Independent Bank Group, Inc. (NASDAQ:IBTX) Q1 2024 Earnings Call Transcript

Independent Bank Group, Inc. (NASDAQ:IBTX) Q1 2024 Earnings Call Transcript April 23, 2024

Independent Bank Group, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Independent Bank Group First Quarter 2024 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Ankita Puri, Executive Vice President and Chief Legal Officer. Thank you. You may begin.

Ankita Puri: Good morning, and welcome to the Independent Bank Group first quarter 2024 earnings call. We appreciate you joining us. The related earnings press release and investor presentation can be accessed on our website at ir.ifinancial.com. I would like to remind you that remarks made today may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and expected results to differ. We intend such statements to be covered by safe harbor provisions for forward-looking statements. Please see Page 5 of the text in the release or Page 2 of the slide presentation for our safe harbor statement. All comments made during today’s call are subject to that statement. Please note that if we give guidance about future results, that guidance is a statement of management’s beliefs at the time the statement is made, and we assume no obligation to publicly update guidance.

In this call, we will discuss several financial measures considered to be non-GAAP under the SEC’s rules. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are included in our release. I’m joined this morning by our Chairman and Chief Executive Officer, David Brooks; our Vice Chairman, Dan Brooks; and our Chief Financial Officer, Paul Langdale. At the end of their remarks, David will open the call to questions. And with that, I will turn it over to David.

David Brooks: Thank you, Ankita. Good morning, everyone, and thanks for joining the call today. First quarter adjusted net income totaled $26 million, or $0.63 per diluted share, compared to $25.5 million, or $0.62 per diluted share, in the linked quarter. While the abrupt reversal in the rate markets and the non-interest bearing deposit trends early in the quarter, delayed the inflection of our NIM and NII, we were pleased to see continued steady performance on our fee lines and maintain expense discipline during the quarter. Net funded loan growth was slow as payoffs rose during the quarter. Encouragingly, we saw $640 million in new commitments in the first quarter and the pipelines remain healthy. That said, the slower pace of net growth this quarter allowed us to preferentially remix our liabilities and reduce borrowings to the lowest level in over a year.

Going forward, we remain well positioned to capitalize on any rate cuts that might transpire. And in a flat rate environment, we expect to continue expanding earning asset yields. We continue to observe strength in our asset quality indicators for the first quarter with 0 annualized net charge-offs and low non-performing assets of 0.34%. We’ve continued to reprice our earning assets upward with loan yields expanding by 10 basis points during the quarter, while observing no material issues and our borrowers’ ability to absorb these higher rates. As Dan will discuss in greater detail, our credit migration trends remained positive, and the ratio of classified loans to bank capital stood at just 5.18% at quarter end, down from 5.74% in the linked quarter, and 7.05% in the first quarter of 2023.

Our key consolidated capital ratios grew in the first quarter with total capital ratio expanding by 11 basis points to 11.68% and the tangible common equity ratio expanding by 7 basis points to 7.62%. Consistent with our philosophy of providing consistent returns to our shareholders, our Board of Directors declared a quarterly dividend of $0.38 per share payable to the holders of our common stock on May 16. Lastly and perhaps most importantly, I’m excited to announce that we opened our first full-service branch in San Antonio, Texas market on March the 6th. Entering this market has been a key focus of our strategic plan, and we opportunistically recruited a very highly thought of and talented team to serve the beachhead there for our franchise.

This first full-service location will allow us to capitalize on a strong deposit and loan pipeline that we’ve already built in the market. And with that overview, I’ll turn the call over to Paul to discuss financials.

Paul Langdale: Thanks, David, and good morning, everyone. Net income for the quarter was $24.2 million, or $0.58 per diluted share. Adjusted net income for the quarter was $26.0 million, or $0.63 per diluted share, which primarily excludes the impact of the $2.1 million supplemental FDIC special assessment as well as a $345,000 OREO impairment related to a closed branch property that was disposed of in the first quarter. As David mentioned, the NII and NIM inflection was delayed due to the abrupt reversal in rate markets experienced in February and March as well as greater than anticipated non-interest bearing deposit attrition experienced in late January and early February. While the NIM compressed by 7 basis points to 2.42% for the first quarter, our spot NIM in March increased by 1 basis point from February and non-interest bearing balances have stabilized on an average basis.

Average non-interest bearing balances month to date in April are $3.41 billion, an increase from the March average of $3.35 billion. Currently, our modeling indicates that if these trends remain stable, we should see the expected inflection of both NIM and NII in the second quarter. Furthermore, NII was impacted in the quarter by lower average loan balances, and therefore, NII should be bolstered by any growth in the average loan balance going forward. We continue to maintain a significant liability sensitivity that will benefit our income statement in the event of rate cuts, but that should also stabilize our interest-bearing deposit costs as the Fed holds rates constant. During the quarter, we further bolstered our liquidity position and reduced borrowings to the lowest level in over a year.

