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00:01 Greetings, and welcome to the Independent Bank Group Third Quarter twenty twenty one Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

00:24 It is now my pleasure to introduce Paul Langdale, Executive Vice President, Corporate Development and Strategy. Thank you. You may begin..

00:34 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 third quarter twenty twenty one earnings call. We appreciate you joining us.

The related earnings press release and the slide presentation can be accessed on our website at ibtx.com. 00:52 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 of the slide presentation for our Safe Harbor statement. 01:11 All comments made during today's call are subject to that statement.

Please note that if we give guidance about future results, that guidance is a statement of management's beliefs at the time the statement is made and we assume no obligation to publicly update guidance. In this call, we will discuss a number of financial measures considered to be non-GAAP under the SEC's rules.

Reconciliations of these financial measures to the most directly comparable GAAP financial measures are included in our release. 01:35 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.

01:46 And with that, I will turn it over to David..

01:49 Thanks, Paul. Good morning, everyone and thanks for joining the call today. For the third quarter, we reported EPS of one point two one dollars per share. Group tangible book value of thirty four point seven nine dollars per share and maintained healthy asset quality with net charge-offs near zero for the quarter.

We are pleased to see the continuation of loan growth at about five percent for the quarter, which was consistent with our expectations of a slower summer being followed by accelerating demand into the fall.

Likewise, deposit growth remained strong at twelve point one percent annualized for the quarter, further bolstering our liquidity position and increasing our optionality in managing funding costs.

02:31 During the quarter, we also repurchased a total of two hundred and seventeen thousand seven hundred and seventy two shares of our common stock at an average price of sixty nine and eighty zero dollars per share. This is consistent with our long standing commitment to return capital and deliver returns to our shareholders.

02:49 With that overview, I'll now turn the call over to Michelle for more detail on the operating results for the quarter..

02:57 Thank you, David. Good morning, everyone. Note that slide six shows selected financial data for the quarter.

Our third quarter adjusted net income was fifty two point six million dollars or one point two two dollars per diluted share compared with fifty nine point six million dollars or one point three eight dollars per diluted share for the third quarter last year and fifty eight point two million dollars or one point three five per diluted share for the linked quarter.

03:20 Net interest income was one hundred and twenty eight point six million dollars in the third quarter compared to one hundred and thirty two million dollars in the third quarter last year and down slightly from one hundred and twenty nine point three million dollars in the linked quarter.

03:33 Accretion income was down one point two million dollars from the linked quarter and three point two million dollars from the prior year and totaled four million dollars in Q3. PPP fees were also lower at four million dollars in Q3 versus five point one million dollars in Q2.

These decreases were partially offset by interest income on growth in the securities portfolio in interest bearing cash. There are approximately six point five million dollars of deferred PPP fees remaining to be recognized and we expect seventy five percent of that will be recognized in Q4.

04:06 The NIM excluding accretion was two point nine one percent down eleven basis points from the linked quarter. The decrease is primarily due to continued increases in liquidity, which impacted the margin by seven basis points.

04:19 Total non-interest income was sixteen point nine million dollars for the third quarter, an increase of nine hundred seventy thousand dollars compared to the linked quarter. The increase in non-interest income over the linked quarter is primarily due to an increase of seven hundred and forty five thousand dollars in mortgage banking revenue.

04:35 Non interest expense totaled eighty point six million dollars for the third quarter, an increase of two point six million dollars over the linked quarter. This was driven by increases of two point seven million dollars in salary and benefit expense.

This quarter includes unusually high expense for senior staff signing bonuses as well as bonuses paid to employees that has leaned in on PPP. 04:57 Contract labor increased five hundred and fifty thousand dollars from Q2 due to the initiation of several infrastructure projects.

In addition, deferred loan costs were down eight hundred and ninety thousand dollars from Q2, as loan volume picks up, we would expect this to return to a normal run rate.

