Q4 2023 South Plains Financial Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the South Plains Financial Inc.

Quarter and full year 2023 earnings conference call during today's.

Presentation, all parties will be in a listen only mode.

Following the presentation. The conference will be open for questions instructions will follow at that time.

As a reminder, this conference call is being recorded I would now.

I turn the call over to Mr. Steve Crockett, Chief Financial Officer, and Treasurer of South Plains financial Mr. Crockett. Please go ahead Sir.

Thank you operator, and good morning, everyone. We appreciate your participation in our earnings conference call with me here today are Curtis Griffith, our chairman and Chief Executive Officer, Corey Newsome, our President and Brent Bates, our Chief Credit Officer.

Mr. Crockett: The related earnings press release and earnings presentation are available on the news and events section of our website <unk> Dot bank before we begin I'd like to remind everyone that this call may contain forward looking statements and are subject to a variety of risks uncertainties and other factors that could cause actual results to differ materially from those.

Mr. Crockett: Anticipating future results.

Mr. Crockett: Please see our safe Harbor statement in our earnings press release or on slide two of the earnings presentation.

Mr. Crockett: All comments made during today's call are subject to those safe Harbor statements.

Any forward looking statements presented herein are made only as of today's date and we do not undertake any duty to update such forward looking statements, except as required by law. Additionally, during today's call. We may discuss certain non-GAAP measures, which we believe are useful in evaluating our performance.

Mr. Crockett: A reconciliation of these non-GAAP measures to the most comparable GAAP measures can also be found in our earnings release and in the earnings presentation.

Mr. Crockett: Let me hand, it over to you.

Mr. Crockett: Thank you, Steve and good morning.

Mr. Crockett: Today's call I will briefly review the highlights of our full year 2023 results.

Mr. Crockett: As well as provide an update on our capital allocation priorities.

Cory: Cory will discuss our loan portfolio as well as our initiatives to drive deposit and fee income growth in the year ahead.

Steve will then conclude with a more detailed review of our fourth quarter financial results.

Mr. Crockett: I would like to start by thanking our employees for their efforts and commitment to both the bank and our customers during an extremely challenging year for our industry.

Steve Rogers: Our success would not be possible without their dedication and hard work.

Cory Johnson: As shown on slide four of our earnings presentation, we delivered nine 7% loan growth for the full year driven by the expansion of our lending platform combined with a resilient economy in Texas continues to benefit from in migration and a favorable business climate.

Steve Rogers: If inflation continues to moderate and the federal reserve begins to reduce their benchmark interest rate, we expect economic growth to accelerate as we look to the second half of 2024.

Steve Rogers: Looking back at the past year, our community based deposit franchise grew modestly which is impressive given the significant dislocation that occurred following the failures of Silicon Valley Bank and signature bank in the first quarter for.

Steve Rogers: For the full year, our core deposits grew 1%, excluding brokered deposits to $3.26 billion, which demonstrates the resilience of our franchise combined with our strong customer relationships.

Steve Rogers: At quarter end, 81% of our deposits were in our rural markets with 19% and our major metropolitan markets of Dallas, Houston and El Paso.

Steve Rogers: Additionally, our average deposit account balance is approximately $36000 with only an estimated 16% of our total deposits being uninsured our uncollateralized.

Steve Rogers: The credit quality of our loan portfolio also remained strong through the fourth quarter as our classified loans have remained at the lowest level since the start of the pandemic as we ended the year.

Lastly, we increased our return on average assets for 154% for the full year 2023, as compared with 1.47% for the full year 2022.

Steve Rogers: We also completed the sale of our wind Mark crop insurance subsidiary in April for a pre tax gain of $33.8 million.

The gain that we recorded positioned us to strategically sell $56 million of investment securities at a loss in a tax efficient manner and reinvest those proceeds into higher yielding loans.

Steve Rogers: Given our strong capital and liquidity position, our board of directors authorized a $15 million stock repurchase program in May which has been exhausted, we repurchased 218000 shares in the fourth quarter and a total of 686000 shares during 2023.

Mr. Crockett: During the year. Our board has believed that our shares have traded below intrinsic value and we have been aggressive buying our stock in the open market.

Looking to the year ahead, we will maintain our liquidity and continue to watch for opportunities to expand the bank and our earnings power.

Mr. Crockett: M&A is an area of interest and we believe you will see transactions take place in the market as sellers expectations are becoming more realistic.

The decline in interest rates at the end of the year also led to a recovery in back securities portfolios, where it's really increased the probability that we will see deal volumes pick up.

Mr. Crockett: However, we will only be interested in acquiring a bank with the right culture excess liquidity, a stable deposit base and an evaluation that makes sense for us and our shareholders.

Mr. Crockett: In the meantime, we remain focused on organic growth, while returning a steady stream of income to our shareholders through our quarterly dividend.

Mr. Crockett: Our board of directors again authorized a 13 <unk> per share quarterly dividend as announced last week. This will be our 19th consecutive quarterly dividend to be paid on February 12, 2024 for shareholders of record on January 29 2024.

Mr. Crockett: Now I'll turn the call over to Corey.

Corey: Thank you Curtis and Hello, everyone. Starting on slide six loans held for investment increased $26 million or two 8% annualized as compared to the linked quarter.

Corey: Loan demand was primarily in commercial real estate during the quarter and was partially offset by an approximately $10 million decline in our indirect auto portfolio and we've said on previous calls we're carefully managing our indirect auto auto portfolio with a focus on maintaining the portfolio's credit quality, while reinvesting a portion of the monthly principal amortization into Howard.

Cory Johnson: Gilding alone.

The yield on our loan portfolio was $6 two 9% in the fourth quarter as compared to six 1% in the linked quarter.

Mr. Crockett: We continue to price new loans to account for the hiring interest rate environment that we're operating in combined with the upward pressure on our deposit cost.

Mr. Crockett: Skipping to slide eight we grew loans by $44 million or 17, 8% annualized to one point over $4 billion in our major metropolitan markets of Dallas, Houston and El Paso.

Mr. Crockett: As compared to the linked quarter.

Mr. Crockett: Our metro markets continue to be an important source of loan growth and more than offset the pay downs that we experienced in our community markets as well as the expected decline in our indirect auto portfolio.

We remain in a hiring mode as we look for good lenders, who fit our culture and can bring new business to the bank, but will remain extremely selective.

Mr. Crockett: Turning to slide nine demand across our markets remains healthy as we continue to experience solid economic growth. So we continue to be selective in who we do business with and what loans we underwrite.

Mr. Crockett: As a result, we expect low single digit loan growth for 2024. So we expect to continue deliver interest income growth as many lower rate loans continued to experience, primarily principal repayments and or rate resets.

Mr. Crockett: Well, we expect the majority of this repricing to began accelerating in the second half of 'twenty 'twenty four we believe loan yields remain elevated even if the fed begins to cut interest rates given lower liquidity in the market, which will benefit our net interest income and NIM in the third and fourth quarters.

Mr. Crockett: In conjunction with our effort to drive loan growth, we also need to deliberate deposit growth, while stabilizing our noninterest bearing deposit balances.

Mr. Crockett: Our lenders have always had an emphasis on deposits as part of their incentive comp plan. We have brought a renewed focus on the top and value of these deposits more.

Mr. Crockett: More specifically true core deposits and noninterest bearing balances narrow carry more weight in these plants.

Mr. Crockett: Better said, we are focused on the profitability of the whole relationship. We're also getting much better at putting in loan covenants to new loan origination centered around deposit requirements illiquidity maintenance agreements.

Mr. Crockett: We've always targeted this we're getting much better negotiating these covenants.

Gregory management: Gregory management is another area, where we have made real progress as we've improved our team our product and our capabilities over the last year during the fourth quarter, we recruited a senior Treasury management executive from a top seven U S Bank to head this business, which follows several additions to our team as we improve the talent of this group I'm. So excited with the level of people.

