Independent Bank Group Inc

NASDAQ:IBTX

Earnings Call Transcript 2022-Q4

[Operator]

Greetings and welcome to the Independent Bank Group’s Fourth Quarter 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ankita Puri, Executive Vice President and Chief Legal Officer for Independent Bank Group. Thank you. You may begin.

[Ankita Puri, Executive Vice President & Chief Legal Officer]

Good morning and welcome to the Independent Bank Group fourth quarter 2022 earnings call. We appreciate you joining us. The related earnings press release and investor presentation can be accessed on our website at ir.ifinancials.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 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.

[David Brooks, Chairman & Chief Executive Officer]

Thank you, Ankita. Good morning, everyone and thanks for joining the call. In 2022, we reported full year adjusted net income of $209.7 million and adjusted earnings per share of $5.02. Reflecting on 2022, we're pleased that our results illustrate the through cycle nature of our business model of healthy loan growth, strong earnings and excellent credit quality. We are in 4 of our nation's strongest markets and we remain encouraged by the economic fundamentals in both Texas and Colorado.

For the fourth quarter, we reported adjusted net income of $49.4 million and adjusted earnings per share of $1.20. During the quarter, we were able to achieve continued loan growth across our markets, while simultaneously maintaining resilient credit quality metrics. Though deposit costs remain a near-term headwind, the sustained repricing of our fixed rate book should provide consistent tailwind to the interest income as rates remain elevated over time, even as payoffs and pay downs slow. Notably, we entered the quarter with a deliberate focus on achieving better expense discipline. In pursuit of that objective, we undertook targeted expense reduction initiatives across our business to position the organization for an uncertain economic environment.

We will continue to focus on strategically managing expenses into 2023. The strategic focus on discipline is consistent with our long-standing history of conferring macroeconomic challenges early on and conservatively positioning the bank to perform throughout the cycle. We also announced yesterday that our Board of Directors declared a dividend of $0.38 per share and reauthorized our stock repurchase plan for an aggregate amount of $125 million for 2023. We believe these capital actions are consistent with our owner-led mentality of providing consistent returns to our shareholders.

With that overview, I'll now turn the call over to Paul to discuss the financials.

[Paul Langdale, Chief Financial Officer]

Thanks, David and good morning, everyone. As David mentioned, full year 2022 adjusted net income was $209.7 million or $5.02 per share and fourth quarter adjusted net income was $49.4 million or $1.20 per share. There were several onetime items during the quarter embedded in the non-interest expense line that I'll discuss momentarily.

Net interest income before provision decreased by 3.7% or $5.5 million from the prior quarter to $141.8 million. While interest income increased by $16.1 million from the prior quarter, funding costs increased by $21.6 million versus Q3. This more pronounced increase in funding costs drove the bulk of the differential in net interest income over the linked quarter as the FOMC raised rates 275 basis points in the last 155 days of the year. The increase in interest income versus Q3 was driven by floating rate loans repricing as well as net loan growth combined with new production funded during the quarter to replace normal amortization, paydowns and payoffs. Payoffs and paydowns slowed modestly in the fourth quarter but the consistent repricing of maturing loans should continue to provide a sustained tailwind to interest income even as deposit costs are expected to peak shortly after the FOMC reaches the expected terminal rate.

Our assumptions for modeling NII in 2023 include a peak in the Fed funds rate toward the end of the first quarter, consistent with the FOMC's dot blot, we expect the Fed funds rate to subsequently hold flat through year-end. In this scenario, our NII line should benefit from sustained fixed rate repricing dynamics throughout the year even as deposit costs present a near-term challenge. The overall yield on interest-earning assets jumped from 4.30% in the third quarter to 4.67% in the fourth quarter, an increase of 37 basis points. The core average loan yield, net of accretion and PPP income, was 5.01% in the fourth quarter, up 39 basis points from 4.62% in the third quarter. The total cost of all deposits was 112 basis points in the fourth quarter compared to 57 basis points in the third quarter, an increase of 55 basis points. The cost of all interest-bearing liabilities was 181 basis points in the fourth quarter, up from 102 basis points in the third quarter, an increase of 79 basis points.