05:13 Expenses related to the PPP forgiveness continue to impact the non-interest expense run rate and totaled two point one million dollars in Q3, including consulting, contract labor and bonuses. PPP expenses should decrease significantly in Q4 with only a small impact expected in twenty twenty two.

05:33 Slide nineteen shows our deposit mix and cost. Total deposits were fifteen point five billion dollars as of quarter end with total non-interest bearing deposits up by two hundred and seventy nine point one million dollars from the linked quarter and seven hundred and twenty six point four million dollars from the third quarter of twenty twenty.

05:50 Interest bearing deposit costs decreased from forty five basis points in Q2 to forty basis points in Q3. With the sustained growth in our core deposits, we continue to evaluate and pursue opportunities to optimize our funding costs where appropriate. 06:05 Capital ratios are presented on slide twenty one.

In the third quarter, the company's consolidated capital ratios remained strong with a common equity Tier-1 capital ratio of eleven point zero six percent and a total capital ratio of thirteen point six four percent.

As David mentioned, we repurchased fifteen point two million dollars or about two hundred and eighteen thousand shares of our common stock during the quarter in addition to the redemption of forty million dollars tranche of five point seven five percent subordinated debt.

06:34 That concludes my comments this morning, so I will turn it over to Dan to discuss the loan portfolio..

06:40 Thanks, Michelle. Overall loans held for investment, excluding mortgage warehouse purchase loans were eleven point five billion dollars at quarter end compared to eleven point six billion dollars in the linked quarter.

Excluding the impact of PPP loans, core loans held for investment increased by one hundred and twenty nine point seven million dollars over the linked quarter. 07:02 Loan growth continues to be driven by broad-based relationship lending to our customers across Texas and Colorado.

PPP loans on balance sheet totaled two hundred and forty three point nine million dollars at quarter end, down from four hundred and ninety point five million dollars in the linked quarter.

07:21 Average mortgage warehouse purchase loans decreased slightly to eight hundred and thirty eight point five million dollars for the quarter, but remained near the second quarter average balance of eight hundred and fifty point five million dollars. Credit quality metrics continue to remain strong overall.

07:39 Total non-performing assets increased to eighty two point eight million dollars or zero point four four percent of total assets at quarter end which is due primarily to the addition of two commercial relationships totaling seventeen point eight million dollars and one commercial real estate loan totaling eleven point seven million.

There were nearly zero net charge-offs for the third quarter. 08:03 At September thirty, twenty twenty one, the allowance for credit losses on loans is one hundred and fifty point three million dollars or one point three four percent of loans held for investment, excluding PPP and mortgage warehouse loans.

08:17 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..

08:22 Thanks, Dan. We remain encouraged by the loan growth prospects into the fourth quarter and our pipelines continue to be supported by strong demand from relationship borrowers across our footprint.

We are also encouraged by the momentum of building from the new hires we have made over the past year, especially when it comes to growing our middle market C&I business.

08:43 In addition to this organic growth trajectory, we are continuing to invest in our infrastructure to ensure we are well positioned to capitalize on strategic M&A opportunities when they present themselves.

We have expanded our executive leadership team to include John Turpen, as Chief Risk Officer and we're pleased to announce promotion of Michael Hobbs to President and Chief Operating Officer. These additions deepened our executive leadership team in preparation for continued growth into the future.

09:12 The Texas and Colorado economies remain two of the most attractive markets in the country and our teams of bankers continued their disciplined approach of winning new business and expanding existing relationships each day.

I'm grateful to all our employees for their tireless dedication to our customers and communities and I remain excited for the opportunities we see on the road ahead. 09:34 Thank you for taking the time to join us today. We'll now open the line to questions.

Operator?.

9:38 Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Michael Young with Truist Securities. Please proceed with your questions..

10:17 Hey. Good morning, everyone..

10:19 Good morning, Michael..

