or 11% annualized in the 4th quarter. For four year 2023 loans proved by 569.9 million or 4.2%. Both for the 4th quarter and for the full quarter was supported by the man from our core customers across our markets and taxes in Colorado. Average mortgage warehouse purchase loans were 408.4 million for the quarter, down 4.1% from the 3rd quarter averages.

Dan Brooks: Overall, we saw a relative stability in these balances on a month-a-month basis and we anticipate these balances to generally remain stable moving forward. Credit quality metrics continued to remain strong during the 4th quarter. Non-forming assets were down 1 basis point to 0.32% of total assets at quarter end. And the bank again had just a single basis point of annualized charge loss for the quarter. For the full year 2023 net charge loss also totally just 1 basis point of average loans.

Dan Brooks: We were successful in moving a property held in ORE out of the bank during the quarter which resulted in a loss on sale of 1.8 million dollars. We also took a $3 million right off related to the one repossessed property remaining in ORE as we position that property for an eventual sale. This is consistent with our overall philosophy of disposing of ORE in an expedited manner. Overall, asset quality trends are very positive.

Dan Brooks: And while we are always vigilant against emerging risks, we currently do not see any areas of concern across the loan portfolio. We are particularly encouraged that classified assets fell by 34% from $191.1 million at September 30 to $126 million at December 31.

Dan Brooks: [inaudible] Our company is fortunate to be supported by the growing Texas and Colorado economies, both of which are experiencing sustained inflows of labor and capital that insulate them from broader macroeconomic volatility. We're able to capitalize on this position of strength because across four of the most dynamic metropolitan markets in the country because of the incredible teams that we have across our footprint. I'm pretty grateful to our employees, all of whom are committed to serving our customers and communities by working together to provide outstanding service and fostering meaningful lasting relationships. Thank you for taking the time to join us today. We'll now open the line. The question's up here.

Operator: Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star one from your telephone keypad and the confirmation tone indicate your line is in the question queue. You may press star two if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please. We'll be poll for questions. Thank you.

Brandon King: Thank you, and our first question comes from the line of Brandon King with truest securities. Please just use your questions. Hey, good morning, basically taking my questions. Good morning, Brandon.

David Brooks: Yeah, so Paul, I appreciate all the commentary around NII deposits, but I was hoping to get a better sense of how you're thinking about the pace of NII growth in 2024. I think in the first and second quarters, Brandon, we're going to see an inflection and NII some growth that will accelerate through the back half of 24. And then continue to accelerate through 25 is we think about our balance sheet today compared to where it was even just a quarter ago. We have substantially enhanced liability sensitivity, as I mentioned in my prepared remarks.

David Brooks: That's going to prepare us to really capitalize on any rate cuts that we see over the next six to eight quarters, as well as just get the natural lift that we would have even in a flat rate environment from earning assets repricing. So what we've tried to do strategically is prepare ourselves for any scenario that the Fed throws at us to benefit from after 2023. Okay, that's helpful.

David Brooks: And is there any way you could potentially quantify how much higher maybe kind of exit rate 2024 for Q24 or how much higher NII could be relative to what it was quarter? If we think about it on a NIM basis, Brandon, I think we have the opportunity to get back to our historic levels of profitability by year and 25. It's really a six to eight quarter push for us. So I think we'll see some meaningful lift really accelerating as I said through the back half of this year. Okay.

David Brooks: And then within your NII expectations, what are you expecting on the long growth front? I was pretty strong in this quarter, are you expecting potentially a slightly slower pace going forward? Yeah, Brandon, the the loan growth was outsized as quarter and really just a lot of factors and deals from third quarter got pushed to the fourth and the number of our long time clients were being optimistic, you know, to pick up some assets here before the rates start coming down and cap rates start coming down.

David Brooks: But we're expecting, you know, mid single digit growth for the year. The pipeline is, you know, we indicated that the fourth quarter pipeline was really strong going into the quarter. First quarter, you know, we've got a nice pipeline but it's not not like it was going into the fourth quarter, so we do expect that growth moderate mid single digits. I was, you know, 4 to 6% in that range.

David Brooks: We do expect also. We've done a lot of work. The last, you know, a couple of quarters in terms of our treasury and, and our relationship officers and, and helping and understanding the dynamic of growing deposits as well. So we're going to our, our base model budget and plan and commitment is to grow our deposits at the same. We rate or approximate same pace or faster than to grow our loans this year. So, so we know understand the value and the importance of continuing to grow that quarter positive base as we grow the loans. We expect both to be mid single digits.

Brandon King: Thank you. I'll, how that can be cute. Hey, thanks a lot.

Brady Gailey: Our next question is from the line of Brady Gayley with KBW. Please just hear through questions. Hey, thanks.

Brady Gailey: Come on guys. But I know it's tough to forecast nowadays, but when you look at your sensitivity to down rates, like saying a down 100 basis point scenario, but what does the model say about how much that could benefit spread income? So our, our gap, just for example, Brady has doubled quarter to quarter. So we've substantially, as I said, enhanced liability sensitivity. I think you'll get meaningful double digits pick up and net income for even a down 100 rate environment. Okay. All right.

Paul Langdale: And then you know, Paul, I heard your comment about getting back to kind of your historic profitability level by the end of next year, so the end of 2025. How do you guys think about the store profitability? Like what, what is that in terms of our our way or our way or whatever metrics you guys focus on?

Paul Langdale: I think that as we think about it, Brady by the by a second half of 25 depending on, you know, how much and how quickly the fed rates come pull rates down. We should see us be able to achieve our, you know, a more historic men in the mid three so 350 360 and that range is what our forward model show in the back half of 25 that happens more quickly. If rates come down more quickly, but again, just I think what we think of the middle of the road assumption gets us to that level at that level, given what we've done with our cost structure, we would get back into that 120 125 return on assets.

Paul Langdale: And then, you know, that should translate depending on any, you know, what the capital level is, of course, would put us somewhere in the 15 to 16% ROTCE. So those are the numbers we think we will be back at by second half of 25. All right, that makes sense.

Brady Gailey: And then finally for me, I know Independent has been a great organic grower of years, but also a pretty good bank buyer. And if you look at what's happened with the long end of the curve, like the 10 year bond, you know, went from five to basically 4% now.

David Brooks: So that that kind of helps with the interest rate mark piece of M&A. But maybe just an update on you is M&A sawing here. Do you expect it to be active this year? Do you expect IVTX to be still involved and interested in M&A? Yes, we remain interested, remain close to a lot of really, there are a lot of really high quality banks, as you mentioned, like us that have struggled with margin and some of the banks have struggled with bigger AOC I mark as you alluded to, Brady. So this does help immensely.

David Brooks: We've been obviously focused on our own situation mostly, trying to get our earnings and I and them back to more, you know, moving back toward historical level. But we remain interested. I do think there will be some of them. I think right now that there's seems to be more of a, you know, this is waiting, let this settle out, you know, for in the quarter or two. So my guess is probably back half of of 24 and we will definitely be interested and be a participant of that. Obviously, we, you know, we need to perform and we need our own stock to perform well in order to be at that table, but we expect to be there.

Brady Gailey: Okay. All right. Great. Thanks for the card, guys.

Operator: Thanks, great.

Matt Olney: Our next questions are from the line of Matt Olney with Stevens. Please just hear your questions. Hey, thanks. Good morning.

Matt Olney: Just want to go back to the discussion around the NII and NIM outlook. It seemed that we've been talking about stabilization for a while, but the results continued to erode lower. I think investors are looking for more details as far as the alloc here. So in the fourth quarter of the NIM was called 249 and the NII was 106.3 million. Can you be more specific about your near term expectation? Then we talk about stabilization and flexion. I think those terms can be kind of usually sometimes.

Paul Langdale: So any more details you can provide on on both the NII and the NIM in the first quarter. Thanks. Sure, Matt.

Paul Langdale: Happy to give you a little bit more color on that is we look at our modeling the multiple scenarios that we show in both flat and down rate environments and we model three scenarios specifically. We model the flat rate environment. We model the forward curve and we model the fed summary of economic projections.

Paul Langdale: As we talk through those in our out though all of those three scenarios show us growing them by five to seven basis points in the first quarter. From there that growth accelerates to where we can get back to call it a 3% NIM by the end of 24 and then as we mentioned back to a 3.5 NIM by the end of 25. 5.

Paul Langdale: So that's our target and that's really what we're focused on. As I mentioned again, I mean, we've moved a lot of pieces around on the balance sheet in the fourth quarter to enhance our liability sensitivity and capture that upside of down rate environments. So we wanted to make sure that we were optimally positioned to recapture the earnings that we lost on the way up for rates when rates come back down. And so that's more of just a modifier from the flat rate scenario where we're still going to grow nm starting as I said by 5 to 7 basis points and then forward accelerating over the back half of the year. Okay, that's hell for Paul.

Paul Langdale: Thank you for that. And I guess if the nm's going to move higher in the first quarter, I would assume that on a monthly basis, the nm has already inflected at some point late in the fourth quarter. Is that a reasonable assumption? Any color there?

Paul Langdale: That is a reasonable assumption. Okay, perfect. Thanks. And then I guess switching gears on the on the expense side, I think you gave us the 85, 86 million dollar alloc from here, a touch higher than what we've seen of the last few quarters of ours expectations. Any anything to call out there?

Paul Langdale: Just a normal first quarter expenses are generally higher for us. You know, we have obviously merit and bonus season. You know, as we think about some investments that we have to make, obviously Matt will remain focused really on expense discipline and will be mindful of trying to find any offsets we can to where we have expense increases. That's something that as you know, has been a focus of ours for really the last six quarters and that's something that we're going to remain focused on in 2024.

Paul Langdale: And just to clarify, the 85 to 86, that's a guidance or a goal for the next several quarters that I catch that right, or is that just the first quarter? Yes, yes, that's my expectation really around 85 million for the next several quarters.

Matt Olney: Perfect. Thanks, guys. Thanks, Matt.

Operator: Thank you.

Michael Rose: Our next question comes from the line of Michael Rose with Raymond James. This is your three questions. Hey, good morning, everyone. Thanks for taking my questions. Maybe my Dan, I just wanted to get some color.

Dan Brooks: Good morning. Just want to get some color on the CRD credit, this quarter, and you know, what the resolution could, you know, potentially look like there. And then I was also just curious is to, you know, why some of the Oreo loss, you know, flowed through being in common as opposed to charge offs, we just like some clarification. Thanks. So, good morning, Michael. This is Dan.