<unk> that we have today, which is unmatched in our history.

Mr. Crockett: We're also doing a better job than we ever have and making sure we align the rat treasury products with the customer's financial needs, that's allowing us to continue to drive deposit growth and fee income.

Mr. Crockett: Turning to slide 11, we generated $9 $1 billion of noninterest income in the fourth quarter as compared to $12 $3 million in the third quarter.

Mr. Crockett: This decline was largely due to a $2 9 million dollar decline in mortgage banking revenues, which includes the $2 $2 million decline in the fair market value adjustment to our mortgage servicing rights portfolio.

Mr. Crockett: Importantly, we've aggressively managed our mortgage banking expense base as volumes have decreased over the last 18 months with a focus on maintaining profitability.

Mr. Crockett: While this downturn in mortgage origination has been the most severe and more than three decades, we've experienced negligible losses, while maintaining our mortgage capabilities for the eventual apparently volume is mortgage rates continue to decline.

Mr. Crockett: And as I mentioned, we expect our initiatives been treasury management to begin to impact the income beginning in the second quarter for the fourth quarter noninterest income was 21% of bank revenues as compared to 26% in the third quarter of 2023.

Mr. Crockett: To conclude we delivered strong results through the fourth quarter I believe we remain well positioned that said, we're not standing still and are aggressively addressing the current environment to manage deposit cost pressures, while accelerating fee income growth.

Mr. Crockett: We need to stabilize our noninterest bearing deposits and grow our deposit franchise in order to position us to take advantage of improving loan demand as we move through 2024.

Steve Rogers: I'm confident that we have the right people and plan and I'm excited about the opportunities ahead, I will now turn the call over to Steve.

Steve: Thanks Corey.

Steve: The fourth quarter diluted earnings per share was <unk> 61.

Steve: Which compares to 78 cents per share in the linked quarter.

Steve: We recorded $1 $5 million write down at the fair value of our mortgage servicing rights asset during the quarter as compared to a $700000 write up in the linked quarter.

Mr. Crockett: The current court impact on our earnings per share was <unk> seven after tax.

Mr. Crockett: Turning to slide 13, net interest income was $35 $2 million for the fourth quarter as compared to $35 7 million for the linked quarter.

Mr. Crockett: Loan production in the third quarter combined with the rise of new low rates lifted the yield on our loan portfolio by 19 basis points in the fourth quarter, resulting in a $1 $7 million increase in loan interest income.

Mr. Crockett: The rise in loan interest income was offset by the one by $1.3 million increase in interest expense due to the rise in short term interest rates on interest bearing liabilities and a decrease of $900000 in income on other interest earning assets as average investable liquidity declined in the fourth quarter.

Mr. Crockett: Our net interest margin calculated on a tax equivalent basis held steady at 3.52% in the fourth quarter as compared to the linked quarter.

Mr. Crockett: Higher loan balances and loan yields offset the rise in our cost of deposits and the decline in noninterest bearing deposits.

Mr. Crockett: As outlined on slide 14, our average cost of deposits was 224 basis points in the fourth quarter, an increase of 17 basis points from the linked quarter.

Mr. Crockett: Given the rising interest rate environment through the year, we've had to be proactive in maintaining deposit relationships, which has led to the rise in our funding cost.

Cory Johnson: Overall, our core deposit franchise continues to remain steady with only a slight decrease in the fourth quarter as Cory touched on we put initiatives in place designed to stabilize our noninterest bearing deposit balances, while also driving core deposit growth.

Cory Johnson: We expect these initiatives to begin to have an impact as we move through 2024.

Cory Johnson: In the meantime, we expect continued upward pressure on deposit costs, which will modestly pressure on NIM.

Cory Johnson: That said, we expect our NIM to trough through the first half of 'twenty 'twenty four.

Cory Johnson: Turning to slide 15, our ratio of allowance for credit losses to total loans held for investment was 1.41% at December 31, 2023, which is unchanged from the end of the prior quarter.

Cory Johnson: We recorded a $600000 provision for credit losses in the fourth quarter, which was largely attributable to our organic loan growth as well as net charge off activity in the quarter.

Skipping ahead to slide 19, our noninterest expense was $36 million in the fourth quarter as compared to $31.5 million in the linked quarter.

Mr. Crockett: The $900000 decrease was largely due to lower mortgage cost as we continue to manage through the the decline in mortgage volumes.

Mr. Crockett: That said, we would expect noninterest expense to modestly rise through the first half of 'twenty 'twenty four is mortgage volume increase through the spring selling season.

Mr. Crockett: Moving ahead to slide 21, we remain well capitalized with tangible common equity to tangible assets of 9.21% at the end of the fourth quarter, an increase from eight 4% at the end of the third quarter of 2023. The increase was largely driven by a $32 9 billion dollar increase in accumulated other comprehensive.

Mr. Crockett: Income or a OCI.

Mr. Crockett: And $8 $2 million of net income after dividends paid a M. C. I was positively impacted by decreases in long term market interest rates during the fourth quarter.

Mr. Crockett: Tangible book value per share increased to $23.47 as of December 30, <unk> compared to $21.07 as of September 30th 2023, largely due to the impact of a OCI and our net earnings in the fourth quarter.

Curtis Griffith: I'll turn the call back to Curtis for concluding remarks. Thank you Steve to conclude I'm very proud of our performance over the past year our.

Curtis Griffith: Our community based deposit franchise remained resilient, while our lenders continued to drive high quality loan growth contributed to our strong earnings growth in 2023.

Curtis Griffith: We also sold when Theyre, which provided capital for share repurchases as well as our strategic reposition of a portion of our securities portfolio.

Curtis Griffith: The bank is operating very well as we enter 2024, well we know we have much more to do.

Korea, we have initiatives in place that we believe will stabilize our noninterest bearing deposit balances grow core deposits and drive fee income growth.

Curtis Griffith: This will provide improved liquidity for loan growth looking to the second half of 2024, when we expect to see a meaningful portion of our loan portfolio reprice and an acceleration in the Texas economy from already healthy levels.

Curtis Griffith: We expect competitor liquidity to fund new loans in our markets to be limited and believe we will be well positioned to add high quality customers and attractive loans to our portfolio.

Curtis Griffith: We also expect our fee income to improve starting in the second quarter.

We remain optimistic on the year ahead, as we focus on delivering value to our shareholders. Thank you again for your time today operator, please open the line for any questions.

Curtis Griffith: Thank you well now be conducting a question answer session, if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will 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 star.

Curtis Griffith: One moment, please while we poll for questions.

Curtis Griffith: Our first question today is coming from Graham <expletive> from Piper Sandler Your line is now live.

Graham <expletive>: Hey, good morning, guys.

Graham <expletive>: Alright, great.

Graham <expletive>: I just wanted to start on loan growth I heard your guidance there for for.

Graham <expletive>: So low single digit growth, which I guess of lines in the last few quarters pretty well, but you know for the full year, 2023% to 10%. It's definitely definitely slower and then also for you to sort of frame that up with I guess, what you see between your community markets and in the Metro markets because it sounds like the growth in the Metro markets has been pretty strong.

Mr. Crockett: Which is a little different than some of the the metro focus there or headquartered banks in Texas. So I just like to hear maybe what you are doing differently to grow loans faster there.

Mr. Crockett: And then also how you know that the community banking payoffs might play into that low single digit growth.

Curtis Griffith: Our grandmothers Curtis Yep.

Yeah, I think a lot of our growth it's getting as a result of making some great hires that we've done and some of those markets in the last couple of years and all of that's kind of coming to fruition.

Curtis Griffith: You know, it's still a little more challenging to get the growth out here and some of the more rural markets, but we're seeing good activity too I don't know what Brent Bates.

Curtis Griffith: Right on that what he kind of sees going forward a little here in 'twenty four.

