Independent Bank Group - Q4 2021

Transcript

Operator (participant)

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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 & Strategy for Independent Bank Group. Thank you. You may begin.

Paul Langdale (EVP of 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 a 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 five of the text in the release or page two for 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. Reconciliation to 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 and 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 non-performing 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 shares 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 and CFO)

Thank you, David. Good morning, everyone. Note that slide six 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 costs. 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 to 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 4 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 costs. 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 flat 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 of noninterest expense related to COVID-19 vaccinations incentives and testing. Slide 19 shows our deposit mix and costs. Deposits totaled $15.6 billion at quarter end, with total noninterest-bearing deposits up by $153 million from linked quarter and $901.8 million from the fourth quarter of 2020. Interest-bearing deposit costs decreased 8 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 1 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 non-performing 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 our 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 31, 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. With that, I'll turn it back over to David.

David Brooks (Chairman and CEO)

Thanks, Dan. Looking ahead, we remain confident in our ability to grow our core loan portfolio at the 7%-8% level in 2022. We are also incrementally encouraged by our strategic positioning of the balance sheet ahead of any increases in overnight rates. To that end, we have made a concerted effort to optimize our funding costs 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, and we will now open the line to questions. Operator?

Operator (participant)

Thank you. If you'd like to ask a question, please press start one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. In the interest of time, we ask that you limit to one question and one follow-up. Thank you. Our first question comes from the line of Brady Gailey with KBW. Please proceed with your question.

Brady Gailey (Managing Director and Equity Research Analyst)

Hey, thank you. Good morning, guys.

David Brooks (Chairman and CEO)

Hey, good morning, Brady.

Brady Gailey (Managing Director and Equity Research Analyst)

I know last quarter, you know, Michelle gave us the expense guidance of, you know, expecting expenses up about 3% year-over-year in 2022. You know, 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 y'all thinking about expenses now? Has there been any change to that 3% growth estimate, Michelle?

Michelle Hickox (EVP and CFO)

Yeah, that's a good question, Brady. I think similar to our peers, we have, you know, seen continue to have challenges on wages. You know, just being able to identify and hire talent, especially talent with specific skill sets, has been more expensive. We are gonna update our expense guidance. I think previously it was 3% over 2021. I'm gonna update that to 5% over full year 2021 expenses, just due to the wage pressures as well as, you know, our board has wanted to continue to make investments in our infrastructure. We've identified some new areas, you know, that we're gonna make some investments there as well.

Brady Gailey (Managing Director and Equity Research Analyst)

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

Michelle Hickox (EVP and 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. You know, our plan is called for us to put at least $500 million in this year. It could be more, you know, really depending on how the liquidity holds.

Brady Gailey (Managing Director and Equity Research Analyst)

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

David Brooks (Chairman and CEO)

I think, Brady, our view on that hasn't changed at all. We will be opportunistic with the volatility in the markets. We've had the opportunity the last two quarters to repurchase, you know, for us, material amounts of stock compared to what we've purchased in the past. You know, but because our retained earnings and our capital continues to grow, our tangible book value per share is growing. As it grows, then obviously the price at which we, you know, would be willing to purchase our stock continues to go up.

We'll see how that, you know, plays out over time. I still believe that, you know, strong organic growth and some future M&A opportunity possibly is the best use of our capital for our shareholders. 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 (Managing Director and Equity Research Analyst)

Okay. Got it. Thanks, David.

David Brooks (Chairman and CEO)

Thanks, Brady.

Operator (participant)

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

Michael Rose (Managing Director and Equity Research Analyst)

Hey, good morning, everyone. Hope you're doing well.

David Brooks (Chairman and CEO)

Hey. Good morning, Michael.

Michael Rose (Managing Director and Equity Research Analyst)

Good morning. Hey, just wanted to touch on the loan growth outlook. It sounds like, you know, the expectation is kind of in line with last quarter, you know, really healthy growth for next year. It looks like you guys had really good energy growth for the second quarter in a row. Can you just give us, you know, kind of what the puts and takes are of that outlook? Then maybe, if you can just comment on the C&I team, you know, build out that you've talked about previously. Thanks.

