David Brooks: Okay, thanks Brett.
Operator: Thank you. Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.
Michael Rose: Hey, good morning, everyone. Thanks for taking my question. To go back to deposits. I think like every bank, you’re seeing a mix shift into obviously higher cost deposits. Any sense from a modeling perspective, where do you think that mix shift kind of troughs like, where does DDA trough and then if you can just kind of update us on beta accumulate through the cycle. Thanks.
David Brooks: Thanks Michael. good morning.
Paul Langdale: Sure, Michael, thanks for the question. As I mentioned earlier, the pace of non-interest bearing attrition was really accelerated through the first part of the first quarter, due to yield seeking behavior since quarter we’ve seen that pace slow down meaningfully and begin to stabilize. So based on what we know today, there could be some incremental pressures that that has the terminal rate, but all in we don’t expect to see the big move down and non interest bearing balances that we saw on Q1 repeat itself. So if it’s non-interest bearing, being a percentage of that positive book, it is today, I’d expect that ratio to gradually come down maybe another 1% to 2% over the coming 12 months, although I wouldn’t expect any significant non-interest bearing run off relative to what we’ve seen in Q1.
From a beta standpoint, as I mentioned earlier, betas will slow down, given that we’ve already passed on a meaningful amount of deposit costs increases to our customers. It has been our stated strategies since the beginning of this rate, hike cycle to play defense with our interest bearing balances and make sure that we’re taking care of our customers. If we pay rate to anyone, we would like it to be to our core customers. And so that’s why you’ve seen us have a little bit sharper betas over the last couple of quarters relative to the interest bearing branch book. And I think given where we are in the cycle right now, you’ll see those betas meaningfully slow.
Michael Rose: Very helpful. And, Paul, I think you mentioned that you expected deposit balance growth in the second quarter. I appreciate that. I would expect that given commentary around maybe some of those deposits that kind of moved off balance sheets potentially coming back on that we should expect you have continued growth through the year and you guys assume the expectation would be to keep that low deposit ratio of sub 100%.
Paul Langdale: Yes, absolutely. We do expect to keep a loan to deposit ratio under 100%. And we are employing and all of the above strategy in the deposit book, we like to maintain a reasonable mix shift, especially among the broker deposits, keep it relatively short duration, use a ladder strategy, use a number of different products. We really do believe that strategically achieving granularity across the deposit book both in our core deposits and our wholesale flavor deposits is something that will benefit us long term and really dovetails well with our conservatism and gearing the balance sheet. So that’s something I think you should expect us to continue to do over the coming quarters.
Michael Rose: Okay, great. And then maybe just just finally, for me back to expenses, appreciate the color on the kind of expense run rate. Maybe just holistically, if you can kind of balance for us cost saving efforts with investments as you continue to grow the franchise and just how you balance that and maybe in the context of how do you think about the efficiency ratio, kind of when we get into the intermediate term now that funding cost profiles have definitely changed. Just trying to get some holistic color on how you balance investments versus savings.
David Brooks: Thanks. Sure, Michael, it’s obviously the same conundrum that every management team has across the country right now, given the economic environment, but we’ve made significant investments in our infrastructure over the last couple of years. As you know, we’ve spoken about it clearly in technology and process improvement and risk of enterprise risk management, build out things like that, that we continue to do and continue to invest in and we’re not going to back away from our commitments there and our strategy there. We are clearly as we think about the next few years, assessing what the highest priorities are and moving ahead on those projects. But then, at the same time, looking at, at our organization, in our org chart division by division, and just understanding where we’ve invested and what that investment is going toward in terms of our high level objectives of our company.
So I think it’s a healthy process that we go through on a regular basis anyway of investing and then assessing, investing and then assessing how we’re doing there. So we are continuing to go through that process. As you know we really started it last fall. And just we expected that it was going to be a difficult environment in ’23. And so it’s playing out how we expect it. And we just continue to be diligent around that. We’re not going to do anything from a cost cutting standpoint that harms our franchise or our long term value. We believe deeply in the markets we’re in. We believe deeply in our team on the field who are day-to-day interacting with our customers. We’ve got terrific customer base. In our markets, as you know, we don’t have national business lines and things like that is as our strategy is really focused on the for great markets we are in dealing with our customers in those markets.