Brad: Yeah. You know this is a this is Brad last year and 23 weeks, we saw real strong growth in the first half in <unk>.

Brad: And closer to that 3% second half of the year.

Brad: And you know I think what we're what we're expecting this year is still to see some some tailwind from our construction portfolio and advances in the first half of the year on the construction portfolio, which is a predominantly multifamily and industrial projects in our metro markets.

Mr. Crockett: And still see some pullback in residential construction.

Mr. Crockett: And then.

Mr. Crockett: We're still seeing good activity from our existing clients even out in our rural markets. So I think the the low single digit growth for 'twenty four is realistic, it's attainable and and definitely 24 Ah.

Mr. Crockett: I would expect to be much more of a smooth growth period than the 2023 was.

Cory: Grant this is Cory I think the other thing we've got to keep in mind is we're being much more selective about what we're wanting to find so we've we've had opportunities to look at it and number of transactions that we just passed we don't we don't think it's the right time on some of those for US right now or for sort of the pie. So we just we have selectively pulled back.

Cory Johnson: A little bit and we're okay with that.

Operator: Good morning, ladies and gentlemen, and welcome to the South Plains Financial Inc. fourth quarter and full year 2023 earnings conference call. During today's presentation, all parties will be in a listen-only mode.

Brent Bates: Yeah that definitely makes sense and that's helpful. Brent Thanks for that I guess, just just moving to the the margin a little bit it was flat quarter over quarter. I know you guys said that you're calling for a trough maybe in the first half of the year I was wondering if you if you'd be willing to maybe give an idea of.

Operator: Following the presentation, the conference will be open for questions, with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Mr. Crockett, please go ahead.

Brent Bates: Where do you see that trough I mean is that low three forties or is it just slightly below this level just trying to get an idea of the trends going forward. Given we saw you know flat margin quarter over quarter and it seems like the rate environment should get a little bit better to start the year, but obviously still a very competitive out there.

Thank you, Operator, and good morning, everyone. We appreciate your participation in our earnings conference call. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer; Corey Newsom, our President; and Brent Bates, our Chief Credit Officer. The related earnings press release and earnings presentations are available on the News and Events section of our website, spfi.bank.

Yeah.

Steve: Graham This is Steve I'll start and then I'll, let I'll, let corrick jump in as well.

Steve: We were we were.

Steve: Fortunate that we were able to keep it keep it flat during the fourth quarter.

Corrick: We do continue to see pricing pressure, particularly on the deposit side, we we did.

Before we begin, I'd like to remind everyone that this call may contain forward-looking statements that are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those anticipated future results. Please see our Safe Harbor Statement in our earnings press release or on slide two of the earnings presentation. All comments made during today's call are subject to those safe harbor statements. Any forward-looking statements presented herein are made only as of today's date, and we do not undertake any duty to update such forward-looking statements, except as required by law. Additionally, during today's call, we may discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can also be found in our earnings release and in the earnings presentation. Curtis, I'll hand it over to you.

Corrick: While we did increase.

The cost of cost of deposits during the quarter that that rate of growth did slow down and where.

Mr. Crockett: We're we're prepared for that to still increase but that overall.

Corrick: Growth continued to slow down.

Corrick: Yes, we hope there will be.

Corrick:

Some some relief in the side.

Corrick: Depending on what they do with rates.

It's been a little bit of mixed messages in the first three weeks of the year. So far it seems like is looking.

Corrick: Looking like they're headed down and then kind of pulling back up a little bit not not on ours, specifically, but just when you look at the when you look at the Treasury market and some other other rates so are we.

Curtis Griffith: Thank you, Steve, and good morning. On today's call, I will briefly review the highlights of our full year 2023 results, as well as provide an update on our capital allocation priorities. Corey will discuss our loan portfolio as well as our initiatives to drive deposit and fee income growth in the year ahead. Steve will then conclude with a more detailed review of our fourth quarter financial results. I would like to start by thanking our employees for their efforts and commitment to both the bank and our customers during an extremely challenging year for our industry. Our success would not be possible without their dedication and hard work.

We were hopeful that we can we can keep our NIM.

Corrick: NIM close to where it is a little bit of a drop you know.

Corrick: I hate to put any specific number out there, but I mean.

Corrick: Five basis point drop.

Corrick:

Corrick: Three to five three to three seven or so something like that would not.

Not be unrealistic, but we're going to do everything we can to try to keep it close to where it is today.

Graham I think one thing, though that this is the first quarter that we felt comfortable to start making matter.

Changes in less sensitive less rate sensitive deposits out of the company and so I think that I think that's really.

Curtis Griffith: As shown on slide four of our earnings presentation, we delivered 9.7% loan growth for the full year, driven by the expansion of our lending platform combined with a resilient economy as Texas continues to benefit from in-migration and a favorable business climate. If inflation continues to moderate and the Federal Reserve begins to reduce its benchmark interest rate, we expect economic growth to accelerate as we look to the second half of 2024. Looking back at the past year, our community-based deposit franchise grew modestly, which is impressive given the significant dislocation that occurred following the failures of Silicon Valley Bank and Signature Bank in the first quarter. For the full year, our core deposits grew 1%, excluding brokered deposits, to $3.26 billion, which demonstrates the resilience of our franchise combined with our strong customer relationships. At quarter end, 81% of our deposits were in our rural markets, with 19% in our major metropolitan markets of Dallas, Houston, and El Paso. Additionally, our average deposit account balance is approximately $36,000, with only an estimated 16% of our total deposits being uninsured or uncollateralized.

Says a lot when you start looking at the fact that we finally feel comfortable to start making some minor rate reductions across the board and those are going to be small and incremental and it's going to take a while for the for it to start really showing but.

I think that's I think that says a lot. If you kind of think about tech that we're finally willing just to start doing that.

Curtis Griffith: No absolutely definitely does and I guess, just staying here with the NIM. So I get it is some of the trough that's going to happen or I guess, the pressure and what happens that because of the fixed rate repricing is weighted towards the back half of the year Curtis did I hear that correctly.

We definitely have had more more of that repricing that that will occur as we get to the second half of 'twenty.

<unk> 24.

Curtis Griffith: We have some going along but but but it accelerates a lot more as we get to the second half.

Oh, one other point.

This is the time of year that our AG loans do pay down.

In the big scheme of things, it's not a significant number but it does move things a penny or two here and there because most of those operating lines were priced up at current rates for days, we went through FY 'twenty, three and there'll be priced at current rates, we might renew and I start growing up again in 'twenty four but there is a little drop there and it will be in some of our hiring.

Mr. Crockett: <unk> notes that are out there right now.

Mr. Crockett: Okay. Okay that makes sense and then the last one is just more housekeeping I just want to make sure I got the the mortgage servicing right adjustments correctly. So you said that there was a 1.5 million dollar Mark this quarter, a negative mark compared to last quarter, where it was a $700000 write up which is the that's the 2.2 number is really the delta between the two quarter.

Curtis Griffith: The credit quality of our loan portfolio also remained strong through the fourth quarter, as our classified loans remained at the lowest level since the start of the pandemic as we ended the year. Lastly, we increased our return on average assets by 1.54% for the full year 2023, as compared with 1.47% for the full year 2022. We also completed the sale of our Windmark Crop Insurance subsidiary in April for a pre-tax gain of $33.8 million.

Right, Yes, yes, okay. Okay, alright, I just wanted to make sure I understood that correctly alright, that's all from me guys. Thank you.

That's great. Thanks.

Thank you next question today is coming from Brett Robinson from Hovde Group. Your line is now live.

Hey, guys good morning.

Mr. Crockett: Good morning.