Dan Brooks: The credit that we moved to non accrual, which I'm assuming is what you're asking about, was one property in Houston. And that has been approved. Um, that's shooting that loan remains current. And the owners are preparing to sell that asset. And we just felt like it was in a position that there might be a slight loss on it. So we just positioned it for that. But we expect that'll be resolved sometime here in the first of the year. As it pertains to the accounting treatment, Michael, we've always taken Oreo expenses in income and to non-interest income and non-interest expense respectively.

Paul Langdale: We've recently moved, I think I noted on the third quarter call, Oreo income and expense to offset each other and to non-interest expense, but when we book a gain or a loss on sale, we put that through the fee line consistent with what our auditors and what our internal accounting teams feel is the appropriate accounting treatment. Okay, that's helpful. And then maybe just I know we've probably beaten the margin question a lot here, but just to kind of follow up on that, what does your kind of baseline forecast include in terms of cuts for this year?

Paul Langdale: And I guess the step up from here to kind of what you talked about, I guess, for mid to late next year and the mid 350s, 360s is a really big ramp. And I think it's going to be probably difficult for some investors to kind of see. So can you kind of just give us the help us with the bridge to kind of get there and kind of what really needs to go right and your baseline scenario isn't correct what could that range look like if we're higher for longer, for instance, or you have more growth and you have to fund it with higher cost deposits, kind of et cetera, just looking for a bearable base kind of case for the margin. Thanks.

Paul Langdale: Sure, happy to walk you through the modeling logic there. As we think about a base case scenario, we're assuming a flat rate environment. As you know, over the last four quarters, we've really talked about our ability to reprise earning assets due to our fixed rate, CRE book, and our ability to roll those loans over. New volume rates are coming on right at 8% right now.

Paul Langdale: So we've been able to continue to expand earning asset yields even as short term rates have peaked. That's something that we're going to be able to do even in an environment where you see several Fed cuts. So we're focused obviously on expanding the margin, topping out those deposit costs even in a flat rate environment. As I noted, because the curve is pointing down, and because we have run two other scenarios with 75 basis points and 150 basis points, 125 basis points of cuts respectively, we are going to be able to capture a substantial amount of deposit cost decreases on the way down, which will help drive that margin even higher.

Paul Langdale: All of our marginal funding is helped really short, and as you know, Michael, that's really expensive to do at the top of the cycle. We've done that so that we can really focus on optimizing NII and NIN growth in 2024. If I look across the portfolio, I look at the FHLB advances, for example, are right at 543. As I mentioned, the broker portfolio at 536 are 6 month branch CDs, 1.1 billion of those at 550 APY.

Paul Langdale: For us, we have a significant opportunity even in the first quarter to reduce all of those costs as all of those individual components have seen 30, 40 basis points of pickup on spread as we begin to reprise those. Having held short, that's really what's going to drive the margin. The upside to reducing the funding costs is ultimately what's going to create the delta between a base case scenario where you have a fat flat head funds rate environment and an upside case where you have down 150.

Stephen Scouten: Paula. Okay, that's really helpful. Thanks for taking my questions, guys. Thanks, Michael.

Stephen Scouten: Our next question is from the line of Stephen Scouten with Piper Sandler. Please excuse your question. Yeah, thanks. Good morning.

Paul B. Langdale: Hey, Paul. I wanted to follow up. I think I heard you say that the down 100 points scenario was going to be an up double digit. And I kind of percentage, and I'm just kind of wondering, you know, versus the last few, I think we're showed 1.66% in a down 100 basis point, like kind of what seems, whether it's in the modeling or what you guys did from a hedging or, you know, structural standpoint to create the delta that seems to have come about.

Paul Langdale: The three things there, I'll correct you slightly, double digit net income, NII is right on the cusp of double digits. But yes, I mean, it's a substantial increase in our liability sensitivity from last quarter. Two things really driving that one is the updated deposit study that we do in the remixing of non maturity deposits into short duration time deposits and other wholesale types of funding. The back for us is substantially enhanced our liability sensitivity.

Paul Langdale: The additional thing as I noted, Stephen, is the indexation of a substantial portion of our deposit base defense funds. So our ability to drop deposit costs, whereas in a normal down rate environment, if we have exception pricing as a tool that we use to negotiate with our depositors, it's a little bit harder to bring those costs down. For us now, we have that index tool that's going to be able to drop our deposit costs instantaneously with Fed.

Paul Langdale: So all of those actions that we undertook to enhance that portion of our deposit base and increase that liability sensitivity. But really the reduction of those non maturity deposits was the single largest driver of that model. Okay, and I think last quarter you said it was three to four billion index deposits. Has that number gone up further on a quarter of a quarter basis? That doesn't include the six month CD's, the promo CDs as well some of the broker CDs.

Paul Langdale: So if you look at the portfolio and total, we're going to be able to move roughly half of the deposit book, which is really substantial portion of the interest bearing deposit. So we're going to be able to drop the deposit book inside of four months for any move and Fed funds. Okay, great. That's extremely helpful.

Dan Brooks: Thanks. And then I guess just my only other follow up is kind of curious what you guys are seeing around new CRE demand. Obviously put up really strong growth this quarter. And then I respect, you know, heard the comment that pipelines maybe aren't quite as strong, but still guiding towards positive loan growth. How, you know, what's kind of the push back on these eight percent rates within the CRE markets. Indeed, I think, you know, we'll see kind of a pick up in the back half if we do indeed get the projector great cuts.

Dan Brooks: Yeah, the granularity of our loan requests continues to be the theme. Steven, as we as we broke board, we've seen a lot of requests, you know, generally smaller. You know, requests that acquiring families, acquiring assets, investment groups, acquiring assets is what we've seen on the CRE side. We have seen a drop in demand for large theory deals. We're not seeing much construction and haven't been doing much construction lending. So, so we haven't seen much there.

Dan Brooks: We're really working, as we plan for 2024-25, Stephen, we've invested, as Paul mentioned earlier, in doing what we can to balance our future growth away from being so serious, concentrated. We were in the process of hiring some additional commercial industrial lenders in our major markets, adding to the teams we already have there, and then also SBA is something, again, given our granular nature of our requests, we do have some SBA requests, we haven't set that up as a big national business or anything, but in terms of assisting our customers.

Dan Brooks: So we think we've missed some opportunities there, so we've added to our SBA team or adding to our SBA team in Houston and in Austin in particular. So we're doing what we can on that front, but it's partly also why we're thinking, Stephen, that it's kind of a mid-single-digit growth because of the uncertainty out there in the seary market, and our desire to really balance up our long growth with our deposit growth, so we think those are all achievable for 2024. Great. Makes sense.

Dan Brooks: Thanks for all the color. I appreciate the time. Hey, thanks a lot.

Operator: Thank you.

Brett Rabatin: Those questions come from the line of Brett Rebatton with Hoveter Group. Pleasure to see you with your questions. Hey guys, good morning.

Paul Langdale: Wanted to go back, Paul, to a question to a comment you made earlier about the bank term funding program, and it sounded like you were going to utilize that to some extent, this quarter, you know, presuming that does run out at some point, was the usage of the BTFP, is that going to be to replace? I didn't quite catch if it was to replace some of the borrowings, or if you had just intended to kind of ride the spread that a lot of banks seemed to be enjoying at the present time.

Paul Langdale: Yeah, so for example, Brad, if I'm looking at the FHLB advances, what's yet 1231 were cost us 543 basis points, and I look at where 1-year OIS is today, even at 490 minutes of 50 basis points, Brad, from where that funding is, and so that would be an example of where we would utilize BTFP prior to its expiration to lock in that funding as a way to reduce our liquidity costs. Okay, and then you've talked quite a bit about the funding side of the equation.

Paul Langdale: Can we talk about the lending side, and just how much of the fixed rate loan portfolio reprices this year, and maybe in 1Q specifically? Yeah, we anticipate about $2 billion of fixed rate assets and variable assets to reprise over the course of 2024. That starts in the first quarter with several hundred million dollars, and then we'll accelerate from there through the end of the year. So really the bulk of the repricing activity is pretty evenly distributed, but it's a slight acceleration from the beginning of the year.

Paul Langdale: We're looking at a maturity schedule. Some of those contractual maturitys, obviously we expect to be able to reprice those up about 300[inaudible] at this point, similar to the adjustable note. So if you think of our three to five-year fix straight theory loan book, if we ever make a loan past that in CRE, we have an adjustable mechanism at the five-year mark. So that's what I'm referring to when I talk about the adjustable rate book.

Paul Langdale: In addition, you still do have some prepayments. So we still are seeing, even at much lower level, some prepayments coming from our core customers. Obviously, as we've booked loans at the top, we've put in prepayments penalties. Usually in the form of three to one, to try to mitigate the down rate environment risk that we would have to earning asset yields.

David Brooks: So all in Brett, we do expect some meaningful repricing of assets over the course of the year that should look to earning asset yields. Okay. And then lastly, just for me, I know mortgage is tough to predict, but in terms of thinking about fee income this year, obviously fee income was kind of flat down in 23. Any drivers, I know that about treasury, David, any drivers to fee income in 24 that it might be notable aside from a possible increase in mortgage assuming that gets back to a more normal level at some point?

David Brooks: Yeah, Brett, I think you hit the nail in the head. I mean, apart from mortgage, which is a wild card, and obviously if rates come down some more, we could see some meaningful lift in mortgage demand, you know, we would expect relative stability in the other areas of the income. You know, we're focused on fees, obviously, to the extent that we can optimize those lines, we're going to do it. But, you know, I think mortgage is really what's going to swing that line from one direction to the other.

Brett Rabatin: Okay. Great. Appreciate the color. Thank you.

Brandon King: The next question is an online of Brandon King with true securities. Please I had a few follow ups.

Paul Langdale: And I just want to understand the potential range of outcomes for the NAMM. Things like that, 350 by the back half of 2025's kind of a baseline scenario. So if the fairer is filming it, if the Ford curve does play out that the margin could be closer to 4% by end of 2025? No, I think Brandon in a scenario where we have a hundred, followed 150 basis points, or 125 basis points, because that's really going to get us to that 355 to 365 range.

