Q4 2023 South Plains Financial Inc Earnings Call

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the South Plains Financial Inc. fourth quarter and full year 2023 earnings conference call. During today's presentation, all parties will be in a listen only mode following the presentation, the conference will be opened for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Mr. Crockett, please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings conference call. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer, Cory Newsom, our President, and Brent Bates, our Chief Credit Officer. The related earnings press release and earnings presentation are available on the News and Events section of our website SPFI. Dot Bank.
Before we begin, I'd like to remind everyone that this call may contain forward-looking statements that are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated future results. Please see our safe harbor statement in our earnings press release or on Slide 2 of the earnings presentation. All comments made during today's call are subject to those Safe Harbor statements. Any forward-looking statements presented herein are made only as of today's date, and we do not undertake any duty to update such forward-looking statements except as required by law Additionally, during today's call, we may discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can also be found in our earnings release and in the earnings presentation purchase. Let me hand it over to you.

Thank you, Steve, and good morning. On today's call. I will briefly review the highlights of our full year 2023 results, as well as provide an update on our capital allocation priorities. Cory will discuss our loan portfolio as well as our initiatives to drive deposit and fee income growth in the year ahead.
Steve will then conclude with a more detailed review of our fourth quarter financial results. I would like to start by thanking our employees for their efforts and commitment to both the bank and our customers during an extremely challenging year for our industry, our success would not be possible without their dedication and hard work.
As shown on slide 4 of our earnings presentation. We delivered 1.7% loan growth for the full year, driven by the expansion of our lending platform, combined with a resilient economy as Texas continues to benefit from in-migration and a favorable business climate. If inflation continues to moderate and the Federal Reserve begins to reduce their benchmark interest rate, we expect economic growth to accelerate as we look to the second half of 2024.
Looking back at the past year, our community based deposit franchise grew modestly which is impressive given the significant dislocation that occurred following the failures of Silicon Valley Bank and Signature Bank in the first quarter.
For the full year, our core deposits grew 1%, excluding brokered deposits to $3.26 billion, which demonstrates the resilience of our franchise combined with our strong customer relationships. At quarter end, 81% of our deposits were in our rural markets with 19% in our major metropolitan markets of Dallas, Houston and El Paso. Additionally, our average deposit account balance is approximately $36,000 with only an estimated 16% of our total deposits being uninsured or uncollateralized. Credit quality of our loan portfolio also remained strong through the fourth quarter as our classified loans have remained at the lowest level since the start of the pandemic as we ended the year.
Lastly, we increased our return on average assets for 1.54% for the full year 2023 as compared with 1.47% for the full year 2022. We also completed the sale of our wind mark crop insurance subsidiary in April for a pretax gain of $33.8 million gain that we recorded positioned us to strategically sell $56 million of investment securities at a loss in a tax-efficient manner and reinvest those proceeds into higher yielding loans.
Given our strong capital and liquidity position, our Board of Directors authorized a $15 million stock repurchase program in May, which has been exhausted. We repurchased 218,000 shares in the fourth quarter and a total of 686,000 shares during 2023. During the year, our Board has believed that our shares have traded below intrinsic value and we have been aggressive buying our stock in the open market.
Looking to the year ahead, we will maintain our liquidity and continue to watch for opportunities to expand the bank and our earnings power. M&a is an area of interest, and we believe you will see transactions take place in the market as sellers' expectations are becoming more realistic. The decline in interest rates at the end of the year also led to a recovery in bank securities portfolios, which will increase the probability that we will see deal volumes pickup. However, we will only be interested in acquiring a bank with the right culture, excess liquidity, a stable deposit base and at a valuation that makes sense for us and our shareholders. In the meantime, we remain focused on organic growth while returning a steady stream of income to our shareholders through our quarterly dividend. Our Board of Directors again authorized a $0.13 per share quarterly dividend as announced last week. This will be our 19th consecutive quarterly dividend to be paid on February 12th, 2024 for shareholders of record on January 29, 2024.
Now I'll turn the call over to Cory.