Curtis Griffith: The gain that we recorded positioned us to strategically sell $56 million of investment securities at a loss in a tax-efficient manner and reinvest those proceeds into higher-yielding loans. Given our strong capital and liquidity position, our board of directors authorized a $15 million stock repurchase program in May, which has been exhausted. We repurchased 218,000 shares in the fourth quarter and a total of 686,000 shares during 2023. Through the year, our board has believed that our shares have traded below intrinsic value, and we have been aggressive in buying our stock in the open market. Looking to the year ahead, we will maintain our liquidity and continue to watch for opportunities to expand the bank and our earnings power. M&A is an area of interest, and we believe you will see transactions take place in the market as sellers' expectations become more realistic.

Wanted to first just talk about the deposit initiatives and you you talk quite a bit about stabilizing D. D. E. And then I know you're hopeful for Treasury management to possibly be a part of that can you guys. Maybe go through a little bit on the stabilization of DDA, what what that entails in terms of product.

Or or strategy, you know, how you're going to achieve that and then just maybe talk a little bit about the growth of deposits and where you expect that to come from.

Yeah. So Brett good morning. This is corey so.

You know we've had this conversation we were we talking amongst ourselves quite a bit I mean, we'd like to sit here and tell you that I mean.

Sure He's got it.

At quarter over quarter, just immediate change, it's not going to happen you know what I mean or what we're trying to do is an overall initiative that chases the trend long term in the way that we chase relationships.

A lot of it's going to come back specifically around the lending relationships and making sure that we require much more emphasis on the deposit gathering so historically in the past our our lenders have always we've always had a positive a bit on the forefront of all we look at relationships, but we were never as picky about the types of deposits.

Curtis Griffith: The decline in interest rates at the end of the year also led to a recovery in bank securities portfolios, which will increase the probability that we will see deal volumes pick up. However, we will only be interested in acquiring a bank with the right culture, excess liquidity, a stable deposit base, and at a valuation that makes sense for us and our shareholders. In the meantime, we remain focused on organic growth while returning a steady stream of income to our shareholders through our quarterly dividends. Our Board of Directors again authorized a $0.13 per share quarterly dividend, as announced last week. This will be our 19th consecutive quarterly dividend to be paid on February 12, 2024, for shareholders of record on January 29, 2024. Now I'll turn the call over to Corey. Thank you, Curtis, and hello, everyone.

Now, we've really changed that focus and incorporating that into.

The loan covenant that we have requiring the full operating accounts all of the things like that that really come back around but when we talked about continuing to step up delivery on the treasury side I mean, it's real.

We've continued to tweak till we get Treasury leadership, the way, we really want it and where there are where we are continuing to enhance our team and we're focused on education with our lenders and our our staff better than we've ever been so I mean, it's it's not a sprint I mean, it's it's I mean, it's a marathon and one that I.

Thank you.

We're continuing to build it in the rat and the right way, but that's a bogus of our deposit initiatives I mean, we it's all day long every day looking at the value of deposits, which ones are sticky, which once they really do mean core to us and which ones. They will ultimately help us drive profitability in our relationships.

Starting on slide 6, Loan Tell for Investment increased $20.6 million or 2.8% annualized as compared to the linked quarter. Loan demand was primarily for commercial real estate during the quarter and was partially offset by an approximate $10 million decline in our indirect auto portfolio. As we've said on previous calls, we're carefully managing our indirect auto portfolio with a focus on maintaining the portfolio's credit quality while reinvesting a portion of the monthly principal amortization into higher-yielding loans. The yield on our loan portfolio was 6.29% in the fourth quarter as compared to 6.1% in the linked quarter. We continue to price new loans to account for the higher interest rate environment that we are operating in, combined with the upward pressure on our deposit costs.

Okay. That's that's helpful. I appreciate that.

The other thing I wanted to ask about was the expenses going forward, obviously, they've been managed well the past year and maybe some of that is mortgage incentive compensation going down which should probably reports on this year and what she as you indicated aside from the mortgage piece are there pressure points inflationary or otherwise.

Is that would drive expenses in 'twenty four relative to 'twenty three.

Skipping to slide 8, we grew loans by $44 million, or 17.8% annualized, to $1.04 billion in our major metropolitan markets of Dallas, Houston, and El Paso as compared to the linked quarters. Our metro markets continue to be an important source of loan growth and more than offset the paydowns that we experience in our community markets, as well as the expected decline in our indirect auto portfolio.

Breath, Steve So one.

One other piece that we.

We didn't specifically talk about earlier.

Earlier, but we did not previously during the year some of our technology.

Technology initiatives that we've been working on during 'twenty three in particular, some of our transition to the cloud.

Is is some we'll have some increased expenses some of that was just being built out and some of it was infrastructure and different things that we would start seeing some similar depreciation on during during the current year.

We remain in a hiring mode as we look for good lenders who fit our culture and can bring new business to the bank, though we'll remain extremely selective. Turning to slide 9, demand across our markets remains healthy as we continue to experience solid economic growth, though we continue to be selective in who we do business with and what loans we underwrite. As a result, we expect low single-digit loan growth for 2024, though we expect to continue to deliver interest income growth as many lower-rate loans continue to experience principal repayments and or rate resets. Additionally, we expect the majority of this repricing to begin accelerating in the second half of 2024.

I mean, theres always a little bit of inflationary pressures on on some of the other some of the other items I don't I don't think there's a.

I don't think we're looking to to drastically increase noninterest expense absent mortgage just.

Changing a whole lot as far as vol.

Volume and production that.

That would that would warrant that but outside of that we again, we should be we should be probably closer to the to the Q3 number I think we were at about 31, and a half million versus $30 6 million I don't think will be quite that high but but.

We believe loan yields will remain elevated even if the Fed begins to cut interest rates given lower liquidity in the market, which will benefit our net interest income and them in the third and fourth quarters. In conjunction with our effort to drive loan growth, we also need to deliver deposit growth while stabilizing our non-interest-bearing deposit balance. So our lenders have always had an emphasis on deposits as part of their incentive compensation plan.

Fourth quarter was definitely.

Down a little bit more than probably what we will see.

On a go forward basis. This is Cory, though I think to go along with what Steve was saying that I do anticipate the mortgage side actually picking up from the from the expense number in the second half I mean, we had were very much getting geared up for that because.

We have brought a renewed focus on the type and value of these deposits. More specifically, true core deposits and non-interest-bearing balances now carry more weight in these plans. Better said, we are focused on the profitability of the whole relationship. We're also getting much better at putting in loan covenants on new loan originations centered on deposit requirements and liquidity maintenance agreements. While we've always targeted this, we're getting much better at negotiating these covenants. Treasury management is another area where we have made real progress as we have improved our team, our product, and our capabilities over the last year. During the fourth quarter, we recruited a senior treasury management executive from a top seven U.S. bank to head this business, which follows several additions to our team as we improve the talent of this group.

We were kind of proud of the fact of the way we managed mortgage through the last 18 months in I mean, we we basically manage to a net zero that that's been our focus to make sure we could keep capabilities in place that manage the.

EBIT nimble like we've always said we would do now we feel like that is that we'll be making sure that where he got the right protections in place to really take care take advantage of the step in the second half of the year.

Okay breakfast encourage over there.

Yeah, one more quick point and again this is just I'm, giving you a reason not an excuse.

I am so excited with the level of people and products that we have today, which is unmatched in our history. We're also doing a better job than we ever have in making sure we align the right treasury products with the customer's financial needs, thus allowing us to continue to drive both deposit growth and fee income. Turning to slide 11, we generated $9.1 million of non-interest income in the fourth quarter as compared to $12.3 million in the third quarter. This decline was largely due to a $2.9 million decline in mortgage banking revenues, which included a $2.2 million decline in the fair market value adjustment to our mortgage servicing rights portfolio.

As we have grown our team added real high quality people. So that we're doing so in what to me is probably the toughest hardest.

Market for banking talent and I remember in 50 years of doing this.

And so to bring the people along that we were doing which we know is the right thing to do.

Personnel cost is going to be what it is to get them and keep them. So there is just a little extra tightness right there that sir overtime.

