Independent Bank Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 23, 2024

There are 11 speakers on the call.

Operator

Greetings. Welcome to Independent Bank Group's 4th Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I'll now turn the conference over to Ankita Puri, EVP and Chief Legal Officer. Ms. Furrier, you may now begin.

Speaker 1

Good morning, and welcome to the Independent Bank Group's 4th quarter 2023 earnings call. We appreciate you joining us. 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 and expected results to differ.

Speaker 1

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 1

Reconciliations of these financial measures the most directly comparable GAAP 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.

Speaker 2

Thank you, Ankeeta. Good morning, everyone, and thanks for joining the call today. 4th quarter earnings totaled $14,900,000 or $0.36 per per diluted share. Excluding the one time impact of the $8,300,000 FDIC special assessment and other one timers, our adjusted 4th quarter earnings were $25,500,000 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 originations higher.

Speaker 2

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 1 basis point annualized for the 2nd quarter in a row. And our capital ratios ended the quarter in a healthy position with the Tier 1 capital ratio at 9.93%, the total capital ratio at 11.57%. Notably, our TCE ratio strengthened to 7.55% as of December 31, and we grew tangible book value by 5.8 percent to $32.90 per share.

Speaker 2

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

Speaker 3

Thanks, David, and good morning, everyone. As David mentioned, net income for the quarter was $14,900,000 which includes $8,300,000 related to the FDIC special assessment and $4,800,000 of OREO related charges that Dan will discuss in more detail. Adjusted income for the quarter was $25,500,000 or $0.62 per diluted share, compared to $32,600,000 or $0.79 per diluted share in the linked quarter. Net interest income was $106,300,000 in the 4th quarter compared with $109,000,000 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.

Speaker 3

Encouragingly, we saw deposit cost peak during the quarter We have started to reprice some of our marginal liquidity downward as brokered rates have moved meaningfully lower. Of the $2,500,000,000 of brokered funds noted on Slide 20, The weighted average rate is 5.36%. Approximately 1,800,000,000 of the brokered portfolio is in CDs, while the remainder is in money market funds tied primarily to an index. Of the CDs, dollars 1,300,000,000 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.

Speaker 3

Additionally, the overwhelming majority of our public funds book is index to Fed funds, which will move immediately with rate cuts. We have almost $2,100,000,000 in promotional CDs, dollars 1,100,000,000 of which are our 5.5 percent APY 6 month promotional CDs with a weighted average life of between 3 4 months. Beginning today, we have reduced the renewal rate on these 6 month CDs to 5.15 percent APY consistent with the market, which should also help drive expenses down. In addition to our enhanced liability sensitivity, which will be reflected in our IRR and 1 year GAAP 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.

Speaker 3

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 $621,800,000 at December 31, a slight increase from the linked quarter. Still, Borrowings remain at a low level relative to earlier in 2023. Additionally, we may explore utilizing order to replace higher cost FHLB advances as 1 year OIS has evolved favorably to FHLB rates. 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.

Speaker 3

We reported a provision of $3,500,000 for the 4th quarter, which supported the net growth we experienced during the quarter despite an improvement in the MEVs and 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 reserves. Adjusted non interest income was $12,400,000 for the quarter, down slightly from adjusted non interest income of $13,400,000 for the linked quarter. Adjusted non interest expense totaled $83,800,000 for the quarter, up from $81,300,000 in the linked quarter.

Speaker 3

Going forward, I expect non interest expense to be between $85,000,000 $86,000,000 per quarter. These are all the comments I have today. So with that, I'll turn the call over to Dan. Thanks, Paul.

Speaker 4

Core loans held for investment, excluding mortgage warehouse loans, increased by 300 and $83,600,000 or 11 percent annualized in the 4th quarter. For full year 2023, loans grew by $169,900,000 or 4.2%. Growth for the 4th quarter and for the full quarter was supported by demand from our core customers across our markets in Texas and Colorado. Average mortgage warehouse purchase loans were 408 $400,000 for the quarter, down 4.1% from the 3rd quarter averages. 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.

Speaker 4

Credit quality metrics continue to remain strong during the Q4. Nonforming assets were down 1 basis point to 0.32 percent of total assets at quarter end And the bank again adjust 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 loans. We were successful in moving a property held in ORE out of the bank during the quarter, resulted in a loss on sale of $1,800,000 We also took a $3,000,000 write 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.

Speaker 4

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. We are particularly encouraged that classified assets fell by 34 percent from $191,100,000 at September 30 to $126,000,000 at December 31, due both to payoffs and upgrades. Total classified loans plus ORE Bank Capital were just 6.2% at year end, indicative of the overall health of the portfolio These are all the comments I have related to the loan portfolio this morning. So with that, I'll turn it back over to David.

