Independent Bank Group Inc

NASDAQ:IBTX

Earnings Call Transcript 2021-Q4

[Operator]

Greetings, and welcome to the Independent Bank Group Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Paul Langdale, Executive Vice President, Corporate Development and Strategy for Independent Bank Group. Thank you. You may begin.

[Paul Langdale, EVP, Corporate Development and Strategy]

Good morning, everyone. I am Paul Langdale, Executive Vice President of Corporate Development and Strategy for Independent Bank Group. And I would like to welcome you to the Independent Bank Group Fourth Quarter 2021 Earnings Call. We appreciate you joining us. The related earnings press release and the slide presentation can be accessed on our website at ibtx.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 a number of 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 David Brooks, our Chairman and CEO; Dan Brooks, our Vice Chairman; and Michelle Hickox, Executive Vice President and CFO. At the end of their remarks, David will open the call to questions. With that, I will turn it over to David.

[David Brooks, Chairman & CEO]

Thanks, Paul. Good morning, everyone, and thank you for joining us on today's call. We were very pleased to report solid results for the fourth quarter, with adjusted earnings of $1.28 per share, healthy return metrics, and a strong annualized organic loan growth of 11.2%. Notably, this organic growth is driven by broad-based lending to our customers across Texas and Colorado, and is supported by the strong tailwinds that continue to benefit our four great markets.

On the credit side, we were pleased to see a meaningful improvement in our nonperforming assets, which declined from 44 basis points to 31 basis points during the quarter. Our company’s strong performance in the fourth quarter resulted in tangible book value per share increasing by $0.46 to $35.25. In addition, we repurchased a total of 201,326 share of our common stock, and increased our dividend for the fourth quarter to $0.36 per share. These actions reiterate our steadfast commitment to deliver returns to our shareholders.

With that overview, I'll now turn the call over to Michelle for more detail on the operating results for the quarter.

[Michelle Hickox, EVP & CFO]

Thank you, David. Good morning, everyone. Note that Slide 6 shows selected financial data for the quarter. Full year 2021 GAAP net income was $224.8 million or $5.21 per diluted share, an increase of $23.5 million or $0.54 per share over the prior year on a diluted basis. For the fourth quarter, adjusted net income totaled $55 million or $1.28 per share, an increase of $2.4 million or $0.06 per diluted share over the linked quarter. Net interest income trended upwards to $132.7 million in the fourth quarter, which was an increase of $4 million over the linked quarter. This increase was driven by an increase of $1.7 million of acquired loan accretion income versus the linked quarter, as well as a strategic reduction in our deposit funding cost.

During the quarter, we achieved our target of growing our securities book to $2 billion, and booked loan growth at an 11.2% annualized rate. However, the impact of these increased earning asset balances, were partially offset by lower incremental yields, relative to older loans and securities maturing. PPP fees remained stable at $4 million in Q4, with $2.6 million remaining be recognized. We anticipate this $2.6 million to be mostly recognized in the first half of 2022.

The net interest margin, excluding accretion, was 2.87%, down four basis points from the linked quarter. The decrease is primarily due to increased average liquidity during the quarter, which had a negative impact of seven basis points, and was partially offset by the reduction in deposit cost. Total non-interest income was $15.1 million for the fourth quarter, a decrease of $1.8 million versus the linked quarter, which was primarily due to decreases in mortgage banking revenue due to seasonality impacts, as well as the recent uptrend in mortgage rates more broadly impacting the mortgage business.

Non-interest expense totaled $79.9 million for the fourth quarter, a slight reduction of $664,000 versus the linked quarter, and an increase of $4.7 million when compared to the fourth quarter of 2020. The increase over the prior year is primarily due to $5.2 million of increased salaries and benefits expense, mostly driven by additional headcount, including executive and senior leadership positions that were added during 2021. This increase was partially offset by a reduction in mortgage commissions and incentives of $1.8 million due to lower volumes in the year-over-year period. Fourth quarter 2021 also includes $614,000 a non-interest expense related to COVID-19 vaccinations incentives and testing.