Notably, we paid our FHLB liabilities down to 0 at quarter end, and we were able to reduce brokered deposits by $97 million during the quarter as well. Our deposit pipelines remain robust and net growth in our core branch deposits will allow us to further optimize and manage our funding cost as we remain at the terminal rate. During the quarter, we recognized a $3.2 million release in our CECL reserve, which was driven partly by a reduction in the size of our loan portfolio, a further decline in classified loans as well as an improvement in macroeconomic factors in the Moody’s forecast. Adjusted non-interest income was $12.8 million in the first quarter, an increase from $12.4 million in the linked quarter. The increase was primarily driven by increases in mortgage banking revenue due to stronger mortgage production in the first quarter.

Adjusted non-interest expense was $86 million for the first quarter, an increase from $83.8 million in the linked quarter that was primarily driven by anticipated additions to salary and benefits expense due to annual compensation adjustments and merit awards. Going forward, we expect non-interest expense to remain around $86 million per quarter for the remainder of the year. As David mentioned, our consolidated risk-weighted capital ratios improved over the linked quarter with a common equity Tier 1 capital ratio improving 2 basis points to 9.60%, the Tier 1 capital ratio improving 1 basis point to 9.94% and the total capital ratio improving 11 basis points to 11.68%. Additionally, our tangible common equity ratio improved by 7 basis points to 7.62%.

These are all the comments I have today. So with that, I’ll turn the call over to Dan.

Dan Brooks: Thanks, Paul. Loans held for investment were $14.1 billion as of March 31, 2024, down $101.3 million from the linked quarter. Growth was seasonally slow during the first quarter and payoffs rose to above average levels compared to recent quarters. Pipelines and fundings indicate that net loan production will pick up in the second quarter. As David mentioned, we had gross loan production totaling $640 million in new commitments during the first quarter. Average mortgage warehouse purchase loans were $455.7 million for the quarter compared to $408.4 million for the fourth quarter of 2023. Mortgage warehouse was supported during the quarter by higher borrower mortgage production driven by lower rates early in the quarter as well as recent exits and curtailment of the mortgage warehouse business by some of our competitors.

While mortgage rates have begun to climb back up again alongside the broader rate markets, we do expect to be able to continue to maintain these levels of average balances going forward. As David mentioned, asset quality metrics continue to remain very strong. Net charge-offs were 0% annualized for the first quarter compared to 0.01% annualized in the linked quarter and 0.04 annualized in the first quarter of 2023. In addition, non-performing assets remained low at 0.34% of total assets. We observed a further decline in classified assets during the quarter with classified loans representing just 5.18% of bank capital as of March 31, 2024. These are the lowest levels of classified loans to bank capital that we’ve experienced in over 15 years.

We have managed our book with the same approach for the past 36 years with an eye toward conservatism and underwriting and a focus on being nimble and proactive when risks emerge. We continue to be pleased with the performance of the portfolio. But as always, we remain both vigilant in our internal stress testing and watchful for emerging risks that may arise. These are all the comments I have related to the loan portfolio this morning. So with that, I’ll turn it back over to David.

David Brooks: Thanks, Dan. We remain very encouraged by the strength and resilience of our markets across Texas and Colorado, and we’ve been pleased to note growing demand for high-quality business from our core customers. Looking ahead, we will remain strategically focused on the disciplined management of our expense base, optimization of our funding stack and the continued pursuit of through-cycle performance and healthy growth. We expect loan growth to remain slow with pipelines indicating that net growth in loan balances should gradually accelerate over the coming quarter. Notably, we have made strategic investments in C&I and SBA lenders that we expect to begin yielding new production in the second quarter, and we remain encouraged by our deposit production pipelines across all four of the metropolitan areas.

Our entry into San Antonio market should additionally help spur production for both loans and deposits. We are fortunate to be in dynamic and growing markets with strong fundamentals. The demographic and macroeconomic tailwinds in Texas and Colorado continue to support our goal of running a high performance purpose-driven company dedicated to serving our customers and communities. I remain tremendously grateful to our teams, who are working tirelessly to deepen existing relationships and win new business across our footprint every day. Thank you for taking the time to join us today. We’ll now open the line to questions. Operator?

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Q&A Session

Operator: Thank you. The floor is now open for questions. [Operator Instructions] Today’s first question is coming from Brandon King of Truist Securities. Please go ahead.

Brandon King: Hi, good morning. Thanks for taking my questions.

David Brooks: Good morning, Brandon.

