Independent Bank Group Inc
NASDAQ:IBTX
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
36.57
66.61
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Independent Bank Group Inc
You don't have any saved screeners yet
Thank you. I will now turn the call over to Ankita Puri, Executive Vice President and Chief Legal Officer.
Good morning and welcome to the Independent Bank Group Second 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 five of the text in the release or page two of the slide presentation for our Safe Harbor statement. All comments made during today's call are subject to that statement.
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. 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.
With that, I will turn it over to David.
Thank you, Ankita. Good morning everyone and thanks for joining the call today. Second quarter adjusted earnings totaled $33.7 million or $0.82 per diluted share. During the quarter, NII was impacted by higher deposit costs as the expected term rate rose more than expected and non-interest-bearing deposits shifted into interest-bearing alternatives.
As Paul will discuss, during the second quarter, we strengthened our balance sheet by reducing our loan-to-deposit ratio to 95%, reducing FHLB advances by $925 million, expanding our contingent liquidity availability and commencing the repayment of our holding company line of credit. These efforts help optimize our earnings trajectory on a go-forward basis and decrease risk in an uncertain environment.
During the quarter, we were pleased to see that a rebound in our mortgage origination volume bolstered our fee income, while our other fee lines remain resilient. In addition, our focus on expense discipline further reduced adjusted non-interest expenses and we continue to pursue the most efficient gearing for the current environment.
As Dan will discuss, credit quality remains excellent with low non-performing assets and net recoveries of three basis points annualized for the quarter. While we remain watchful for any signs of stress in our markets, credit trends indicate that we continue to be supported by the strong foundation of conservative underwriting that we have maintained over these three decades.
Capital ratios ended the quarter in a healthy position as well with a Tier 1 capital ratio of 10.13%, a total capital ratio of 11.95% and a TCE ratio of 7.37% at quarter end.
And with that overview, I'll turn it over to Paul to give a few more details on the financials.
Thanks David and good morning everyone. GAAP net income for the quarter was $33.1 million or $0.80 per diluted share compared to a net loss of $37.5 million or $0.91 per diluted share in the linked quarter. Adjusted non GAAP net income for the quarter was $33.7 million or $0.82 per diluted share compared to $44.1 million or $1.07 per diluted share in the linked quarter.
Net interest income was $113.6 million for the second quarter compared with $127.9 million in the linked-quarter. NII was primarily impacted by an accelerated remix of noninterest-bearing deposits to interest-bearing alternatives during the first half of the year as well as higher rates paid on interest-bearing deposit products due to competitive pressure.
NIM excluding acquired loan accretion was 2.69% for the second quarter, down 45 basis points from the linked-quarter. NIM was primarily impacted by the aforementioned remix of noninterest-bearing deposits as well as higher rates paid on interest-bearing balances, which were not offset by a corresponding increase in earning asset yields.
I'll also note that the second quarter NIM was negatively impacted by higher average on balance sheet cash balances carried following the macro liquidity events of the spring. While the trough for NIM proved lower than anticipated, the NIM dynamics for the remainder of the year have positive tailwinds and that indicated near-term inflection and the resumption of an upward trajectory in the fourth quarter that should persist as long as the Fed holds rates flat.
In any scenario where the Fed cuts rates our liability sensitivity should give us meaningful immediate benefits. While the Fed's terminal rate has evolved to be higher than previously anticipated, near-term stabilization and downward slope in the forward curve should indicate funding pressures abating. This is helped by a meaningful stabilization in the deposit base during the second quarter.
Additionally, total adjusted uninsured deposits, excluding public funds, declined in the second quarter to 31.1% from 37.4% in the linked-quarter. Uninsured depositors are now overwhelmingly paid highly competitive rates, limiting additional downside risk to deposit costs for the bank as short-term rates peak. We also continue to pay down our higher rate borrowings such as FHLB advances and our holding company line of credit, while increasing broker deposits, which are currently less expensive than short-term borrowings at this point in the cycle.
Overall, we feel the actions we took during the second quarter have strengthened our balance sheet, reduced the risk profile and positioned us to capitalize on increases in earning asset yields.
