Independent Bank Group, Inc

To our enhanced liability sensitivity, which will be reflected in our IRR and one-year gap disclosures, we also expect to continue repricing our fixed-rate loan portfolio upward. Our modeling indicates steadily expanding earning asset yields over the course of the year in both flat and down-rate scenarios. We anticipate that these factors acting in concert will allow us to grow NIM and NII from quarter to quarter throughout 2024 and beyond. Total borrowings were just $621.8 million at December 31st, a slight increase from the linked quarter. Still, borrowings remain at a low level relative to earlier in 2023. Additionally, we may explore utilizing BTFP during the first quarter to replace higher cost FHLB advances as one year OIS has evolved favorably to FHLB rates. The substantial contingent funding capacity available to us and low level of borrowing utilization strengthens our balance sheet against any subsequent shocks and positions us well to capitalize on sustained growth in earning asset yields. We reported a provision of $3.5 million for the fourth quarter, which supported the net growth we experienced during the quarter despite an improvement in the MEVs in the CECL model. Going forward, we expect provision that represents about 1% of loan growth. This is, of course, dependent on all else being held equal in the CECL model, which could, of course, be impacted by further changes to the macroeconomic forecast or specific reserves. Adjusted non-interest income was $12.4 million for the quarter, down slightly from adjusted non-interest income of $13.4 million for the linked quarter. Adjusted non-interest expense totaled $83.8 million for the quarter, up from $81.3 million in the linked quarter. Going forward, I expect non-interest expense to be between $85 and $86 million per quarter. These are all the comments I have today. So with that, I'll turn the call over to Dan.

Thanks, Paul. Core Loan Software Investment. excluding mortgage warehouse loans increased by 383.6 million or 11 percent annualized in the fourth quarter. For full year 2023 loans grew by 569.9 million or 4.2 percent. Growth for the fourth 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 $408.4 million for the quarter, down 4.1% from the third 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. Credit quality metrics continue to remain strong during the fourth quarter. Non-performing assets were down one basis point to 0.32% of total assets at quarter end. and the bank again at just a single basis point of annualized charge-offs for the quarter. For the full year 2023, net charge-offs also totaled just one basis point of average loans. We were successful in moving a property held in ORE out of the bank during the quarter, which resulted in a loss on sale of $1.8 million. We also took a $3 million 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. 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% from $191.1 million at September 30 to $126 million at December 31st, due both to payoffs and upgrades. Total classified loans plus ORE bank capital was just 6.2% at year end, indicative of the overall health of the portfolio, even in a higher rate environment. These are all the comments I have related to the loan portfolio this morning. So with that, I'll turn it back over to David.

Thanks, Kent. 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 to march upward while short duration funding cost pressures have already begun to abate as the forward curve points to meaningful rate cuts on the horizon. As Paul noted, we have already been able to reprice some of our marginal funding down in the first quarter and we expect to see NIM expansion and NII growth in the first quarter. In addition, we will maintain our discipline on the expense front, reallocating expenses to only the most strategic investments in our franchise. And to that end, we are excited to announce that we are opening our first full-service branch in San Antonio in the first quarter. 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 four 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. Thank you for taking the time to join us today. We'll now open the line to questions. Operator?

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad, and the confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to move your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

Thank you.

Thank you, and our first question comes from the line of Brandon King with Truist Securities. Please receive your questions.

Hey, good morning. Thanks for taking my questions. Good morning, Brandon. Yeah, so, Paul, I appreciate all the commentary around NII and deposits. But I was hoping to get a better sense of how you're thinking about the pace of NII growth in 2024.

I think in the first and second quarters, Brandon, we're going to see an inflection in NII, some growth that will accelerate through the back half of 24 and then continue to accelerate through 25. As we think about our balance sheet today compared to where it was even just a quarter ago, we have substantially enhanced liability sensitivity, as I mentioned in my prepared remarks. That's going to prepare us to really capitalize on any rate cuts that we see over the next six to eight quarters, as well as just get the natural lift that we would have even in a flat rate environment from our earning assets repricing. So what we've tried to do strategically is prepare ourselves for any scenario that the Fed throws at us to benefit from after 2023.