Paul Langdale: You know, in a scenario where we have flat rates, it's going to take just a little bit longer to get there. But, you know, the helpful thing for our balance sheet, obviously, is if we're able to continue repricing our earning assets at current rates, i.e, the curve doesn't move, that's going to position us for continued NAMM expansion as well. So if you think of all the moving pieces together, the range of outcomes between those three scenarios is maybe a little tighter than you might anticipate, even though we have against our line of sensitivity that really offsets any impact to earning asset yields in a down rate environment. Okay, not that makes sense.

Paul Langdale: And then you seem pretty confident in hitting those, doesn't that interest margin targets, which you're modeling forecast. But could you just talk about any of any risks that could prevent you from getting to where you think you'll get to? Yeah, of course, the macroeconomic and liquidity environment is always going to pose a risk to the outlook. It's hard to forecast the unknown unknowns as you know, Brandon, but I think, you know, we've been pleasantly surprised in the soft landing narrative, how the economy continues to perform, how we continue to see available liquidity, how we're able to reduce some of our marginal funding costs. Obviously, if the liquidity environment changed, or if we saw any meaningful reduction of liquidity in the banking system, that could create some upward pressure on funding costs, even in a down rate environment.

Brandon King: I'd say that's probably the biggest risk, although as it stands today, I don't see that. Okay, very helpful. Thanks to take my follow-up questions. You bet. Thank you.

David Brooks: That's a silent hand call back to David Brooks for closing remarks. Hey, thank you for joining us today. We, as I said in my prepared remarks, it was difficult year in 2023, but we feel very encouraged and positive about the trajectory of the banks, margins, and earnings here going forward. So, appreciate everyone's time. Everyone has a great day. Thanks. This concludes today's conference. Let me disconnect your lines this time. Thank you for your participation.

Greetings and welcome to the independent Bank group's fourth quarter 2023 earnings call.

Time, all participants are in 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 from your telephone keypad.

Please note this conference is being recorded.

I'll now turn the conference over to and he that Perry EVP and Chief legal officer.

Mr. Barry you May now begin.

Barry: Good morning, and welcome to the independent Bank group's fourth quarter 2023 earnings call. We appreciate you joining us.

Barry: The related earnings press release, and Investor presentation can be accessed on our website at IR I financial dotcom.

Barry: 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 unexpected results to differ we intend such statements to be covered by safe Harbor provisions for forward looking statements. Please.

Please see page five of the text 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.

Barry: Please note that if we give guidance about future results that guidance is a statement of managements beliefs at the time of eight minutes, Nate and we assume no obligation to publicly update guidance.

Barry: In this call we will discuss several financial measures considered to be non-GAAP under the Sec's rules.

Barry: Reconciliations of these financial measures to the most directly comparable GAAP financial measures are included in our release.

Speaker Change: I'm joined this morning by our Chairman and Chief Executive Officer, David Brooks, Our Vice Chairman, Dan Brown, and our Chief Financial Officer, Paul Langdale.

Speaker Change: The end of their remarks, David will open the call to questions and with that I will turn it over to David.

David R. Brooks: Thank you. Thank you Dan good morning, everyone and thanks for joining the call today.

David R. Brooks: Fourth quarter earnings totaled $49 million or 36 cents per diluted share.

Excluding the one time impact of the $8 $3 million FDIC special assessment and other one timers, our adjusted fourth quarter earnings were $25 $5 million or 62 cents per diluted share.

David R. Brooks: During the quarter, we were pleased to see the continuation of healthy organic core loan growth, which came in seasonally strong at 11% annualized.

David R. Brooks: Demand from our relationship borrowers drove originations higher.

David R. Brooks: For the full year loan growth totaled four 2%.

David R. Brooks: This healthy growth will help to support NII on a going forward basis and was driven by the needs of our core customers across growing, Texas and Colorado Kratos.

David R. Brooks: Credit quality remains excellent with low nonperforming assets and net charge offs totaling just one basis point annualized.

David R. Brooks: Second quarter or what.

David R. Brooks: Our capital ratios ended the quarter in a healthy position with the tier one capital ratio of 993% of total capital ratio.

David R. Brooks: 11.57%.

David R. Brooks: Notably our TCE ratio strengthened to 755% as of December 31st and we grew tangible book value by five 8% to $32.90 per share.

Speaker Change: With that overview I'll now turn the call over to Paul to give more details on the financials.

Paul Langdale: Thanks, David and good morning, everyone as David mentioned net income for the quarter was $14 9 million, which includes $8 3 million related to the FDIC special assessment and $4 8 million of Oreo related charges that Dan will discuss in more detail adjusted income for the quarter was $25 5 million or <unk> 62 cents per diluted share.

Compared to $32 6 million or 79 per diluted share in the linked quarter.

Paul Langdale: Net interest income was $106 3 million in the fourth quarter compared with $109 million in the linked quarter. Our NIM for the quarter was impacted several basis points more than expected by the incremental loan growth during the quarter as we carried higher amounts of marginal liquidity to support the loan fundings Encouragingly, we saw deposit cost peaked during the quarter and we.

Started to reprice some of our marginal liquidity downward as brokered rates have moved meaningfully lower of the $2 5 billion of brokered funds noted on slide 20, the weighted average rate is 536% approximately $1 8 billion of the brokered portfolio is in Cds, while the remainder is in money market funds tied primarily to an index.

Paul Langdale: Yes.

Paul Langdale: Of the C. DS 1.3 billion will mature by the end of May and currently we are repricing. These new brokerage Cds below 5% on an all in basis as soon as the fed moves the index brokered funds will move in tandem as well.

Paul Langdale: Additionally, the overwhelming majority of our public funds book is indexed to fed funds, which will move immediately with the rate cuts, we have almost $2 1 billion and promotional Cds $1 1 billion of which are our five 5% a P Y six month promotional Cds with a weighted average life of between three and four months beginning today.

Paul Langdale: We have reduced the renewal rate on these six month Cds to 5.15% a T Y consistent with the market, which should also help drive expenses down.

Paul Langdale: In addition to our enhanced liability sensitivity, which will be reflected in our IRR and one year gap disclosures. We also expect to continue repricing, our fixed rate loan portfolio upward our modeling indicates steadily expanding earning asset yields over the course of the year and both flat and down rate scenarios, we anticipate that these factors acting.

Paul Langdale: In concert will allow us to grow NIM and NII from quarter to quarter throughout 2024 and beyond.

Total borrowings were just $621 8 million at December 31, a slight increase from the linked quarter still borrowings remain at a low level relative to earlier in 2023 and.

Additionally, we may explore utilizing V T F P. During the first quarter to replace higher cost FH there'll be advances. It's one year OIS has evolved favorably to F. H L b rates the.

Paul Langdale: The substantial contingent funding capacity available to us and low level of borrowing utilization strengthens our balance sheet against any subsequent shocks and positions us well to capitalize on sustained growth in earning asset yields we.

Paul Langdale: We reported a provision of $3 5 million for the fourth quarter, which supported the net growth we experienced during the quarter. Despite an improvement in the <unk> and the seasonal model going forward. We expect provision that represents about 1% of loan growth. This is of course dependent on all else being held equal on the CSO model, which could of course be impacted by further changed.

Paul Langdale: As to the macroeconomic forecast our specific reserves.

Paul Langdale: Adjusted Noninterest income was $12 4 million for the quarter down slightly from adjusted noninterest income of $13 4 million for the linked quarter.

Paul Langdale: Adjusted noninterest expense totaled $83 8 million for the quarter up from $81 3 million in the linked quarter going forward I expect noninterest expense to be between 85 and $86 million per quarter.

Speaker Change: These are all the comments I have today, so with that I'll turn the call over to Dan.

Daniel W. Brooks: Thanks, Paul.

Daniel W. Brooks: Loans held for investment excluding mortgage warehouse loans increased by $383 6 million or 11% annualized in the fourth quarter.

Daniel W. Brooks: For full year 2023 loans grew by $569 9 million or four 2%.

Daniel W. Brooks: Both for the fourth quarter and for the full quarter was supported by demand from our core customers across our markets in Texas and Colorado.

Daniel W. Brooks: Average mortgage warehouse purchase loans was $408 4 million for the quarter down four 1% from the third quarter averages.

Daniel W. Brooks: Overall, we saw relative stability in these balances on a month to month basis, and we anticipate these balances to generally remain stable moving forward.

Daniel W. Brooks: Credit quality metrics continue to remain strong during the fourth quarter.

Daniel W. Brooks: Well I'm flooring assets were down one basis point to 0.32% of total assets at quarter end and the bank again, just a single basis point of annualized charge offs for the quarter.

Daniel W. Brooks: For the full year of 2023 net charge offs also totaled just one basis point of average loans.

Daniel W. Brooks: We were successful in moving our property held and I've already out of the bank during the quarter, which resulted in a loss on sale of $1 $8 million.

Daniel W. Brooks: We also took a 3 million dollar.

Daniel W. Brooks: Write off related to the one repossessed property, Romanian who already as we position that property for an eventual sale.

This is consistent with our overall philosophy of disposing of a watery in an expedited manner.

Daniel W. Brooks: Overall asset quality trends are very positive and while we are always vigilant against emerging risks. We currently do not see any areas of concern across the loan portfolio.

Daniel W. Brooks: We are particularly encouraged that classified assets fell by 34% from $191 $1 million at September 3200, 26 million at December 31st due both to payoffs and upgrades.

Daniel W. Brooks: Total classified loans plus worried that catheter with just six 2% at year and indicative of the overall health of the portfolio, even in a higher rate environment.

Daniel W. Brooks: These are all the comments I had related to the loan portfolio. This morning, so with that I'll turn it back over to David.

David R. Brooks: Thanks Pam.

David R. Brooks: While 2023 was a difficult year for our company and our industry and we're happy to be through it and we remain very encouraged heading into 2024.

David R. Brooks: We expect earning asset yields to continue their march upward, while short duration funding cost pressures have already begun to abate as the board curb wants to meaningful rate cuts on the horizon as Paul noted, we have already been able to reprice some of our marginal funding down in the first quarter.

David R. Brooks: And we expect to see NIM expansion and NII growth in the first quarter.

David R. Brooks: In addition, we will maintain our discipline on the expense front reallocating expenses to only the most strategic investments in our franchise.

David R. Brooks: To that end, we're excited to announce that we're opening our first full service branch in San Antonio in the first quarter.

David R. Brooks: This will allow our talented team already operating there to better serve our customers with a full state of deposit products.

David R. Brooks: Our company is fortunate to be supported by the growing Texas, and Colorado economies, both of which are experiencing sustained inflows of labor and capital that insulate them from broader macroeconomic volatility.