David Brooks (Chairman and CEO)

Yeah. Thanks, Michael. We were pleased with, you know, where the loan growth was in the fourth quarter. We felt like, you know, that's what we had, what we'd expected it to be for the year. You know, a little over 6% was, you know, I think where we had budgeted in the range of what we had expected. Certainly felt like it would accelerate in the second half of the year. We feel like that, our guidance to 7%-8% for 2022 is still a good number. You know, there could be upside to that depending on, you know, how the economy goes, how quickly the Fed raises rates, and a lot of things we don't control.

We feel like under, you know, most scenarios, 7%-8% is a good number for us for 2022. The C&I, middle market C&I build-out 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, continuing to build out their team. We expect to continue to do that aggressively as we build out across Texas in 2022. On the energy front, we have had a lot of success moving over and picking up some high quality relationships. You know, it's about, I think, current commitments around $500 million and current outstandings around $340 million-$350 million.

It's still a relatively small piece of our overall loan portfolio. I'm very proud of the team we've got there. We did just hire another energy banker in Houston, and we intend to continue to invest and look for opportunities in the energy space. You know, with current outstandings around 2.5%-3% of our total loan book, we think we have some room to grow. You know, as long as we see the high quality opportunities with the right structures and the right pricing, then I think we'll continue to do that. Dan, did 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. Beyond that, I think you covered the nice opportunities we saw in middle market.

Michael Rose (Managing Director and Equity Research Analyst)

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

Michelle Hickox (EVP and CFO)

Yeah. I think for our plan for our retail mortgages, we expect that they will be down just a bit in 2022 relative to 2021. You know, of course, it's hard to predict that business really depending on what rates do this year that could more heavily impact them. They have done a good job of building out that team, you know, and we do have great markets where we have more, you know, buy versus refinance here in our Texas markets for sure. Warehouse, we expect, you know, 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 2022 as well. We still think probably $700 million-$750 million is what our plan calls for right now.

Michael Rose (Managing Director and Equity Research Analyst)

Okay. Thanks for taking my questions.

David Brooks (Chairman and CEO)

Great. Thanks, Mike.

Operator (participant)

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

Brad Milsaps (Managing Director and Equity Research Analyst)

Hey, good morning.

David Brooks (Chairman and CEO)

Hey, good morning, Brad.

Michelle Hickox (EVP and CFO)

Brad.

Brad Milsaps (Managing Director and Equity Research Analyst)

David, 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. I noticed too there was a pretty decent difference between kind of period end deposits and the average. Is that more seasonal, you know, kind of public funds related, or is there something specific there that you're running off in categories that might continue to help you out as well?

Michelle Hickox (EVP and CFO)

As it relates to our funding costs, you know, 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. 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 will reprice as well. 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.

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. That's why you see the year-end balances be lower than the average balances. Those have really sort of come back to where they were before that, I would say kind of fairly flat for the first quarter.

Brad Milsaps (Managing Director and Equity Research Analyst)

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

Michelle Hickox (EVP and CFO)

Yeah. I think we have about $24 million left of accretion, which is primarily from the Guaranty deal, Brad. You know, our current outlook and plan doesn't call for any rate increases. That's not. We did our budget, you know, assuming a flat rate environment, which I think we all probably expect that that is 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, you know, how long will deposits lag, you know, hopefully longer than they have in the past just due to the amount of liquidity.

You know, 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 (Managing Director and Equity Research Analyst)

Okay, great. Thank you, guys.

David Brooks (Chairman and CEO)

Thanks, Brad.

Michelle Hickox (EVP and CFO)

Great.

Operator (participant)

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

Matt Olney (Managing Director and Senior Equity Analyst)

Hey. Thanks. Good morning, guys. Just wanted to follow up on a few of Brad's questions there. I think you said-

David Brooks (Chairman and CEO)

Morning, Matt.

Matt Olney (Managing Director and Senior Equity Analyst)

Good morning. 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 and CFO)

Yeah, we did have some accelerated accretion in Q4. If you noticed it went up from Q3. I think our expectation is that that run rate is gonna be closer to $3.5 million a quarter for 2022 is a better way to look at it.

Matt Olney (Managing Director and Senior Equity Analyst)

Okay. Perfect. As far as the discussion around sensitivity to higher rates, I get there's lots of moving parts here, but any commentary you can give us around the loans that are gonna be repricing higher with the Fed? 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 and CFO)

We have very few loans that are below floor. You know, on our variable rate loans, we should get an immediate impact on most of those. But that's only about, you know, 15% of our loan portfolio that reprices immediately, even though I think we're about half-and-half fixed and variable right now. You know, some of those reprice monthly, some quarterly, and so you'd have to consider that. You know, right now I think it's gonna 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. You know, we don't really have that built into our plan that we're gonna get a significant benefit from that at this point.