Thank you, Charlie, and hello, everyone. Starting on Slide 6, loans held for investment increased $20.6 million or 2.8% annualized compared to the linked quarter. Loan demand was primarily in commercial real estate during the quarter and was partially offset by an approximate $10 million decline in our indirect auto portfolio. As we said on previous calls, we're carefully managing our indirect auto auto portfolio with a focus on maintaining the portfolio's credit quality while reinvesting a portion of the monthly principal amortization into higher yielding loans. The yield on our loan portfolio was 6.29% in the fourth quarter as compared to 6.1% in the linked quarter. We continue to price new loans to account for the higher interest rate environment that we are operating in, combined with the effort pressure on our deposit costs.
Skipping to slide 8, we grew loans by $44 million or 17.8% annualized to $1.04 billion in our major metropolitan markets of Dallas, Houston and El Paso as compared to the linked quarter. Our metro markets continue to be an important source of loan growth and more than offset the paydowns that we experienced in our community markets, as well as the expected decline in our indirect auto portfolio. We remain in a hiring mode as we look for good lenders who fit our culture and can bring new business to the bank, but we'll remain extremely selective.
Turning to Slide 9. Demand across our markets remains healthy as we continue to experience solid economic growth. So we continue to be selective in who we do business with and what loans we underwrite. As a result, we expect low single digit loan growth for 2024. So we expect to continue deliver interest income growth as many lower rate loans continue to experience, perhaps principal repayments and or rate resets. While we expect the majority of this repricing to begin accelerating in the second half of 2024. We believe loan yields will remain elevated even if the Fed begins to cut interest rates given lower liquidity in the market, which will benefit our net interest income and NIM in the third and fourth quarters. In conjunction with our effort to drive loan growth, we also need to deliver deposit growth while stabilizing our noninterest-bearing deposit balances, our lenders have always had an emphasis on deposits as part of their incentive comp plan. We have brought a renewed focus on the top and value of these deposits. More specifically, true core deposits and non-interest bearing balances now carry more weight in these plants. Better said, we are focused on the profitability of the whole relationship. We're also getting much better at putting in loan covenants to new loan originations centered on deposit requirements and liquidity maintenance agreements. While we've always targeted this, we're getting much better negotiating these covenants.
Treasury management is another area where we have made real progress as we've improved our team, our product and our capabilities over the last year during the fourth quarter, we recruited a senior treasury management executive from a top seven U.S. Bank to head this business, which follows several additions to our team as we improved the talent of this group and folks had with the level of people and product that we have today, which is unmatched in our history. We're also doing a better job than we ever have, and making sure we align the right treasury products with the customers' financial needs, thus allowing us to continue to drive both deposit growth and fee income.
Turning to slide 11, we generated $9.1 million of noninterest income in the fourth quarter as compared to $12.3 million in the third quarter. This decline was largely due to a $2.9 million decline in mortgage banking revenues, which includes a $2.2 million decline in the fair market value adjustment to our mortgage servicing rights portfolio. Importantly, we've aggressively managed our mortgage banking expense base as volumes have decreased over the last 18 months with a focus on maintaining profitability. While this downturn in mortgage originations has been the most severe in more than three decades. We've experienced negligible losses while maintaining our mortgage capabilities for the eventual targeted volumes as mortgage rates continue to decline. And as I mentioned, we expect our initiatives in treasury management to begin to impact fee income beginning in the second quarter.
For the fourth quarter, noninterest income was 21% of bank revenues as compared to 26% in the third quarter of 2023.
To conclude, we delivered strong results through the fourth quarter and believe we will remain well positioned. That said, we're not standing still and are and are aggressively addressing the current environment to manage deposit cost pressures while accelerating fee income growth, we need to stabilize our noninterest-bearing deposits and grow our deposit franchise in order to position us to take advantage of improving loan demand as we move through 2024. I'm confident that we have the right people and plan, and I'm excited about the opportunities ahead.
I will now turn the call over to Steve.