As Slide 20 shows, we have been successful in playing both defense and incremental offense in our core deposit book, maintaining branch deposit balances despite a slight shift of noninterest-bearing balances to interest-bearing balances. Year-to-date fluctuation in specialty verticals is mostly a function of managing liquidity needs strategically in the current interest rate environment. Deposit competition remains intense as we near the Fed funds terminal rate and we will continue to remain nimble and opportunistic in funding the balance sheet. Deposits are likely to continue to be a headwind near term to near-term NII growth until the terminal rate is reached. Still, over the medium term, our loan book should continue to serve as a tailwind even after deposit costs peak.

Provision for credit losses was $2.8 million for the fourth quarter and looking ahead, we are budgeting for provision that represents about 1% of net loan growth. This assumes all else being held equal in the CECL model and no material changes to the macroeconomic forecast and other model factors. Non-interest income decreased by $2.3 million compared to the third quarter which was mostly driven by lower net revenue from our mortgage warehouse -- mortgage businesses due to lower mortgage volumes across the industry as well as lower other income. For the first quarter, we expect mortgage fee income to remain flat at current levels.

Adjusted non-interest expense was $88.3 million for the fourth quarter which was down approximately $386,000 from the linked quarter. Adjusted non-interest expense excludes approximately $10.4 million of onetime charges related to the targeted expense reduction initiatives undertaken during the fourth quarter. Of this, $7.1 million is related to severance and accelerated stock listing and $3.3 million is related to the write-off of certain assets related to discontinued technology projects as well as the termination of a correspondent banking relationship.

The fourth quarter's expense reduction initiatives will help us achieve our goal of holding the quarterly expense run rate flat through 2023. As we enter the new year, we remain focused on strategically managing the expense line and we will explore additional opportunities to realize savings over the coming quarters.

Slide 22 shows consolidated capital levels over time. All capital ratios, including the TCE ratio, increased slightly from the linked quarter. And capital levels remain well above regulatory well-capitalized minimums. These are all the comments I have today.

So with that, I'll turn the call over to Dan.

[Daniel Brooks, Vice Chairman]

Thanks, Paul. Loans held for investment increased to $13.6 billion in the fourth quarter, up from $13.3 billion in the linked quarter. Loan growth, excluding mortgage warehouse and PPP loans totaled $320 million or 9.6% annualized for the quarter. New production during the quarter was well distributed, both geographically and by product type and we continue to underwrite with the same discipline that has guided us through past economic cycles.

Average mortgage warehouse purchase loans decreased to $297.1 million in the fourth quarter, down from $402.2 million in the prior quarter. Volatility and interest rate increases more broadly have resulted in decreased demand, lower volumes and shorter hold times across the mortgage industry. Our expectation is for this business to remain flat at current levels through early 2023. Credit quality metrics saw a notable improvement during the quarter with several large commercial credits achieving final resolution with minimal losses. Total nonperforming assets decreased to $64.1 million or 0.35% of total assets at quarter end. Other real estate owned was flat at $23.9 million during the quarter. Net charge-offs totaled just 2 basis points annualized during the quarter.

Our loan book continues to be bolstered by a multi-decade history of strong underwriting as well as the underlying strength of our markets in Texas and Colorado. Even so, we are continually stressing our portfolio for the impacts of higher rates and mindful of the evolving macroeconomic situation. Currently, we remain very confident in the strength of our underwriting and the ability of our borrowers to navigate the current environment and we remain ever vigilant against emerging risks in the economy as we enter 2023.

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 & Chief Executive Officer]

Thanks, Dan. As we enter 2023, we continue to be very encouraged by the strength and resilience of our markets across Texas and Colorado and we have been pleased to see sustained demand for high-quality business from our long-time customers even as the FOMC approaches the expected terminal rate. This sustained borrower demand, combined with our strategic focus on the disciplined management of our expense base, helps fuel our continued pursuit of through-cycle performance and healthy growth. Our priority remains to deliver value to our shareholders by running a high-performance, purpose-driven company dedicated to serving our customers and communities each day.

Thanks again for taking time to join us today. We'll now open the call to questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Brad Milsaps with Piper Sandler.