Speaker 2

Thanks, Dan. While 2023 was a difficult year for our company and our industry, we're happy to be through it and we remain very encouraged heading into 2024. We expect earning 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 Q1 and we expect to see NIM expansion and NII growth in the Q1. In addition, we will maintain our discipline on the expense front, reallocating expenses to only the most strategic investments in our franchise.

Speaker 2

And to that end, we are excited to announce that we are opening our 1st full service branch in San Antonio in the Q1. This will allow our talented team already operating there to better serve our customers with a full spate 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're able to capitalize on this position of strength because across 4 of the most dynamic metropolitan markets in the country because of the incredible teams that we have across our footprint. 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.

Speaker 2

Thank you for taking the time to join us today. We'll now open the line to questions. Operator?

Operator

Thank you. We'll now be conducting a question and answer session. Thank you. And our first question comes from the line of Brandon King with Truist Securities. Please proceed with your questions.

Speaker 5

Hey, good morning. Thanks for taking my questions.

Speaker 6

Good morning, Brandon.

Speaker 5

Yes. So Paul, 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?

Speaker 3

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 twenty four and then continue to accelerate through 2025. 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, that's going to prepare us to really capitalize on any rate cuts that we see over the next 6 to 8 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 2023.

Speaker 5

Okay. That's helpful. And is there any way you could potentially quantify how much higher maybe kind of exit rate 2024 or 4Q 24%, how much higher NII could be relative to what it was this quarter?

Speaker 3

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 end 2025. It's really a 6 to 8 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 5

Okay. And then within your NII expectations, what are you expecting on the loan growth front? It was pretty strong this quarter. Are you expecting potentially a slightly slower pace going forward?

Speaker 2

Yes, Brandon, the loan growth was outsized this quarter and really just A lot of factors and deals from 3rd quarter got pushed to the 4th and a number of our long time clients were being opportunistic to Just had to pick up some assets here before the rates start coming down and cap rates start coming down. But we're expecting mid single digit growth for the year. The pipeline is we indicated that the Q4 pipeline was really strong going into the quarter. 1st quarter, we've still got a nice pipeline, but it's not like it was going into the Q4. So we do expect that growth to moderate mid single digits, 4% to 6% in that range.

Speaker 2

We do expect also we've done a lot of work 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 and 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, 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 5

Thank you. I'll hop back in the queue.

Speaker 2

Hey, thanks a lot.

Operator

Our next question is from the line of Brady Gaili with KBW. Please proceed with your questions.

Speaker 7

Hey, thanks. Good morning, guys. Good

Speaker 2

morning, Eddie.

Speaker 7

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?

Speaker 3

So our GAAP, just for example, Brady has doubled quarter to quarter. So we've substantially, as I that enhanced liability sensitivity, I think you'll get meaningful double digit pickup in net income for even a down 100 rate environment.

Speaker 5

Okay.

Speaker 7

All right. And then, Paul, I heard your comment about getting back to kind of your profitability level by the end of next year, so the end of 2025. How do you guys think about historic Profitability, like what is that in terms of ROA or ROE or whatever metrics you guys focus on?

Speaker 2

I think that as we think about it Brady by second half of 25 depending on how much and how quickly the Fed rates come pull rates down, We should see us be able to achieve our a more historic NIM in the mid 3, so 3.50, 3.60 in that range is what our Ford model show in the back half of of 'twenty five 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 that should translate depending on any What the capital level is, of course, would put us somewhere in the mid teens, 15% to 16% ROTCE. So those are the numbers we think we will be back at by second half of twenty twenty five.

Speaker 7

All right. That makes sense. And then finally for me, I know Independent has been a great organic grower over the 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 yield went from 5% to Basically 4% now. So that kind of helps with the interest rate mark piece of M and A.

Speaker 7

But maybe just an update on you, is M and A Falling here, do you expect it to be active this year? Do you expect IVTX to be still involved and interested in M and A?

Speaker 2

Yes, we remain interested. We remain close to a lot of really there are a lot of really high quality banks, 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. We've been obviously focused on our own situation mostly trying to get our Earnings and NII and them back to more moving back toward historic levels. But we remain interested.

Speaker 2

I do think there will be some M and A. I think right now that there seems to be more of Let's just wait and let this settle out for another quarter or 2. So my guess is probably back half of 24 and we will definitely be interested 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.

Speaker 7

Okay. All right, great. Thanks for the color guys.

Speaker 2

Thanks, Brie.

Operator

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

Speaker 8

Hey, thanks. Good morning. 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 lower. I think investors are looking for more details As far as the outlook here.