Thanks, Corey. For the fourth quarter, diluted earnings per share was $0.61, which compares to $0.78 per share in the linked quarter. We recorded a $1.5 million write-down of the fair value of our mortgage servicing rights asset during the quarter as compared to a $700,000 write-up in the linked quarter. The current quarter impact on our earnings per share was $0.07 after-tax.
Turning to slide 13, net interest income was $35.2 million for the fourth quarter as compared to $35.7 million for the linked quarter. Our loan production in the third quarter, combined with the rise in new loan rates lifted the yield on our loan portfolio by 19 basis points in the fourth quarter, resulting in a $1.7 million increase in loan interest income. The rise in loan interest income was offset by the one by $1.3 million increase in interest expense due to the rise in short-term interest rates on interest bearing liabilities and a decrease of $900,000 in income on other interest earning assets. As average investable liquidity declined in the fourth quarter, our net interest margin calculated on a tax-equivalent basis held steady at 3.52% in the fourth quarter as compared to the linked quarter. Higher loan balances and loan yields offset the rise in our cost of deposits and the decline in non-interest bearing deposits.
As outlined on slide 14, our average cost of deposits was 224 basis points in the fourth quarter, an increase of 17 basis points from the linked quarter. Given the rising interest rate environment through the year, we have had to be proactive in maintaining deposit relationships, which has led to the rise in our funding cost. Overall, our core deposit franchise continues to remain steady, with only a slight decrease in the fourth quarter. As Cory touched on, we put initiatives in place designed to stabilize our non-interest bearing deposit balances while also driving core deposit growth. We expect these initiatives to begin to have an impact as we move through 2024.
In the meantime, we expect continued upward pressure on deposit costs, which will modestly pressure on them. That said, we expect our medium to trough through the first half of 2020.
For Turning to slide 15, our ratio of allowance for credit losses to total loans held for investment was 1.41% at December 31st, 2023, which is unchanged from the end of the prior quarter. We recorded a $600,000 provision for credit losses in the fourth quarter, which was largely attributable to our organic loan growth as well as net charge-off activity in the quarter.
Skipping ahead to Slide 19, our noninterest expense was $30.6 million in the fourth quarter as compared to $31.5 million in the linked quarter, $900,000 decrease was largely due to lower mortgage costs as we continue to manage through the decline in mortgage volumes. That said, we would expect noninterest expense to modestly rise through the first half of 2024 as mortgage volume increased through the spring selling season.
Moving ahead to slide 21, we remain well capitalized with tangible common equity to tangible assets of 9.21% at the end of the fourth quarter, an increase from 8.4% at the end of the third quarter of 2023. The increase was largely driven by a $32.9 million increase in accumulated other comprehensive income or AOCI and $8.2 million of net income after dividends paid AMCI. was positively impacted by decreases in long-term market interest rates. During the fourth quarter, tangible book value per share increased to $23.47 as of December 31st compared to $21.7 as of September 30th, 2023, largely due to the impact of AOCI in our net earnings in the fourth quarter. I'll turn the call back to Curtis for concluding remarks.

Thank you, Steve. To conclude, I'm very proud of our performance over the past year our community-based deposit franchise remained resilient while our lenders continue to drive high-quality loan growth that contributed to our strong earnings growth in 2023, we also sold Wellmark, which provided capital for share repurchases as well as a strategic reposition of a portion of our securities portfolio. The bank is operating very well as we enter 2024, but we know we have much more to do. As Corie outlined, we have initiatives in place that we believe will stabilize our non-interest bearing deposit balances, grow core deposits and drive fee income growth this will provide improved liquidity for loan growth.
Looking to the second half of 2024, when we expect to see a meaningful portion of our loan portfolio reprice and an acceleration in the Texas economy from already healthy levels. We expect competitor liquidity to fund the loans in our markets to be limited and believe we will be well positioned to add high-quality customers and attractive loans to our portfolio. We also expect our fee income to improve starting in the second quarter. We remain optimistic on the year ahead as we focus on delivering value to our shareholders. Thank you again for your time today. And operator, please open the line for any questions.

Question and Answer Session

Operator

Thank you, and I'll be conducting a question-and-answer session. If you'd like to be placed in the question queue, please press star 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 maybe necessary to pick up your handset before pressing star one One moment, please, while we poll for questions.
Our first question today is coming from Graham Dick from Piper Sandler. Your line is online.

Hey, morning, guys. And I just wanted to start on loan growth I heard your guidance there for for low single digit growth, which I guess aligns the last few quarters pretty well. But for the full year 2023 at 10% it's definitely definitely slower.
And then also for you too, sort of frame that up with, I guess, what you see between your community markets and in the metro markets because it sounds like the growth in the mature markets has been pretty strong, which is a little different than some of the Metro focused or headquartered banks in Texas. So I'd just like to hear maybe what you are doing differently to grow loans faster there? And then also how the community banking payoffs might play into that low single digit growth?