Okay, that's helpful. And is there any way you could potentially quantify how much higher maybe kind of exit rate 2024 for Q24, how much higher NII could be relative to what it was this quarter?

If we think about it on a NIM basis, Brandon, I think we have the opportunity to get back to our historic levels of profitability by year end 25. It's really a six to eight quarter push for us. So I think we'll see some meaningful lift, really accelerating, as I said, through the back half of this year.

Okay. And then within your NI 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?

Yeah, Brandon, the loan growth was outsized this quarter and really just a lot of factors and deals from third quarter got pushed to the fourth and a number of our longtime clients were being optimistic to try 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, you know, we indicated that the fourth quarter pipeline was really strong going into the quarter. First quarter, you know, we've still got a nice pipeline, but it's not like it was going into the fourth quarter. So we do expect that growth to moderate mid-single digits, you know, four to six percent in that range. 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-to-single digits. Thank you. I'll hop back in the queue. Hey, thanks a lot.

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

Hey, thanks. Good morning, guys. Good morning, Brady. 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 point scenario, what does the model say about how much that could benefit spread income?

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

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

I think that as we think about it, Brady, by the second half of 25, depending on how much and how quickly the Fed rates come, pull rates down, we should see us be able to achieve our you know a more historic men in the mid uh three so 350 360 and that range is what our ford model show in the back half of 25 that happens more quickly if rates come down more quickly but again just uh i think what we think of the middle of the road assumption gets us to that level at that level, given what we've done with our cost structure, we would get back into that 120, 125 return on assets. And then, you know, that should translate depending on any, you know, what the capital level is, of course, would put us somewhere in the, you know, mid teens, 15 to, So those are the numbers we think we will be back at by second half of 25. All right.

That makes sense. And then finally for me, you know, I know independent has been a great organic grower of years, but also a pretty good bank buyer. And if you look at what's happened with the long end of the curve, like the 10-year bond yield went from 5% to basically 4% now. So that kind of helps with the interest rate piece of M&A. But maybe just an update on you. Is M&A stalling here? Do you expect it to be active this year? Do you expect IVTX to be still involved and interested in M&A?

Yes, we remain interested. We remain interested. close to a lot of really there are a lot of really high quality banks as you mentioned like us that have struggled with margin and and some of the banks have struggled with bigger AOC I 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 and and I and them back to more moving back toward historic levels and But we remain interested. I do think there will be some movement. I think right now that there seems to be more of a, you know, let's just wait and let this settle out, you know, for another quarter or two. So my guess is probably back half of 24. And we will definitely, you know, be interested and be a participant in that. Obviously, we need to perform and we need our own stock to perform well.

but we expect to be there okay all right great thanks for the color guys thanks brie our next questions are from the line of matt olney with stevens please proceed with your questions hey thanks good morning um i just want to go back to the discussion around the nii and m 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. So in the fourth quarter, the NIM was, call it, 249, and the NII was 106.3 million. Can you be more specific about your near-term expectations? And we talk about stabilization and inflection. I think those terms can be kind of used loosely sometimes. So any more details you can provide on both the NII and the NIM in the first quarter? Thanks.

Sure. Sure, Matt. Happy to give you a little bit more color on that. As we look at our modeling, the multiple scenarios that we show in both flat and down rate environments, and we model three scenarios specifically. We model the flat rate environment, we model the forward curve, and we model the Fed's summary of economic projections. And as we talk through those in our ALCO, all of those three scenarios show us growing them by five to seven basis points in the first quarter. From there, that growth accelerates to where we can get back to, you know, call it a 3% NIM by the end of 24, and then, as we mentioned, back to a 3.5 NIM by the end of 25. So that's our target, and that's really what we're focused on. You know, as I mentioned again, I mean, we've moved a lot of pieces around on the balance sheet in the fourth quarter to enhance our liability sensitivity and capture that upside of downrate 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 NIM starting, as I said, by five to seven basis points and then forward accelerating over the back half of the year.