10:22 Wanted to just start off on the loan growth side. You mentioned that some of it was a little slower, but curious what you're seeing now as we kind of head into the fall.

And would you expect higher growth in the fourth quarter to kind of get you to that high-single digit level that you talked about maybe in the back half? Just any updated thoughts or color around pipeline. All that will be helpful..

10:44 Sure. I think if you look at our second quarter growth, Michael around twelve, this quarter around five that was -- production was pretty close in the third quarter than what it was in the second quarter. But we had a pretty significant pickup in paydowns and again, that's just happened cyclical gains it’s hard to predict.

But that said, the pipeline looks really good for the fourth quarter so far. If we've grown seventeen percent last two quarters, which average about eight point five percent then I think something like that eight percent or so is what we're expecting and then depending on the payout levels, it could vary a little from there.

But we're still thinking high-single digits in the fourth quarter, which we get us for Q2, Q3 and Q4 on average eight percent or better..

11:42 Okay. Thanks, David. That's helpful. And maybe one for Michelle, just on expenses, you called out the higher PPP related expenses and then some of the one-time senior management moves during the quarter.

So, should we expect some of that, that two point -- two point five million dollars or so to come back out, so we're closer to maybe seventy eight, seventy eight point five kind of million run rate from here?.

12:05 Yeah. I think in the fourth quarter, Michael, we're going to have about one point three million dollars of PPP expenses come out of the run rate.

We did have unusually high bonus expense related to some senior positions we added, but I wouldn't say, pull that out at this point just because we are continuing to add people and the end of the year, it makes a little more difficult to bring people on without paying the signing bonuses.

So, I think, I would stick closer to seventy nine million dollars for fourth quarter..

12:39 Okay, great. Thanks. I'll hop back..

12:42 Thanks, Mike..

12:44 Thank you. Our next questions come from the line of Brad Milsaps with Piper Sandler. Please proceed with your question..

12:53 Hey. Good morning..

12:54 Hey. Good morning, Brad..

12:57 David or Dan, I was just curious if you guys could talk about the new loans that are coming on the books kind of what rates you're seeing in terms of new loan generation? And then maybe as a follow up for Michelle, if we were to get an increase in the Fed funds rate later next year.

What do you think IBTX’s leverage would be twenty five, fifty, seventy five basis points higher Fed funds rate in terms of the margin?.

13:27 Brad, this David, let me start out saying that one of our takeaways from the quarter was that the pricing pressure on the new loans coming on is a little more significant than we felt like than what we’ve really seen earlier in the year and so that affected our yields a little more than we expected as well.

So, we're seeing things in from three point five percent to four percent of the broad range, but whereas I felt like earlier in the year on balance, we were booking loans and the upper threes and I felt like were down ten to twenty basis points from that of what the book that your putting on the third quarter.

Dan can give any additional color there about. Dan....

14:21 No. I don’t have any additional color to add on that, Dave..

14:22 Okay. So, that's kind of what I think on the loan yields, Brad.

Just a little tougher sledding and maybe a little more headwind there than we'd expected, but Michelle?.

14:30 I think, as it relates to your question about NIM, Brad, the real question is with all the liquidity in the market, how much that funds increase is going to impact longer term rates. And I'm not sure our -- we are currently more asset sensitive than we have been since I've been here.

Maybe the history of the bank that we will benefit from the Fed fund increase, but I'm really not sure how much that will impact longer term rates at least in the next year, just given liquidity in the market..

15:03 Michelle, that's helpful. Would you anticipate with long rates up a bit here, would you anticipate you guys getting more aggressive and adding to the bond portfolio with some of your liquidity that you got.

I mean, I think on average, it was approaching three billion dollars in the quarter?.

15:19 We expect it to be over two billion dollars by the end of this year. So we continue to put money in the bond portfolio especially considering that we continue to see deposits come in and liquidity is growing on our balance sheet. And I think, we will continue to do that into twenty two as long as it makes sense to offset loan growth.