And so whatever we have to invest in to meet the needs, as Paul said earlier, to make sure we’ve got the product set and the technology and everything that our customers need. And at the same time being mindful that we’re running a business here. And we need to run a high performing business and we’re committed to doing that.
Michael Rose: Appreciate the color. Thanks, everyone.
David Brooks: Thanks Mike.
Operator: Thank you. Our next question comes from line of Brady Gailey with KBW. Please proceed with your question.
Brady Gailey: Hey, thanks, good morning, guys.
David Brooks: Good morning.
Brady Gailey: I know we’ve talked about the components of the net interest margin. But when you look overall, at the net interest margin, how do you think that trends from here? I know in the past we’ve talked about, once the Fed pauses your CRE catch up and you could actually see some of them expansion. But how do you think about the overall NIM from here?
Paul Langdale: So Brady as I discussed a little bit earlier, we saw an accelerated NIM compression in the first quarter due to predominantly the mix shift as well as some funding cost pressures. We don’t expect to see that repeat in the second quarter. We do expect to see NIM bottom in the second quarter, and the magnitude of the decline from Q1 to Q2 will be less than it was from Q4 to Q1. But on the whole, it’s hard to handicap exactly where the bottom is. From Q3, Q4 onwards, we do expect to see NIM expansion, because we do see believe that we’ve hit close to the peak in terms of our funding costs with the Fed assuming a Fed terminal rate of just above 5%. Ultimately, the fixed rate loan repricing those yields will continue to expand on loans and that’ll continue to drive our NIM upward through cycle.
So it’s a little bit different due to the short duration nature of our CRE book. We’ll have that continued yield, loan yield expansion over the next three or four years.
Brady Gailey: All right, that’s helpful. And then Paul, on your expense guidance of $88 million per quarter for the rest of the year. Does that incorporate any further cost cutting or is that just where you see it as of now, and if you did decide to do further cost cuts, that would be a benefit to that number?
Paul Langdale: There could be upside to that number Brady, but it’s going to be dependent on the opportunities we identify and our ability to really execute on them.
Brady Gailey: Okay, and then lastly for me I know Independent is a pretty big commercial real estate lender. And the market seems to be concerned about CRE over the next couple of years. But you guys have a great track record over a lot of cycles in commercial assessment. Maybe just your updated thought on CRE over the next couple of years.
Dan Brooks: Yes, good morning Brady. This is Dan. I’ll take that one. As you can imagine, we continue to scrub that portfolio and stress it, in particular, the ones that are maturing in the next couple of years for higher rates in an effort to identify any potential risks there and in short, we’re confident and based on that, that we will continue to see it perform well in any slowdown. As you know, we’ve always employed a disciplined approach to growing our book. We’ve avoided holding outsize pieces of credits which limits the impact to any individual credit that we have. We rely on cash equity, which stays in the deal versus appraised equity, which we have seen time and again through downturns if that makes a difference. We have not used trended rents and underwriting which I know some banks have been prone to do.
We just think that sets you up for some issues when you have contraction in that. For the most part, we have secondary sources of repayment that are vetted and as you know, we stay in the markets that we’re in with our loan borrowers, which those strongest markets in the country, as David mentioned, have seen strong NOI growth with material increase in rents and occupancy over the last five years. So the coverages provide significant cushion and NOI and a strong debt service coverage. We have been stressing the book as most banks have been, in particular, for those that are maturing here in the next couple of years. And I would say those have average rates currently in the high fours with fixed rates, and are stressing of that all the way up to the highest sevens indicates that book is going to perform really well in there and the few that will have some work with the customers have strong guarantor support with verified liquidity.
So again, we feel very confident in that at this point.