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

That is a reasonable assumption.

Okay. Perfect. Thanks. And then I guess switching gears on the expense side, I think you gave us the $85, $86 million, Alec, from here, a touch higher than what we've seen over the last few quarters as far as expectations. Anything to call out there?

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

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 first quarter?

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

Perfect. Thanks, guys.

Thanks, Matt. Thank you. Our next question comes from the line of Michael Rose with Raymond James. Pleased to see your questions.

Hey, good morning, everyone. Thanks for taking my questions. Um, maybe Dan, I just wanted to get some color. Uh, good morning. Just want to get some color on the, uh, the, uh, the, the CRE credit, uh, this quarter and, you know, what the resolution could, you know, potentially look like there. And then, um, I was also just curious as to, you know, why some of the Oreo loss, you know, flow through, um, free income as opposed to, to charge off. So just like some clarification there. Thanks.

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 that has been that loan remains current and the owners are preparing to sell that asset and we just felt like it was in a position that there might be a slight loss on it so we just positioned it for that but we expect that'll be resolved sometime here in the first part of the year and as it relates to as it pertains to the accounting treatment Michael we've always

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

Okay, that's helpful. And then maybe just, I know we've probably beaten the margin question a lot here, but just to kind of follow up on that, what does your kind of baseline, you know, forecast include in terms of cuts, you know, for this year? And I, you know, I guess, you know, the step up, you know, from here to kind of what you talked about, I guess, for mid to late next year in the mid 350s, 360s is a really big ramp. And I think it's going to be you know, probably difficult for some investors to kind of see. So, you know, can you kind of just give us the, you know, help us with the bridge, you know, to kind of get there and kind of what, you know, really needs to go right. And, you know, if your baseline scenario isn't, you know, correct, what could that range, you know, look like if we're higher for longer, for instance, or, you know, you have more growth and you have to fund it with higher cost deposits, you know, kind of, et cetera, just looking for a kind of a bearable base, you know, kind of case for the margin. Thanks.

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. So we're focused obviously on expanding the margin, topping out those deposit costs even in a flat rate environment. As I noted, because the curve is pointing down and because we have run two other scenarios with 75 basis points and 150 basis points, 125 basis points of cuts respectively, You know, we are going to be able to capture a substantial amount of deposit cost decreases on the way down, which will help drive that margin even higher. All of our marginal funding is held really short. And as you know, Michael, that's really expensive to do at the top of the cycle. 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, our you know, right at 543. As I mentioned, the broker portfolio at 536, our six-month branch CDs, 1.1 billion of those at 550 APY. You know, for us, we have a significant opportunity even in the first quarter to reduce all of those costs as all of those individual components have seen 30, 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, you know, ultimately what's going to create the delta between, you know, a base case scenario where you have a flat-fed funds rate environment and an upside case where you have down 150 call it.

Okay, that's really helpful. Thanks for taking my questions, guys. Thanks, Michael.

Our next question is from the line of Steven Scanton with Piper Sandler. I'm pleased to see you with your question.

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

Three things there. I'll correct you slightly. Double digit net income. NII is right on the cusp of double digits. But yes, I mean, it's a substantial increase in our liability sensitivity from last quarter. Two things really driving that. One is the updated deposit study that we do in the remixing of non-maturity deposits into short-duration time deposits and other wholesale types of funding. 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. So all of those actions that we undertook to enhance that portion of our deposit base increased that liability sensitivity. But really, the reduction of those non-maturity deposits was the single largest driver of that model.

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

That doesn't include the six-month CDs, the promo CDs, as well as some of the broker CDs. 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 four months for any move in fed funds okay great that's extremely helpful thanks and then i guess just my only other follow-up is kind of i'm curious what you guys are seeing around new cre demand obviously put up really strong growth this quarter and then i respect you know heard heard the comments that pipelines maybe aren't quite as strong but um still guiding towards positive loan growth how you know, what's kind of the pushback on these 8% rates within the CRE markets? And do you think, you know, we'll see kind of a pickup in the back half if we do indeed get the projected rate cut?