It really doesn't make sense to leave that money sitting it Fed earning eight basis points. And I guess, I'm more convinced now that the liquidity is going to stick around maybe longer than I thought a year ago..

15:53 And to be clear, you expect liquidity be closer to two billion dollars or the bond portfolio to be closer to two billion dollars?.

15:57 The bond portfolio will be a little over two billion dollars at the end of the year, and then I expect that we will continue to grow it through twenty two relative to the balance sheet..

16:09 Got it, helpful. Okay. And just final question for me.

I’m was curious, if Dan could offer more color on the three loans that went to non-accrual this quarter just any sense for loan to value there? Any kind of theme, just any other color that might give us a sense of kind of how you guys are thinking about maybe loss rate through resolution there?.

16:30 Yes. Thank you Brad. In the normal course of the resolving credits, some cases, you'll have a payoff and in others you'll see an upgrade. And in some cases, they'll actually migrate into the non-accrual category because of their longer resolution.

I would say the credits that migrated in the third quarter were not unusual in any regard with material equity and so our expectation is that, that there would not be any loss exposure that's not accounted for CECL.

Notably, those loans were already on the classified loan list and in total, when you take all of the non-accruals, that number remains at a low level really..

17:30 Thank you. Our next question comes from the line of Brady Gailey with KBW. Please proceed with your questions..

17:37 Hey. Thank you. Good morning, guys..

17:39 Good morning, Brady..

17:41 I just wanted to start on the buyback. It was good to see you all be a little active there in the quarter that you bought it back at basically two times tangible book value I know the stock is higher than that today.

So how do you think about continued buybacks from here?.

18:01 Brady, we're going to continue -- for opportunities to buy our stock back and given that the M&A activity has been slower than we expected given that we continue to accumulate capital more quickly than we're able to grow the bank, if you will or more quickly than we need to support the growth of the bank.

So right, way to say that and we're going to continue to do that. We have our Board meeting later in the week. So the Board will decide the dividend later in the week, but we're going to continue to look at opportunities to get back and we're going to continue to be active and opportunistic and just depending on how the stock is trading..

18:52 All right. And then on the energy front -- I know energy lending is not a big piece of what you guys do. I mean, it's still only two percent of loans. It is up kind of eighty million dollars in the last couple of quarters, that has gone from, if two hundred to two forty dollars and now two eighty.

Should we think about the energy portfolio kind of continuing to expand at a pretty nice clip here?.

19:20 I think Brady, this is Dan. I would view that as just a continuation of efforts that we've applied with our team that was added a couple of years ago, that came out of one of our peer banks and they've had opportunity really to get engaged in significant, great credits that have a afforded us the opportunity to be a part of those.

I think we'll continue to see some growth in there. I don't think we'll be out size. I think it be comparable to what we've seen as those opportunities present themselves to us. So there will be some growth, I don't think I would consider that to be any acceleration of that growth..

20:07 Okay. And then finally for me, David, just on M&A, you just mentioned it's been a little slower than maybe you guys had thought? We saw a big splash of a deal with Johnny Allison and Brian [indiscernible], which I thought may have been a good deal for you all, just given all the excess funding that could have brought to independent.

And maybe just a general update on M&A, why do you think it's been slower? And do you guys remain active in chasing targets?.

20:38 I would say, at this way, Brady, we remain active in engaging relationships with smaller banks that we admire that are in our footprint that are higher growth markets.

That's one of the challenges if you acquire a large to your balance sheet, your footprint that's not in a growth market then you really, I think limit your growth opportunities going forward, liquidity is reasonably important core deposits are critically important.

But as Michelle was mentioned, we've been -- we think felt like you’re being aggressive this year and adding to our bond portfolio, our loan growth has returned to more historic levels and we're still sitting on three billion dollars of liquidity.