David R. Brooks: We're able to capitalize on this position of strength because.

David R. Brooks: Across four of the most dynamic.

David R. Brooks: Metropolitan markets in the country because of the incredible teams that we have across our footprint.

David R. Brooks: Perennially thankful to our employees all of whom are committed to serving our customers and communities by working together to provide outstanding service and fostering meaningful lasting relationships.

Speaker Change: Thank you for taking the time to join US today, and we'll now open the line to questions operator.

Thank you well now be conducting a question and answer session.

Speaker Change: If you'd like to ask a question today. Please press star one from your telephone keypad.

Speaker Change: A confirmation tone will indicate your line is in the question queue.

Speaker Change: You May press Star two if you like in most of your question from the queue.

For Christmas using speaker equipment it maybe.

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Speaker Change: One moment please poll for questions. Thank you.

Speaker Change: Yeah.

Speaker Change: Thank you and our first question comes from the line of Brandon King with Choice Securities. Please proceed with your questions.

Brandon King: Hey, good morning, Thanks for taking my questions.

Brandon King: Brendan.

Brandon King: Yes, so Paul I appreciate all the commentary around NII.

Brandon King: But I was hoping to get a better sense of how you're thinking about the pace of NII growth in 2024.

Brandon King: I think in the first and second quarters, Brandon, we're going to see an inflection in NII some growth that will accelerate through the back half of 'twenty four and then continue to accelerate through 'twenty five as we think about our balance sheet today compared to where it was even just a quarter ago, we have substantially enhanced.

Brandon King: Sensitivity as I mentioned in my prepared remarks.

Speaker Change: That's going to prepare us to really capitalize on any rate cuts that we see over the next six to eight quarters as well as just get the natural lift that we would have even in a flat rate environment from our earning assets repricing. So what we've tried to do strategically is prepare ourselves for any scenario that the fed throws at us to benefit from.

Speaker Change: After 2023.

Speaker Change: Okay. That's helpful and is there any way you could potentially quantify how much higher maybe kind of exit rate 2024 for Q.

Speaker Change: 24 at much higher NII could be relative to what it was this quarter.

Speaker Change: If we think about it on our NIM basis, Brandon I think we have the opportunity to get back to our historic levels of profitability by year end 'twenty five it's really it's really a six to eight quarter push for us. So I think we'll see some meaningful lift really accelerating as I said through the back half of this year.

Speaker Change: Okay.

And then looking at your NII expectations, what are you expecting on the loan growth front I was.

Speaker Change: Pretty strong this quarter, I expecting, particularly a slightly slower pace going forward.

Speaker Change: Yeah Brandon.

Speaker Change: The loan growth was outsized this quarter and really was just a lot of factors some deals from third quarter got pushed to the fourth and in a number of our longtime clients, we're being opportunistic to us.

Operator: Greetings. Welcome to Independent Bank Group's fourth quarter 2023 earnings call. At this time, all participants are in listen-only mode.

Speaker Change: You got to pick up some assets here before the rates start coming down and cap rates start coming down.

Operator: 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. Please note, this conference is being recorded. I'll now turn the conference over to Ankita Puri, EVP and Chief Legal Officer. In this period, you may now begin. Good morning and welcome to the Independent Bank Group fourth quarter 2023 earnings call. We appreciate you joining us.

Speaker Change: But we're expecting mid single digit growth for the year. The pipeline as you know, we we indicated that the fourth quarter pipeline was really strong going into the quarter. Our first quarter, we've still got a nice pipeline, but it's not.

Speaker Change: Not like it was going into the fourth quarter. So we do expect that growth to moderate mid single digits, you know, 4% to 6% in that range.

The related earnings press release and investor presentation can be accessed on our website at ir.ifinancial.com. 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 unexpected results to differ.

Speaker Change: Do expect also.

Speaker Change: We've done a lot of work the last couple of quarters in terms of the.

Speaker Change: Our treasury and our relationship officers in and helping them understand the dynamic of growing deposits as well. So we're going to our base model budget and plan and commitment.

We intend such statements to be covered by safe harbor provisions for forward-looking statements. Please see page 5 of the text in the release or page 2 of the slide presentation for our Safe Harbor Statement. All comments made during today's call are subject to that statement. Please note that if we give guidance about future results, that guidance is a statement of management's beliefs at the time the 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.

Speaker Change: Is to grow our deposits at the same rate or approximately the same pace or faster than we grow our loans. This year. So we know understand the value and the importance of continuing to grow that core deposit base as we grow the loans, we expect both to be mid single digits.

Speaker Change: Thank you I'll hop back in the queue.

Reconciliations of these financial measures to the most directly comparable gap financial measures are included in our release. 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. And with that, I will turn it over to David. Thank you, Ankita.

Speaker Change: Thanks, a lot.

Speaker Change: Our next question is from the line of Brady Gailey with <unk>. Please proceed with your questions.

Hey, Thanks, good morning, guys.

Good morning Brady.

Brady Gailey: But I know, it's tough to forecast nowadays, but when you look at your sensitivity to down rates, let's say in a down 100 basis point scenario, what what is the model say about how much that could benefit spread income.

David R. Brooks: Good morning, everyone, and thanks for joining the call today. Fourth quarter earnings totaled $14.9 million, or $0.36 per diluted share. Excluding the one-time impact of the $8.3 million FDIC special assessment and other one-timers, our adjusted fourth quarter earnings were $25.5 million, or $0.62 per diluted share. During the quarter, we were pleased to see the continuation of healthy organic core loan growth, which came in seasonally strong at 11% annualized, as pent-up demand from our relationship borrowers drove origination tires. For the full year, loan growth totaled 4.2%. This healthy growth will help support NII on a going forward basis and was driven by the needs of our core customers across growing Texas and Colorado economies. Credit quality remains excellent, with low non-performing assets and net charge-offs totaling just one basis point annualized for the second quarter in a row.

Speaker Change: So our R gap just for example, Brady has doubled quarter to quarter. So we have substantially as I said enhanced liability sensitivity I think you'll get meaningful double digit pickup in net income for even a down 100 rate environment.

Speaker Change: Okay, Alright, and then you know Paul I heard your comment about getting back to kind of your historic profitability levels by the end of next year. So the end of 2025, how do you guys think about historic profitability like what what is the in terms of our.

Paul Langdale: Our ROA or ROE or whatever metrics you guys focus on.

Paul Langdale: I think that as we think about it brady, but by a second half of.

Paul Langdale: 25, depending on you know.

Paul Langdale: How much and how quickly the fed rates come a poor rates down we should see us.

Paul Langdale: And our capital ratios ended the quarter in a healthy position, with the Tier 1 capital ratio at 9.93%, and the total capital ratio at 11.157%. Notably, our TCE ratio strengthened to 7.55% as of December 31st, and we grew tangible book value by 5.8% to $32.90 per share. With that overview, I'll now turn the call over to Paul to get more details. Thanks, David. And good morning, everyone.

Paul Langdale: Us be able to achieve our more historic NIM in the mid threes. So $353 60 in that range is what our board model show in.

Paul Langdale: In the back half of 'twenty five that happens more quickly if rates come down more quickly.

Paul Langdale: But again just to I think what we think of the middle of the road assumption gets us to that level at that level, given what we've done with our cost structure, we would get back into that $1 21 25, our return on assets and then you know that should translate depending on any you know what the capital level is of course.

Paul Langdale: As David mentioned, net income for the quarter was $14.9 million, which includes $8.3 million related to the FDIC Special Assessment and $4.8 million of OREO-related charges that Dan will discuss in more detail. Adjusted income for the quarter was $25.5 million, or $0.62 per diluted share, compared to $32.6 million or $0.79 per diluted share in the previous quarter. Net interest income was $106.3 million in the fourth quarter, compared with $109 million in the linked quarter. Our NIM for the quarter was impacted several basis points more than expected by the incremental loan growth during the quarter, as we carried higher amounts of marginal liquidity to support the loan fund. Encouragingly, we saw deposit costs peak during the quarter, and we have started to reprice some of our marginal liquidity downward as brokered rates have moved meaningfully lower. For example, of the $2.5 billion of brokered funds noted on slide 20, the weighted average rate is 5.36 percent.

Paul Langdale: Would put us somewhere in the you know.

Paul Langdale: Mid teens 15 to $2.

16% our R. A T C C.

Paul Langdale: So those are the numbers, we think we will be back at by second half of 'twenty five.

Speaker Change: Alright that makes sense and then finally for me you know I know independent has.

Speaker Change: It's been a great organic grower of years, but also a pretty good bank buyer and you know if you look at what's happened with the long end of the curve like the 10 year bond yield went from five to basically 4% now so that that kind of helps with the interest rate Mark piece of M&A, but maybe just an update on your M&A falling here.

Speaker Change: Or do you expect it to be active this year do you expect I V T X to be I'm still involved and interested in M&A.

Paul Langdale: Approximately $1.8 billion of the brokered portfolio is in CDs, while the remainder is in money market funds tied primarily to an index. Of the CDs, $1.3 billion will mature by the end of May. And currently, we are repricing these new brokered CDs below 5% on an all-in basis. As soon as the Fed moves, the index brokered funds will move in tandem as well. Additionally, the overwhelming majority of our public funds book is indexed to Fed funds, which will move immediately with rate cuts. We have almost $2.1 billion in promotional CDs, $1.1 billion of which are our 5.5% APY six-month promotional CDs with a weighted average life of between three and four months.

Speaker Change: Yes.

Speaker Change: Remain interested.

Speaker Change: Main.

Speaker Change: Close to a lot of really there are a lot of really high quality banks as you mentioned like us that have struggled with margin and and some other banks have struggled with bigger a OCI marks as you alluded to Brady. So this does help immensely.

Speaker Change: And obviously focus on our own situation, mostly trying to get our earnings.

Speaker Change: Earnings in NII, and NIM back to more moving back towards historic levels.

But we remain interested I do think there will be some M&A I think right now that theres.

Paul Langdale: Beginning today, we have reduced the renewal rate on these 6-month CDs to 5.15% APY, consistent with the market, which should also help drive expenses down. In addition, we expect to continue repricing our fixed-rate loan portfolio upward. Our modeling indicates steadily expanding earnings asset yields over the course of the year in both flat and downrate scenarios. We anticipate that these factors acting in concert will allow us to grow NIM and NII from quarter to quarter throughout 2024 and beyond. Total borrowings were just $621.8 million at December 31, a slight increase from the linked quarter.