Over time, it's still going to generate a lot of good revenue for us and we got to have the right people to do it across all sectors, not just lenders, but it doesn't come cheap and we're not going to lose side of it.

Importantly, we've aggressively managed our mortgage banking expense base as volumes have decreased over the last 18 months with a focus on maintaining profitability. While this downturn in mortgage originations has been the most severe in more than three decades, we've experienced negligible losses while maintaining our mortgage capabilities for the eventual turn in volumes as mortgage rates continue to decline. And, as I mentioned, we expect our initiatives in treasury management to begin to impact earnings beginning in the second quarter. For the fourth quarter, non-interest income was 21% of bank revenues as compared to 26% in the third quarter of 2023.

Okay. That's helpful. If I could sneak in one last one.

You mentioned, you guys mentioned M&A and in the call and it sounds like you're somewhat optimistic that you'll see some activity in and maybe you guys will be able to do a deal that makes sense to add to the platform can you guys talk about from here you know some folks strategy has evolved are now looking to maybe buy more.

Or more rural franchises that are deposit funded versus metro markets can you guys. Just talk about what's your M&A strategy would be from here from a geography perspective than what you booked for you know a community bank to bring to your platform.

To conclude, we delivered strong results through the fourth quarter and believe we will remain well positioned. That said, we are not standing still and are aggressively addressing the current environment to manage deposit cost pressures while accelerating fee income growth. We need to stabilize our non-interest-bearing deposits and grow our deposit franchise in order to position us to take advantage of improving loan demand as we move through 2024. I'm confident that we have the right people and plan, and I'm excited about the opportunities ahead. I will now turn the call over to Steve. Thanks, Corey. For the fourth quarter, diluted earnings per share were $0.61, which compares to $0.78 per share in the full quarter.

Well I'll I'll stick with what I said I think in the end of the call.

A recording park right there that we believe that we know what we're looking for and that is.

Got script back in front of me.

Hey bank with the right culture.

That's number one because we're not going to try to make a culture that doesn't look like us fit in.

We've seen too many failures with that excess liquidity.

Stable deposit base and the valuation that makes sense, well look in excess liquidity and stable deposit base to me you're almost by definition in Texas Youre looking at more rural markets.

So I think.

You are quite right in there perhaps the way some other people are looking now to for so long they didn't they weren't interested in banks out in smaller communities and now we've seen that pick up so.

Yeah, we've had some phone calls where you're going to have a few discussions were still not anywhere close to doing a deal but.

We recorded a $1.5 million write-down of the fair value of our mortgage servicing rights asset during the quarter as compared to a $700,000 write-up in the linked quarter. The current quarter impact on our earnings per share was $0.07 after tax. Turning to slide 13, net interest income was $35.2 million for the fourth quarter as compared to $35.7 million for the linked income. Our loan production in the third quarter, combined with the rise in new loan rates, lifted the yield on our loan portfolio by 19 basis points in the fourth quarter, resulting in a $1.7 million increase in loan interest income. The rise in loan interest income was offset by a $1.3 million increase in interest expense due to the rise in short-term interest rates on interest-bearing liabilities and a decrease of $900,000 in income on other interest-earning assets as average investable liquidity declined in the fourth quarter.

If the right one comes along.

And right. One also means the right size and all of that as well then we believe we've got the capital and we've got the people and we believe we can make it work, but after watching what we've seen right here in our market.

And the Permian as well.

In the past couple of years, we don't want to go down the road of having the kind of difficulties that we've seen from some other acquirers I'll just leave it at that Brett This is Corey.

Interesting, though that you know you talked about the fact that people are starting to recognize the value of some of these rural deposits. We always had that's the thing that matters.

That's even when we went public in 19, we had discussions around this we have always seen the value of the rural deposits and I think that probably puts us in a better position than a lot of the the other ones that are just kind of changing their focus and looking at it but I do think that we're very good at it and we're very focused and begin community minded when we leave some of these these rural markets.

Yeah, if you're going if you're going to do what's in those smaller markets really have to understand that you have to be the hometown banks no matter, where your headquarters are and that's always been our philosophy at all of our smaller markets.

Okay, Great. That's really helpful. Thanks for all the color.

Thanks, Brett next thank you. Your next question is coming from Julien <unk> from Raymond James Your line is now live.

Our net interest margin, calculated on a tax-equivalent basis, held steady at 3.52% in the fourth quarter as compared to the length of the year. Higher loan balances and loan yields offset the rise in our cost of deposits and the decline in non-interest bearing deposits. As outlined on slide 14, our average cost of deposits was 224 basis points in the 4th quarter, an increase of 17 basis points from the linked quarter. Given the rising interest rate environment through the year, we've had to be proactive in maintaining deposit relationships, which has led to the rise in our funding costs. Overall, our core deposit franchise continues to remain steady, with only a slight decrease in the fourth quarter. As Corey touched on, we've put initiatives in place designed to stabilize our non-interest-bearing deposit balances while also driving core deposit growth. We expect these initiatives to begin to have an impact as we move through 2024.

Okay.

So perhaps your phone is on mute.

So from Raymond James Your line is now live.

Yeah.

As a reminder, everyone that star one to be placed into the question queue. Our next question is coming from Mark suddenly from <unk>. Your line is now live.

Hey, guys good morning.

Alright.

So on the buyback I know you guys continue down this quarter and sort of.

The current authorization.

Hmm.

Do you still favor the buyback as sort of you know near the top of the list as far as priorities for 'twenty four and do you expect that new authorization coming.

Oh, it's gonna be a decision by the board.

I think clearly we were doing the right thing at the time in 'twenty three.

We'll take a hard look at it in fact, it will probably be discussed in our February board meeting.

We'll decide where we think we ought to be for the year.

As long as we have the capital levels that we do if we collectively think we're trading at a level that.

It makes that a good investment for our shareholders money, then, yes, I think will reauthorize and have something out there, but right now today I can't give you any real firm metrics on it but it is going to be a topic of discussion for sure.

In the meantime, we expect continued upward pressure on deposit costs, which will modestly pressure our NIM. That said, we expect our NIM to peak through the first half of 2024. Turning to slide 15, our ratio of allowance for credit losses to total loans held for investment was 1.41% at December 31st, 2023, which is unchanged from the end of the prior quarter. We recorded a $600,000 provision for credit losses in the fourth quarter, which was largely attributable to our organic loan growth, as well as net charge-off activity in the. Skipping ahead to slide 19. Our non-interest expense was $30.6 million in the fourth quarter as compared to $31.5 million in the late... The $900,000 decrease was largely due to lower mortgage costs as we continue to manage through the decline in mortgage volume.

If so obviously I guess in terms of.

Priorities on things, we're gonna be sure we have plenty of capital for organic growth because we do think we'll get a chance to do some during the year.

And we're going to keep paying a steady dividend.

And.

If a deal came along for M&A, we would want to know we've got the dry powder to do that but right in there at about that same tier is buyback of our existing shares and as long as we think it's a good value for the money, we're not gonna be bashful about doing.

Great that's helpful.

And maybe just one for Steve I apologize if I missed this but when you think about the NIM.

For 2024, what are the rate cut assumptions that you all are using when you think about those margin projections, but.

Yeah, So right now and again, it's it's a moving target but as of as of right. Now we plan I've just got two two rate cuts.

That said, we would expect non-interest expense to modestly rise through the first half of 2024 as mortgage volume increases through the spring selling season. Moving ahead to slide 21, we remain well capitalized with tangible common equity to tangible assets of 9.21% at the end of the fourth quarter, an increase from 8.4% at the end of the third quarter of 2023. The increase was largely driven by a $32.9 million increase in accumulated other comprehensive income, or AOCI, and $8.2 million of net income after dividends paid. AOCI was positively impacted by decreases in long-term market interest rates during the fourth quarter. Tangible book value per share increased to $23.47 as of December 31st, compared to $21.07 as of September 30th, 2022, largely due to the impact of AOCI on our net earnings in the fourth quarter.