[Brad Milsaps, Piper Sandler]

Maybe, Paul, I wanted to start with the margin and net interest income. You kind of offered a lot of color there on kind of how you guys are thinking about it. Just maybe bigger picture, do you think most of the significant margin compression is behind you? And is there a chance that you could start to see maybe NII begin to trend up maybe in the back half of the year based on some of the fixed rate asset reprice you have? Just kind of wanted to get a better sense of kind of how you're thinking about the trajectory of the NIM and NII as you move through '23.

[Paul Langdale, Chief Financial Officer]

That's exactly the right way to think about it, Brad. As we went into the fourth quarter, we were really trying to play incremental defense and offense in the deposit book. So if you look at Page 20 in our slide deck, we were really focused on ensuring we were able to grow those branch deposit balances, even though we knew there would be a bit of remix from noninterest-bearing to interest-bearing. We were successful in doing that and preserving our contingent liquidity options going into 2023. So as we look through the directionality of NIM in 2023, we expect it to bottom out at current levels flat to down just a couple of basis points for the first quarter. And then we should see that dramatic inflection in the second quarter accelerating through the third quarter as those fixed rate repricing dynamics should offer us some significant lift in NIM for the year.

[Brad Milsaps, Piper Sandler]

And just maybe as my follow-up, on the fixed rate loan repricing, where are you seeing those new loans and those loans to reprice to in terms of rate. Just wanted to kind of get a sense of the potential pickup. And maybe David or Dan, how are those new rates may be impacting loan demand out there in terms of where I think you've sort of guided to 7-, 8-ish percent type loan growth. Just kind of curious what -- how those rates are impacting appetite out there?

[David Brooks, Chairman & Chief Executive Officer]

Sure. Brad, this is David. I'll talk about from a high level, we're seeing rates come on in the mid-7s, upper 7s now in the current environment. And we expect that will slow. The Fed will likely accomplish their purpose of slowing the economy. So that's kind of in our thinking that overall loan growth will slow a bit as we head into 2023 here. One of the things and I think you're alluding to it and I'll let Dan speak to this but one of the challenges will be if there are loans in the low 4s rolling to the mid-7s or upper 7s or 8s if the Fed continues on here, then that might pose one-off challenges for certain borrowers and cash flows and things.

I'll let Dan speak to the credit aspect of it.

[Daniel Brooks, Vice Chairman]

Yes, I think really, I would think about it this way. Conservative underwriting on the front end is really the best defense against that risk. And so we have put material interest rate shock tests in our underwriting, even a year -- 4 years ago when rates are in the 4s and now they're rolling up for maturity. But we're looking at every credit that's maturing in the next year and stressing it for impact on higher rates. Our early look at those has been that we see very few issues. For the few credits where a conversation will be required, we'll do what we always have and we'll get in front of it with our borrowers early on.

[Operator]

Our next question comes from the line of Brady Gailey with KBW.

[Brady Gailey, KBW]

So if loan growth is going to slow a bit here, what does that mean for 2023? Are we thinking more of like a mid-single-digit level potentially for this year?

[David Brooks, Chairman & Chief Executive Officer]

Well, it's seasonal as well so it's a little tricky to try to forecast. I think 6% to 8% which is the guidance we gave at the end of the third quarter, still looks about right to us for the entire year. But it may be a little slower in the first quarter, just a lot of people are looking around here trying to figure out what their plan is for '23. We've got good demand and good pipeline but I expect, based on what we know today, Brady, that we'll probably start out with a mid-single digit here in the first quarter and then accelerate a little bit, a little bit, emphasis on little, in that 6%, 7%, maybe 8% range. And look, there's a wide range of possibilities for 2023 and what happens with the economy. And as we've said over and over again and I don't want to say it had nausea and maybe we do but the markets we're in should give us some insulation, right, even if it's a pretty difficult overall economic slowdown, we still expect our loans will grow and it just becomes a magnitude of how much.

[Brady Gailey, KBW]

Okay. All right. And then the decisions that were made on the expense base, what was the impact of those decisions? Like how much annualized expenses were taken out of the bank?

[Paul Langdale, Chief Financial Officer]

So Brady, this was really a prerequisite for us to meet our expense guidance of holding expenses flat from that run rate. So if you think about expenses, heading into 2023, I would expect them to remain in that $89 million to $90.25 million [ph] range. And this was a crucial part of heading off some of the expense headwinds we're going to have in terms of increased FDIC assessment and things like that in 2023.