To that end, while contractual maturities were lower in Q2, maturities of our fixed rate loans will be higher for the remainder of the year, and we should begin to see a meaningful lift from the re-pricing of loans at renewal. This should provide a consistent tailwind to NII in a scenario where the Fed holds for longer at the terminal rate.
Notably, we are pleased with where new loan production yields are coming on the books, just above coming on the books, just above 7.78%, while renewal rates are holding steady at about 7.75%. In addition, higher expected net loan growth should bolster earning asset yields.
Provision expense was $220,000 for the second quarter, and we continue to anticipate a base case provision of around 1% of net loan growth. This is, of course, dependent on all else being held equal in the CECL model, which could, of course, be impacted by changes to the macroeconomic forecast.
Adjusted non-interest income was $13.7 million for the quarter, an increase of $1.1 million versus the linked-quarter. This increase was primarily driven by fees, increases in retail mortgage income, service charges and mortgage warehouse fees.
Adjusted non-interest expenses totaled $84.5 million for the quarter, down from $84.9 million in the linked-quarter. As David noted, we continue to pursue expense discipline and gear the organization appropriately for the current environment. These are all the comments I have today.
So with that, I'll turn the call over to Dan.
Thanks, Paul. Core loans held for investment, excluding mortgage warehouse and PPP loans, increased by $23.2 million or 0.7% annualized in the second quarter. New loan production was slower during the first half of the quarter due to borrowers sitting on the sidelines and mid a volatile rate environment.
However, as the rate environment stabilized towards the end of the quarter, borrower appetite increased, and we saw an uptick in deal flow across our footprint. Through July, our loan production has been running at a faster pace compared to the first half of the year.
Looking ahead, we expect larger production volumes and stronger net growth for the remainder of the year. Average mortgage warehouse purchase loans were $413.2 million for the quarter, up from $298 million in the prior quarter. Rebound in mortgage warehouse volumes represents an uptick in mortgage origination volumes more broadly in addition to targeted efforts to gain market share as incumbents scale back or exit the business. We've also begun to see improved margins in this business as other banks pull back.
Credit quality metrics remained strong during the quarter. Nonperforming assets totaled just 32 basis points of total assets at quarter end, and the bank had a net recovery of three basis points annualized during the quarter. Overall asset quality trends remain stable. And while we are always vigilant against emerging risk, we currently do not see any area that concern across the loan 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.
Thanks, Dan. As we enter the second half of 2023, we are very encouraged by the outlook for our franchise. As it stands today, we are seeing a number of positive catalysts materializing in the form of stronger growth, stabilizing NIM, consistency in fees, resilience and credit quality and discipline on expenses.
As Paul also discussed, the emerging stability of the forward curve is a positive sign for the income statement. Our current expectation is that funding costs are peaking on a spot basis and that a larger amount of growth and repricing activity for the remainder of the year will help bolster earning asset yields.
Therefore, we expect inflection in the NIM during Q3 and the reduction of NII growth in Q4. Our outlook is underscored by the continued strength of our four high-growth markets across Texas and Colorado, which are all buoyed by positive demographic trends and capital inflows that insulate them from broader macroeconomic volatility. I'm especially encouraged by the incredible teams we have across our footprint who are keenly focused on providing exceptional customer service and shepherding our culture of sovereign leadership.
Thank you for taking time to join us today. We'll now open the line to questions. Operator?
Thank you. We'll now conduct the question-and-answer session. [Operator Instructions] Thank you. And our first question today comes from the line of Brady Gailey with KBW. Please proceed with your question.
Thanks. Good morning, guys.
Good morning.
So I wanted to start just on the net interest margin. I know we've talked about having a down quarter in 2Q, which we saw and then a little stability and then some NIM growth, how can we think about the magnitude of how much the NIM could grow once the Fed pauses, but you still get loan repricing higher?
So as we think about earning asset yields, Brady, specifically, we're looking at the gross production that we expect between now and the end of the year to be at least $1 billion. That includes both the repricing as well as the net growth that we expect for the remainder of the year.