Slide 19 shows our deposit mix and cost. Deposits totaled $15.6 billion at quarter end, with total non-interest-bearing deposits up by $153 million from linked quarter, and $901.8 million from the fourth quarter of 2020. Interest bearing deposit costs decreased eight basis points from 40 basis points in Q3, to 32 basis points in Q4. This was a result of our efforts to reduce rates on CDs and interest bearing DDA accounts in anticipation of contemplated increases in the Fed funds rates during 2022.

Capital ratios are presented on Slide 21. In the fourth quarter, the company's consolidated capital ratios remained strong, with common equity tier one capital of 11.12%, and a total capital ratio of 13.67%. As David mentioned, we repurchased about 201,000 shares of our common stock during the quarter for an aggregate price of $14 million.

That concludes my comments. I will turn it over to Dan to discuss the loan portfolio.

[Dan Brooks, Vice Chairman]

Thanks, Michelle. Overall, loans held for investment, excluding mortgage warehouse purchase loans, were $11.7 billion at quarter end, compared to $11.5 billion in the linked quarter. Excluding the impact of PPP loans, core loans held for investment increased by $318.2 million over the linked quarter, which represents an 11.2% annualized rate of loan growth. Loan growth continues to be driven by a broad-based relationship lending to our customers across Texas and Colorado. There are $112.1 million of PPP loans on balance sheet at quarter end, down from $243.9 million in the linked quarter. Average mortgage warehouse purchase loans decreased slightly to $801.7 million for the quarter, which is reflective of lower industry volumes overall due to upward pressure on mortgage rates.

Credit quality metrics strengthened during the quarter, in line with our expectations. Total nonperforming assets decreased to $57.5 million or 0.31% of total assets at quarter end, which was a reduction of $25.3 million during the quarter. Net charge-offs totaled $3.0 million or 10 basis points annualized during the quarter, and were related to a leasing portfolio acquired as part of a previous M&A transaction. These credits had been fully reserved through purchase accounting adjustments at the acquisition date, and were subsequently transitioned to the allowance under CECL. At December 31st, 2021, the allowance for credit losses on loans is 148.7 million, or 1.28% of loans held for investment, excluding mortgage warehouse loans.

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, Chairman & CEO]

Thanks, Dan. Looking ahead, we remain confident in our ability to grow our core loan portfolio at the 7% to 8% level in 2022. We are also incrementally encouraged by our strategic position of the balance sheet ahead of any increases in overnight rates. To that end, we have made a concerted effort to optimize our funding cost and mix, while deliberately booking new business with a rate hike environment in mind. We are also continuing to make strategic investments in our platform in anticipation of future growth. And we remain focused on continuing to attract talented individuals to our company. While we are encouraged by strategic discussions with potential partner banks, we will remain patient, disciplined, and deliberate in our approach to M&A. Our priority remains to create long-term shareholder value by growing our high-quality franchise across our four strong markets, and to deliver consistent high performance to our shareholders, customers, and communities.

Texas and Colorado remain two of the most attractive economies in the country, and our bankers continue their disciplined pursuit of winning new business and expanding existing relationships each day. I'm grateful to our entire team for the strong finish to 2021, and look forward to the great things we can accomplish as we continue to leverage our strong culture and grow our platform in 2022.

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

[Operator]

Thank you. [Operator Instructions]. Thank you. Our first question comes from the line of Brady Gailey with KBW. Please proceed with your question.

[Brady Gailey, KBW]

Hey, thank you. Good morning, guys. I know last quarter, Michelle gave us the expense guidance of expecting expenses up about 3% year-over-year in 2022. So far throughout earnings season, we've heard a lot of banks talk about inflation and compensation going up because they need to retain people. How are you all thinking about expenses now? Has there been any change to that 3% growth estimate, Michelle?