Graham, it's Curtis. Yes, I think a lot of our growth it's getting it's the result of making some great hires that we've done in some of those markets in the last couple of years. And I'll let Scott coming to fruition. It is a still a little more challenging to get the growth out here in some of the more rural markets, but we're seeing good activity, too. I'm going to let Brent might just kind of elaborate on that, what he kind of sees going forward here in '24.

Yes, you know, this is Brent. Last year and '23, we saw real strong growth in the first half and and closer to that 3% second half of the year. And I think overall, what we're expecting this year is still to see some some tailwinds from our construction portfolio advances in the first half of the year on the construction portfolio, which is predominantly multifamily and industrial projects and our metro markets and still see some pullback in residential construction. And then we're still seeing good activity from our existing clients even out in our rural markets. So I think the low single digit growth for 24 is realistic. It's attainable and definitely 24 odd. I would expect to be much more of a smooth growth period than the 2023.

was granted as Corey. I think the other thing we've got to keep in mind is we're being much more selective about what we're wanting to fund. We've we've had opportunities to look at a number of transactions that we just we've passed on. We don't we don't think it's the right time and some of those for us right now or for for silicon. So we've just we have selectively pulled back a little bit and we're okay with that.

Yes, definitely makes sense. And that's helpful, Brent.
Thanks for that.
I guess just moving to the margin a little bit. Was flat quarter over quarter. I know you guys said that you're calling for a trough maybe in the first half of the year I was wondering if you'd be willing to maybe give an idea of where you see that trough. Is that low 30s 40s or is it just slightly below this level?
So trying to get an idea for the trends going forward, given we saw a flat margin quarter-over-quarter and it seems like the rate environment should get a little bit better to start the year, but obviously still a very competitive out there.

Yes, I'll grab, Steve. I'll start and then I'll let Alex that career purchased the jump in as well. I mean, we were we were fortunate that we were able to keep keep it flat in the fourth quarter, and we do continue to see pricing pressure, particularly on the deposit side. We've we did while we did increase the cost of cost of deposits during the quarter, that that rate of growth did slow down. And we're we're prepared for that to still increase. But that overall, that growth has continued to slow down. And yes, we hope there will be some some some relief in sight with the payer. What they do with rates have been a little bit of big mixed messages in the first three with three weeks of the year so far, it seems like it's looking like they're headed down and then kind of pulling back up a little bit, not not on our specifically, but just when you look at the when you look at the treasury market and some other other rates, so we are hopeful that that we can we can keep at NIM. close to where it is a little bit of a drop. You know, I hate to put any specific number out there, but I mean 5 basis point to 3 basis point drop or 5 basis point, 3 basis point to 7 basis point ourselves of something like that would not be unrealistic, but we're going to do everything we can to trying to keep it close to where it is today.

To Graham, I think one thing, though, that this is the first quarter that we felt comfortable to start making minor changes in less sensitive, less rate-sensitive deposits throughout the Company. And so I think that I think that's really says a lot when you start looking at the fact that we finally feel comfortable to start making some minor rate reductions across the board. But those are going to be small and incremental, and it's going to take a while for the for it to start really showing. But I think that's I think that says a lot if you kind of think about the fact that we're finally willing just to start doing it now?

Absolutely, definitely does. And I guess just stand here with an M, so I guess is some of the trough that's going to happen or I guess the pressure and want to have is that because the fixed rate repricing is weighted towards the back half of the year?
Curious, did I hear that correctly?

We definitely have had more and more of that repricing that that will occur as we get to the second half of 24. Have we have some going along, but it accelerates a lot more as we get to the second half.

One other point of this is the time of year that our ag loans do pay down and another in the big scheme of things, it's not a significant number, but it does move things a penny or two here and there because most of those operating lines were priced up at current rates for a day as we went through 2023, and they will be priced at current rate of rights when they renew and they start going up again in '24. But there is a little drop there and it will be in some of our higher yielding notes that are out there right now.

Okay.
Okay.
That makes sense.
And then the last one, just more housekeeping. I just want to make sure I got the mortgage servicing right adjustments correctly. So you said that there was a $1.5 million mark this quarter, negative mark compared to last quarter, it was a $700,000 write-up, which is the that's the 2.2 number is really the delta between the two quarters, right?

Yes.
Yes.

Okay.
Okay.
All right.
I just wanted to make sure I understood that correctly. That's all for me, guys.
Thank you.

Thanks, Gary, and thanks.