As David mentioned in our opening statement that the production has been higher so far this quarter. And so we have a higher degree of confidence that a lift off and earning asset yield is imminent as it pertains to funding costs, though, we have seen stability in those costs. The NIM on a spot basis at quarter end was higher than the average NIM for the quarter. So we feel positive about our ability to control funding costs, get lift off and earning asset yields and see some meaningful inflection between now and the end of the year.
And what was the spot NIM at the quarter end?
It was, I think, just a couple of basis points higher than what the average was.
Okay. And then I know you guys are very focused on expenses and expenses came a little lower this quarter. How are you thinking about expenses going forward? Is the 2Q run rate a good run rate, or will it be a little different?
I think $85 million a quarter, Brady, between now and the end of the year is a good guide for expenses. We expect to hold them in that area. Obviously, we're looking hard across the expense base, making sure we're geared appropriately for the current environment and are going to continue that discipline that we have so far.
And then finally for me, the loan to deposit ratio moved from 100% to 95%, which is good to see. Are you happy with 95%, or do you want to see that continue to go lower?
We're happy with 95% as it stands, Brady, and that gives us some flexibility in managing the funding base, managing those funding costs, that some optionality built into the balance sheet for us as we look across the next two quarters and also into 2024.
Okay. Great. Thanks, guys.
Yes. Thanks Brady.
Our next question is from the line of Brandon King with Truist Securities. Please proceed with your question.
Good morning. Thanks for taking my questions.
Good morning, Brandon.
Good morning, Brandon.
Yes. So I wanted to get on pack as far as the NIM guidance and the loan repricing and loan yields were up 18 basis points sequentially. I just want to get a sense of what the expectation was for the back half of the year? Are you looking to see a similar type of increase quarter-over-quarter, or could that potentially be higher?
I think we're expecting that loan yields will grow faster in the back half of the year than they did in the first two quarters. The things that give us confidence on that is that we have another hike in where we don't expect a significant increase in deposit costs relative to earning asset yields. So, we will get the benefit of the floating rate if the Fed moves this Wednesday, in addition to that higher gross production for the third and fourth quarters is really going to be a tailwind to earning asset yield.
Yes. We've seen a real pickup here, Brandon, early in the quarter in our loan pipeline. It's as good as spending a year. We've got a nice log of approved deals that are going to be funding. And so as Paul said, that really gives us a lot of momentum with over, we think, over $1 billion of these higher-yielding assets coming on the books in the last half of the year, which still obviously gives us -- and that continues to accelerate into 2024 and 2025, the amount of loans that are maturing in the amount of loans that we expect to produce during those times. So we feel like we'll get an increasing benefit as this year goes on and really get the tailwind in 2024.
Got it. And could you quantify the amount of maturities you're expecting in the second half of this year versus what occurred in the first half?
It's about twice the level of maturities in the second half of the year than we had in the first half.
Okay. And then just lastly, with the expectation of stronger earning asset growth and the loan production, is it fair to assume that you're going to fund this production with broker CDs or borrowings, or are there any other funding sources that you're looking to fund that growth?
Our treasury team has made some good progress on some new initiatives and we do expect to grow the core deposits. We'll see how rapidly that ramps up. But we do think we'll be able to grow our core deposits in the second half of the year, Brandon, but then, yes, we'll have to fund at the margin.
And Paul and his team have done a great job of keeping our funding very short creating a lot of optionality to find the best source of funding at the margin. But at the end of the day, we've got to grow our core deposits and we think we can in the second half.
We were pleased, Brandon, with our ability to grow interest-bearing branch deposits during the second quarter. So, that gives us some incremental confidence that we'll continue to see that traction as we look through the third and fourth quarter of this year.
Thanks. I’ll hop back in the queue.
Thanks Brandon.
The next question is from the line of Michael Rose with Raymond James. Please proceed with your question.
Hey good morning everyone. Thanks for taking my questions.
Good morning.
Good morning. You guys sound a little bit more positive on loan growth, which is good, although it sounds maybe perhaps a little bit more of it is from kind of market share gains? I know the markets are strong maybe less paydowns. But what's -- why do you think you've seen kind of the increase in production? And is there any difference between kind of the Texas markets and the Colorado markets? Thanks.