[Brady Gailey, KBW]

Okay. And any -- should we expect you guys to consider continued changes in the expense base? Or do you feel kind of good with where expenses are at this point?

[Paul Langdale, Chief Financial Officer]

We're going to continue to look across the footprint for opportunities to have targeted reduction of expenses. I wouldn't expect anything programmatic like we did in the fourth quarter. But obviously, as we as we navigate, what David mentioned, is shaping up to be a very uncertain economic environment, we want to be really mindful and disciplined about managing the expense base on an ongoing basis.

[Brady Gailey, KBW]

All right. And then so the $125 million of buybacks, the stocks at $1.9 million [ph] at tangible book value, tangible common equity is kind of in the high 7% range, do you expect to be active on that $125 million this year?

[David Brooks, Chairman & Chief Executive Officer]

Make a lot of that depends, Brady, on what happens with the markets and the economy and stock prices. But we'll be opportunistic and continue to look for opportunities to buy our stock at attractive prices. I'd say that, obviously, we're all watching to see what's going to happen. Capital is precious. We do like the way our balance sheet has held up, with tangible equity, as you mentioned, still in the upper 7s. That's quite different than a number of banks in our peer group. You have handles and 4 handles on their tangible capital ratio. So we do think we've got some room and we'll be opportunistic but we're not anxious to give away capital in this environment either.

[Brady Gailey, KBW]

All right. And then last question for me is just I know you guys have been focused on improving the profitability profile of the bank. Any color on where you would like to get ROA or ROE or efficiency ratio or whatever metric you're focused on, any color on what the targeted profitability ratios are for Independent?

[David Brooks, Chairman & Chief Executive Officer]

Sure. again, every question, I guess, we answer and I'll put [indiscernible] but every question we answer is in light of everything we don't know about 2023 to come. And so our discussion right here has been about being nimble and everything we do from expense base to growth to the credit side, all of that, just being nimble watching what is coming our way and acting accordingly. But you asked the question last quarter and I appreciated it which is, you guys have historically been a high-performing bank. Your numbers right now wouldn't fit in that category and what are you going to do about it? That's not exactly how you asked it but it was -- I think the answer is, Brady, we -- you can't -- you can't turn a ship on a dime, so to speak. So we've been undertaking the things that we believe will return us to the kinds of metrics that we want to be at, that we have traditionally been at.

So I would expect that our return on tangible common equity to be mid-teens and up from there and our ROAs to be in the 120s and 130s and rising. We won't be there in the first quarter of this year given the continued pressure on deposit rates and things. But I think when you get to the back half of this year, Brady, those are the kind of numbers come third quarter, fourth quarter, we should be able to generate given our base economic assumptions of what's going to happen this year. So I think if you had an ROA in the 120s and 130s and return on tangible equity in the 15% to 18% range but that would be where we've been traditionally and where we expect to be back to by the end of this year.

[Operator]

Our next question comes from the line of Michael Rose with Raymond James.

[Michael Rose, Raymond James]

Just wanted to go back to Slide 20. I appreciate the color here but the loan-to-deposit ratio at the warehouse is creeping up there a little bit. Just can you walk us through in more specific detail some of the strategies? I know there's a push-pull with the nonprimary sources of deposit funding. But can you just update on some of the initiatives you have in place? And maybe if you change incentive structure, just anything that you're doing more specifically on the deposit side to kind of balance that loan-to-deposit ratio with the funding needs as you continue to grow?

[Paul Langdale, Chief Financial Officer]

Sure. Thanks for the question, Michael. I will say this, we were very deliberate in the fourth quarter about preventing runoff in our core deposit book and we were successful at doing that and defending with rate, some of our core deposit relationships that we've had. As a relationship bank, we're always keen to make sure that if we have to pay for deposits, we're paying it to our customers and we're taking care of them. That being said, we have incentivized the teams with very explicit deposit goals heading into 2023. It's an all-hands-on-deck approach in terms of ensuring that everyone is focused on making sure that we keep our costs down on the deposit side of the house as much as possible.