Operator

Your next question today is coming from Brett Rabatin from Hovde Group. Your line is now live.

Hey, guys, good morning.

Good morning, everybody.

Wanted to first just talk about the deposit initiatives, and you talked quite a bit about stabilizing DDA. And I know you're hopeful for treasury management to possibly be a part of that. Can you guys maybe go through a little bit on the stabilization of DDA, what that entails in terms of product or or strategy or are you going to achieve that? And then just maybe talk a little bit about the growth of deposits and where you expect that to come from?

Yes, good morning. This is Corey. So you know, we have the conversation we talk amongst ourselves quite a bit. I mean, we'd like to sit here and tell you that I mean, Treasury has got at it quarter over quarter, just immediate change. It's not going to have you. And I mean, our what we're trying to do is an overall initiative that chases the trend long term in the way that we chase relationships. Most of it is going to come back specifically around the lending relationships and making sure that we require much more emphasis on the deposit gathering. So historically, in the past, our lenders have always we've always had deposited a bit at the forefront, but we looked at relationships, but we were never picky about the type of deposits. Now we've really changed that focus in incorporating that into.
Yes, the loan covenant that we have requiring the full operating accounts, all of the things like that, that really come back around that when we talked about continuing to step up delivery on the treasury side, I mean it's real I mean we continue to tweak to we get treasury leadership the way we really want it. And we're there. We're continuing to enhance our team work, and we're focused on education with our lenders and our our staff better than we've ever been. So I mean, it's it's not a sprint. I mean, it's a and it's a marathon and one that I think that we're continuing to build it in the right in the right way. But that's a focus of our deposit initiative. I mean, we it's all day long every day looking at the value deposits, which ones are sticky, which ones they really do mean core to us and which ones that will ultimately help us drive profitability in the relationships.

Okay.
That's helpful. I appreciate that, Tom, the other thing I wanted to ask about was the expenses going forward.
Obviously, they've been managed well the past year and maybe some of that's mortgage incentive compensation going down, which should probably revert some this year, which you, as you indicated, aside from the mortgage piece, are there pressure points inflationary or otherwise that would drive expenses in '24 relative to 23 as read,

Steve, so one one other piece that we didn't specifically talk about earlier, but we did our previously during the year, some of our technology initiatives that we've been working on had during '23, in particular, some of our transition to the cloud is it some we'll have some increased expenses. Some of that was just being built out and some of it was infrastructure and different things that we will start seeing some some more depreciation on during during the current year. I mean, there's there's always a little bit of inflationary pressures on some of the other some of the other items. And I don't I don't think there's a I don't think we're looking to drastically increase noninterest expense absent mortgage just changing up a whole lot as far as volume and production that that was that would warrant that. But outside of that, we again, we should be we should be probably closer to the Q3 number. I think we were at about $31.5 million versus $30.6 million. I don't think we'll be quite that high, but but Q4 was definitely a down a little bit lower than probably what we'll see on a go forward basis.

It is Corey, that I think to go along with what Steve was saying, though, I do anticipate the mortgage side actually picking up from a from the expense number in second half. I mean we're very much getting geared up for that because we've we're kind of proud of the fact of the way we managed mortgage through the last 18 months in. I mean, we we basically manage to a net zero. That's been our focus to make sure we could keep capabilities in place, but manage the EBIT, nimble, like we've always said, we would do now we feel like that is that we'll be making sure that we get the right protections in place to really take it take advantage of step in the second half of the year.

Okay.

And breadth as you heard, tell of their pump.

Yes, one more quick point of and again, this is just I'm giving you a reason not an excuse as we have grown our team and added real high-quality people so that we're doing so in blood to me is probably the toughest hardest market for banking talent that I remember in 50 years of doing this and so to bring the people along that we were doing, which we know is there and to do a personnel cost is going to be what it is to get them and people. So there's just a little extra tightness right there, that So over time, it's still going to generate a lot of good revenue for us. And we've got to have the right people to do it across all sectors, not just lenders, but it doesn't come cheap and we're not going to lose sight of it.

Okay.

That's helpful. If I could sneak in one last one. You mentioned you guys mentioned M&A in the call and it sounds like you're somewhat optimistic that you'll see some activity. And maybe you guys will be able to do a deal that makes sense to add to the platform.
Can you guys talk about from here, you know, some folks strategies evolve, they're now looking to maybe buy more more rural franchises that are deposit funded versus metro markets. Can you guys just talk about what your M&A strategy would be from here from a geography perspective and what you booked for a community bank to bring to your platform?