Paul Langdale: Good morning, Brandon.

Brandon King: So with the NIM and NII inflection being pushed to the second quarter, could you give us a sense of what the magnitude of expansion you’re expecting throughout this year, particularly in a stable rate environment? Sorry.

Paul Langdale: Sure. I think I will take you back to last quarter’s call; we were really getting about 40 to 50 basis points of pickup on broker deposit spreads. That, coupled with the noninterest-bearing declines that we saw in the first quarter really was what drove that NIM compression. We’ve seen noninterest-bearing balances come back actually, not just stabilized but increase in the month of March and really into April. Those balances are stable as of this morning. So given that, we should expect to notch some meaningful NIM expansion over the next few quarters as we continue to reprice earning assets upwards. So I would expect earning asset yields to continue to expand at an accelerating pace. And that with stable deposit costs should get us back to where – close to where we expected to be at the end of the year on the last call.

Brandon King: Okay. And so is the expectation that deposit costs have already peaked?

Paul Langdale: Yes.

Brandon King: And…

Paul Langdale: And just to add color on that, Brandon, just to clarify, we weren’t able to run off some of the brokered funds and some of the excess liquidity that we are carrying on the balance sheet during the quarter. So average cash balances during the first quarter were a little higher than we’ll be able to carry them in the second quarter. And the broker deposits, the more expensive funding and the FHLB advances that we paid down that came right at quarter end. So that should benefit us more meaningfully on the deposit cost side in the second quarter.

Brandon King: Okay. Okay, and then lastly, loan growth sounds like it’s trending a little slower for the year. How much of that are you expecting commercial real estate to contribute to loan growth this year, just given knock concentration levels?

Dan Brooks: That’s a great question, Brandon. We did see a slight decline in average loan balances, as you know we are at quarter end loan balances as you saw in the numbers. We still had strong production during the quarter, and that was more balanced this quarter with C&I, particularly energy, is getting some traction right now with oil prices where they are, we’re seeing a lot of companies picking up their drilling activities and so seeing some nice demand there, companies advancing on their lines, et cetera, so increasing the funded debt there. And we expect that trend to continue actually into the year. We’ve been careful as we have made lending hires over the last 12 months, primarily focused on C&I broadly, adding to our energy team, adding to our SBA team as well.

And again, when I say SBA, I want to be careful to say that’s a business line that we overlay in our markets, and if not, we haven’t embarked on a national SBA business or anything like that, it’s just really beefing up the SBA team across our footprint in order to capture a bigger percentage of our customers in our markets. So with those efforts, Brandon I think, we’ll see positive loan growth in the second quarter probably low- to mid-single digits here in the first quarter, and we think that picks up as the year goes along to maybe mid-single digits. So something three to five this quarter and maybe five-ish for the balance of – for the second half of the year. And we feel good about what’s coming on in a much more balanced method.

We also expect our deposits, I think, the overall number showed deposits declining, but those were wholesale and broker deposits that went out, we had core deposit growth in the first quarter, and we expect that to continue and accelerate as the year goes along. We’ve got really good trends in the pipeline on deposits and new deposit relationships along with the new loan relationships. So we expect deposits to actually grow at or in excess of the pace of our loan growth for the year.

Brandon King: Got it. I will hop back in queue. Thanks for taking my questions.

Dan Brooks: Hey, thanks, Brandon.

Operator: Thank you. The next question is coming from Michael Rose of Raymond James. Please go ahead.

Michael Rose: Hey good morning guys, thanks for taking my questions. Just wanted to go back to the margin discussion.

David Brooks: Good morning.

Michael Rose: Good morning. I know you guys have talked about kind of around a 3% margin at the end of the year. That’s a pretty steep ramp in the back half of the year. Paul, maybe if you can just give us some of the asset repricing dynamics, whether it be how much in loans are expected to mature this year, and what the yield pickup could be and then kind of expectations on the deposit side? Just trying to figure out what are the puts and takes to get back there? And if we don’t get any cuts, and we are higher for longer, particularly given it seems like a little bit slower loan growth, just how should we kind of reconcile that steep ramp that you guys are still anticipating?

Paul Langdale: Sure, Michael, happy to give you some color around that. A couple of the big moving pieces. We really do see actually an acceleration in earning asset yield pickup. If you think about seasonality for our company vis-à-vis the loans that are maturing, we have slower seasonality in the first quarter always. So I’d expect the second, third and fourth quarter, if you look at the year in which we have the originations that are now maturing to pick up in terms of our ability to reprice those earning assets upwards. From this point on through the remainder of the year, we had $640 million of net new commitments in the – sorry, in gross new commitments in the first quarter. I’d expect that pace to pick up over the remainder of the year.