Speaker Change: It seems to be more of a but you know this is wait and let that settle out for another quarter or two so my guess is it's probably back half of of.

Speaker Change: 24, and we will definitely be interested in and and be a participant in that obviously, we you know we need to perform and we need our own stock to perform well in order to be at that table, but we expect to be there.

Speaker Change: Okay, alright, great. Thanks for the color guys.

Speaker Change: Thanks Barry.

Speaker Change: Our next questions are from the line of Matt Olney with Stephens. Please proceed with your question.

Matt Olney: Hi, Thanks, good morning.

Just wanted to go back to the discussion around the NII and NIM outlook. It seems like we've been talking about stabilization for a while but the results continued to erode lower I think investors are looking for more details as far as the outlook here. So in the fourth quarter. The NIM was call it $2 49, and the NII was.

Paul Langdale: Still, borrowings remain at a low level relative to earlier in 2023. Additionally, we may explore utilizing BTFP during the first quarter to replace higher-cost FHLB advances as one-year OIS has evolved favorably to FHLB rates. The substantial contingent funding capacity available to us at a low level of borrowing utilization strengthens our balance sheet against any subsequent shocks and positions us well to capitalize on sustained growth in earning asset yields. We recorded a provision of $3.5 million for the fourth quarter, which supported the net growth we experienced during the quarter despite an improvement in the MEVs in the CECL model. Going forward, we expect provision that represents about 1% of loan growth. This is, of course, dependent on all else being held equal in the CECL model, which could, of course, be impacted by further changes to the macroeconomic forecast or specific reserves. Adjusted non-interest income was $12.4 million for the quarter, down slightly from adjusted non-interest income of $13.4 million for the linked quarter. Adjusted non-interest expense totaled $83.8 million for the quarter, up from $81.3 million in the linked quarter.

Matt Olney: One of the $6 3 million.

Speaker Change: Can you be more specific about your near term expectations and we talk about stabilization of inflection I think those terms can be kind of use loosely sometimes so anymore.

Speaker Change: Details you can provide on on both the NII and the NIM in the first quarter sure sure Matt happy to happy to give you a little bit more color on that as we look at our modeling.

Speaker Change: That multiple scenarios that we show in both flat and down rate environments, and we model three scenarios, specifically, we modeled the flat rate environment, we model the forward curve and we modeled the fed summary of economic projections and as we talked through those in our Alco all of those three scenarios show us growing them by 5%.

Speaker Change: Seven basis points in the first quarter.

Speaker Change: From there that growth accelerates to where we can get back to call. It a 3% NIM by the end of 'twenty four and then as we mentioned back two or three and a half NIM by the end of 'twenty five so that's our target and that's really what we're focused on you.

Paul Langdale: Going forward, I expect non-interest expense to be between $85 and $86 million per quarter. These are all the comments I have today. So with that, I'll turn the call over to Dan. Thanks, Paul. Core loans held for investment, excluding mortgage warehouses, increased by 383.6 million, or 11% annualized, in the fourth quarter. For full year 2023, loans grew by $569.9 million, or $4.2. Demand from our core customers across our markets in Texas and Colorado was supported by demand from our core customers across our markets in Texas and Colorado. Average mortgage warehouse purchase loans were $408.4 million for the quarter, down 4.1% from the third quarter average.

Speaker Change: As I mentioned again, I mean, we moved a lot of pieces around on the balance sheet in the fourth quarter to enhance our liability sensitivity and capture that upside down rate environments. So we wanted to make sure that we were optimally positioned to recapture the earnings that we lost on the way up.

Speaker Change: For rates when rates come back down and so that that's more of just a modifier from the flat rate scenario, where we're still gonna grow NAND, starting as I said by five to seven basis points, and then board accelerating over the back half of the year.

Speaker Change: Okay. That's helpful. Paul Thank you for that and I guess, if the NIM is going to move higher in the first quarter I would assume that you know on a monthly basis. The NIM has already infected.

Overall, we saw relative stability in these balances on a month-to-month basis, and we anticipate these balances to generally remain stable moving forward. Credit quality metrics continued to remain strong during the fourth quarter. Non-performing assets were down one basis point to 0.32% of total assets at quarter end, and the bank again had just a single basis point of annualized charge-offs for the quarter. For the full year 2023, net charge-offs also totaled just one basis point of average. We were successful in moving a property held in ORE out of the bank during the quarter, which resulted in a loss on sale of $1.8 million.

Speaker Change: At some point late in the fourth quarter is that a reasonable assumption any any color there.

Speaker Change: That is that is a reasonable assumption.

Speaker Change: Okay perfect. Thanks, and then I guess switching gears on the on the expense side I think you gave us the 80 $586 million Alex from here, a touch higher than what we've seen over the last few quarters as far as expectations any anything to call out there.

Alex: Just a normal first quarter expenses are generally higher for us.

Alex: We have obviously merit and bonus season.

Alex: You know as we think about some investments that we have to make obviously, Matt will remain focused really on expense discipline and we'll be mindful of trying to find any offsets we can to where we have expense increases.

We also took a $3 million... Wrightoff related to the one repossessed property remaining in ORE as we position that property for an eventual sale. This is consistent with our overall philosophy of disposing of ORE in an expedited manner. Overall asset quality trends are very positive.

Alex: That's something that as you know has been a focus of ours for really the last six quarters and that's something that we're going to remain focused on in 2024.

David R. Brooks: And while we are always vigilant against emerging risks, we currently do not see any areas of concern across the loan portfolio. We are particularly encouraged that classified assets fell by 34% from $191.1 million. September 30, to $126 million at December 31, due both to payoffs and up. Total Classified Loans plus ORE Bank Capital was just 6.2% at year-end, indicative of the overall health of the portfolio even in a higher-rate environment. These are all the comments I have related to the loan portfolio this morning. So with that, I'll turn it back over to you. Thanks, Ken.

Speaker Change: And just to clarify the 85 to 86, that's a that's a guidance or a goal for the next several quarters than it did I catch that right or is that just the first quarter. Yes, yes, that's my expectation really around $85 million for the next several quarters.

Speaker Change: Perfect. Thanks, guys.

Speaker Change: Thanks, Matt.

Speaker Change: Thank you. Our next question comes from the line of Michael Michael Rose with Raymond James. Please proceed with your question.

Michael Rose: Hey, good morning, everyone. Thanks for taking my questions, maybe Dan I just wanted to get some color. Good morning, just wanted to get some color on the.

Daniel W. Brooks: The CRE credit this quarter and you know what the resolution could.

David R. Brooks: While 2023 was a difficult year for our company and our industry, we're happy to be through it, and we remain very encouraged going into 2024. We expect earnings asset yields to continue their march upward, while short-duration funding cost pressures have already begun to abate as the forward curve points to meaningful rate cuts on the horizon. As Paul noted, we have already been able to reprice some of our marginal funding down in the first quarter, and we expect to see NIM expansion and NII growth in the first quarter. In addition, we will maintain our discipline on the expense front, reallocating expenses to only the most strategic investments in our franchise. To that end, we are excited to announce that we are opening our first full-service branch in San Antonio in the first quarter.

Daniel W. Brooks: Potentially look like there and then I was also just curious as to why some of the Oreo loss flow through fee income as opposed to charge offs were just like some clarification there. Thanks.

Speaker Change: So good morning, Michael This is Dan.

Daniel W. Brooks: The credit that we moved to non accrual, which I'm assuming is what you're asking about was one one property and.

Daniel W. Brooks: Houston and.

Daniel W. Brooks: That has been.

Daniel W. Brooks: The shooting that loan remains current and the owners are preparing to sell that asset.

Daniel W. Brooks: We just felt like it was in a position that there.

David R. Brooks: This will allow our talented team already operating there to better serve our customers with a full suite of deposit products. Our company is fortunate to be supported by the growing Texas and Colorado economies, both of which are experiencing sustained inflows of labor and capital that insulate them from broader macroeconomic volatility. We were able to capitalize on this position of strength because across four of the most dynamic. metropolitan markets in the country because of the incredible teams that we have across our footprint.

Daniel W. Brooks: There might be a slight loss on it. So we just positioned it for that but we expect that'll be resolved sometime here in the first part of the year.

Speaker Change: And as it relates to as it pertains to the accounting treatment Michael we've always.

Speaker Change: Taken Oreo expenses and income into noninterest income and noninterest expense respectively.

Speaker Change: We've recently moved I think I noted on the third quarter call Oreo income and expense to offset each other into noninterest expense, but when we book a gain or loss on sale, we've put that through the fee line consistent with what our what our auditors and what our internal accounting teams feel is the appropriate accounting treatment.

David R. Brooks: I'm perennially thankful to our employees, all of whom are committed to serving our customers and communities by working together to provide outstanding service and fostering meaningful, lasting relationships. Thank you for taking the time to join us today. We'll now open the line to questions. Operator?

Speaker Change: Okay. That's helpful. And then maybe just I know, we've probably beating the margin question.

Speaker Change: A lot here, but just to kind of follow up on that what does your kind of baseline forecast include in terms of cuts.

Operator: Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star 1 on your telephone keypad, and the confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For adjustments using speaker equipment, it may be necessary to pick up your handset before pressing the start key.

Speaker Change: For this year and I, you know I guess.

Speaker Change: Step up.

Speaker Change: From here to kind of what you talked about I guess for mid to late next year in the mid $3 $53. Six years. This is a really big ramp and I think that's gonna be probably difficult for some investors to kind of see so can you kind of just give us you know.

Speaker Change: Help us with the bridge.

Speaker Change: Kind of get there and kind of what you know.

Speaker Change: Needs to go right in your baseline scenario is correct what cause that range look like where if were higher for longer for instance are you are you have more growth and you have to fund it with higher cost deposits, you know kind of et cetera, just just looking for a kind of a variable base.

Operator: One moment, please, while we poll for questions. Thank you. Thank you, and our first question comes from the line of Brandon King with Truist Securities. Hey, good morning. Thanks for taking my question. Good morning, Brandon.

Speaker Change: Case for the margin thanks.

Speaker Change: Sure happy to walk you through the modeling logic there as we think about a base case scenario were assuming a flat rate environment.

Speaker Change: As you know over the last four quarters, we've really talked about our ability to reprice, earning assets due to our fixed rate CRE book and our ability to roll those loans over new volume rates are coming on right at 8% right. Now so we've been able to continue to expand earning asset yields even as short term rates at peak and that's something that we're going to be able to.