No, we're seeing good loan demand across our markets, Michael, and the strength in -- one of the reasons we sound a little more positive is the strength in Dallas-Fort Worth, Austin, Houston and Denver Front Range of Colorado has really continued to improve the feelings or the optimism of our borrowers, the wealthy families that we bank, the investors that we bank, the businesses that are looking to make investments all seems to be much more positive.
It felt like in the first half, people were quite cautious. A lot of people are talking about deep recession and with all the Fed's aggressive move, maybe we go into some kind of a deep economic downturn and even people in the best markets were concerned.
We sense, I think, broadly, as we've talked to our relationship officers across our footprint, that people are feeling broadly more encouraged, optimistic, we see assets changing hands, people selling real estate, buying real estate, a lot of our best borrowers had a lot of cash on the sidelines and we're just waiting for opportunities. And we see that cash coming off the sidelines now into deals.
And so yes, we think, as we've always said, our markets are stronger but now our borrowers and our team feel really positive about where we're headed and that -- there's certainly still economic uncertainty ahead, but it seems every quarter that goes by and we're seeing terrific asset quality across our book. And so things are just generally more positive as we enter into the third quarter here than they were a quarter or two ago.
That's encouraging to hear. And I know last quarter, you guys had talked about kind of a 4% to 5% kind of annualized growth rate over the final three quarters of the year. It sounds a little bit more positive than that at this point, care to take a gander what we could expect?
We were expecting to grow a little more in the second quarter than we did. I still think a mid single-digit, Michael, 4% to 6% for the second half of the annualized pace for the second half of the year is a good -- kind of holding place. We're hopeful there's upside to that, but I think that's a good number as we think about at this point.
Perfect. And then just on the flip side, the warehouse was a little bit stronger, I think, than many of us were probably expecting. I know one of your larger competitors in the state got out of the business and also a smaller competitor, you guys are only down about 12% year-over-year in average warehouse balances. Can you just talk about, what you guys are expecting for that business? It seems like maybe there's some opportunities there for some market share pick? Thanks.
Hey, Michael, this is Dan. I'll take that one. We were able to see some new quality clients come on as some of the banks scale back or exit, as you noted there, and we expect that will continue to be the case, given the trends that are out there. In addition, we've seen rates in that portfolio pick up some as well, that speaks to the change in the competition. Our average rates are going to be higher -- haven't been a little bit higher a year at the end of the second quarter and go on for the rest of the year.
Perfect. And maybe just finally for me, just kind of a broader question. You guys have done a really good job addressing kind of the revenue headwinds with some targeted expense cuts, but the efficiency ratio is still running a little bit higher than peers, and you guys are obviously a growth bank and that's been a little bit more challenging in this backdrop. But as we think about the next couple of years, how should we kind of think about the balance between continuing to invest in the franchise versus kind of ongoing cost-saving efforts and what that could translate to from an efficiency and profitability perspective?
Well, we think -- thanks, and thanks for the compliment, Michael. We have done, I think, some good work -- getting our expenses down to fit the current environment. That said, we're going to continue to -- we're positive about the future here. We're a growth company. We expect that to be the case going forward. We expect growth to accelerate. And the way we're looking at 2024, it appears to be lining up for an even better, more stable environment and a growth year environment. But I think we've got a really strong team customer-facing team across the company. And so I don't see us needing to add a lot to that here over the next year or two. We think we can generate high single to low double-digit, kind of, growth in a great market across our markets.
If the economy allows that, we've got the team to do that to my point. And -- and so I think we're going to be quite cautious about expense growth. Paul and his team have done a terrific job on really -- we've got some new -- we have a really strong team, obviously, non-customer-facing as well.
And they have really been, kind of, searching the company, looking at every contract renewal, looking at ways to negotiate things. And so we're seeing some positive -- we're still going to have some positive results on that front. But we also have the reality of increasing compensation for our teams and all that in the days ahead. So we're realistic that expenses are not going to be $85 million a quarter for the next three years. But we think the growth will be slower than it had been previously.
That's great color, David. Thanks for taking all my question.
Thanks a lot, Mike.