[Michelle Hickox, EVP & CFO]

Yes, that's a good question, Brady. I think, similar to our peers, we have seen - continue to have challenges on wages, just being able to identify and hire talent, especially talent with specific skillsets has been more expensive. And so, we are going to update our expense guidance. I think previously it was 3% over ‘21. I'm going to update that to 5% over our full year ‘21 expenses, just due to the wage pressures, as well as our board has wanted to continue to make investments in our infrastructure. So, we've identified some new areas that we're going to make some investments there as well.

[Brady Gailey, KBW]

Okay. All right, that makes sense. And then as you guys had talked about the bond book grew in the fourth quarter, how are you thinking about - you guys still have excess liquidity here. So, how are you thinking about bond book growth into 2022?

[Michelle Hickox, EVP & CFO]

I think we'll continue to invest in the bond portfolio, as long as we continue to have that liquidity on our balance sheet. Our plan has called for us to put at least $0.5 billion in this year. It could be more, really depending on how the liquidity holds.

[Brady Gailey, KBW]

Okay. All right. And then just one final one for me, the buybacks, you were - you bought back about 0.5% of the company this quarter. You did the same last quarter, but the stock is now trading - I think in the back half of the year, you bought it at a little under 70 bucks a share. The stock's now higher than that. How are you all thinking about the buyback this year? Do you think you continue just to chip away it at every quarter? How are you thinking about the buyback?

[David Brooks, Chairman & CEO]

I think, Brady, our view on that hasn't changed at all. We’ll be opportunistic with the volatility in the markets. We've had the opportunity in the last few quarters to repurchase, for us, material amounts of stock compared to what we purchased in the past. But because our retained earnings and our capital continues to grow, our retained book value for share is growing. So, as it grows, then obviously the price at which we would be willing to purchase our stock, continues to go up and we'll see how that plays out over time. I still believe that strong organic growth and some future M&A opportunity, possibly is the best use of our capital for our shareholders. But in the meantime, we will be active buying the stock back when the market allows that, and then also continue to look to raise our dividends in the days ahead.

[Brady Gailey, KBW]

Okay. Got it. Thanks, David.

[Operator]

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

[Michael Rose, Raymond James]

Hey, good morning, everyone. Hope you’re doing well. Hey, just wanted to touch on the loan growth outlook. So, it sounds like the expectation is kind of in line with last quarter, really healthy growth for next year. Looks like you guys had really good energy growth for the second quarter in a row. Can you just give us kind of what the puts and takes are of that outlook? And then maybe if you can just comment on the C&I team buildout that you talked about previously. Thanks.

[David Brooks, Chairman & CEO]

Yes. Thanks, Mike. We were pleased with where the loan growth was in the fourth quarter. We felt like that's what we had expected it to be for the year, a little over 6% was I think where we had budgeted in the range of what we had expected, but certainly felt like it would accelerate in the second half of the year. We feel like that our guidance to 7% to 8% for ‘22 is still a good number. There could be upside to that, depending on how the economy goes, how quickly the Fed raises rates and a lot of things we don't control. But we feel like under most scenarios, 7%, 8% is a good number for us for ‘22. The C&I, middle market C&I buildout continues to go very well. We saw some good traction there. They had some nice relationships moved over and some good fundings in the fourth quarter, continued to build about their team. We expect to continue to do that aggressively as we build out across Texas in ’22.

On the energy front, we have had a lot of success moving over and picking up some high-quality relationships. It's about, I think current commitment is around $500 million, and current outstandings around $340 million, $350 million. So, it's still a relatively small piece of our overall loan portfolio, but I’m very proud of the team we've got there. We did just hire another energy banker in Houston. And so, we intend to continue to invest and look for opportunities in the energy space. But with current outstandings around 2.5% to 3% of our total loan book, we think we have some room to grow as long as we see the high-quality opportunities with the right structures and right pricing, and I think we'll continue to do that. Dan, do you have any other thoughts on energy?

[Dan Brooks, Vice Chairman]

No. I think you covered it well, David. We did see some really nice opportunities during 2021 in the energy book specifically, and would expect if we see those opportunities in 2022, we'll continue to grow there. But beyond that, I think you covered the nice opportunities we saw in middle market.