Speaker 8

So in the Q4, the NIM was call it $249,000,000 and the NII was 106,300,000 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. So any more details you can provide on both the NII and the NIM in the Q1? Thanks.

Speaker 3

Sure, Matt. Happy to give you a little bit more color

Speaker 4

on that.

Speaker 3

As we look at our modeling, the multiple scenarios that we show in both Flat and down rate environments, and we model 3 scenarios specifically. We model the flat rate environment, we model the forward curve and we model the Fed's summary of economic projections. And as we talk through those in our outflow, all of those three scenarios show us growing them by 5 basis points to 7 basis points in the Q1. 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 to a 3.5 NIM by the end of 2025. So that's our target and that's really what we're focused on.

Speaker 3

As I mentioned again, I mean, we've moved a lot of pieces around on the balance sheet in the Q4 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 NAND starting, as I said, by 5 to 7 basis points and then forward accelerating over the back of the year.

Speaker 8

Okay. That's helpful, Paul. Thank you for that. And I guess if the NIM is going to move higher in the Q1, I would assume that on a monthly basis, the NIM has already inflected at some point late in Q4. Is that a reasonable assumption?

Speaker 8

Any color there?

Speaker 3

That is a reasonable assumption.

Speaker 8

Okay, perfect. Thanks. And then I guess switching gears On the expense side, I think you gave us the $85,000,000 $86,000,000 Alex from here, a touch higher than what we've seen over the last Few quarters as far as expectations, anything to call out there?

Speaker 3

Just a normal first quarter expenses are generally higher for us. We have obviously merit and bonus season. As we think about some investments that we 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 really the last six quarters and that's something that we're going to remain focused on in 2024.

Speaker 8

And just to clarify the 85% to 86%, that's a guidance or a goal for the next several quarters. Did I catch that right? Or is that just the Q1?

Speaker 3

Yes. Yes. That's my expectation really around $85,000,000 for the next several quarters.

Speaker 8

Perfect. Thanks guys.

Speaker 4

Thanks, Matt.

Operator

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

Speaker 9

Hey, good morning, everyone. Thanks for taking my questions. Maybe for Dan, I just wanted to Good morning. Just want to get some color on the CRE credit this quarter and what the resolution could Potentially look like there? And then, I was also just curious as to why some of the OREO loss flow through Fin and comm as opposed to charge offs, we'd just like some clarification there.

Speaker 9

Thanks.

Speaker 4

So good morning, Michael. This is Dan. The credit that we moved to non accrual, which I'm assuming is what you're asking about, was one property in Houston and Excuse me, 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 will be resolved sometime here in the

Speaker 2

1st part of the year.

Speaker 4

And as it relates to the

Speaker 3

As it pertains to the accounting treatment, Michael, we've always taken OREO think I noted on the Q3 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 feline consistent with what our auditors and what our internal accounting teams feel is the appropriate accounting treatment.

Speaker 9

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. And I guess the step up from here to kind of what you talked about, I guess, for mid to late year in 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. 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 if 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 etcetera.

Speaker 9

Just looking for a kind of a variable base kind of case for the margin? Thanks.

Speaker 3

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.

Speaker 3

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 2 other scenarios with 75 basis points and 150 basis points, 125 basis to do at the top of the cycle. 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 look at the FHLB advances, for example, are right at $543,000,000 as I mentioned the brokered portfolio at $5.36,000,000 are 6 month branch CDs $1,100,000,000 of those at 550 APY, for us, we have a significant opportunity even in the Q1 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 reprice 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 flatbed funds rate environment and an upside case where you have down 150 call it.

Speaker 9

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

Speaker 8

Thanks, Michael.

Operator

Our next questions are from the line of Stephen Scouten with Piper Sandler. Please proceed with your question.

Speaker 8

Yes, thanks. Good morning. Paul, I

Speaker 6

wanted to follow-up. I think I heard 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 versus the last Q, I think, where it showed 1.66% and then down 100 basis points. Like kind of what changed, whether it's in the modeling or what you guys did from a Hedging or structural standpoint to create the delta that seems to have come about?

Speaker 3

There's 3 things there. I'll correct you slightly. Double digit net income, NII is right on the cusp of double digits. But yes, mean, it's a substantial increase in our liability sensitivity from last quarter. 2 things really driving that.

Speaker 3

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. 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 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 indexed tool that's going to be able to drop our deposit costs instantaneously with Fed.

Speaker 3

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.

Speaker 6

Okay. And I think last quarter you had said $3,000,000,000 to $4,000,000,000 in index deposits. So has that number gone up further on a quarter over quarter basis?