Our next question is from the line of Stephen Scouten with Piper Sandler. Please proceed with your question.
Hi, good morning everyone. Appreciate the time. Maybe one quick clarifying question from the slide deck. It looks like, I don't know if this is the same number quarter-over-quarter, but it looks like the energy reserves may have declined; it looks like it shows 1.6% energy ACL on slide 16 versus what shows 5.6% energy reserve last quarter. Is that accurate, or -- and if so, what's the dynamic that's going on there?
Yeah. Thanks for asking, Stephen. The CECL calculation, I think we noted in our remarks and earnings release was subject to its normal annual review. We went through that process. And the energy book, of course, as we, I think, have described over time has totally changed over the years such that the quality of that book is just top-notch, best-in-class and it's more reflective of the C&I category.
So actually, it was combined with C&I in the most recent model change. And that ultimately did, in fact, reduce the amount of reserves that are held specifically against energy, which we think was accurate and timely in terms of the way it came across. But essentially, there's a change of it lining up with C&I, which is really what we believe that looks like at this point.
Okay. Perfect. Very helpful. And then as it pertains to the increase in the loan pipeline that you're seeing, the strength of potential second half growth, how are you viewing growth in CRE today, given market dynamics? I mean, are you seeing more opportunities because other competitors pull back, and given your conveyed cautiousness around the economy and the strength of your credit quality overall. How do you -- how does that push-pull work as you potentially see cracks in the CRE environment overall?
Yeah. Most of the demand appears to be high-quality demand in our markets with our existing customers is that it would be the profile of a lot of what's grown in the pipeline, as I mentioned earlier, Stephen, our customers and long-time relationships, getting active again or more active again in the markets. And then, of course, we're continuing to call on strong borrowers that we've been calling on for years, and there is a little bit of a dynamic in the market that as some banks have either decided they don't want to make as many loans going forward, or if they don't want to make CRE loans, in particular, going forward, then there is -- there may be some opportunity at the margin, but that's not the bulk of the opportunity we're seeing, the bulk is our customers, our relationships continuing to do what they've done historically, which is take advantage of good opportunities. And then there may be at the margin, some opportunity for market share gains from banks that are getting out of the market, but I don't recall seeing a lot of that.
Okay. Great color there. And then just maybe last thing for me. On the stability you guys are seeing on the deposit front. I mean, obviously, funding is the biggest tension point here for every bank, as we all know. I'm calculating the interest-bearing deposit beta at like 129% this quarter, give or take. I guess what is it that gives you the confidence around that stability in the face of the next height and maybe specifically around non-interest-bearing deposits and where you think those might be able to bottom out as a percentage of the deposits?
Yes, absolutely. We've been very fortunate to see stabilization in the non-interest-bearing deposit base over the last 45 days, really. So if you think about that number at quarter end being around 26% of total deposits, our expectation is that may fall another point, but we don't really expect much contraction in the non-interest-bearing deposit base after that.
When we look at interest-bearing deposits specifically, we're giving a lot of confidence by the fact that pretty much all of our uninsured depositors are paid at overnight market rates really at the highest rates. So there's not a lot of room to run up in terms of those interest-bearing deposit costs.
In addition, where we have our products priced right now is very competitively, and we feel like the bulk of our deposit base is compensated fairly at this point in the cycle as we hit the terminal rate. So that positions us nicely to see that stability in the deposit base. As it pertains to just funding more broadly, we're, of course, opportunistic about maintaining funding on the margins.
We attempt to, for our short duration funding that we supplement the balance sheet with be mindful of taking advantage of dislocations at different points in the curve and being mindful to catch a couple of basis points of spread everywhere we can. But I'll also note that we're paying down our holding company line of credit, which is over 7% and today, which we will make another third of that payment this quarter. And then the final third of that payment, our expectation is to make that in the third quarter. So that's $100 million in total of relatively expensive funding that will come off the balance sheet by the end of the third quarter.
Okay. Got it. Very helpful. Thank you all for the color and the time this morning.
Thanks, Stephen. Appreciate the call.
Our next question is from the line of Matt Olney with Stephens. Please proceed with your question.