[Michael Rose, Raymond James]

Great. Thanks for the color. And maybe just as a follow up, David or Michelle, if you guys can comment on the mortgage business. Obviously, we can all see the NBA's forecast and what that implies for next year. But if you could just comment on your portfolio, just given the strength - relative strength to your markets, and then maybe what you might expect for the warehouse as we move through the year. Thanks.

[Michelle Hickox, EVP & CFO]

Yes. I think for our plan for our retail mortgage is, we expect that they will be down just a bit in ‘22 relative to ‘21. Of course, it's hard to predict that business really, depending on what rates do this year, that could more heavily impact them. But they have done a good job of building out that team, and we do have great markets where we have more buy versus refinance here in our Texas markets, for sure. Warehouse, we expect - again, they've done a really good job of building, upgrading their customer base. Those average balances should be down a bit. That's our expectation for ‘22 as well, but we still think probably $700 million to $750 million is what our plan calls for right now.

[Michael Rose, Raymond James]

Okay. Thanks for taking my questions.

[Operator]

Thank you. Our next question comes from line of Brad Milsaps with Piper Sandler. Please proceed with your question.

[Brad Milsaps, Piper Sandler]

Hey, good morning. David and Michelle, I know you guys have been really focused on lowering your funding costs. Just kind of curious how much more room you think there is to go there. And then, I noticed too, there was a pretty decent difference between kind of period end deposits and the average. Is that more seasonal kind of public fund related, or is there something specific there that you're running off the categories that might continue to help you out as well?

[Michelle Hickox, EVP & CFO]

Yes. As it relates to our funding costs, we made some changes fairly early in the quarter to reduce costs on CDs and interest-bearing DDA, really trying to align better with peers. And just given the liquidity we had, we felt like we had room to do that. There is still some opportunity, I think in the first quarter as CDs reprice, and we have some contractual agreements that we’ll reprice as well. So, it should be a bit lower in the first quarter, but we probably won't see the full benefit of that until the end of Q1, Brad. We did have - there was just a lot of volatility the last week of the year with some of our specialty treasury deposits, where we had a bunch of outflows, and we actually sent some one-way deposits off. I think it was about $400 million right at the end of the year. So, that's why you’re seeing the year imbalances be a bit - be lower than the average balances. Those have really sort of come back to where they were before that. I would say fairly flat for the first quarter.

[Brad Milsaps, Piper Sandler]

Okay, great. And then just kind of sticking with the margin discussion, Michelle, can you kind of discuss - I know there's a lot of moving parts, but in your mind, if we do start to see short term rates lift, what does that - for each one, what does that mean for IBTX's margin, and if you want to do it in dollars or basis points? And then finally, can you remind us how much accretion you guys have left to recognize from some of your previous deals? Thanks.

[Michelle Hickox, EVP & CFO]

Yes. I think we have about 24 million left of accretion, which is primarily from the guarantee deal, Brad. Our current outlook and plan doesn't call for any rate increases. That's not - we did our budget assuming a flat rate environment, which I think we all probably expect that that's not what is going to happen. It will benefit us. We're more asset-sensitive than we ever have been, but it's really hard to predict. It's hard to predict how long will deposits flag, hopefully longer than they have in the past, just due to the amount of liquidity. Also, what will the impact be on our mortgage group as rates go up, because I think you'll get some offsets there. I mean, I think it will be beneficial. I just hesitate to estimate what that would be at this point.

[Brad Milsaps, Piper Sandler]

Okay, great. Thank you, guys.

[Operator]

Thank you. Our next question comes from the line of Matt Olney with Stephens Inc. Please proceed with your question.

[Matt Olney, Stephens Inc.]

Hey, thanks. Good morning, guys. Just wanted to follow up on a few of Brad’s questions there. I think you said that remaining discounts, $24 million. Michelle, any more color on what we should expect to see in a more normalized quarter over the next few quarters?