We came into the year hoping that we can deploy that and get that down to a lesser number hasn't happened. So that gives us an opportunity as well to think about the funding side of the balance sheet and can we – or the things we can do to improve our cost of funds. And so we're looking at all those evaluating all those opportunities.

And so I would, yes, certainly acquisitions have been a part of our track record. We continue to be interested in growing, but our focus has been as we've talked about this morning on organic growth on really building an infrastructure, making sure that we position the company to be in great shape or whenever that next opportunity comes along.

And so that's we've been our focus and a focus of our time and of our non-interest expenses..

22:30 Okay. Got it. Thanks guys..

22:34 Thanks, Brady..

22:37 Thank you. Our next question comes from the line of Brett Rabatin with Hovde Group. Please proceed with your question..

22:44 Hey. Good morning, David and Michelle..

22:46 Good morning..

22:49 Wanted to go back to the securities portfolio question, Michelle, I’m just talking about you mentioned that it would be two billion dollars by the end of the year.

I was curious what you had bought during 3Q and then what you're looking at and how you think that might impact the bond portfolio yield and then kind of as it relates to that, it would seem like your margin would actually potentially move up, if you're deploying excess liquidity that's yielding ten basis points to something north of one percent, any thoughts on that as well?.

23:25 That's true, if we can finally get ahead of the liquidity, right? Our bond portfolio is very conservative, Brett, we continue to buy mortgage back, agencies, I think we've been bought some treasuries this quarter. And generally, those yields have been averaging one thirty.

So I think the current yield in our portfolio was a little less than two percent so it has trended down this year. But as you say, it is a lot better than eight basis points that we can earn instead..

23:58 Okay.

So any thoughts on the margin potentially at least having some offset to lower loan yield production going forward?.

24:08 I've kind of got not the business of predicting the margin, just because it looks – might be wrong or year along. And that continued to push it down. As David said, we are still -- we're continuing to look at ways that we could possibly continue to push our cost of funds down.

If we could redeploy the liquidity even into the investment portfolio, that would be an offset or even better will be deploying it into loan. So I think there is some upside, but I'm not going to predict that the margin is going to increase at this point..

24:41 Yeah. Fair enough. I know it's been hard to predict with liquidity rising. The other the I was curious about – I’m sorry go ahead, Michelle..

24:50 I mean, what I would continue to emphasize is that we are just looking at ways to grow rather than focusing on margin, looking at ways to grow net interest income, right? And then letting the mark-to-market buildup..

25:04 Okay. And then David, you gave an outlook for the fourth quarter around loan growth and I guess one of the things, I was curious about was the increase in the unfunded commitment reserve six point one versus one point seven in the prior quarter for construction and energy.

And so I'm curious as we think about twenty twenty two would seem like construction could be a category that grows.

Any thoughts on where the portfolio might be growing more from here? Is it construction? Is it what you’ve been wanting to grow C&I? What are the buckets that you think will have more growth as we go into next year?.

25:42 My suspicion Brett is that we're going to see a balance. Continued balance in the growth that we're seeing is really not one area that we're focused on. We're seeing more opportunities there.

Certainly, a lot of construction going on in Denver, Colorado Front Range and all our Texas markets by via virtue, if you drive around there a lot of cranes and things. So construction is a part of what we're seeing. But I don't think of it as being dominant.

I'd say the biggest change if there is a change in our mix is that C&I is really picking up and kicking in. The people we've hired the great teams that we've hired across Texas and adding to our team in Colorado are really getting some traction and we expect that to be a big part of what we see in fourth quarter and really in twenty two and beyond.

Strong growth there and then really just what we've always done well, which is strong real estate and small business lending and medical practice lending and all those things doing that we've done well. And the real estate really across the board, McKinney.

Because of our airport here as an example, we're seeing tremendous industrial growth out by the airport, a new Amazon facility there and people opting to bring their goods through McKinney’s airport as opposed to DFW or Love Field.