Our expectation heading into the first quarter is that as the Fed hits the terminal rate, we'll see the deposit cost pressures abate and we'll be able to, especially as the curve points a little bit further down in both the brokered and the FHLB arenas, we'll be able to selectively take some different tenors of deposit there. We obviously want to keep the deposit book short but we're going to be opportunistic in using the significant capacity we have in both the broker, the specialty and the other wholesale verticals in order to maximize our rate outlook on deposits for 2023.

[Michael Rose, Raymond James]

Okay. That's helpful. And then just maybe separately, just on the loan growth outlook, obviously, keeping the guide just about the same but it does seem from the tone that maybe things are going to get a little bit more challenging just with rates, as you mentioned, David, in the 4s going up to the 7 or 8? And how much of the growth is kind of intentionally maybe pulling back a little bit, just given uncertainty in the economy? Or is it truly just rates moving a lot higher and your customers may be looking for alternative options out there for funding their own growth?

And then just separately, if you can just give us an update, I know this has been a multiyear process but where you stand on some of the C&I initiatives. It looks like growth was double-digit annualized but if you back out the energy loans, looks to be a little bit softer. So I know a lot in there but just any color would be great.

[David Brooks, Chairman & Chief Executive Officer]

Yes. Thanks, Michael. I may not remember all the questions embedded in that question, so you may have to help me remember some of them. But yes, the -- we believe, overall, at the highest level, the amount of economic activity and the amount of deal flow is going to slow. It is already slowing deals, income-producing well at 8% as they do at 4% [ph]. So there's -- that's going to be a bit of a drag. The positive side of that has been the payoffs and refinancings and sales of assets and all that have slowed. So therefore, we don't have the payoff headwind that we had in the last couple of years. So we won't have to generate as many loans to net that mid-5%, 6%, 8% -- 7%, 8% that we expect for the year. So that's it at a high level.

We continue to be committed to diversifying our balance sheet. You mentioned the energy loans. We think that's a positive for us. We're seeing great opportunities there. We threw only about 4% of -- about 4% of our overall loan book in energy. So we think that's an area that can continue to grow a little bit as we go forward. And we'll continue to look at other lines of business but it's not as easy as this -- it's not as easy as snapping your fingers and making it happen. But, yes, we're committed to continue to diversify our lines of business. But your other one comment, Michael, was embedded around are we intentionally being cautious and the answer to that is yes. In this environment, heading into the uncertainties ahead, there's no easy button here. And as a long time shareholders and owners of this company, we've been running for 35 years and we're not going to start in our 35th year, 36th year here looking for an easy button to go, "Oh, gosh, let's go hire a team and book a bunch of this kind of loan or this kind of loan."

We're -- and obviously, our credit sizes being lower generally, our hold sizes being well lower than our peer averages, those are things that are core to our credit philosophy and risk management philosophy and we're not going to change that in our 36th year. And yes, there are avenues, Michael, out there which some banks may take, where you can go book a lot of really big loans or you can get into lines of business that you haven't been in historically. And we think that's a uniquely bad thing to do at this point in the cycle. So we're not going to be doing those kinds of things. We're going to be growing our loan book with our customers and our markets and continue to watch our risk.

[Michael Rose, Raymond James]

Okay, great. Maybe 1 last 1 for me. I'm going to try. I don't think you're going to answer it but I know you guys are involved in the Stanford Group litigation which another bank in the Southeast just settled. Just wanted to get any comments from you see if there's any update. I know a trial is for 1 of the classes is set for February 27. Again, I don't think your comment but I thought I'd try.

[David Brooks, Chairman & Chief Executive Officer]

Thanks for the question, Michael. Correct, we don't comment on pending litigation, as you know. But we always assess what's in the best interest of our company and our shareholders, as I said a moment ago. There are details in specific -- on this specific case that you asked about in our normal public disclosures and filings and you can read up on that as well and we'll continue to update that accordingly.

[Operator]

Our next question comes from the line of Brett Rabatin with Hovde Group.

[Brett Rabatin, Hovde Group]

I wanted to first circle back to fee income. And you mentioned that you think mortgage banking will be flat in the first quarter. I wanted to see; one, if you think -- obviously, the market is helping for a pivot, we'll see. But wanted to see if pass that, you felt like there could be some optimism for that to maybe pick up a little bit. And then also the decline in the other bucket due to the correspondent fee, if that has fully run its course or if there could be any additional atrophy related to that? And then if you just basically saw any other opportunities to maybe have growth in fee income lines of business.

