Independent Bank [IBTX] Conference call transcript for 2023 q4
2024-01-23 14:09:11
Fiscal: 2023 q4
Operator: Greetings. Welcome to Independent Bank Group’s Fourth Quarter 2023 Earnings Call. [Operator Instructions]. Please note, this conference is being recorded. I’ll now turn the conference over to Ankita Puri, EVP and Chief Legal Officer. Ms. Puri, you may now begin.
Ankita Puri: Good morning, and welcome to the Independent Bank Group fourth 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. 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 rule. Reconciliations of these financial measures to 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.
David Brooks: Thank you, Ankita. Good morning, everyone, and thanks for joining the call today. Fourth quarter earnings totaled $14.9 million or $0.36 per diluted share. Excluding the one-time impact of the $8.3 million FDIC special assessment and other one-timers, our adjusted fourth quarter earnings were $25.5 million or $0.62 per diluted share. During the quarter, we were pleased to see the continuation of healthy organic core loan growth, which came in seasonally strong at 11% annualized, as pent-up demand from our relationship borrowers drove originations higher. 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 growing Texas and Colorado economies. Credit quality remains excellent, with low non-performing assets and net charge-offs totaling just one basis point annualized for the second quarter in a row. And our capital ratios ended the quarter in a healthy position, with a tier one capital ratio of 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% to $32.90 cents per share. With that overview, I'll now turn the call over to Paul to give more details on the financials.
Paul Langdale: Thanks, David, and good morning, everyone. As David mentioned, net income for the quarter was $14.9 million, which includes $8.3 million related to the FDIC special assessment, and $4.8 million of OREO-related charges that Dan will discuss in more detail. Adjusted income for the quarter was $25.5 million or $0.62 per diluted share, compared to $32.6 million or $0.79 per diluted share in the linked quarter. Net interest income was $106.3 million in the fourth quarter, compared with $109 million in the linked quarter. Our NIM for the quarter was impacted several basis points more than expected by the incremental loan growth during the quarter, as we carried higher amounts of marginal liquidity to support the loan fundings. Encouragingly, we saw deposit costs peak during the quarter, and we have started to reprice some of our marginal liquidity downward as brokered rates have moved meaningfully lower. Of the $2.5 billion of brokered funds noted on Slide 20, the weighted average rate is 5.36%. Approximately $1.8 billion of the brokered portfolio is in CDs, while the remainder is in money market funds tied primarily to an index. Of the CDs, $1.3 billion will mature by the end of May, and currently, we are repricing these new brokerage CDs below 5% on an all-in basis. As soon as the Fed moves, the index-brokered funds will move in tandem as well. Additionally, the overwhelming majority of our public funds book is indexed to Fed funds, which will move immediately with rate cuts. We have almost $2.1 billion in promotional CDs, $1.1 billion of which are our 5.5% APY six-month promotional CDs, with a weighted average life of between three and four months. Beginning today, we have reduced the renewal rate on these six-month CDs to 5.15% 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 one-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 downright scenarios. We anticipate that these factors acting in concert will allow us to grow NIM and NII from quarter to quarter throughout 2024 and beyond. Total borrowings were just $621.8 million at December 31, a slight increase from the linked quarter. Still, borrowings remain at a low level relative to earlier in 2023. Additionally, we may explore utilizing VTFP 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 million and $86 million per quarter. These are all the comments I have today. So, with that, I'll turn the call over to Dan.
Dan Brooks: Thanks, Paul. Core loans held for investment, excluding mortgage warehouse loans, increased by $383.6 million or 11% annualized in the fourth quarter. For full year 2023, loans grew by $569.9 million or 4.2%. 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 continued to remain strong during the fourth quarter. Non-performing assets were down one basis point to 0.32% of total assets at quarter end. And the bank, again, had just a single basis point of annualized charge-offs for the quarter. For the full year of 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 31, 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.
David Brooks: 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 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?
Operator: Thank you. [Operator Instructions] And our first question comes from the line of Brandon King with Truist Securities. Please proceed with your questions.
Brandon King: Hey, good morning. Thanks for taking my questions.
David Brooks: Good morning, Brandon.
Brandon King: Yes. So, Paul, 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.
Paul Langdale: I think in the first and second quarters, Brandon, we're going to see an inflection in NII, some growth that'll accelerate through the back half of 2024 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 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.
Brandon King: Okay, that's helpful. And is there any way you could potentially quantify how much higher maybe kind of exit rate 2024, 4Q 2024, how much higher NII could be relative to what it was this quarter?
