Independent Bank Group, Inc. (NASDAQ:IBTX) Q3 2023 Earnings Call Transcript

Independent Bank Group, Inc. (NASDAQ:IBTX) Q3 2023 Earnings Call Transcript October 24, 2023

Operator: Hello and welcome to the Independent Bank Group Q3 2023 Earnings Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Ankita Puri, Executive Vice President and Chief Legal Officer. Please go ahead.

Ankita Puri: Good morning and welcome to the Independent Bank Group third quarter 2023 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 rule. 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. Third quarter earnings totaled $32.8 million or $0.79 per diluted share. During the quarter, we were pleased to see healthy organic core loan growth of 4.5% annualized, as demand began to pick up in our markets, while we did see some additional uptick in deposit costs due to the intra-quarter Fed increase. We are pleased that our overall loan book yields continue to march upward. As – at this point, we believe that we are around the bottom for a NIM. We also were able to decrease our loan to deposit ratio to 92.7% at quarter end, compared with 95.1% at prior quarter end by growing our certificates of deposit and paying off some short-term FHLB advances and borrowings.

At quarter end, our balance and FHLB advances outstanding was lower, than the end of last year. This comfortably positions, our balance sheets navigate an environment with sustained, macroeconomic uncertainty and allows us to continue, to serve our customers and communities throughout the economic cycle. Fee income remained stable both quarter-over-quarter and year-over-year. In addition, our focus on expense discipline resulted in total non-interest expense declining to $81.3 million for the quarter. As Dan will discuss, credit metrics remain excellent and low nonperforming assets and net charge-offs totaling just one basis point annualized for the quarter. While we remain watchful for any signs of stress in our markets, credit trends indicate that we continue to be supported, by the strong foundation of conservative underwriting, that we have maintained over three decades.

Capital ratios ended the quarter in a healthy position with the Tier-1 capital ratio at 10.21%, the total capital ratio at 11.89%. Notably, our TCE ratio also remained strong at 7.35% as of September 30. With that overview, I’ll now turn the call over to Paul to give some more details on the financials.

Paul Langdale: Thanks, David, and good morning, everyone. Net income for the quarter was $32.8 million or $0.79 per diluted share compared to $33.1 million or $0.80 per diluted share in the linked quarter. Net interest income was $109 million for the third quarter compared with $113.6 million in the linked quarter. During the quarter, we saw incremental upward pressure on deposit costs due to the Fed hike as well as incremental noninterest-bearing attrition. These factors were partially offset by increases in loan yields. Net interest margin was 2.60% for the third quarter, down 11 basis points from the linked quarter. NIM was primarily impacted by the attrition of noninterest-bearing deposits as well as higher rates paid on interest bearing balances which were not offset by a corresponding increase in earning asset yields.

While NIM came in at the lower end of our expectations, we are encouraged that our modeling and trends indicate a likely bottom for NIM around these levels. Thus, we expect NIM to further stabilize in the fourth quarter and we expect that NIM should begin expanding in the first quarter of 2024, as earning assets continue to reprice. The exact trajectory of NIM will be influenced partially by external factors, but we are encouraged by the stabilization of noninterest-bearing deposits following quarter end and the healthy sales pipelines, we are seeing for both higher yielding loans and lower cost deposits. Total adjusted uninsured deposits declined in the third quarter to 29.9% from 31.1% in the linked quarter. Uninsured deposits are currently paid highly competitive rates limiting additional downside risk to deposit costs for the bank as short-term rates peak.

We also continue to pay down our higher rate borrowings, such as FHLB advances and our holding company line of credit in the third quarter, while increasing broker deposits, which remained less expensive than short-term borrowings at this point in the cycle. Total borrowings were just $546.6 million at September 30, lower than the total borrowings were at year-end 2022. The substantial contingent funding capacity available to us and the low level of borrowing utilization, strengthens our balance sheet against any subsequent shocks and positions us well, to capitalize on sustained growth in earning asset yields. To that end, contractual maturities of our fixed rate loans are poised to grow in 2024 – even as payoffs remain at low levels. This should provide a consistent tailwind to loan yields and help support NII even as near-term rates remain at their peak.

Provision expense was $340,000 for the third quarter, which was impacted by improvements to Moody’s macroeconomic scenarios. Going forward, we expect provision that represents about 1% of total loan growth. This is, of course, dependent on all else being held equal in the CECL model which could, of course, be impacted by further changes to the macroeconomic forecast or any specific reserves. Noninterest income was $13.6 million for the quarter, down slightly from adjusted noninterest income of $14.1 million for the linked quarter. Noninterest expenses totaled $81.3 million for the quarter, down from $85.7 million in the linked quarter. Third quarter noninterest expense was partially impacted by a $2.2 million reduction in expenses related to executive compensation.