Matt Olney (Managing Director and Senior Equity Analyst)

Okay. 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 the first part of the year, but hopefully moderate the back half of the year into 2023. Curious kind of what your thoughts are around the pace of the pay downs.

David Brooks (Chairman and CEO)

Yeah. We've been a little surprised, Brad, by the you know volatility. It seems like in one quarter they're elevated, the next quarter they're not. From the highest level, I think our expectation is that we will continue to see you know 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 you know as the market gears up for a you know for this rate increase cycle that most everyone's expecting, the thought is that maybe the cap rates on some of these assets 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 might accelerate even if people think that, "Hey, this is my last chance to really sell this asset at a very low cap rate." You know, 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. 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 gonna hold here for this next cycle. There'll always be some, obviously, turnover and pay downs. Yeah, our view is the same. Similar, pretty accelerated first half of the year and slowing down late into the year and end of 2023.

Matt Olney (Managing Director and Senior Equity Analyst)

Thank you, guys.

Michelle Hickox (EVP and CFO)

Thanks, Matt.

David Brooks (Chairman and CEO)

Oh, thanks much, Matt.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Brett Rabatin with Hovde Group. Please proceed with your question.

Brett Rabatin (Managing Director and Head of Equity Research)

Hey, good morning, David and Michelle.

David Brooks (Chairman and CEO)

Hey, good morning, Brett.

Michelle Hickox (EVP and CFO)

Hi, Brett.

Brett Rabatin (Managing Director and Head of Equity Research)

Wanted to ask, you know, your deposits through the pandemic are up about 1/3, 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, you know, as we go forward as rates increase? 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 and CEO)

I'll start us out, Brett, and then Michelle can give some more detail, Brett. Our view is that, you know, for starters, these are our customers' deposits, so there's not a lot of, you know, high yield money that's come in, you know, during this time, right? It's really our customers' deposits. There will certainly be, you know, some pressure to raise rates as rates go up over time. I think early on, our expectation is that, given the amount of liquidity that we and other banks have, there will be, you know, an ability to keep the deposit prices down without, you know, losing a whole lot of deposits. As rates continue to go up, that gets, you know, a little more interesting, a little trickier.

Our view is that a lot of that DDA growth has been our C&I customers and C&I deposits. We feel good about that. I feel good about, as you pointed out, the growth in DDA, the trend as a percentage. You know, our deposits are getting better quality. Michelle, you could comment on, you know, deposit runoff or how, you know, how much we might expect it to, you know, those deposits to flow out.

Michelle Hickox (EVP and CFO)

Yeah. I think at this point, Brett, I don't really have an expectation for a big outflow of deposits, at least in 2022. I think this is gonna be a longer term phenomenon. You know, obviously as David said, we're gonna have to manage as rates go up and as our competitors, you know, change rates on deposit accounts, manage it that way. You know, 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, you know, as David said, to improve our deposit base. 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 (Managing Director and Head of Equity Research)

Okay. That's great color. The other question I wanted to ask was, you know, David, thinking about M&A, you know, last year we kind of started the year early and you were pretty optimistic on, you know, doing a deal or two. I think as the year progressed, you know, maybe price expectations may have ebbed your enthusiasm a little bit. You know, as we start 2022, 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 know, you think maybe M&A is tougher, what your thoughts are on optimism around deals.

David Brooks (Chairman and CEO)

Well, Brett, as my brother says, I'm a glass half full rising guy. You know, I'm always encouraged, you know, about opportunity in the future. But that said, given my track record the last couple of years, prognosticating about M&A volumes, I'm gonna give up that job and just stick to what we do really well, which is growing our organic bank in the best markets in the country. That's what we control. I really don't have a good sense, Brad. At the highest level, I just 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.

What motivates, you know, a group to decide to seek a partner, you know, those things vary obviously across the board in timing. I do think that, you know, our expectation going into this pandemic was that would cause a lot of disruption in the credit cycle, that would, you know, force, not force, but cause a lot of banks to think about, you know, where they were and what their future was, you know, gonna be the next three to five years, and that they might think it was a good time to, you know, 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, the 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. There's just nothing kind of pushing, if you will, motivating. A lot of people point to the bigger macro things which I think, you know, are all relevant and pertinent around technology and, you know, regulatory investments and things like that. That's a longer term focus thing, and that's not anything that I think presses, you know, banks that are in this $2 billion-$10 billion range that, you know, are bank size that we would be looking at. All that said, I just don't have a feel for it.