Paul Langdale: 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 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.
Brandon King: Okay. And then within your NII expectations, what are you expecting on the loan growth front? That was pretty strong this quarter. Are you expecting potentially a slightly slower pace going forward?
David Brooks: Yes, Brandon, the loan growth was outsized this quarter and really just a lot of factors. Some deals from third quarter got pushed to the fourth, and a number of our longtime clients were being opportunistic 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 - we indicated that the fourth quarter pipeline was really strong going into the quarter. First quarter, we've still got a nice pipeline, but it’s not like it was going into the fourth quarter. So, we do expect that growth to moderate mid-single digits, 4% to 6%, 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-single digits.
Brandon King: Thank you. I'll hop back in the queue.
Operator: Our next question is from the line of Brady Gailey with KBW. Please proceed with your questions.
Brady Gailey: Hey, thanks. Good morning, guys. 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?
Paul Langdale: So, our GAAP, 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.
Brady Gailey: All right. And then, 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? Like what is that in terms of ROA or ROE, or whatever metrics you guys focus on?
David Brooks: I think that as we think about it, Brady, by second half of 2025, depending on how much and how quickly the Fed rates come - pull rates down, we should see us be able to achieve a more historic NIM in the mid three. So, 350, 360 in that range is what our forward models show in the back half of 2025. That happens more quickly if rates come down more quickly. But again, just, I think what we think of the middle of the road assumption gets us to that level. At that level, given what we've done with our cost structure, we would get back into that 120, 125 return on assets, and then that should translate depending on 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 2025.
Brady Gailey: All right. That makes sense. And then finally for me, I know Independent has been a great organic grower of 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&A. But maybe just an update on, is M&A thawing here? Do you expect it to be active this year? Do you expect IBTX to be still involved and interested in M&A?
David Brooks: Yes, we remain interested. We remain close to a lot of really - there are a lot of really high-quality banks, as you mentioned like us that have struggled with margin and some of the banks have struggled with bigger 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 NIM back to more - moving back toward historic levels. But we remain interested. I do think there will be some M&A. I think right now there seems to be more of a, let's just wait and let this settle out for another quarter or two. So, my guess is probably back half of 2024, 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.
Brady Gailey: Okay. All right, great. Thanks for the color, guys.
Operator: Our next questions are from the line of Matt Olney with Stephens. Please proceed with your questions.
Matt Olney: 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. So, in the fourth quarter, the NIM was, call it, $249 million, and the NII was $106 0.3 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.
Paul Langdale: 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 talked through those in our ALCO, all of those three scenarios show us growing NIM by five to seven basis points in the first quarter. From there, that growth accelerates to where we can get back to, call it, a 3% NIM by the end of 2024, 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. As I mentioned, again, I mean, we've moved a lot of pieces around on the balance sheet in the fourth quarter to enhance our liability sensitivity and capture that upside of down rate environments. So, we wanted to make sure that we were optimally positioned to recapture the earnings that we lost on the way up for rates when rates come back down. And so, that's more of just a modifier from the flat rate scenario where we're still going to grow NIM, starting, as I said, by five to seven basis points and then forward accelerating over the back half of the year.
Matt Olney: Okay, that's helpful, Paul. Thank you for that. And I guess if the NIM is going to move higher in the first quarter, I would assume that on a monthly basis, the NIM has already inflected at some point late in the fourth quarter. Is that a reasonable assumption? Any color there?
Paul Langdale: That is a reasonable assumption.
Matt Olney: Okay, perfect. Thanks. And then I guess switching gears, on the expense side, I think you gave us the $85 million, $86 million outlook from here, a touch higher than what we've seen over the last few quarters as far as expectations. Anything to call out there?
Paul Langdale: Just the normal first quarter expenses are generally higher for us. We have obviously merit and bonus season. 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, Matt, 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.
Matt Olney: And just to clarify, the $85 million to $86 million, that's a guidance or a goal for the next several quarters. Did I catch that right, or is that just the first quarter?
Paul Langdale: Yes, that's my expectation, really around 85 million for the next several quarters.
Matt Olney: Perfect. Thanks, guys.
Operator: Thank you. Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your questions.
Michael Rose: Hey, good morning, everyone. Thanks for taking my questions. Maybe for Dan, I just wanted 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 flowed through fee income as opposed to charge-offs. Would just like some clarification there. Thanks.
Dan Brooks: 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 that has been - 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'll be resolved sometime here in the first part of the year. And as it relates to …
Paul Langdale: 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.