Hey, thanks. Good morning, guys.
Good morning, Matt.
Good morning. I want to go back to the question and topic around loan yields and the improvement, you expect the back half of the year, make sure on the same page here. I'm showing that the average loan yields were up 49 bps in 2Q as compared to the fourth quarter of last year. So are you saying that the average loan yield improvement will be greater than 49 bps in the back half of the year? So we'll be well over 6% loan yields by the fourth quarter. Am I on the right page there?
It's our expectation that spot yields where we're putting on fixed rate loans, we're seeing higher improvement. That will push rates up. Obviously, we had a lot of rate increases in the first part of the year that helped with the floating rate portion of our book. But relative to -- as you think about deposit costs, we certainly expect greater expansion in the loan yields. So it's hard to handicap the exact increase in loan yields that we expect in the back half of the year, but it will be greater in terms of what we've seen the lift in the second quarter for the back half of the year.
Okay. All right. Thanks for clarifying that Paul. And then I guess thinking about the risk of that -- of the loan yields not improving, given these are more fixed rate maturities, it sounds like the risk isn't really bad funds, but probably the risk is more on the yield curve more of five and 10 years, or how do you typically price this?
We typically price based off of what we see in the market. And so it hasn't really correlated with the 5 and 10 year treasury mat so much as it's correlated with Prime. So as we see stability in the curve and specifically as other banks that were funding loans at relatively cheap rates in the first half of the year, half pulled back. That's alleviated some pricing pressure in the marketplace. It's allowed us to pass through some increased costs on that side. And we feel confident about our ability to price loans where we're currently pricing them, which I noted in the opening remarks in the call, and so our expectation is that with the higher bulk production in the back half of the year, that's going to serve as a tailwind to loan yields.
Okay. I appreciate that. And then also you gave some good commentary on the noninterest-bearing deposits in the last 45 days seems stability there. And any color on the -- it looks like time deposit balances are the products that grew the most as far as on the average in 2Q? Any color on kind of spot balances of time deposits what you're seeing more recently?
We have seen some people take advantage of our CD specials, which is positive that has contributed obviously to our interest-bearing branch deposit growth. As you think about that, all in math, those are cheaper than the broker deposits that we're getting. So we're happy to have that growth in interest-bearing branch deposits on the CD side, on the time deposit side. As we -- if we do continue to see utilization or growth there, then we'll obviously -- some of those broker deposits are short duration, so we'll allow those to run-off from where we see growth in the branch deposits.
Okay. And I think you said, Paul that the funding costs are now peaking on a spot basis. But did I hear that right? And any more color on kind of what -- where that's peaking right now?
Yeah, that's exactly right, Matt. We are seeing funding costs peak on a spot basis. We've seen some stability in funding costs. And as I mentioned, the June NIM was just a hair above where the average Q2 NIM was, so that gives us some confidence that really as we are around 5.25%. Those are our marginal funding costs at this point.
Okay. Okay. Thanks for taking my questions, guys.
Thanks, Matt.
Thank you. [Operator Instructions] Our next question is from the line of Brett Rabatin with Hovde Group. Please proceed with your questions.
Hey, good morning.
Hey, good morning, Brett.
Thanks for the questions. I wanted to first come at the loan re-pricing topic from a different angle. When I look at the regulatory filings, it indicates that you guys have about half of the loan portfolio into one year to five year bucket. Can you talk maybe about how much of the loan portfolio doesn't re-price in the next year or so and hasn't so far, i.e., what's the -- what's the drag going to be from the piece of the book that hasn't re-priced yet.
Yeah, absolutely, Brett. And it may be a little bit helpful color to add that when we do a loan for greater than five years, specifically a commercial real estate loan, we typically have an adjustable pricing mechanism in that loan at maximum five years after origination. So we generally expect some level of adjustability in the first five years on our commercial real estate book in total.