[David Brooks, Chairman & Chief Executive Officer]

Let me say from a high level, I'll let Paul comment on some specifics, Brett, of your question. But at a high level, our view of the mortgage business right now is that it's hitting its lows and will linger there for a prolonged period of time. So in our numbers and assumptions, we don't have any increase or acceleration in. Obviously, that would be great for everyone if it happened. But in our decision-making in the fourth quarter of last year about around our cost base, included our view that it was going to be a very difficult year in mortgage. We've got great teams running both of those businesses and we feel good about it long term. But we think it's going to be very hard in '23 and maybe longer. And until we see real evidence that there's some environment that will allow a return to normal kind of volumes, we don't bake that in any of our forecasts. In terms of the correspondent and specific things you asked about, I'll let Paul comment.

[Paul Langdale, Chief Financial Officer]

Yes, Brett, that was just a onetime charge related to the severance of a correspondent banking relationship that won't recur in future quarters. And as far as the other fee income items, we expect them to remain relatively stable over the coming quarters.

[Brett Rabatin, Hovde Group]

Okay. That's helpful. And then I wanted to make sure I understood kind of the flavor, so to speak, of the commentary around the cost of funds from here. And it sounds if I'm getting it right, it sounds like you feel like you've maybe taken some -- big chunk of the pain, so to speak and what it took to keep deposits to keep relationships on balance sheet and maybe the deposit beta, so to speak, might slow on a relative basis going forward. Is that a fair assessment that you feel like you've taken some of the lion's share of the pain in terms of the cost of funds increase and maybe any thoughts on how we should think about the deposit beta from here?

[Paul Langdale, Chief Financial Officer]

Sure, Brett. We've been very deliberate in making sure that we play defense in our core customer base. And consistent with our history as a relationship bank, that's been a focus of ours. I think there's still going to be continued pressure on deposit costs near term until the Fed hits the terminal rate. Our expectation, though, is that once the Fed hits the terminal rate, we should see some significant abatement of pressure on deposit costs that help us in the back half of the year.

[Brett Rabatin, Hovde Group]

Okay, fair enough. And then maybe a question for Dan. You guys mentioned you look at the commercial real estate loan portfolio and I think a lot of investors are worried about commercial real estate. And maybe there's a couple of credits to think about from a loan repricing perspective that you'll get in front of. I wanted just to hear if you look at Slide, I think it's 17%, your credit has historically been much better than peers. Wanted to hear maybe what you might worry about in terms of the environment, maybe not even your own loan portfolio but just the environment around commercial real estate, if it's rents, if it's something else, if it's the change in rates, what's the big factor you're kind of concerned about for the environment?

[Daniel Brooks, Vice Chairman]

Yes, Brett, great question. I think, in general, let me say it this way, it might help you as you think about certain asset classes that we think are under pressure and will continue to be under pressure this year. Spec industrial, spec office, those may seem a bit obvious to you but I would say there's been a lot of that activity in the last couple of years. And as a rule, we've just stayed away from that type of lending and keeping with our core principles here. I would say, in general, people are watching certainly occupancies in the office space. I think rents certainly continue to be pretty solid. It seems on the multifamily side. So I don't think there are any primary concerns there that we're seeing. But, in general, I think we're just continuing to be very vigilant about stressing our portfolios for the rate increases and then mindful about what could happen in a downturn.

And I think in general, again, our structure with granular book which is limits exposure on any individual credit and the way we've underwritten those with the same standards we have over the last 3 decades, I think positions us as good as we can be. And while we're watching that, I think we feel very good about our portfolio at the present and continuing to monitor what that would look like. I guess that's why I would ask that for you.

[David Brooks, Chairman & Chief Executive Officer]

Yes. And I would say to Brett -- this is David. At a high level, Brett, one of the things as we thought about these loans rolling 5 years in that were underwritten at 4% interest rates. One of the things that has really helped in our markets, if you're thinking about the markets that we're in and the in-migration of people, whether it's office or multifamily or professional office buildings, the demand and the rents have increased materially in the last 5 years. So the cash flow that we underwrote 5 years ago are much higher today in almost every property and that goes through our philosophy to a high-quality property in great locations and great markets. It just has risen, if you will, with the tide of the economic activity in our market. So that's making it actually much better than we had feared maybe 6 months ago as we began the process re-underwriting these credits. So the great markets we're in. And also Dan and his team have done a great job of avoiding kind of the hot idea. And so spec industrial, office warehouse, that kind of space has been across the country around every airport and everything, given what's going on with Amazon and delivery and all that has been just built by the tens of millions of square feet.