Michael Rose: Okay, that's helpful. And then maybe just, I know we've probably beaten the margin questions 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 next 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. So, can you kind of just give us the - help us with the bridge to kind of get there and kind of what really needs to go right? And 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 et cetera? Just looking for a kind of a bear-bull base kind of case for the margin. Thanks.
Paul Langdale: Sure. Happy to walk you through the modeling logic there. As we think about a base case scenario, we're assuming a flat rate environment. As you know, over the last four quarters, we've really talked about our ability to 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, 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, are right at 543. As I mentioned, the brokered portfolio at 536, our six-month branch CDs, $1.1 billion of those at 550 APY. 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 ultimately what's going to create the delta between a base case scenario where you have a flat Fed funds rate environment and an upside case where you have down 150, call it.
Michael Rose: Okay. That's really helpful. Thanks for taking my questions, guys.
Operator: Our next question is from the line is Stephen Scouten with Piper Sandler. Pleased. Please proceed with your question.
Stephen Scouten: Yes, thanks. Good morning. Hey, Paul, I wanted to follow up, I think I heard you say that the down 100 basis point 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 what change, 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
Paul Langdale: 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 and the remixing of non-maturity deposits into short duration time deposits and other wholesale types of funding. That, for us has substantially enhanced our liability sensitivity. The additional thing, as I noted, Stephen, is the indexation of a substantial portion of our deposit base to Fed funds. So, our ability to drop deposit costs, whereas in a normal 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 and increase that liability sensitivity, but really the reduction of those non-maturity deposits was the single largest driver of that model.
Stephen Scouten: Okay. And I think last quarter you had said it was $3 billion to $4 billion in index deposits. So, has that number gone up further on a quarter-over-quarter basis?
Paul Langdale: 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.
Stephen Scouten: 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 I respect - heard the comment that pipelines maybe aren't quite as strong, but still guiding towards positive loan growth. 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?
David Brooks: Yes. The granularity of our loan requests continues to be theme, Stephen. As we grow 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 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 invested, as Paul mentioned earlier, in doing what we can to balance our future growth away from being so CRE concentrated. We are 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, are 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 our loan growth with our deposit growth. So, we think those are all achievable for 2024.
Stephen Scouten: Great. Makes a lot of sense. Thanks for all the color, guys. Appreciate the time.
Operator: Thank you. The next questions come from the line of Brett Rabatin with Hovde Group. Please proceed with your questions.
Brett Rabatin: Hey guys, good morning. 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, presuming that does run out at some point. Was the usage of the BTFP, is that going to be to replace - I didn't quite catch if it was to replace some of the borrowings, or if you had just intended to kind of ride the spread that a lot of banks seem to be enjoying at the present time?
Paul Langdale: Yes, so for example, Brad, if I'm looking at the FHLB advances, which at 12/31 were - cost us 543 basis points, and I look at where one year OIS is today even at490, 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, is a way to reduce our liquidity costs.
Brett Rabatin: Okay. And then you talk quite a bit about the funding side of the equation. Could 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?
Paul Langdale: Yes, we anticipate about $2 billion of fixed rate assets in variable rate - variable - sorry, adjustable assets to reprice over the course of 2024. That starts in the first quarter with several hundred million dollars, and then we'll accelerate from there through the end of the year. So, really the bulk of the repricing activity is pretty evenly distributed, but it's a slight acceleration from the beginning of the year, 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, Brett, we do expect some meaningful repricing of assets over the course of the year that should lift earning asset yields.
Brett Rabatin: Okay. And then I know 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 2023. Any drivers - I think you talked a little bit about treasury, David. Any drivers to fee income in 2024 that might be notable, aside from a possible increase in mortgage, assuming that gets back to a more normal level at some point?
Paul Langdale: Yes, 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, we would expect relative stability in the other areas of fee income. We're focused on fees. Obviously, to the extent 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.
Brett Rabatin: Okay, great. Appreciate the color.
Operator: Thank you. The next question is on the line of Brandon King with Truist Securities. Please proceed with your questions.
Brandon King: 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 end of 2025?
Paul Langdale: 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 for continued NIM expansion as well. So, if you think of all the moving pieces together, the range of outcomes between those three scenarios is maybe a little tighter than you might anticipate. Even though we haven't enhanced our liability sensitivity, that really offsets any impact to earning asset yields in a down rate environment.
Brandon King: 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?
Paul Langdale: 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, 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.
Brandon King: Okay. Very helpful. Thanks to take my follow-up questions.
Operator: Thank you. At this time, I'll hand the call back to David Brooks for closing remarks.
David Brooks: 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.
Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