I'm going to I'll stick with what I've said. I think at the end of the call, the recording part right there that we believe that we know what we're looking for, and that is production creep back in front of me, a bank with the right culture. And that's number one because we're not going to crowd, Mike, our culture that doesn't look like us fit in inside. It's we've seen too many failures with that excess liquidity, our stable deposit base and the valuation that makes sense. Will you look at excess liquidity and stable deposit base to me, you're almost by definition and taxes, you're looking at more rural markets. So I think you're right you're quite right. And the best stories from other people are looking now to for so long, they didn't they weren't interested in banks out in smaller communities. And now we've seen that pickup. So yes, we've had some phone calls. We are going to have fee discussions were still not anywhere close to doing a deal. But if the right one comes along we've been an right one also means the right size and all of that as well. Then we believe we've got the capital and we've got the people and we believe we can make it work. But after watching what we've seen right here in our London market and the Permian as well, our in the past couple of years, we don't want to go down the road of having the kind of difficulties that we've seen from some other acquirers And I'll just leave it at that

breadth is, of course, you know, it's kind of interesting that you talk about the fact that people are starting to recognize the value from these rural deposits we always have. That's the thing that that even when we went public in '19, we had discussions around this. We have always seen the value of the rural deposits. And I think that probably puts us in a better position than a lot of the other ones that are just kind of changing their focus in looking at it.

But I do think that we're very good at it and we're very focused and being community minded when we lease some of these rural markets directly or do whatever those smaller markets really have to understand that you have to be the hometown bank, no matter where your headquarters are, and that's always been our philosophy in all of our smaller markets.

Okay, great.
That's really helpful. Thanks for the color.

Thanks, Brad.

Operator

And thank you. Our next question is coming from Joe introduced from Raymond James. Your line is now open.
Joe, perhaps your phone is on mute. So for Raymond James, your line is now live. As a reminder, everyone. That's star one to be placed into the question queue.
Our next question is coming from [Mark Sudley] certainly from KBW.
Your line is now live

with more than $400 billion or so on the buyback. I know you guys continued that this quarter and sort of finish the current authorization. Um, do you still favor the buyback as sort of near the top of the list.
As far as priorities for 2014, that's a new authorization comment, and it's going to be a decision by the Board.

I think clearly we were doing the right thing at the time in 23, we'll take a hard look at it and in fact, it will probably be discussed in our February Board meeting, and we'll decide where we think we ought to be for the year as long as we have the capital levels that we do, if we collectively think we're trading at a level that makes that a good investment for our shareholders money then yes, I think will reauthorize have something out there, but right now that I can't give you any real firm metrics on it but it is going to be a topic of discussion for sure. If Dell, obviously, I guess in terms of our priorities on things, we're going to be sure we have plenty of capital for organic growth because we do think we've get a chance to do some during the year and we're going to keep paying a steady dividend. And so after deal came along for M&A with one another. We've got the dry powder to do that. But right in there at about that same tier is buyback of our existing shares. And as long as we think it's a good value for the money. We're not going to be bashful about doing it.

Great. That's helpful. And maybe just one for Steve. Apologies if I missed this. But when you think about the NIM. for 2024, what are the rate cut assumptions that you are using when you think about those margin projections Thanks.

Yes, that so right now and again, it's a moving target. But as of as of right now, we've kind of just got two rate cuts baked in at this point lift in the in the first quarter, early second quarter would be that kind of the first one. And then later, I think in the end, the third quarter, first of the fourth quarter is when we've got the second one. And so again, that's the viewpoint on that can shift day-to-day sometimes. But I know some people have got more up to maybe four port as a product. But at this point, we're just kind of baking into.

Got it. Thanks.
That's it for me, guys, appreciate.

Thanks, Bart.

Operator

Thank you.
Next question is coming from Julian finished from Raymond James. Your line is live.

Sorry, good morning, U.S. labor that are able to carry Pagine Gialle can ahead.

Perfect.

So just kind of piggyback off that rate question, what's your model sensitivity to a 25 basis point rate cut? And as we think about that, what kind of deposit betas are you assuming on the way down and so I'll start here.