Brandon King: Yeah, Paul, I appreciate all the commentary around NII and deposits, but I was hoping to get a better sense of how you're thinking about the pace of NII growth in 2024. I think in the first and second quarters, Brandon, we're going to see an inflection in NII, some growth that will accelerate through the back half of 24, and then continue to accelerate through 25. As we think about our balance sheet today, compared to where it was even just a quarter ago, we have substantially enhanced liability sensitivity, as I mentioned in my prepared remarks.

Speaker Change: Due even in an environment, where you see several fed cuts. So we're focused obviously on expanding the margin topping out those deposit costs, even in a flat rate environment.

Speaker Change: As I noted because the curve is pointing down and because we have run two other scenarios with 75 basis points and 150 basis points under 25 basis points of cats, respectively.

Paul Langdale: That's going to prepare us to really capitalize on any rate cuts that we see over the next six to eight quarters, as well as just get the natural lift that we would have even in a flat-rate environment from our earning assets repricing. So what we've tried to do strategically is prepare ourselves for any scenario that the Fed throws at us to benefit from after 2020. Okay, that's helpful.

Speaker Change: We are going to be able to capture a substantial amount of deposit cost decreases on the way down which will help drive that margin even higher all of our marginal funding has helped really short and as you know Michael that's really expensive to do at the top of the cycle. We've done that so that we can really focus on optimizing it.

Paul Langdale: And is there any way you could potentially quantify how much higher the maybe kind of exit rate 2024 for Q24, how much higher NII could be relative to what it was this quarter? If we think about it on a NIMB basis, Brandon, I think we have the opportunity to get back to our historic levels of profitability by year-end 25. It's really a six-to-eight-quarter push for us, so I think we'll see some meaningful lift, really accelerating, as I said, through the back half. OK. And then within your NII expectations, what are you expecting on the loan growth front? That was pretty strong this quarter.

Speaker Change: And then growth in 2024, if I look across the portfolio I look at the <unk> advances. For example are you know right at $5 43, as I mentioned, the brokered portfolio at 536 or six month branch Cds $1 1 billion of those at $5 58.

Speaker Change: Why are you know for US we have a significant opportunity even in the first quarter to reduce all of those costs as all of those individual components have seen 30 or 40 basis points of pick up on spread as we begin to reprice those having held sure that's really what's going to drive the margin up.

Are you expecting possibly a slightly slower pace going forward? Yeah, Brandon, the loan growth was outsized this quarter, and really, a lot of factors and deals from the third quarter got pushed to the fourth, and a number of our long-time clients were being opportunistic, you know, to just try to pick up some assets here before the rates start coming down and cap rates start coming down. Um, but we're expecting mid-single digit growth for the year. The pipeline, we indicated that the fourth quarter pipeline was really strong going into the quarter. First quarter, we've still got a nice pipeline, but it's not, not like it was going into the fourth quarter, so we do expect that growth to moderate mid-single digits, you know, four to six percent in that range.

Speaker Change: Up side to reducing the funding costs is.

Speaker Change: Ultimately, what's going to create the delta between you know.

Speaker Change: Base case scenario, where you have a fat flatbed funds rate environment, and an upside case, where you have down $1 50 call. It.

Speaker Change: Okay. That's really helpful. Thanks for taking my questions guys.

Speaker Change: Okay.

Speaker Change: Michael.

Speaker Change: Our next question is from the line of Stephen Scouten with Piper Sandler. Please proceed with your question.

Yeah. Thanks, Good morning, Hey, Paul I wanted to follow up I think I heard you say that the down 100 basis points scenario was going to be.

Speaker Change: And up double digit NII kind of percentage and I'm just kind of wondering you know versus the last Q I think where it showed 1.66% in a down 100 basis points like what change whether its in the modeling or what you guys did from a.

We do expect also, we've done a lot of work in the last couple of quarters in terms of our treasury and our relationship officers and helping them understand the dynamic of growing deposits as well, so we're going to, our base model budget, plan, and commitment is to grow our deposits at the same rate or approximately the same pace or faster than we grow our loans this year. So we know and understand the value and the importance of continuing to grow that core deposit base as we grow the loans. We expect both to be single digits. Thank you. I'll hop back in the queue.

Speaker Change: Hedging or you know structural standpoint to create the delta that seems to have come about.

Speaker Change: There's three things there all cranky slightly double digit net income NII is right on the cusp of double digits, but yes, I mean, it's a substantial increase in our liability sensitivity from last quarter are two things really driving that one is the updated deposit study that we do and the remixing of Nam.

Speaker Change: Maturity deposits into short duration time deposits and other wholesale types of funding.

Brady Gailey: Hey, thanks a lot. Our next question is from the line of Brady Gailey with KBW. Please proceed with, Hey, thanks.

Speaker Change: That for US has substantially enhanced our liability sensitivity. The additional thing as I noted Stephen is the indexation of a substantial portion of our deposit base to fed funds, so our ability to drop deposit costs, whereas in a normal downright environment. If we have exception pricing as a tool that we use to NIM.

Paul Langdale: Good morning, guys. But I know it's tough to forecast nowadays. But when you look at your sensitivity to down rates, like say in a down 100 basis points scenario, what does the model say about how much that could benefit spread income? So our gap, just for example, Brady has doubled quarter to quarter.

Speaker Change: Oh <expletive> with our depositors, it's a little bit harder to bring those costs down for US now we have that indexed tool that's going to be able to drop our deposit costs instantaneously with fad. So all of those actions that we undertook to enhance that portion of our deposit base.

Paul Langdale: So we've substantially, as I said, enhanced liability sensitivity; I think you'll get a meaningful double-digit pickup in net income for even a down 100 rate. Okay. All right.

Speaker Change: An increase that liability sensitivity, but really the reduction of those non maturity deposits was the single largest driver of that model.

Speaker Change: Okay, and I think last quarter, you had said it was three to 4 billion in index deposits. So has that number gone up further on a quarter over quarter basis.

Paul Langdale: And then, you know, Paul, I heard your comment about getting back to kind of your historic profitability level by the end of next year, so the end of 2025. What do you guys think about historic profitability? Like, what is that in terms of a ROA or ROE or whatever metrics you guys focus on? I think that as we think about it, Brady, by the second half of, 25, depending on, you know, how much and how quickly the Fed rates come, pull rates down. We should see us be able to achieve our, you know, a more historic minimum in the mid-3s, so 350, 360, and that range is what our forward models show in the back half of 25.

Speaker Change: That doesn't include the six.

Speaker Change: Six months Cds, the promo Cds as well as some of the broker Cds so.

Speaker Change: If you look at the portfolio in total we're gonna be able to move roughly half of the deposit book, which is really a substantial portion of the interest bearing deposit book inside of four months for any move in fed funds.

Speaker Change: Okay, Great. That's extremely helpful. Thanks, and then I guess just my only other follow up it's kind of I'm curious what you guys are seeing around new CRE demand, obviously put up really strong growth this quarter.

Speaker Change: I never heard that heard the comment that pipelines, maybe aren't quite as strong but.

Paul Langdale: That happens more quickly if rates come down more quickly, but again, just, I think, what we think is a middle-of-the-road assumption gets us to that level. At that level, given what we've done with our cost structure, we would get back into that 120, 125 return on assets, and then, you know, that should translate, depending on any, you know, what the capital level is, of course, would put us somewhere in the mid-teens, 15-16% ROTCE. So those are the numbers we think we will be back at by the second half of 25. All right, that makes sense.

Speaker Change: Still.

Speaker Change: Guiding towards positive loan growth, how do you know, what's kind of a pushback on the 8% rates within the CRE markets and do you think you will see kind of a pick up in the back half if we do indeed.

Get the projected rate cuts.

Speaker Change: Yeah, the the granularity of our loan requests.

Speaker Change: Continues to be the theme Stephen as we as we go forward we've seen a lot of requests you know generally smaller.

Quest acquiring families acquiring assets investment groups acquiring assets as what we've seen on the CRE side, we have seen a drop in demand for large CRE deals, we're not seeing much construction and haven't been doing much construction.

David R. Brooks: And then finally, for me, you know, I know Independent has been a great organic grower over the years, but also a pretty good bank buyer. And you know, if you look at what's happened with the long end of the curve, like the 10 year bond yield went from five to basically 4% now. So that kind of helps with the interest rate mark piece of M&A. But maybe just an update on you: is M&A falling here? Do you expect it to be active this year?

Speaker Change: Lending so.

Speaker Change: So we haven't seen much there we're really looking we.

Speaker Change: As we plan for 2024 25 Steven.

Speaker Change:

Speaker Change: Invested as Paul mentioned earlier in.

Speaker Change: Doing what we can to balance our our future growth away from being so CRE concentrated.

David R. Brooks: Do you expect IBTX to remain involved and interested in M&A? Yes, we remain interested. We remain close to a lot of really high-quality banks, as you mentioned, like us that have struggled with margin, and some of the banks have struggled with bigger AOCI marks, as you alluded to Brady. So this does help immensely.

Speaker Change: We are in the process of hiring some additional.

Speaker Change: Commercial industrial lenders in our major markets, adding to the teams we already have there and then also our SBA is something again, given our granular nature of our request we do have some SBA.

Speaker Change: Quest, we haven't set that up as a big national business or anything but in terms of assisting our customers. So we think we've missed some opportunities. There. So we've added to our SBA team or adding to our SBA team in Houston and in Austin in.

David R. Brooks: We've obviously been focused on our own situation mostly, trying to get our earnings and NII and them back to more, you know, moving back toward historic levels. But we remain interested. I do think there will be some movement. I think right now that there seems to be more of a, you know, let's just wait and let this settle out for another quarter or two. So my guess is it's probably back in the second half of December, of 24, and we will definitely, you know, be interested in and be a participant in that. Obviously, we need to perform, and we need our own stock to perform well in order to be at that table, but we expect to be there. Okay. All right.

Speaker Change: In particular so.

Speaker Change: We're doing what we can on that front, but it's partly also why were thinking Steven that it's kind of a mid single digit growth because of the uncertainty out there in the CRE market and our desire to really balance up our loan growth with our deposit growth. So we think those are all achievable for 2024.

Speaker Change: Great. It makes a lot of sense. Thanks for all the color guys I appreciate the time, thanks a lot.

Thank you.