[Michelle Hickox, EVP & CFO]

Yes. We did have some accelerated accretion in Q4. If you noticed, it went up from Q3. I think our expectation is that run rate is going to be closer to $3.5 million a quarter for ‘22, is a better way to look at it.

[Matt Olney, Stephens Inc.]

Okay, perfect. And then as far as the discussion around sensitivity to higher rates, I get there's lots of moving pieces here, but any commentary you can give us around the loans that are going to be repricing higher with the Fed, and how should we think about the loan floors and how much incremental repricing benefit you'll get with each incremental Fed increase? Thanks.

[Michelle Hickox, EVP & CFO]

We don't have - we have very few loans that are below floor. So, we should any - on our variable rate loans, we should get an immediate impact on most of those. But that's only about 15% of our loan portfolio prices - reprices immediately, even though I think we're about half and half fixed and variable right now. But some of those reprice monthly, some quarterly. And so, you have to consider that. Right now, I think it's going to depend on liquidity in the market. The long-term rates have really not changed. And so, I think the question is still out on how that will impact our fixed rate loans. And so, we don't really have that built into our plan that we're going to get a significant benefit from that at this point.

[Matt Olney, Stephens Inc.]

Okay. And just lastly for me, I guess for David around loan growth, any incremental thoughts on commercial real estate pay downs? I know it's been a pretty aggressive pace over the last year or so, but I guess some of your peer banks have expectations that pay downs are going to remain elevated for the first part of the year, but hopefully moderate the back half of the year into ‘23. Curious kind of what your thoughts are around the pace of the pay downs.

[David Brooks, Chairman & CEO]

Yes. We've been a little surprised, Brad, by the volatility. It seems like in one quarter they're elevated, the next quarter they're not. But from the highest level, I think our expectation is that we will continue to see accelerated payoffs in the first half of the year. The reason, as much as anything is, one of our concerns, especially on the commercial real estate side, is that as the market gears up for this rate increase cycle that every - most everyone's expecting, the thought is that maybe the cap rates on some of these assets that have been at historic lows for the last couple of years and have resulted in a lot of these asset sales and asset repositionings and things that we've seen our customers doing, that that might accelerate even if people think that, hey, this is my last chance to really sell this asset at a very low cap rate.

So, I think that's consistent with the way we're thinking about it, that the payoffs will continue to be a lot of headwind, at least for the first half of the year. Then I really would expect that to moderate once rates start going up, because again, I think cap rates will go up, people will be settled into whatever they're going to hold here for this next cycle. And so, there'll always be something obviously turnover in pay downs, but yes, our view is the same, similar, pretty accelerated first half of the year and slowing down late into year end and into ‘23.

[Matt Olney, Stephens Inc.]

Thank you, guys.

[Operator]

Thank you. [Operator instructions]. Our next question comes from the line of Brett Rabatin with Hovde Group. Please proceed with your question.

[Brett Rabatin, Hovde Group]

Hey, good morning, David and Michelle. One, wanted to ask, your deposits through the pandemic are up about a third, like many, and your DDA is up almost $1 billion in the past year. I'm curious, what's the thought on the stickiness of deposits as we go forward as rates increase, and how are you thinking about kind of managing excess liquidity as it relates to maybe some concern that some deposits might draw down?

[David Brooks, Chairman & CEO]

I'll start us out, Brett, and then Michelle can give some more details, Brett. But my - our view is that for starters, these are our customers’ deposits. So, it’s not a lot of high yield money that's come in during this time, right? It's really our customers, their deposits. There will certainly be some pressure to raise rates as rates go up over time. But I think early on, our expectation is that given the amount of liquidity that we and other banks have, there will be an ability to keep the deposit prices down without losing a whole lot of deposits. Then, as rates continue to go up, that gets a little more interesting, a little trickier. But our view is that a lot of that DDA growth has been our C&I customers and C&I deposits. And so, we feel good about that, feel good about, as you pointed out, the growth in DDA, the trend as a percentage. Our deposits are getting better quality. But Michelle, you could comment on deposit runoff or how much we might expect it to - those deposits to blow out.