Yeah, the granularity of our loan requests continues to be the theme. Steven, as we as we go forward, we've seen a lot of requests, you know, 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 CRE deals. We're not seeing much construction and haven't been doing much construction lending, so we haven't seen much there. We're really looking, as we plan for 2024 and 2025, Stephen, we've We've invested, as Paul mentioned earlier, in doing what we can to balance our future growth away from being so CRE concentrated. We're in the process of hiring some additional commercial industrial lenders in our major markets, adding to the teams we already have there. And then also SBA is something, again, given our granular nature of our request, we do have some SBA requests. We haven't set that up as a big national business or anything, but in terms of assisting our customers, so we think we've missed some opportunities there, so we've added to our SBA team or adding to our SBA team in Houston and in Austin in particular. we're doing what we can on that front, but it's partly also why we're thinking Steven, that it's kind of a mid single digit growth because of the uncertainty out there in the CRE market and our desire to really balance up our loan growth with our deposit growth. So we think those are all achievable for 2024.

Great. Makes a lot of sense. Thanks for all the color guys. Appreciate the time.

Hey, thanks a lot.

Thank you. The next question is coming from the line of Brett. with Hovda Group. Please proceed with your questions.

Hey, guys. Good morning.

Morning, Brett.

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

Yeah. So, for example, Brad, if I'm looking at the FHLB advances, which at 1231 cost us 543 basis points, and I look at where one-year OIS is today, even at 490, I mean, it's a 50 basis point spread from where that funding is. And so that would be an example of where we would utilize BTFP prior to its expiration to lock in that funding as a way to reduce our liquidity costs.

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 reprices this year and maybe in 1Q specifically?

We anticipate about $2 billion of fixed rate assets and variable, sorry, adjustable assets to reprice over the course of 2024. That starts in the first quarter with several hundred million dollars and then will 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 three to five year fixed rate CRE loan book, if we ever make a loan past that in CRE, we have an adjustable mechanism at the five year mark. So that's what I'm referring to when I talk about the adjustable rate book. In addition, you still do have some prepayments. So we still are seeing even at much lower levels, some prepayments coming from our core customers. Obviously, as we've booked loans at the top, we've put in prepayment penalties, usually in the form of 3-2-1 to try to mitigate the down-rate environment risk that we would have to earning asset yields. So all in breadth, we do expect some meaningful repricing of assets over the course of the year that should lift earning asset yields.

Okay. And then lastly, just for me, and I know mortgage is tough to predict, but in terms of thinking about fee income this year, obviously, Fee income was kind of flat down in 23. Any drivers? I think you talked a little bit about Treasury. David, any drivers to fee income in 24 that might be notable aside from a possible increase in mortgage, assuming that gets back to a more normal level at some point?

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

Okay. Great. Appreciate all the color.

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

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 by the back half of 2025 is kind of a baseline scenario. So is it fair to assume that if the forward curve does play out that the margin could be closer to 4% by the end of 2025?

No, I think, Brandon, in a scenario where we have 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 for continued NIM expansion as well. If you think of all the moving pieces together, the range of outcomes between those three scenarios is maybe a little tighter than you might anticipate, even though we have enhanced our liability sensitivity, that really offsets any impact to earning asset yields in a down-rate environment.

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

Yeah, of course, the macroeconomic and liquidity environment is always going to pose a risk to the outlook. It's hard to forecast the unknown unknowns, as you know, Brandon, but I think we've been pleasantly surprised in the soft landing narrative, how the economy continues to perform, how we continue to see available liquidity, how we're able to reduce some of our marginal funding costs. Obviously, if the liquidity environment changed or if we saw any meaningful reduction of liquidity in the banking system, that could create some upward pressure on funding costs even in a down rate environment. I'd say that's probably the biggest risk, although as it stands today, I really don't see that.

Okay. Very helpful. Thanks for taking my follow-up questions. You bet.

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

Hey, thank you for joining us today. 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.

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