Speaker Change: Question comes from the line of Brett <unk> with <unk>.

Brady Gailey: Great. Thanks for the call, guys. Thanks, Brady.

Brett: Please proceed with your questions.

Matt Olney: Our next questions are from the line of Matt Olney with Stevens. Please proceed with your question. Hey, thanks. Good morning.

Brett: Hey, guys good morning good.

Good morning, Barbara.

Brett: Wanted to go back Paul to your question to a comment you made earlier about the bank term funding program.

Paul Langdale: I just want to go back to the discussion around the NII and the NIM outlook. It seems like we've been talking about stabilization for a while, but the results continue to erode. I think investors are looking for more details as far as the outlook here. So in the fourth quarter, the NIM was, call it, 249 and the NII was 106.3 million. Can you be more specific about your near-term expectations? And we talk about stabilization and inflection. I think those terms can be kind of used loosely sometimes.

Paul Langdale: Like you were going to utilize that to some extent this quarter you know presuming that does run out at some point was was the usage of the <unk>.

Speaker Change: On the <unk> is that going to be to replace I didn't quite catch if it was to replace some of the borrowings or if you would just intended to kind of ride the spread there's a lot of banks seem to be enjoying at the present time.

Speaker Change: So for example, Brad if I'm looking at the FHA advances what you're at 12 31 were cost US 543 basis points and I look at where one year OIS is today, even at 490, I mean, it's a 50 basis point spread from where that funding is and so that would be an example of where we would utilize.

Paul Langdale: So any more details you can provide on both the NII and the NIM in the first quarter? Thanks. Sure. Sure, Matt.

Paul Langdale: I'm happy to give you a little bit more color on that. As we look at our modeling, the multiple scenarios that we show in both flat and downrate environments, and we model three scenarios specifically. We model the flat rate environment, we model the forward curve, and we model the Fed's summary of economic projections.

<unk> <unk> prior to its expiration to lock in that funding.

Speaker Change: As a way to reduce our our liquidity costs.

Speaker Change: Okay, and then you've talked quite a bit about the funding side of the equation can we talk about of the lending side and just how much of the fixed rate loan portfolio re prices.

Paul Langdale: And as we talk through those in our ALCO, all of those three scenarios show us growing them by five to seven basis points in the first quarter. From there, that growth accelerates to where we can get back to, call it, a 3% NIM by the end of 24. And then, as we mentioned, back to a three and a half NIM by the end of 25.

Speaker Change: This year and maybe in <unk> specifically.

Speaker Change: Yeah, we anticipate about $2 billion of fixed rate assets and variable rate variable sorry adjustable assets to reprice over the course of 2024.

Paul Langdale: So that's our target, and that's really what we're focused on. As I mentioned, again, I mean, we moved a lot of pieces around on the balance sheet in the fourth quarter to enhance our liability sensitivity and capture that upside of downrated buyers. So we wanted to make sure that we were optimally positioned to recapture the earnings that we lost on the way up for rates when rates come back down. And so that's more of just a modifier from the flat rate scenario where we're still gonna grow NEM starting, as I said, by five to seven basis points and then forward accelerating over the back. Okay, that's helpful, Paul.

Speaker Change: You know that starts in the first quarter with several hundred million dollars and then we will accelerate from there through the end of the year. So really the bulk of the repricing activity, it's pretty evenly distributed but it's a slight acceleration from the beginning of the year, we're looking at our maturity schedule some.

Speaker Change: Some of those those contractual maturities, obviously, we expect to be able to reprice those up about 300 basis points similar to the adjustable notes. So if you think of our three to five year fixed rate CRE loan book, if we ever make alone passed that in CRE, we havent adjustable mechanism at the five year Mark So that's what I'm referring to.

Paul Langdale: Thank you for that. And I guess if the NIM is going to move higher in the first quarter, I would assume that, on a monthly basis, the NIM has already inflected at some point late in the fourth quarter. Is that a reasonable assumption? Any color there?

Speaker Change: Talk about the adjustable rate book. In addition, you still do have some prepayments. So we still are seeing even at much lower level. Some prepayments coming from our core customers are obviously as we booked loans at the top we've put in prepayment penalties are usually in the form of three two wanted to try to mitigate the down rate environment risk that we would have to earning asset.

Paul Langdale: That is a reasonable assumption. Okay, perfect. Thanks. And then, I guess, switching gears on the expense side, I think you gave us $85-$86 million, Alec, from here, a touch higher than what we've seen over the last few quarters as far as expectations are concerned. Anything to call out there? Just a normal first quarter; expenses are generally higher for us. You know, we have, obviously, merit and bonus season

Yields so all and Brett we do expect some meaningful repricing of assets over the course of the year that should lift earning asset yields.

Speaker Change: Okay.

Speaker Change: And then lastly, just for me and I know mortgage is tough to predict but in terms of thinking about fee income. This.

Speaker Change: This year obviously.

Paul Langdale: You know, as we think about some investments that we have to make, obviously, Matt, we'll remain focused really on expense discipline. And we'll be mindful of trying to find any offsets we can to where we have expense increases. That's something that, as you know, has been a focus of ours for the last six quarters. And that's something that we're going to remain focused on in 2020. And just to clarify, the $85 to $86 million, is that guidance or a goal for the next several quarters? Did I catch that right, or was that just the first quarter?

Speaker Change: Fee income was kind of flat to down in 'twenty three any drivers I think you talked a little bit about treasury, David any any drivers to fee income and 24, then it might be notable aside from a possible increase in mortgage assuming that gets back to a more normal level at some point.

Speaker Change: Yeah, Brett I think you hit the nail on the head I mean, apart from mortgage which is a wildcard and obviously if rates come down some more we could see some meaningful lift in mortgage demand, we would expect relative stability in the other areas of fee income.

Paul Langdale: Yes, that's my expectation, really around $85 million for the next several quarters. Perfect. Thanks, guys. Thanks, Matt. Thank you. Our next question comes from the line of Michael Rose with Raymond James. I'm pleased to receive your question. Hey, good morning, everyone. Thanks for taking my questions. Maybe Dan, I just wanted to get some color.

Speaker Change: We're focused on fees, obviously to the extent that we can optimize those lines, we're going to do it but you know.

Speaker Change: I think mortgage is really what's going to swing that line from one direction to the other.

Speaker Change: Okay, Great appreciate all the color.

Speaker Change: Thank you the.

Speaker Change: Our next question is from the line of Brandon King with Choice Securities. Please proceed with your question.

Michael Rose: Good morning. Just want to get some color on the CRE credit this quarter and you know what the resolution could potentially look like there. And then I was also just curious as to why some of the Oreo losses flow through fee income as opposed to charge offs. We'd just like some clarification there. So Michael, this is Dan.

Brandon King: Hey, I had a few follow ups.

Brandon King: And I just want to understand.

Brandon King: Potential range of outcomes for the near term it seems like that $3 50 by the back half of 'twenty three in the box comp a baseline scenario. So is it fair to assume there before curve does play out that the margin could be closer to 4%.

And the current 24.

The credit that we moved to non-accrual, which I'm assuming is what you're asking about, was one property in Houston. That loan remains current, and the owners are preparing to sell that asset. It felt like it was in a position that there might be a slight loss on it, so we just positioned it for that. But we expect that will be resolved sometime here in the first part of the year. As it pertains to the accounting treatment, Michael, we've always taken OREO expenses and income into non-interest income and non-interest expense, respectively.

Speaker Change: I think I think Brandon in a scenario, where we have a 100 call. It 150 basis points of cats or 125 basis points of cats, that's really going to get us to that $3 55 to $3 65 range.

Speaker Change: You know in a scenario, where we have flat rates, it's going to take just a little bit longer to get there but.

Speaker Change: The helpful thing for our balance sheet, obviously is if we're able to continue repricing, our earning assets at current rates I E. The curve doesn't move that's going to position us for continued NIM expansion as well so.

Speaker Change: If you think of all the moving pieces together the range of outcomes between those three scenarios is maybe a little tighter than you might anticipate even though we have our liability sensitivity that really offsets any impact to earning asset yields in a down rate environment.

Speaker Change: Okay, no that makes sense and then.

Speaker Change: You seem pretty confident in hitting those net interest margin card base with your modeling forecast could you just talk about any risks that could prevent you from getting to where you think you'll get to.

We've recently moved, I think I noted on the third quarter call, OREO income and expense to offset each other into non-interest expense. But when we book a gain or a loss on sale, we put that through the fee line consistent with what our auditors and what our internal accounting teams feel is the appropriate account. Okay, that's helpful. And then maybe just, I know we've probably beat the margin question a lot here, but just to kind of follow up on that, what does your kind of baseline, you know, forecast include in terms of cuts, you know, for this year? And I, you know, I guess, you know, the step up, you know, from here to kind of what you talked about, I guess, for mid to late next year in the mid 350s, 360s, is a really big ramp.

Speaker Change: Yeah of course, the macroeconomic and liquidity environment is always going to pose a risk to the outlook.

Speaker Change: You know, it's hard to forecast the unknown unknowns as you know Brandon, but I think we've been pleasantly surprised in the soft landing narrative of how the economy continues to perform.

Speaker Change: We continue to see available liquidity, how were able to reduce some of our marginal funding costs.

Speaker Change: Obviously, if the liquidity environment changed or if we saw any meaningful reduction of liquidity in the banking system that could create some upward pressure on funding costs, even in a down rate environment I'd say, that's probably the biggest risk although as it stands today I really don't see that.

And I think it's going to be, you know, probably difficult for some investors to kind of see. So, you know, can you kind of just give us the, you know, help us with the bridge, you know, to kind of get there and kind of what, you know, really needs to go right. And, you know, if your baseline scenario isn't, you know, correct, what could that range look like if we're higher for longer, for instance, or, you know, you have more growth, and you have to fund it with higher-cost deposits, etc., just just looking for a kind of a bearable base, you know, kind of case for the margin. Thanks.

Okay.

Speaker Change: Very helpful. Thanks for taking my follow up questions.

Speaker Change: You bet.

Speaker Change: Thank you.

Speaker Change: This time I'll hand, the call back to David Brooks for closing remarks.

David R. Brooks: Hey, Thank you for joining us today, we are as I said in my prepared remarks.

David R. Brooks: At year end 2023, but we feel very encouraged and are positive about the trajectory of the banks are margins in and and earnings here going forward. So I. Appreciate everyones time hope everyone has a great day.