And look, we're a little cautious around that as an example. We think there could be some pain in that if we have a significant economic slowdown. So we just have not bet the farm, so to speak, on any 1 asset class. Multifamily is great. It's strong here. But even then, you have to be cautious not to overbuild submarkets within these good markets. So those are the kinds of things we think about and talk about.

[Operator]

Our next question comes from the line of Brandon King with Truist Securities.

[Brandon King, Truist Securities]

So yes, could you please talk a little more about your confidence in the assumptions that deposit rates will peak soon after the rate pause, in particular, in an environment where we could be in a higher for longer rate environment [indiscernible] still be long out there and a lot of your competitors are still finding and scratching for deposits?

[Paul Langdale, Chief Financial Officer]

Sure, Brandon. And back to what I had mentioned on the previous answer to a question, we were deliberate in getting in front of the rate increases. So we wanted to make sure we could retain our core deposit relationships, those relationships that we've had for some time upwards of 3 decades. And the way that we did that is we were very focused on making sure we paid a higher rate as the Fed was hiking not waiting for the noise after the Fed hit the terminal rate and then as you mentioned, scratching and clawing and trying to play hand-to-hand combat for deposits against our competitors who are trying to take our customers. So we've been more generous on the front end with deposit increases for those core customers with the expectation that once the Fed does hit and hold at the terminal rate, that, that should provide us some alleviation of pressure on deposit rates as we continue to see that higher-for-longer environment that you mentioned.

[Brandon King, Truist Securities]

Okay. And does that also -- are you also assuming that kind of the non DDA noninterest-bearing mix stays kind of cost from here? Or are you also assuming kind of a mix shift from noninterest-bearing to interest-bearing as well?

[Daniel Brooks, Vice Chairman]

We're expecting a very slight mix shift in our forward forecasting but it's not very meaningful.

[Brandon King, Truist Securities]

Okay. Okay. And then a question on expenses, just as far as how you evaluate the expense run rate going forward? How do you feel about kind of your current headcount? And do you still see potentially room for there to get more efficient going forward?

[David Brooks, Chairman & Chief Executive Officer]

Look, I think, costs, Brandon, are going to be on everyone's plate in 2023. And so everyone is going to be -- our industry has been through unique time where from PPP revenues to the liquidity and system keeping interest rate, deposit costs down, et cetera. We've had a season here the last 2 or 3 years where costs haven't -- people have been able to invest as we have in our infrastructure and building out business lines and things like that. But we're entering a time now where if we're going to have an economic slowdown, rates are going to level out at a higher level, then the only of the lever that financial institutions are going to have to use their cost base. And so we took a hard look at ours in the fourth quarter and trying to position ourselves for what to be nimble and be able to react to what could come our way in 2023.

I think other banks will do similarly as the rates level out here in the second quarter. I think our headcount is right where we need it to be. We've invested in a lot of businesses. We have the best teams out customer-facing teams we've ever had and we're going to take great care of our customers. We're going to grow with our customers in our markets and we'll invest and hire more people as we see the need to do it. So we're -- but I think, right now, we're right where we need to be and looking good here as we go into '23.

[Operator]

[Operator Instructions] Our next question comes from the line of Matt Olney with Stephens Inc.

[Matt Olney, Stephens Inc.]

Want to go back to the outlook for the NII and I appreciate all the comments on the funding. On the other side, you mentioned the loan repricing tailwinds that should provide some offsetting benefits. Any more color you could give us on how quickly this book will turn? Just trying to appreciate why this would be a offsetting some of the funding headwinds as you move into, I think you said 2Q of '23 at the back half would offset some of the funding [ph] headwinds?