[Michelle Hickox, EVP & CFO]

Yes. I think at this point, Brett, I don't really have an expectation for a big outflow of deposits, at least in ‘22. I think this is going to be a longer-term phenomenon. Obviously, as David said, we're going to have to manage as rates go up and as our competitors change rates on deposit accounts, manage it that way. But right now, we don't really have a concern about liquidity. We have plenty to sort of manage that out. We have made a lot of investment in our retail team and in our middle market treasury management team, as David said, to improve our deposit base. So, I think we're in a much better place than we were when - in the last upgrade cycle, as far as building customers and retaining deposits.

[Brett Rabatin, Hovde Group]

Okay. Thanks for the color. And then the other question I wanted to ask was, David, thinking about M&A, last year we kind of started the year early, and you were pretty optimistic on doing a deal or two. And then, I think as the year progressed, maybe price expectations may have ebbed your enthusiasm a little bit. As we start ’22, was curious just kind of what your optimism might be around M&A, and if you think that's a potential likelihood for this year, or if you think maybe M&A is tougher, what your thoughts are on optimism around deals.

[David Brooks, Chairman & CEO]

Well, Brett, as my brother says, I'm a glass half full rising guy. So, I'm always encouraged about opportunity in the future. But that said, given my track record the last couple of years prognosticating about M&A volumes, I'm going to give up that job and just stick to what we do really well, which is growing an organic bank and the best markets in the country, and that's what we control. I really don't have a good sense, Brett. At the highest level, I would - I continue to believe there will be consolidation in Texas and high-quality markets with high quality banks. We continue to invest in those relationships with those banks, but what motivates a group to decide to seek a partner, those things vary obviously across the board and timing.

I do think that the - that our expectation going into this pandemic was that would cost a lot of disruption and get credit cycle, that that would force, but cause a lot of banks to think about where they were and what their future was going to be the next three to five years, and that they might think it was a good time to find a partner. Given the amount of assistance that came into the markets, given the fact that there was really no credit cycle in our view, banks are doing extremely well. All of our peers are doing well, all the high-quality downstream banks that we would have an interest in, are doing extremely well. And there's just nothing kind of pushing, if you will, motivating - and a lot of people point to the bigger macro things, which I think are all relevant and pertinent around technology and regulatory investments and things like that, but that's a longer-term focus thing, and that's not anything that I think presses banks that are in this $2 billion to $10 billion range that are banks the size that we would be looking at.

So, all that said, I just don't have a feel for it. I do know that what we're focused on is, as I mentioned, organic growth, hiring great teams of bankers, both customer-facing, and also hiring really looking across our company and the infrastructure of our company and seeing where we need talent and where we can add talent. That's a part of what Michelle talked about with the expense guidance growing up a little bit for ’22. We really looked late in the fourth quarter at what was going on with the talent war, if you will, in Texas and Colorado, and not only hiring new people, but paying and retaining the great talent that we've got. All that is very expensive. And then also looking to say, hey, where do we need to add more talent? Or where do we need to continue to invest?

Michelle mentioned our board is very focused as well on making sure that we have an outstanding $20 billion platform from an infrastructure and technology standpoint so that we can, in the future, grow the company, continue to grow the company and organically and hopefully someday with some M&A. But I'm not - I just don't have a sense, Brett, at all, whether it's a late 2022 or is it - or will something happen? Will it be ‘23? I continue to believe from a highest level that yes, there will be high quality M&A, but when and timing and structure and all that, I just don't know.

I do know we will continue to be very disciplined around making sure we wait for the right deal at the right time with the right people and the right structure. And that takes 12 months or 18 months or 24 months that it will be what it will be. The other thing that we - tie us back to what I was saying a moment ago is, we have to keep running our company well. We have to keep growing. We have to keep growing our profitability. And by doing so, hopefully that allows us to continue to trade well in terms of our stock, which then, again, continues to give us the opportunity to be a good partner for someone in the future.