So those are just some of a little bit of color behind what we're seeing, but good balance across the portfolio on growth..

27:27 Okay. Appreciate the color there.

And then maybe just the last thing around the mortgage warehouse, would assume that seasonality plays its usual impact in the fourth quarter any sense of the magnitude that you're looking at in terms of how that might play out?.

27:44 You’re out with seasonality, you could see their average balances drop a bit, but I think they've done a good job of adding some new customers and so we still think that eight hundred million dollars average is best for this quarter..

27:58 Okay. Great. Appreciate all the color..

28:02 Thanks, Brett..

28:05 Thank you. [Operator Instructions] Our next question comes from the line of Matt Olney with Stephens. Please proceed with your questions..

28:17 Hey, good morning. Thanks guys. Wanted to just stick on the mortgage warehouse discussion, David, you mentioned the comments about loan yield pressure in the third quarter versus the first half of the year. I assume that was more on traditional commercial loans. If so, any comments about the warehouse yield pressure? Thanks..

28:42 Yeah. My comments were more based upon our traditional commercial loan strategy.

I do think there's been a lot of competition in the mortgage to warehouse that Michelle have a – had a handle on their yields compared?.

28:55 Yeah. I think that’s come down a bit from the beginning of the year, but I don't know that it's that significant..

29:04 Okay.

And then Michelle circling back to the commentary about the investment securities portfolio and maybe adding some more balance in the fourth quarter, I think right now, investment securities around ten percent of earning assets, any more color as far as the tolerance of where this could go as we move into twenty twenty two?.

29:30 Yeah. We don't really have a limit, I think historically that balances run around seven percent of our balance sheet just because we've had such a high loan to deposit ratio. We'll just -- we'll continue to evaluate that Matt and fit any excess liquidity in there to offset the loan growth.

So, it could grow to two point five billion by the end of next year, but really we will evaluate that as the year goes along..

29:58 Yeah. Understood. Thank you. And then, I guess my last question is around the allowance ratio, I think we're now at one hundred and thirty four once I strip out the warehouse and PPP.

Just trying to appreciate where this could go, I think the original CECL adoption allowance was around one thirty seven-ish, but that did include a maybe at PCD loan.

So, how should we think about that reserve ratio over the next few quarters?.

30:29 Yeah. Matt our take on in it, as we've been saying is that we'll grow into it our asset quality trends, Dan can share some of that here in a moment, but our asset quality trends and I think will be a tailwind and then the economic factors that go into the model are going to be a tailwind we think in twenty two.

So as we look out at the loan growth rates we're looking at with information we have today, we're not expecting to take the material loan loss provision even in twenty two. And so depending on the assumption for loan growth, we think loan growth in twenty two of seven percent, eight percent core loan growth in twenty two.

And when we factor all that out, so loan loss reserve certainly will or the ratio would dip down. Dan any comments you've got on the tailwinds and but we certainly don't think we're going to be one hundred and thirty four and so we're going to be willing to let that drift down.

I don't -- we haven’t talked about a lower limit, but obviously we're just going to work with CECL model and comply with whatever the results are as all the banks are doing.

So Dan any comments on that?.

31:53 Yeah. I would say I think as David said, the growth will naturally bring that down some, but we don't expect it to change a great deal in the course of the next year. I did want to circle back on the asset quality side.

I think the bigger picture here beyond a couple of credits that were downgraded to non-performing in the quarter is the strength of asset quality here. Overall remains very strong, we indicated in twenty twenty mid-year that we expected the portfolio to perform very well during the course of the recession.

And we did expect some grade migration that would be attributable to the deferrals. And I think that is in fact, what we saw in twenty twenty. 32:48 And then earlier this year, we also said that we expected improvement in grades in the back half of this year and that is exactly what we've seeing.

Criticized and classified loans have steadily declined each of the last three quarters from payoffs and upgrades with more in process for the next few quarters. In fact, we had a fifteen percent decrease in criticized loans in Q3 alone.