Dan at this point.

Kind of in the first quarter early second quarter would be.

The first one and then later.

I think in the in the third quarter. The first of the fourth quarter is when we got the second one.

So again, that's the viewpoint on that can shift a day to day, sometimes but.

I know some people have got more.

Two maybe for board, but at this point, we're just kind of baking into.

Got it. Thanks, that's it for me guys I appreciate it.

Thanks Mark.

Thank you. Your next question is coming from Julien <unk> from Raymond James Your line is alive.

Good morning.

Are you able to hear me.

Hi, Joe Hi, Joe We can go ahead.

Perfect. So just kind of piggyback off that rate question.

What's your model census, there'd be two of 25 basis point rate cut.

And as we think about that what kind of deposit betas are you assuming on the way down.

Curtis Griffith: I'll turn the call back to Curtis for a concluding remark. Thank you, Steve. To conclude, I'm very proud of our performance over the past year. Our community-based deposit franchise remained resilient, while our lenders continued to drive high-quality loan growth that contributed to our strong earnings growth in 2023. We also sold Windmark, which provided capital for share repurchases, as well as a strategic repositioning of a portion of our securities portfolio.

So I'll start here I mean as far as far as 25 basis point.

Decline I don't I don't have the 25 here in front of me, but we definitely are liability liability sensitive.

But.

We we do on the deposit side, we've got about.

Oh, we've got about 20.

I'd say close to 20% of the deposit book.

Curtis Griffith: The bank is operating very well as we enter 2024, but we know we have much more to do. As Corey outlined, we have initiatives in place that we believe will stabilize our non-interest-bearing deposit balances, grow core deposits, and drive fee income growth. This will provide improved liquidity for loan growth looking to the second half of 2024, when we expect to see a meaningful portion of our loan portfolio repriced and an acceleration in the Texas economy from already healthy levels. We expect competitor liquidity to fund new loans in our markets to be limited and believe we will be well positioned to add high-quality customers and attractive loans to our portfolio.

Book that is.

That is tied to our to the short term rate that that would that would reprice down most of that full 25 basis point.

Decline within 30 days or so.

The majority of our public fund.

Book in our.

Brokerage.

Broker deposits.

And then some some of the other indexed accounts that we've got added a.

For the full one for a full 1% drop.

We're word.

Operator: We also expect our fee income to improve starting in the second quarter. We remain optimistic about the year ahead as we focus on delivering value to our shareholders. Thank you again for your time today.

We're at about a three around 3%.

The increase to net interest income.

Sorry, I don't have the I don't have it down to the 25 basis point level.

This is curtis drove one of the things that.

Operator: Operator, please open the line for any questions. Thank you. We will now be conducting a question and answer session. If you would like to be placed in the question queue, please press star 1 on your telephone keypad. A 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.

It will be helpful for us as we have continued to be very reluctant.

Increasing our CD balances out there, we haven't been running any specials or any of that so.

The bulk of our deposits are in transaction counts and we will be able to adjust those rates fairly quickly.

Another factor, we talked touched on Treasury management are one that we can and will certainly move.

Because you can move it into very small increments as our earnings credit rate to.

To the extent that we're using that Treasury management side.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment, please, while we pull for questions. Our first question today is coming from Graham Dick from Piper Sandler. Your line is now live. Hey, good morning, guys. Good morning, Graham.

Well certainly be aggressive in trying to address those as rates decline.

Perfect I appreciate that.

Then.

Last one for me here as asset quality as you know it's remained pretty strong throughout the December quarter.

Curtis Griffith: I just wanted to start on loan growth. I heard your guidance there for low single-digit growth, which I guess aligns with the last two quarters pretty well, but for the full year 2023, at 10%, it's definitely slower. And then also for you to sort of frame that up with, I guess, what you see between your community markets and in the metro markets, because it sounds like the growth in the metro markets has been pretty strong, which is a little different than some of the metro-focused or headquartered banks in Texas. So I'd just like to hear maybe what you are doing differently to grow loans faster there, and then also how the community banking payoffs might play into that low single Grand Miss Curtis.

So as we think about this next year is there a potential if we move through the year and we hit the soft landing that we could start to see some reserve relief for you, which would be somewhat of a tailwind just kind of curious your thoughts of kind of provisioning year over year and the credit outlook.

Hi, John This is Brent you.

You know, we're still seeing I mean passives normalizing.

And and.

Occasionally.

Credit setup deteriorated were just working it hard I mean, it's where we're where we wound up at the end of the quarter was.

It was because of the work work, we accomplished or in a quarter of exiting some repairing some downgrading a few so we're still seeing some activity coming in and out of there.

And I think it kind of really all depends on the long term effect of the rate rise and how that how that most or the economy.

Curtis Griffith: Yeah, I think a lot of our growth is getting is a result of making some great hires that we've done in some of those markets in the last couple of years. And all that's kind of coming to fruition. It is, you know, still a little more challenging to get growth out here in some of the more rural markets, but we're seeing good activity too. I'm going to let Brent Bates kind of elaborate on that and what he kind of sees going forward a little here in 24. Yeah, you know, this is this is Brant.

We still are modeling at our model, having some more stress than we have today in the overall economy.

We don't see that at some point in time of course, we're going to reassess it but.

Right now were still kind of thinking there's still a chance of a little bit of volatility in the overall economy. So.

Brent Bates: Last year in 23, we saw real strong growth in the first half and, you know, closer to that 3% in the second half of the year. And, you know, I think what we're expecting this year is still to see some, some tailwinds from our construction portfolio advances in the first half of the year on the construction portfolio, which is predominantly multifamily and industrial projects and our metro markets, and we still see some pullback in residential construction. And then we're, you know, we're still seeing good activity from our existing clients, even in our rural market. So I think the low single-digit growth for 24 is realistic; it's achievable. And, and definitely 24, I would expect to be much more of a smooth growth period than 2023 was. Graham, this is Corey.

Uh huh.

When we I guess move away from that thinking process.

There is a potential we would see some reversal out of there, but I think if you start seeing from our standpoint, we see enough rate relief, our volume's going to pick up enough that we're probably going to offset that.

Pretty quickly from a growth standpoint so.

Well, we I would say this while we would like to see relief in that we are not we are not dependent upon that for the where we're trying to to Beth.

Earnings.

I think you can count on us always leaning on the conservative side about what's in that reserve.

Just to let everybody sleep, a little better at night and you know there are metrics that they justified.

We're just we're not seeing huge difficulties in our portfolio, but sprint said when a response something we start working it right then we don't want problems faster.

Because that doesn't remember well so we will stay.

Stay as conservative as reasonably possible I'll say in keeping the reserve in there if they are.

Really do indicate we need to pull something out we will but as Corey said hope is that we get enough additional organic growth.

I think the other thing we've got to keep in mind is we're being much more selective about what we're wanting to find. So we've had opportunities to look at a number of transactions that we've just passed on. We don't think it's the right time for some of those for us right now or for some of the clients. So we have selectively pulled back a little bit, and we're okay with that. Yeah, that definitely makes sense.

Moving and the 24 that it'll it'll use up any adjustments that would be related to.

Overall improvement in the economy and.

Speaking for myself, there's still a lot of unknowns out there and one of them is we got an election coming this November and I don't know what the world's going to look like after that so we're going to err on the cautious side.

And that's helpful, Brent. Thanks for that. I guess just just moving to the margin a little bit was flat for a quarter of a quarter. I know you guys said that you're calling for a trough maybe in the first half of the year. I was wondering if you'd be willing to maybe give an idea of where you see that trough? I mean, is that the low 340s?

Joe you don't we're conservative and we were always going to under promise and over deliver whenever we can.

Got it all right well I appreciate you taking my questions. Thank you.