Paul Langdale: Sure, happy to walk you through the modeling logic there. As we think about a base case scenario, we're assuming a flat rate environment. As you know, over the last four quarters, we've really talked about our ability to reprice earning assets due to our fixed-rate CRE book and our ability to roll those loans over. New volume rates are coming on right at 8% right now, so we've been able to continue to expand earning asset yields even as short-term rates have peaked. That's something that we're going to be able to do even in an environment where you see several Fed cuts.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.

David R. Brooks: Yeah.

Paul Langdale: So we're focused, obviously, on expanding the margin, topping out those deposit costs even in a flat rate environment. As I noted, because the curve is pointing down and because we have run two other scenarios with 75 basis points and 150 basis points, 125 basis points of cuts, respectively, we are going to be able to capture a substantial amount of deposit cost decreases on the way down, which will help drive that margin even higher. All of our marginal funding is held really short, and as you know, Michael, that's really expensive to do at the top of the cycle.

Paul Langdale: We've done that so that we can really focus on optimizing NII and NIM growth in 2024. If I look across the portfolio, I see that the FHLB advances, for example, are right at 543. As I mentioned, the brokered portfolio is at 536. Our six-month branch CD is 1.1 billion of those at 550 APY.

Paul Langdale: For us, we have a significant opportunity, even in the first quarter, to reduce all of those costs as all of those individual components have seen 30, 40 basis points of pickup in spread as we begin to reprice them. Having held short, that's really what's going to drive the margin. The upside to reducing funding costs is, you know, ultimately what's going to create the delta between, you know, a base case scenario where you have a flat fed funds rate environment and an upside case where you have down 150 calls. Okay, that's really helpful.

Paul Langdale: Thanks for taking my questions, guys. Hey, thanks, Michael. Our next questions are from the line of Stephen Scouten with Piper Sandler. Yeah, thanks. Good morning.

Stephen Kendall Scouten: Hey Paul, I wanted to follow up. I think I heard you say that the down 100 basis points scenario was going to be, an up-double-digit NII kind of percentage, and I'm just kind of wondering, you know, versus the last Q, I think where it showed 1.66% and a down 100 basis points, like kind of what changed, whether it's in the modeling or what you guys did from a hedging or, you know, structural standpoint to create the delta The three things there, I'll correct you slightly, double-digit net income, NII is right on the cusp of double-digits, but yes, I mean, it's a substantial increase in our liability sensitivity from last quarter. Two things are really driving that.

Paul Langdale: One is the updated deposit study that we do and the remixing of non-maturity deposits into short-duration time deposits and other wholesale types of funding. That, for us, has substantially enhanced our liability sensitivity. The additional thing, as I noted, Stephen, is the indexation of a substantial portion of our deposit base to Fed Funds. So our ability to drop deposit costs, whereas in a normal downrate environment, if we have exception pricing as a tool that we use to negotiate with our depositors, it's a little bit harder to bring those costs down.

Paul Langdale: For us now, we have that indexed tool that's going to be able to drop our deposit costs instantaneously with the Fed. So all of those actions that we undertook to enhance that portion of our deposit base and increase that liability. But really, the reduction of those non-maturity deposits was the single largest driver of that.

Paul Langdale: Okay, and I think last quarter you said it was three to four billion in index deposits. So has that number gone up further on a quarter over quarter basis? That doesn't include the six-month CDs, the promo CDs, as well as some of the broker CDs.

Paul Langdale: So, you know, if you look at the portfolio in total, you know, we're going to be able to move roughly half of the deposit book, which is really, you know, a substantial portion of the interest-bearing deposit book inside of four months for any move in the Fed. Okay, great. That's extremely helpful. And then I guess just my only other follow up, it's kind of I'm curious what you guys are seeing around new CRE demand, which obviously put up really strong growth this quarter. And then I heard the comments that pipelines maybe aren't quite as strong but still guiding towards positive loan growth. How, you know, what's the kind of pushback on the 8% rates within the CRE markets?

Paul Langdale: And do you think, you know, we'll see kind of a pickup in the back half if we do indeed get the projected rate cut? Yeah, the granularity of our loan requests continues to be the theme, Stephen. As we go forward, we've seen a lot of requests, generally smaller requests, acquiring families, acquiring assets, and investment groups acquiring assets is what we've seen on the CRE side. We have seen a drop in demand for large CRE deals. We're not seeing much construction and haven't been doing much construction lending. So, we haven't seen much there.

We're really looking, we've As we planned for 2024 and 2025, Stephen, we've invested, as Paul mentioned earlier, in doing what we can to balance our future growth away from being so seri-concentrated. We're in the process of hiring some additional commercial industrial lenders in our major markets, adding to the teams we already have there. And also SBA is something, again, given the granular nature of our requests, we do have some SBA requests. We haven't set that up as a big national business or anything, but in terms of assisting our customers. So we think we've missed some opportunities there, so we've added to our SBA team or expanded our SBA team in Houston and in Austin, in particular.

We're doing what we can on that front, but it's partly also why we think, Stephen, that it's kind of a mid-single-digit growth because of the uncertainty out there in the CRE market and our desire to really balance up our loan growth with our deposit growth. So we think those are all achievable for 2024. Great, makes a lot of sense. Thanks for all the color, guys. Appreciate the time.

Stephen Kendall Scouten: Hey, thanks a lot. Thank you. The next questions come from the line of Brett Rabatin with Hovda Group. Please proceed with your questions. Hey guys, good morning. Morning, Brad. Hi, Brad.

Brett D. Rabatin: I wanted to go back, Paul, to a comment you made earlier about the bank term funding program. And it sounded like you were going to utilize that to some extent this quarter, you know, presuming that it does run out at some point. Was the usage of the BTFP, is that going to be to replace, I didn't quite catch if it was to replace some of the borrowings or if you just intended to kind of ride the spread that a lot of banks seem to be enjoying at the present time? Yeah, so for example, Brad, if I'm looking at the FHLB advances, which at 1231 cost us 543 basis points. And I look at where one year OIS is today, even at 490.

Paul Langdale: I mean, it's a 50 basis point spread from where that funding is. And so that would be an example of where we would utilize BTFP prior to its expiration to lock in that funding as a way to reduce our liquidity cost.

Paul Langdale: And then you've talked quite a bit about the funding side of the equation. Can we talk about the lending side and just how much of the fixed rate loan portfolio will reprice this year and maybe in 1Q specifically? Yeah, we anticipate about $2 billion of fixed rate assets and variable rate variable, sorry, adjustable assets to reprice over the course of 2024. You know, that starts in the first quarter with several hundred million dollars, and then we'll accelerate from there through the end of the year.

Paul Langdale: So really, the bulk of the repricing activity is pretty evenly distributed, but it's a slight acceleration from the beginning of the year. For example, some of those contractual maturities, obviously, we expect to be able to reprice those up about 300 basis points, similar to the adjustable note. So if you think of our three to five-year fixed-rate CRE loan book, if we ever make a loan past that in CRE, we have an adjustable mechanism at the five-year mark. So that's what I'm referring to when I talk about the adjustable rate book. In addition, you still do have some prepayments. So we still are seeing, even at much lower levels, some prepayments coming from our core customers. Obviously, as we've booked loans at the top, we've put in prepayment penalties, usually in the form of 321 to try to mitigate the downrate environment risk that we would have to incur in earning asset yields.

Paul Langdale: So across the board, we do expect some meaningful repricing of assets over the course of the year that should be Okay. And then lastly, just for me, I know mortgage is tough to predict, but you know, in terms of thinking about fee income this year, obviously, fee income was kind of flat down in 23. Any drivers?

Brett D. Rabatin: I think you talked a little bit about the treasury, David. Any drivers to fee income in 24 that might be notable aside from a possible increase in mortgage, assuming that gets back to a more normal level at some point? Yeah, Brad, I think you hit the nail on the head. I mean, apart from mortgages, which is, you know, a wild card, and obviously, if rates come down some more, we could see some meaningful lift in mortgage demand, we would expect relative stability in the other areas of VMI. We're focused on fees, obviously, to the extent that we can optimize those lines, we're going to do it, but I think mortgages are really what's going to swing that line in one direction. Okay, great. Appreciate it. Thanks.

Brett D. Rabatin: The next question is from the line of Brandon King with Truist Securities. Hey, I had a few follow-ups. And I just want to understand the potential range of outcomes for NIM; things like 350 by the back half of 2025 is kind of a baseline scenario. So is it fair to assume that if the forward curve does play out, the margin could be closer to 4% by the end of 2025? No, I think Brandon, in a scenario where we have 100, call it 150 basis points of cuts or 125 basis points of cuts, that's really going to get us to that 355 to 365 range.

Brandon King: You know, in a scenario where we have flat rates, it's going to take just a little bit longer to get there. But, you know, the helpful thing for our balance sheet, obviously, is if we're able to continue repricing our earning assets at current rates, i.e. If the curve doesn't move, that's going to position us for continued NIM expansion as well. So, if you think of all the moving pieces together, the range of outcomes between those three scenarios is maybe a little tighter than you might anticipate. Even though we have enhanced our liability sensitivity, that really offsets any impact on earning asset yields in a downrated environment. Okay, no, that makes sense. And then you seem pretty confident in hitting those net interest margin targets with your modeling forecast.

Brandon King: But could you just talk about any risks that could prevent you from getting to where you think you'll get to? Yeah, of course, the macroeconomic and liquidity environment is always going to pose a risk to the outlook. It's hard to forecast the unknown unknowns, as you know, Brandon, but I think we've been pleasantly surprised by the soft landing narrative, how the economy continues to perform, how we continue to see available liquidity, and how we're able to reduce some of our marginal funding costs. Obviously, if the liquidity environment changed, or if we saw any meaningful reduction in liquidity in the banking system, that could create some upward pressure on funding costs, even in a downrate environment.

Paul Langdale: I'd say that's probably the biggest risk. Although, as it stands today, I really don't know. Okay. Very helpful. Thanks for taking my follow-up question. You bet.

Paul Langdale: Thank you. At this time, I'll hand the call back to David Brooks for closing remarks. Hey, thank you for joining us today. We, as I said in my prepared remarks, it was a difficult year in 2023.

David R. Brooks: But we feel very encouraged and positive about the trajectory of the bank's margins and, and, and earnings here going forward. So, appreciate everyone's time. Hope everyone has a great day. This concludes today's conference. We will disconnect your lines at this time. Thank you for your participation.