The key with commercial real estate, obviously, for us, has been payoffs and paydowns. We do continue to see payoffs and paydowns that perhaps you wouldn't expect from an economic standpoint. We had just the other day, for example, an $18 million loan pay down that was yielding around $3.7 million. So we do see progress on that front as well as you start to see more price discovery, as David mentioned, in commercial real estate and assets are transacting at a higher volume. So our expectation is we will see meaningful gross production over the next several quarters and into 2024, cushion doing up. But as it pertains to that cushion, that cushion is obviously going to increase over time, over the next three to four years, where our loan book has reliably repriced at any point on that spectrum. So we haven't typically seen duration beyond that in our loan book, especially in the CRE loan book. We do have a small portion of fixed rate mortgages on the book. But again, that's not a big portion of our balance sheet compared to what it is for a lot of our peers.
And also, Brett, I might add the color as Paul said earlier, we think about -- we'll have about twice as much of that type of repricing in the second half of this year as we had in the first half, that accelerates continues to accelerate dramatically in 2024 and again, in 2025. So as we look at it, if this is helpful and make it to kind of the higher level, what your question, which is, we think, over the next two and a half years, the vast majority of that portfolio will either prepay or will reprice or some other or more than half, I guess, would be a fair way to say it, Paul.
And so if we had $6 billion, $7 billion of that coming into this, some of it reprices in the first half of the year, they really accelerate. So that's part of our encouragement, if you will, Brett, about the second half of the year, but really even more so pointing into 2024, that we're going to see significant uplift in our earning asset yields each quarter, quarter-by-quarter accelerating in 2024, that's why we're encouraged that our 2024 results can be much stronger than the kind of results we're seeing right now from a bottom line standpoint.
Okay. That's really helpful. And then maybe a question for Dan on credit quality with the option and maybe demand, obviously, you guys are really strict on credit quality and your markets are also a lot stronger than most. I'm just curious to hear from Dan, is there anything that you don't want to be doing this environment in terms of originations? Is there anything that you kind of view as maybe potentially risk into the next cycle?
Hi, Brett, and good morning. Yes. As you know, we've always employed a very disciplined approach. You've noted that in growing our book and effectively, that's been no different even in the last five years, as we've look at what's been put on the books. And I think the best way to think about that is that continues to be the case on any new opportunities that we have.
Honestly, in the environment we’re in today, you're seeing much more equity going to deals and the underwriting that is in place that is reflective of the much higher rates, just means in general, the type of book that's being booked, we're incredibly proud of.
In terms of an asset class, in particular, that we're looking at, honestly, we just continue to be mindful of the obvious ones, right? Office is a really high bar. If there is an opportunity on that, it would be rare to see that occur. But I would say the rest of the asset class is because of the way we underwrite and the quality of the clients we have in the markets that we're in, we're continuing to book really across the asset classes at this point.
Okay. And Dan, is there any segments that just don't pencil as well, just given that the EPA may be increased requirements either on equity or debt service coverage?
I think a lot of it is based on what the sponsors and the equity sources are willing to put in, right, to get the returns that they want. So, there certainly have been some deals that just haven't made, that could be anywhere from multifamily, in particular, I think we've seen just the margins there are thinner than we've seen on a typical acquisition of a retail facility, property or something like that, the multifamily just by nature have seen that. And in some of those markets, I think it is somewhat tighter given the supply that's come in. And in order to make the deals flow with that kind of margin, I think the amount of equity going on has caused some of them to pull back. But we still see activity, right? It's always location by location and some of our markets really good in that space. Others are probably more built out. And so it's a little harder without putting a lot more equity in. So some of those deals just don't make, but that's usually a decision made by the investor.
Okay. That’s helpful. Appreciate all the color.
Thank you. At this time, we have no additional questions. And then I'll hand the floor back to the management for any closing remarks.
Thank you. I appreciate everyone calling in today. We -- it's been a difficult first half for us, but we feel -- is hopefully, we've conveyed this morning very positive about the second half of this year and '24 to come. Really proud of our team. It's been a difficult really 12 months overall since the rate speckle started to change and our teams, both back office and front-line with our customers have continued to focus on, hey, we've got clients, and we have to be great at taking care of their needs. And so, I appreciate my team and appreciate the investors and your support. I hope you have a great day. Thanks.
This will conclude today's conference. Thank you for your dialing in today and for your participation. You may now disconnect your lines at this time.