[Brett Rabatin, Hovde Group]

Okay. that's great color. I appreciate it, David.

[Operator]

Thank you. Our next question is a follow up from the line of Matt Olney with Stephens Inc. Please proceed with your question.

[Matt Olney, Stephens Inc.]

Yes. Thanks for taking the follow. David, just want to ask about loan pricing. I think on the October call, you mentioned that the pricing for new and renewed loans had deteriorated a little bit in the back half the year versus the first half the year of ‘21. Any update on what you're seeing in more recent weeks and months around loan pricing?

[David Brooks, Chairman & CEO]

Sure, Matt. We continue to see pricing being very competitive for the same reasons we talked about in the fourth quarter, which is that all the liquidity and institutions are just looking to book high quality assets. And so, I'm seeing a lot of pressure on pricing continuing. The structure, I think generally remains strong, and I'll let Dan comment on that. But I think the pricing was continued I would say in the fourth quarter, at similar kind of pricing what we saw in the third quarter. So, it didn't get worse in the fourth quarter, but it certainly remains super competitive, and we expect that to hold. Michelle alluded to this earlier, Matt. What I think is hard to know on some of these three-year and five-year fixed rate deals as interest rates go up later this year, likely how quickly does that get reflected or would it be reflected in the CRE pricing market?

Again, just don't have a feel for that. We've certainly been booking a lot more floating rate as a percentage of our loans here, anticipating an upgrade cycle, as I mentioned in my prepared remarks earlier. But that said, we've built in pretty conservative pricing into our models, and we still feel good about our spreads and our margins. I know Dan, in terms of structure, any concerns or anything you're seeing in the market?

[Dan Brooks, Vice Chairman]

I think the only structural pressure that we're seeing, Matt, is coming from non-banks. Yes, it's always out there. The fact that the banks have the liquidity they have today, I think is primarily a pricing issue. As David mentioned, it's just competitive. But it's been competitive - all of ‘21 was competitive. So, we certainly expect that that would continue in ‘22, but I think overall, the banks have behaved well as it relates to structures and it's primarily the non-bank who are in that space.

[Matt Olney, Stephens Inc.]

Okay. That's helpful. And maybe just lastly, a big picture question. We haven't talked much about efficiency ratios for a little while, but if we go back a few years ago, the bank had an efficiency ratio below that 50% level, and now we're a little bit above. So, help us appreciate just what we need to see to get that co-efficiency ratio back below 50% level. Is it a matter of just seeing higher rates, or you also think it's going to have to be driven partially by M&A? thanks.

[Michelle Hickox, EVP & CFO]

Yes. I think - I don't expect that that efficiency ratio will go back below 50% in ‘22, Matt, just due to all the things that we've talked about this morning. I would expect by ‘23, it will trend back below 50%. It's primarily going to be driven by revenue growth, really. I don't expect at this point, we're going to really reduce our costs going forward. Hopefully they don't continue to increase at the level they will in ‘22, but just as a growing company, I expect they'll continue to increase, but especially with rate increases, we should drive higher revenue in ‘23 that will help us push that efficiency ratio back down.

[Matt Olney, Stephens Inc.]

Okay, thanks. That’s all for me.

[Operator]

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Brooks for any final comments.

[David Brooks, Chairman & CEO]

Thank you. Appreciate everyone being on today. I did want to comment one more time what an amazing job our team did in 2021, and really for the last two years. We had no understanding really in - early in 2020, what was coming for the next two years, and our team has just done a fantastic job of leaning in and taking care of our customers and taking care of our communities. And this has been - I've been proudest of everything that we've accomplished the last two years has been proud of our team and the work they've done, and our ability to continue to attract such talented people who resonate with what we're trying to do and the company we trying to build and the impact we're trying to have in communities. And so, we're committed to that and we continue to build our team in a way that points to a long-term future. And just appreciate each of them and appreciate each of you who listen and who invest in our company, and we will continue to work hard on your behalf as well. Have a great day.

[Operator]

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