Speaker 3

That doesn't include the 6 month CDs, the promo CDs as well as some of the broker CDs. So if you look at the portfolio in total, we're going to be able to move Roughly half of the deposit book, which is really a substantial portion of the interest bearing deposit book inside of 4 months for any move in Fed funds.

Speaker 6

Okay, great. That's extremely helpful. 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.

Speaker 6

And then I respect heard the comment that pipelines maybe Quite as strong, but still guiding towards positive loan growth. How what's kind of the pushback on these 8% rates within the CRE markets? And do you think we'll see kind of a pickup in the back half if we do indeed get the projected rate cut?

Speaker 2

Yes, 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, investment groups acquiring assets is what we've seen on the CRE side. We have seen a drop In demand for large series 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 As we plan 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 CRE concentrated. We 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 then also SBA is something again Given our granular nature of our request, we do have some SBA requests.

Speaker 2

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 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 CRE market and our desire to really balance up our loan growth with our deposit growth. So we think those are all achievable Yes, for 2024.

Speaker 6

Great. Makes a lot of sense.

Speaker 8

Thanks for all the

Speaker 6

color guys. Appreciate the time.

Speaker 9

Hey, thanks

Speaker 4

a lot.

Operator

Thank you. The next question comes from the line of Brett Rabatin with Hovde Group. Please proceed with your questions.

Speaker 10

Hey guys, good morning.

Speaker 4

Good morning, Brett. I

Speaker 10

wanted to go back, Paul, to a question to a comment you made earlier about the bank term funding program, and it sounds like you were going to utilize that to some extent this quarter, 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 just intended to kind of ride the spread that a lot of banks seem to be enjoying at the present time.

Speaker 3

Yes. So for example, Brad, if I'm looking at the FHLB advances, which at twelvethirty one were cost us 543 basis points. And I look at where 1 year OIS is today, even at 4.90, 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 It's a way to reduce our liquidity costs.

Speaker 10

Okay. 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 over prices this year and maybe in 1Q specifically?

Speaker 3

We anticipate about $2,000,000,000 of fixed rate assets in variable or a variable sorry, adjustable assets to reprice over the course of 2024. That starts in the Q1 with several $100,000,000 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 if we're looking at a maturity schedule. Some of 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 3 to 5 year fixed rate CRE loan book, if we ever make a loan past that In CRE, we have an adjustable mechanism at the 5 year mark. So that's what I'm referring to when I talk about the adjustable rate book.

Speaker 3

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 down rate environment risk that we would have to earning asset yields. So all in breadth, we do expect meaningful repricing of assets over the course of the year that should look to earning asset yields.

Speaker 10

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 2023. Any drivers, I think you talked a little bit about treasury, David. Any drivers to fee income in 2024 that It might be notable aside from a possible increase in mortgage assuming that gets back to a more normal level at some point.

Speaker 3

Yes. 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. We're focused on fees, obviously, to the that we can optimize those lines, we're going to do it. But I think mortgage is really what's going to swing that line from one direction to the other.

Speaker 8

Okay, great. Appreciate the color.

Operator

Thank you. The next question is from the line of Brandon King with Truist Securities. Please proceed with your questions.

Speaker 5

Hey, I had a few follow ups. And I just want to understand the potential range of outcomes for the NIM. Seems like that $350,000,000 by the back half of twenty twenty five is kind of a baseline scenario. So is it fair to assume that if the forward curve does play out that The margin could be closer to 4% by end of 2025?

Speaker 3

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. In a scenario where we have flat rates, it's going to take just a little bit longer to get there. But 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 continued NIM expansion as well.

Speaker 3

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 liability sensitivity that really offsets any impact to earning asset yields in a down rate environment.

Speaker 5

Okay. No, that makes sense. And then you seem pretty confident in hitting those net interest margin targets with modeling forecast. But could you just talk about any risks that could prevent you from getting to where you think you'll get to?

Speaker 3

Yes, 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 in the soft landing narrative, 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. I'd say that's probably the biggest risk. Although as it stands today, I really don't see that.

Speaker 5

Okay, very helpful. Thanks for taking my follow-up questions.

Speaker 2

You bet.

Operator

Thank you. At this time, I'll hand the call back to David Brooks for closing remarks.

Speaker 2

Hey, thank you for joining us today. We As I said in my prepared remarks, it was a difficult year in 2023, but we feel very encouraged and positive about The trajectory of the bank's margins and earnings here going forward. So appreciate everyone's time. Hope everyone has a great day. Thanks.

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Earnings Conference Call
Independent Bank Group Q4 2023
00:00 / 00:00