Thanks, Jim.

Thank you we reached end of our question and answer session I'd like to turn the floor back over to Curtis for any further closing comments.

Thanks, operator, thank all of you for joining our call. This morning, you've heard us discuss where you're entering 'twenty four and a real solid position. We think we have some good opportunities for growth in the bank and to highlight just a few of those one more time, we do have an improved treasury management team. We think that's going to drive more fee income and core deposit growth during the year.

Or is it just slightly below this level? Just trying to get an idea for the trends going forward, given we saw, you know, a flat margin quarter of a quarter. And it seems like the rate environment should get a little bit better to start the year, but obviously still very competitive out there. Yeah, I'll... Graham, Steve, I'll start and then I'll let Corey or Curtis jump in as well.

<unk>.

We are getting a gradual remixing of loan and securities portfolios into higher yielding loans.

And coupled with what we expect is low single digit loan growth if the Texas economy remains healthy we will drive net interest income growth.

We were fortunate that we were able to keep it flat during the fourth quarter. However, we do continue to see pricing pressure, particularly on the deposit side. We did, while we did increase the cost of deposits during the quarter, that rate of growth did slow down, and we're prepared for that to still increase, but that overall growth has continued to slow down. Yes, we hope there will be some relief inside, depending on what they do with rates.

And as we've touched on multiple times mortgage has certainly been challenging.

Several months, but we remain positioned to handle some improving volumes and I think we're getting a build.

Buildup out there offer have needs for some financing it's going to start breaking loose as rates began to come down we're going to be well positioned for that and most importantly, the credit quality of our loan portfolio remains solid so I'm excited for the year ahead. We thank you all for your time today and hope to see you again soon.

Curtis Griffith: There's been a little bit of mixed messages in the first three weeks of the year so far, it seems like, uh... looking like they're headed down, and they're trying to pull them back up a little bit, not on our specifically, but just when you look at them uh... when you look at the treasury market, we had some other other other rates so uh... we are hopeful that that weekend we 3-5, 3-7 or so, something like that would not be unrealistic, but we're going to do everything we can to try to keep it close to where it is today, changes in less rate-sensitive deposits throughout the country.

Thanks.

Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.

Yeah.

Curtis Griffith: And so I think that, I think that says a lot when you start looking at the fact that we finally feel comfortable to start making some minor rate reductions across the board. Those are going to be small and incremental, and it's going to take a while for them to start really showing, but... I think that says a lot if you think about the fact that we're finally willing to start doing that. Absolutely, definitely does. And I guess just staying here with the NEM, so some of the trough that's going to happen, or I guess the pressure in one half, is that because the fixed rate repricing is weighted towards the back half of the year? Curtis, did I hear that correctly?

Curtis Griffith: We definitely have more of that repricing that will occur as we get to the second half of... 24. We have some going along, but it accelerates a lot more as we get to the second half. One other point, this is the time of year that our ag loans do pay down, and in the big scheme of things, it's not a significant number, but it does move things a penny or two here and there. Because most of those operating lines were priced up at current rates as we went through 2023, and they'll be priced at current rates when they renew, and they start drawing up again in 2024. But there is a little drop Okay. Okay, that makes sense. And then the last one is just more housekeeping.

I just want to make sure I got the mortgage servicing rate adjustments correctly. So you said that there was a $1.5 million mark this quarter, a negative mark compared to last quarter, where it was a $700,000 write-up, which is the 2.2 number is really the delta between the two quarters, right? Yes. Yes.

Okay. Okay. All right. I just wanted to make sure I understood that correctly.

Operator: All right. That's all for me, guys. Thank you, Thank you.

Operator: Thank you. The next question today is coming from Brett Rabatin from Hovde Group. Your line is now live. Hey guys, good morning.

I wanted to first just talk about the deposit initiatives, and you talked quite a bit about stabilizing DDA, and I know you're hopeful for treasury management to possibly be a part of that. Can you guys maybe go through a little bit on the stabilization of DDA, what that entails in terms of product or strategy, you know, how you're going to achieve that, and then maybe talk a little bit about the growth of deposits and where you expect that to come from. Yeah, so good morning. This is Corey.

So, you know, we've had this conversation. We talked amongst ourselves quite a bit. I mean, we'd like to sit here and tell you that, I mean... Treasury's got a quarter over quarter just immediate change. It's not going to happen, you know what I mean?

What we're trying to do is an overall initiative that chases the trend long term in the way that we chase relationships. You know, a lot of it is going to come back specifically around the lending relationships and making sure that we require much more emphasis on... Now we've really changed that focus and incorporated that into the loan covenants that we have, requiring the full operating accounts, all of the things like that that really come back around. But when we talked about continuing to step up delivery on the Treasury side, I mean it's real. I mean, we continue to tweak until we get Treasury leadership the way we really want it, and we're there.

We're continuing to enhance our team, and we're focused on education with our lenders and our staff better than we've ever been. So I mean, it's not a sprint. I mean, it's a marathon and one that I think that we're continuing to build in the right way, but that's the focus of our deposit initiative. I mean, it's all day long, every day, looking at the value deposits, which ones are sticky, which ones really do mean core to us, and which ones will ultimately help us drive profitability in the relationship. Okay, that's helpful.

I appreciate that. The other thing I wanted to ask about was the expenses going forward. Obviously, they've been managed well the past year, and maybe some of that is mortgage incentive compensation going down, which should probably revert some this year, as you indicated. Aside from the mortgage piece, are there pressure points, inflationary or otherwise, that would drive expenses in 2024 relative to 2023? Uh, Brett Steve.

So one other piece that we didn't specifically talk about earlier, but we did previously during the year, some of our technology initiatives that we've been working on during 23 in particular, some of our transition to the cloud, we'll have some increased expenses. Some of that was just being built out, and some of it was infrastructure and different things that we would start seeing some more depreciation on during the current year. There's always a little bit of inflationary pressure on some of the other items, but I don't think there's a...

I don't think we're looking to drastically increase non-interest expense absent mortgage just yet, as far as volume and production that would warrant that. But outside of that, again, we should probably be closer to the Q3 number. I think we were at about 31.5 million versus 30.6 million. I don't think we'll be quite that high, but the fourth quarter was definitely down a little bit more than probably what we'll see on a go-forward basis. This is Corey, though.

I think to go along with what Steve was saying, though, I do anticipate the mortgage side actually picking up from the expense number in the second half. We're very much getting geared up for that because we were kind of proud of the fact of the way we managed the mortgage through the last 18 months. We basically managed to a net zero.

That's been our focus to make sure we could keep capabilities in place but manage the expense, keep it nimble like we've always said we would do. Now we feel like we'll be making sure that we've got the right protections in place to really take advantage of the stuff in the second half of the year. Okay, she's a good caller there. Yeah, one more quick point. And again, this is just a reason, not an excuse.

Curtis Griffith: As we have grown our team and added really high-quality people to that, we're doing so in what, to me, is probably the toughest, hardest market for banking talent that I can remember in 50 years of doing this. And so to bring in the people that we did, which we know is the right thing to do, personnel cost is going to be what it is to get them and keep them. So there's just a little extra tightness right there that, over time, is still going to generate a lot of good revenue for us. And we've got to have the right people to do it across all sectors, not just lenders. But it doesn't come cheap.

Curtis Griffith: And we're not going to lose sight of that. Okay, that's helpful. If I could sneak in one last one,

Curtis Griffith: You guys mentioned M&A in the call, and it sounds like you're somewhat optimistic that you'll see some activity, and maybe you guys will be able to do a deal that makes sense to add to the platform. Can you guys talk about how some folks' strategies have evolved from here? They're now looking to maybe buy more rural franchises that are deposit-funded versus metro markets. Can you guys just talk about what your M&A strategy would be from here, from a geography perspective, and what you'd look for a community bank to bring to your platform? Well, I'll stick with what I said, I think, in the call, the recorded part right there, that we believe that we know what we're looking for, and that is... I've got the script back in front of me, a bank with the right culture. And that's number one, because we're not going to try to make a culture that doesn't look like us fit in.