[Paul Langdale, Chief Financial Officer]

Sure, Matt. Thanks for the question. As David -- to echo a theme that David spoke to, there are a lot of potential outcomes for the broader economy in 2023. And obviously, the macroeconomic picture is going to influence the payoff and paydown trends. That being said, we have a bulk of our book is those fixed rate, 5-year CRE loans. And the contractual maturities for those will continue to provide a tailwind even in an environment with subdued payoffs or paydowns. As we look back on the fourth quarter, we did see payoffs and paydowns slow a little bit. Some of that is typically a seasonally slower Q4 that we see but some of it is a slowing of paydowns more broadly. Our expectation is to see some blend of the 3Q and 4Q rates on a go-forward basis from a payoff and paydown perspective. So we are optimistic that we will continue to have a pretty good lift from the repricing of those fixed rate loans, especially as contractual maturities happen over the course of the next 4 to 8 quarters.

[Matt Olney, Stephens Inc.]

Okay. I appreciate that, Paul. And then I guess, David, in the past, you've talked about the bank's goal of achieving the positive operating leverage every year. And looking to 2023, is that still a reasonable goal to achieve this operating leverage given the macro headwinds that you're facing in the industry spacing?

[David Brooks, Chairman & Chief Executive Officer]

SP1 We believe it is. Matt, given, again, everything we know today, we believe it is. We think our cost. We've got a very good handle on our cost structure now. And we'll continue to look, as Paul said, for ways to incrementally improve. We're taking a hard look at all our contracts and all those things that you would expect the bank like ours to do on an ongoing basis. So we'll continue to look for things like that. That will be helpful, I guess, as we fight that there are so many things, as Paul mentioned, from FDIC to contracts and contractual increases in pricing and things like that. And obviously, increases merit and pay increases to our teams and all of that we're creating the headwind. So we tried to get ahead of it in the fourth quarter by having some cost reductions across the company and then positioning ourselves to hold the line here, if you will, in 2023. But it's a continued, not only focus of ours, Matt but it's a commitment we have to our shareholders to continue to improve the operating leverage of the company.

[Matt Olney, Stephens Inc.]

Okay. I appreciate that, David. And then I guess, lastly, for -- a credit question for Dan. I think there was a sale of nonaccrual loan in the fourth quarter. Would appreciate any comments you have on the market appetite for loan purchases? And how did the pricing of that loan compared to the appraised value?

[Daniel Brooks, Vice Chairman]

SP1 Yes. Good question. As you noted there, we did have an opportunity to move out to nonperforming credits, large ones, large for us anyways. We tend to have small ones which is a good thing but we also had some additional small ones. And one of those was in a note sale. It was an energy loan, in particular. I would say the percentage of discount which I think is what you're really looking for there, is going to depend on the asset, right? Real estate assets, if you're selling those notes, could be different than C&I assets or others. And I would say relative to the value that we saw on that and the balance on it, it was a slight discount, really off of what we would have expected at that point. Certain that other banks may be looking at or have done the same things. And again, depending on the asset class and the condition of the credit, it's very much depends on those variables when you're trying to determine that.

[Operator]

Our next question is a follow-up from the line of Brett Rabatin with Hovde Group.

[Brett Rabatin, Hovde Group]

Just one follow-up on that repricing of loans question. I think last quarter, you originated $326 million of commercial real estate and had $950 million reprice. Paul, do you happen to have those numbers maybe for the fourth quarter and I think that -- or the CRE portfolio has a 3-years duration, I was just curious if that was still kind of an effective number?

[Paul Langdale, Chief Financial Officer]

Those are the duration assumptions that we're using. As far as repricing is concerned, the bulk production in Q3 was higher than it was in Q4. I don't have the exact number off the top of my head, Brett but I would estimate that it was about 20% less. Again, some of that is seasonality and some of that was an additional slowing of repayments as the Fed's printed up the forward curve. Our expectation, though, is for the future forward rate of the fixed rate repricing to be somewhat blended between what we saw in Q3 and Q4.

[Operator]

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

[David Brooks, Chairman & Chief Executive Officer]

Yes. I appreciate everyone being on the call today and the active back and forth. I feel really incrementally positive as we enter 2023, I think we're well positioned versus our operating leverage versus our ability to continue to grow the company. And I think we're well positioned for whatever happens and excited to take on the challenges ahead. Thanks, everyone, for being on today and I hope everyone has a great day.

[Operator]

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