I mean, as far as as far as 25 basis point decline, I don't I don't have the 25 here in front of me, but we definitely are liability liability sensitive. But if we do that on the deposit side, we've got about we've got about 20, I'd say, close to 20% of the deposit book that is that is tied to the short term rate that that would probably would that wouldn't reprice down. And most of that full 25 basis point decline within 30 days or so are up a lot from the majority of our public fund book in our broker to broker deposits and in some some of the other indexed accounts that we've got to head to and for the full one for a full 1% drop, I think we're where we're at about one three around a 3% increase to net interest income again, sorry, I don't have the I don't have those down to the 25 basis point level.

What this card is. One of the things that will be helpful for us on this is we have continued to be very reluctant on increasing our CD balances out there. We have been running any specials or any of that. So the bulk of our deposits are in transaction accounts and we will be able to adjust those rates fairly quickly. And there are another factor we talked touched on, treasury management, one that we can and will certainly move because you can move it into very small increments as our earnings credit rate. To the extent that we're using that to the treasury management side, we'll certainly be aggressive in trying to adjust those as rates impact the decline.

Perfect. I appreciate that. And the last one for me here, as asset quality has remained pretty strong throughout the December quarter. So as we think about this next year, is there potential if we move through the year and we hit the soft landing that we could start to see some reserve relief for you, which would, you know, be somewhat of a tailwind? Just kind of curious your thoughts of kind of provisioning year over year in the credit networks.

Hey, John, this is Brad. You know, we're still seeing I mean, passives normalizing and occasional credits that have deteriorated. We're just working hard. I mean that's where we're at where we wound up at the end of the quarter was was because of the work we've accomplished during the quarter of exiting some repairing some downgrading a few. So we're still seeing some activity coming in and out of there. And I think it kind of really all depends on the long-term effect of the rate rise and how that how that most are the economy. And we still are modeling in our model having some more stress than we have today and the overall economy, if we don't see that at some point in time, of course, we're going to reassess it. But right now, we're still kind of thinking there's still a chance of a little bit of volatility in the overall economy. So when we I guess, move away from that thinking process?
Yes, there's a potential we would see some reversal out of there.

And I think if you start seeing from our standpoint, we see enough rate relief are volumes going to pick up enough that we'll probably get offset that pretty quickly from a growth standpoint.
So while we I would say this, while we would like to see relief and that we are not we are not dependent upon that further. We were attracted to it for our earnings.

I think you can count on us always leaning on the conservative side about what's in that reserve. I just let's say I sleep a little better at night and there are metrics that they justified. We're just we're not seeing huge difficulties in our portfolio. But Sprint said, when we spot something we start working it right, then we don't let problems faster because then that usually doesn't do well. So we will I'll stay as conservative as reasonably possible, I'll say and keeping the reserve in there. If the mathematics really do indicate we need to pull some out, we will. But as Corey said, hope is that we get enough additional organic growth moving into 24 that it will it will use up any adjustments that were being related to the overall improvement in the economy and then purely speaking for myself, there's still a lot of unknowns out there and want to miss. We got an election coming this November, and I don't know what the world's going to look like after that. So we're going to err on the cautious side.

You know, we're conservative and we we're always going to under-promise and over-deliver whenever we can Got it.

All right.
Well, I appreciate you taking my questions.

Thank you.

Thank you, sir.

Thank you.

Operator

We reached end of our question-and-answer session. I'd like to turn the floor back over to Curtis for any further or closing comments.

Thanks, operator, and thank all of you for joining our call this morning. You've heard us discuss where you're entering 24 in a real solid position. We think we have some good opportunities for growth in the bank and to highlight just a few of those one more time. We do have an improved treasury management team. We think that's going to drive both fee income and core deposit growth during the year. We are getting a gradual remixing of loan and securities portfolios into higher yielding loans and coupled with what we expect as low single-digit loan growth that the Texas economy remains healthy will drive net interest income growth. And as we've touched on multiple times, mortgage has certainly been challenging for the last several months, but we remain positioned to handle some improving volumes. And I think we're getting a yes, a buildup out there of a need for some financing that is going to start breaking loose as rates begin to come down, we're going to be well positioned for that. And most importantly, the credit quality of our loan portfolio does remain solid. So I'm excited for the year ahead. We thank you all for your time today, and I hope to see you again soon. Thanks.
Thank you.

Operator

That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.