I do know that, you know, 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 going up a little bit for 2022. 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 you know, not only hiring new people, but you know, paying and retaining the great talent that we've got. All that, you know, is very expensive.

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, you know, 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, you know, in the future, grow the company, continue to grow the company and organically and, you know, hopefully, someday with some M&A.

I just don't have a sense, Brad, at all, whether it's a late 2022 or is it, you know, will, you know, something happen, will it be 2023? You know, I continue to believe from the highest level that yes, there will be high quality M&A, but when and, you know, 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.

If that takes 12 months or 18 months or 24 months, you know, it will be what it will be. The other thing that we, you know, ties 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. By doing so, hopefully that allows us to, you know, 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 (Managing Director and Head of Equity Research)

Okay. Well, that's very color. Appreciate it, David.

David Brooks (Chairman and CEO)

All right. Thank you, Brad.

Operator (participant)

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 (Managing Director and Senior Equity Analyst)

Yeah, thanks for taking the follow-up. David, I 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 of the year versus the first half of 2021. Any update on what you're seeing in more recent weeks and months around loan pricing?

David Brooks (Chairman and 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, you know, book high-quality assets. We're seeing a lot of pressure on pricing continuing. The structure, I think generally, you know, remains strong and I'll let Dan comment on that. But I think the pricing, it continued, I would say in the fourth quarter at similar kind of pricing what we saw in the third quarter. 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 it's hard to know, you know, on some of these three-year and five-year fixed rate deals, you know, as interest rates go up later this year, likely, you know, how quickly does that get reflected or would it be reflected in the, in the CRE, you know, pricing market? Again, just don't have a feel for that. We've certainly been booking a lot more floating rate, you know, as a percentage of our loans here, anticipating an uprate cycle, as I mentioned in my, you know, prepared remarks earlier. But that said, you know, we've built in, you know, pretty conservative pricing into our models and, you know, and we still feel good about, you know, 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. 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 2021 was competitive, so we certainly expect that would continue in 2022. I think overall, the banks have behaved well as it relates to structures, and it's primarily the non-banks who are in that space.

Matt Olney (Managing Director and Senior Equity Analyst)

Okay. That's helpful. 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 efficiency ratio below that 50% level and now a little bit above. Help us appreciate just what we need to see to get that core efficiency ratio back below 50% level. Is it a matter of just seeing higher rates, or do you also think it's gonna have to be driven partially by M&A? Thanks.

Michelle Hickox (EVP and CFO)

Yeah, I think I don't expect that efficiency ratio will go back below 50% in 2022, Matt, just due to all the things that we talked about this morning. I would expect by 2023 it will trend back below 50%. It's primarily gonna be driven by revenue growth, really. You know, I don't expect at this point we're gonna really reduce our costs going forward. Hopefully, they don't continue to increase at the level they will in 2022, but just as a growing company, I expect they'll continue to increase. You know, especially with rate increases, we should drive higher revenue in 2023 that will help us push that efficiency ratio back down.

Matt Olney (Managing Director and Senior Equity Analyst)

Okay. Thanks. That's all from me.

David Brooks (Chairman and CEO)

Hey, thanks, Matt.

Michelle Hickox (EVP and CFO)

Have a great day.

Operator (participant)

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 and CEO)

Thank you. Appreciate everyone being on today. I did wanna comment one more time what an amazing job our team did in 2021, and really for the last two years. We had no, you know, understanding really, you know, early in 2020, what was coming for the next two years. Our team has just done a fantastic job of leaning in and taking care of our customers and taking care of our communities. I've been, you know, proudest of everything that we've accomplished the last two years, has been proud of our team and the work they've done, and in our ability to continue to attract such talented people who, you know, resonate with what we're trying to do and the company we're trying to build and the impact we're trying to have in communities.

We're committed to that and we continue to build our team in a way that, you know, points to a long-term future and just appreciate each of them. Appreciate each of you who've listened and who invest in our company and we will continue to work hard on your behalf as well. Have a great day.

Operator (participant)

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