Curtis Griffith: We've seen too many failures with that excess liquidity, a stable deposit base, and an evaluation that makes sense. Well, you look at excess liquidity and a stable deposit base. To me, you're, almost by definition, in Texas; you're looking at more rural markets.

Curtis Griffith: So I think you're quite right and that that's the way some other people are looking now, too. For so long, they didn't, they weren't interested in banks out in smaller communities.

Curtis Griffith: And now we've seen that pick up. So yeah, we've had some phone calls, we're going to have a few discussions, but we're still not anywhere close to doing a deal. But if the right one comes along, and the right one also means the right size and all of that as well, then we believe we've got the capital and we've got the people, and we believe we can make it work. But after watching what we've seen right here in our market, and, and the Permian as well, in the past couple of years, we don't want to go down the road of having the kind of difficulties that I'll just leave it at that. Brad, this is Corey.

You know, it's kind of interesting, though, that you talk about the fact that people are starting to recognize the value of some of these rural deposits. We always have. That's the thing that... Back even when we went public in 19, we had discussions around this. We have always seen the value of these rural deposits.

And I think that probably puts us in a better position than a lot of the other ones that are just kind of changing their focus and looking at it. But I do think that we're very good at it, and we're very focused on being community-minded when we lead some of these rural markets. Now, if you're going to do well in those smaller markets, you really have to understand that you have to be the hometown bank, no matter where your headquarters are, and that's always been our philosophy in all of our smaller markets. Okay, great. That's really helpful. Thanks for all the color.

Operator: Thank you. The next question is coming from Julian Trunas from Raymond James. Your line is now live. Joe, perhaps your phone is on mute.

Operator: Joe Parimi James, your line is now live. As a reminder, everyone, that's star number one to be placed into question Q. Our next question is coming from Mark Shutley from KBW. Your line is now live. Hey, guys. Good morning.

Operator: Um, all right. So, on the buyback, I know you guys continued that this quarter and sort of finished the current authorization. Do you still favor the buyback as sort of, you know, near the top of the list as far as priorities for 24 are concerned, and do you expect a new authorization coming? It's going to be a decision by the board. I think clearly we were doing the right thing at the time in 23.

Curtis Griffith: We'll take a hard look at it. In fact, it'll probably be discussed at our February board meeting, and we'll decide where we think we ought to be for the year. As long as we have the capital levels that we do, if we collectively think we're trading at a level that makes that a good investment for our shareholders' money, then yes, I think we'll reauthorize and have something out there. But right now, today, I can't give you any real firm metrics on it, but it is going to be a topic of discussion for sure.

I guess, obviously, in terms of priorities on things, we're going to be sure we have plenty of capital for organic growth because we do think we'll get a chance to do some during the year, and we're going to keep paying a steady dividend. And, you know, if a deal came along for M&A, we'd want to know we've got the dry powder to do that. But right in there, at about that same tier, is a buyback of our existing shares, and as long as we think it's good value for the money, we're not going to be bashful about doing it. Great, that's awesome, and maybe just one question for Steve. Apologies if I missed this, but when you think about the NIM for 2024, what are the rate cut assumptions that you're using when you think about those margin projections? Yeah, so right now, and again, it's a moving target, but as of right now, we've kind of just got two rate cuts baked in at this point. You know, end of So again, the viewpoint on that can shift day-to-day sometimes, but I know some people have got more, up to maybe four runs, but at this point, we're just kind of baking in two.

Got it. Thanks. That's it for me, guys.

Operator: Appreciate it, part. Thank you. Next question is coming from Joe Yanchunas from Raymond James. Your line is now live. Good morning, are you able to hear me?

Operator: I do. Joe, we can. Go ahead. Perfect. So, just to kind of piggyback off that rate question, what's your model sensitivity to a 25 basis point rate cut? And as we think about that, what kind of deposit betas are you assuming on the way down? I'll start here.

As far as the 25 basis point decline, I don't have the 25 here in front of me, but we definitely are liability sensitive. What we do on the deposit side, we've got about So we've got about 20. I would say close to 20% of the deposit book that is tied to the short-term rate would reprice down most of that full 25 basis point decline within 30 days or so. The majority of our public fund book and our broker deposits and some of the other indexed accounts that we've got at For a full 1% drop, I think we're at around a 3% increase in net interest income. Again, sorry, I don't have those down to the 25 basis point level. This is Curtis. Joe, one of the things that will be helpful for us on this is that we have continued to be very reluctant about increasing our CD balances out there. We haven't been running any specials or anything like that.

Curtis Griffith: So the bulk of our deposits are in transaction accounts, and we will be able to adjust those rights fairly quickly. And another factor we've touched on treasury management, one that we can and will certainly move, because you can move it in very small increments, is our earnings credit rate. To the extent that we're using that on the treasury management side, we'll certainly be aggressive in trying to adjust those as rates, in fact, do decline. I appreciate that and, Last one for me here, asset qualities have remained pretty strong throughout the December quarter. So as we think about this next year, is there the potential, if we move through the year and we hit this soft landing, that we could start to see some reserve relief for you? It should be somewhat of a tailwind.

Brent Bates: Just kind of curious about your thoughts on the kind of provisioning year over year in the credit outlook. Hi Joe, this is Brent. You know, we're still seeing past dues normalizing and occasional Board of Trustees meetings, Yeah, there's a potential we could see some reversal out of there, but I think if we start seeing, from our standpoint, we see enough rate relief, our volume's going to pick up enough that we're probably going to offset that pretty quickly from a growth standpoint, so. Well, I would say this, while we would like to see relief in that, we are not, we are not dependent upon that for the where we're trying to thrive earnings. I think you can count on us always leaning on the conservative side about what's in that reserve. It just lets everybody sleep a little better at night. And, you know, there are metrics that do justify it.

Curtis Griffith: We're just, we're not seeing huge difficulties in our portfolio, but as Brett said, when we spot something, we start working on it right then. We don't let problems fester because that usually doesn't end well. So we will be, say, as conservative as reasonably possible, I'll say, and keep the reserve in there. If the mathematics really do indicate we need to pull some out, we will. But as Corey said, the hope is that we get enough additional organic growth moving into 2024 that it'll use up any adjustments that would be related to the overall improvement in the economy. And purely speaking for myself, there are still a lot of unknowns out there, and one of them is that we have an election coming this November, and I don't know what the world's going to look like after that. So we're going to just err on the cautious side. Joe, we're conservative, and we're always going to under-promise and over-deliver whenever we can.

Got it. All right. Well, I appreciate you taking my questions. Thank you. Thanks, Jim. Thanks, sir. Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over to Curtis for any further closing comments.

Curtis Griffith: Thanks, Operator. Thank all of you for joining our call this morning. You've heard us discuss how we're entering 24 in a really solid position. We think we have some good opportunities for growth in the bank. And to highlight just a few of those one more time, we do have an improved treasury management team. We think that's going to drive both fee income and core deposit growth during the year. We are getting a gradual remixing of loan and securities portfolios into higher-yielding loans. And coupled with what we expect is low single-digit loan growth, the Texas economy remains healthy, will drive our net interest income growth.

Curtis Griffith: As we've touched on multiple times, mortgage has certainly been challenging the last several months, but we remain positioned to handle some improving volumes. And I think we're getting a buildup out there of needs for some financing that is going to start breaking loose as rates begin to come down. We're going to be well positioned for that. And most importantly, the credit quality of our loan portfolio does remain solid.

Operator: So I'm excited for the year ahead. We thank you all for your time today, and we hope to see you again soon. Thank you. That does conclude today's teleconference. We disconnect your line at this time, and have a wonderful day. We thank you for your participation today.