Overall, the non-accrual portfolio, we still expect several of those to resolve in the next few quarters, with either no loss or any potential loss exposure already accounted for in the CECL reserve. So as David indicated, we don't expect any material change or provisions to be made especially with the tailwinds of improving economy..

33:45 Okay, great. Thanks, guys..

33:48 Thanks, Matt..

33:51 Thank you. Our next question comes from the line of Brett Rabatin with Hovde Group. Please proceed with your questions..

33:59 Hey, David. I just had one follow-up around talent and you talked about doing some hiring, obviously at the senior management level, and doing some infrastructure build.

Can you maybe give us some color on how many lenders you've added this quarter or this year relative to the existing production base and how you think about that and maybe going forward as well?.

34:25 Brett, I actually don't have an updated number there, there has been activity and continuing activity weekly on that. But we've had hired a material number of new middle market C&I lenders. Our team in Texas has expanded to continue to expand.

And we've added to our teams in Houston, in Dallas-Fort Worth and Denver, Colorado, a number of new team members there as well. So, I’m sorry, I don't have a number. We can get that back to you Brett exactly what that -- what our net -- what are our gross hires and what our net hires are for the year.

But it's material and as part of the reason why we are continuing to be encouraged about our growth even as we focus on the infrastructure and making sure that we have our back of house in order as well..

35:23 Okay. Thanks for that David..

35:26 Okay. Thanks, Brett..

35:30 Thank you. Our next question comes from the line of Michael Young with Truist Securities. Please proceed with your questions..

35:37 Hey. Thanks for the follow-up. Just wanted to ask on the residential real estate portfolio, that's been sort of a trading or running off here over the last year, maybe plus a little bit.

Any just general thoughts on, is that just a duration risk kind of concern or could we expect that book to sort of flatten out or start to grow at any point in twenty twenty two? Just thoughts around that would be helpful..

36:06 I'll take that one, Michael. This is Dan. As you would expect with the rates down, we certainly saw some refinances out, which is why I think you've seen it decrease somewhat there. On those side, we would expect to continue to book those as we have historically.

And I think the overall the balance of that portfolio should remain pretty flat, as we move forward. In the normal course because of us providing mortgages to our customers that we know, they will acquire and then ultimately from time to time sell them or refinance them.

So the refinance may slow, but I expect it that we won't see a big change in that portfolio balance as we move forward..

37:02 There's been a little bit of headwind Michael in that particular portfolio. When we purchased Guaranty Bank in Colorado, they had a relationships with the mortgage company there -- that they had taken a lot of larger single family loans and we didn't continue that relationship because we have our own mortgage entity.

And so a lot of those loans as time had by refinanced out and so that creates a headwind in that portfolio. I think as Dan said, we expect to sort of level out and certainly we'll be opportunistic the ways to grow it a little bit, but that's not going to be a big part of our growth engine. But we also not expect it to be a lot of headwind..

37:50 Okay. Really helpful. And Michelle, just as I look at expenses for twenty twenty two kind of know the normal cadence and kind of growth rate that IBTX has experienced in the past, but obviously inflation potentially is a risk factor to the expense picture.

Have you guys done any early work on that or any thoughts high level just kind of on what that could mean for IBTX?.

38:12 Yeah. We're actually in the process of finalizing our budget for next year right now. But I think for your purposes a three percent over total for the year twenty one expenses is probably good place to start..

38:30 Okay, great. Thanks. I appreciate the follow up..

38:34 Thanks, Mike..

38:36 Thank you. There are no further questions at this time. I would like to turn the call back over to David Brooks for any closing remarks..

38:44 Thank you. Appreciate your time this morning and look forward to getting back out on the road and the stalling in particularly next spring and look forward to seeing you sitting down around the table somewhere. Thanks for your time..

38:58 Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day..