We continue to pursue expense discipline and gear the organization, appropriately for the current environment. These are all the comments I have today. So with that, I’ll turn the call over to Dan.

Dan Brooks: Thanks, Paul. Core loans held for investment, excluding mortgage warehouse loans, increased by $154.7 million or 4.5% annualized in the third quarter. New loan production came in roughly in line with our expectations as deal activity is start to pick up across our markets in Texas and Colorado. Average mortgage warehouse purchase loans were $425.9 million for the quarter, up from $413.2 million in the prior quarter. We saw relative stability in these balances on a month-to-month basis and we currently anticipate, these balances to remain stable in the fourth quarter, despite the seasonality. Credit quality metrics continue to remain strong during the third quarter. Nonperforming assets totaled just 33 basis points of total assets at quarter end, and the bank had just a single basis point of annualized charge-offs for the quarter.

Overall asset quality trends remain stable. And while we are always vigilant against emerging risk, we currently do not see any areas of concern across the loan portfolio. 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. As we entered the fourth quarter, we remain encouraged by the trends we’re seeing in our business. Healthy loan growth has returned, the NIM seems to be stabilizing at its bottom, our fee income remains consistent, credit trends remained strong and we continue to exercise discipline on our expenses. We are especially encouraged by the continued strength of our four high growth markets across Texas and Colorado, which are each buoyed by positive – demographic trends and capital inflows that insulate them, from the broader – macroeconomic activity. Most of all though, our success in growing the bank in this challenging environment has made possible by the incredible team, we have across our footprint.

I’m especially grateful to every one of our employees, who show up each day, to carry the torch of the culture that we’ve built over these three decades and who never strayed, from the mission of providing exceptional service, to our customers and communities throughout the economic cycle. Thank you for taking the time to join us for the call today. We will now open the line to questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is coming from Brady Gailey from KBW. Your line is now live.

Brady Gailey: Hi, thanks. Good morning, guys.

David Brooks: Good morning, Brady.

Brady Gailey: So I just want to – I mean, expenses came, you know, a lot better than I think you guys said had previously expected. I know, I think I saw the release, there was some maybe incentive reversals and some other noise in the quarter. So, I was just wondering as you look at forward expenses, especially as we head into next year, how are you thinking about the run rate and our expenses stable here, are they modestly growing?

Paul Langdale: Yes, thanks for the question, Brady. We – certainly are continuing to focus on expense discipline across the company and just mindful of really gearing, the company for the current environment. You noted a couple of one-time items in the third quarter, but I think $83 million to $84 million is a good run rate for non-interest expenses for the fourth quarter and beyond. We do expect to be able to hold expenses down in 2024. We will have some growth, but we will have some offsets on the other side. So – we’re confident in being able to hold that flat at that $83 million, $84 million rate for at least a few quarters.

Brady Gailey: Okay. All right. And then, you know credit, credit quality remains just so clean for you guys. I think the market, does see the above average commercial real estate exposure and they’re just a little nervous. I know you guys have, looked at stress testing and, you know, when you have a rate reset that goes notably higher, what that does to cash flow and et cetera. So, maybe just give us an update on, how you guys are thinking about the health of the commercial real estate portfolio, as we head into ’24?

Dan Brooks: Good morning, Brady. This is Dan. I would say, we gave some good color at the last quarterly call, but we continue to feel very good about the book that we have. And as we discussed before and that is related, to just sticking to the core philosophy that we’ve had over the years. And that would result in the granularity we’ve seen with average sizes of $2 million or less in the CRE book and strong markets, where we’ve had strong NOI growth. And as you know, we’ve been a high CRE bank over the last 30 years through each cycle with the same type of discipline, that we’ve employed over the last five years, in particular, as we headed into the current conditions. And we believe that will continue to serve us well.

David Brooks: Brady, this is David. And one additional comment just – our structure is a little different. Here, our credit and – the lending teams work together as a team. Credit is not a support to our growth function. It is part and parcel to how we grow our bank and credit and risk sits at the table on all the decisions. And has a bigger hand in our company that I think, is typical across our regional bank competitors. So, it just puts a little different inflection on our – risk filter and how we structure deals and how we don’t stray from what we’ve done for the last 30 plus years.

Brady Gailey: Yes. Okay. And then finally for me, so, you know, the margin will be flattish next quarter and then in ’24, it should start to, increase just from the loan yield going up and deposit and funding cost staying flat. Any idea how to think about the magnitude of how much upside could be in the margin next year?