Independent Bank Group Inc
NASDAQ:IBTX
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
36.57
66.61
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Independent Bank Group Inc
You don't have any saved screeners yet
Good day ladies and gentlemen and welcome to the Independent Bank Group First Quarter 2018 Earnings Conference Call. My name is Brian, and I will be your operator for today. At this time, all participants are in a listen-only mode. Following management's remarks, we will host a question-and-answer session, and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call may be recorded.
It is now my pleasure to hand the conference over to Mr. James Tippit, Executive Vice President of Corporate Responsibility for Independent Bank Group. Sir, you may begin.
Good morning everyone. I am James Tippit, Executive Vice President of Corporate Responsibility for Independent Bank Group, and I would like to welcome you to the Independent Bank Group first quarter 2018 earnings call. We appreciate you joining us. The related earnings press release and a slide presentation can be accessed on our web site at ibtx.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 will be only a statement of management's beliefs at the time the statement is made, and we do not 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.
I am joined this morning by David Brooks, our Chairman, CEO and President; Dan Brooks, our Vice Chairman and Chief Risk Officer; and Michelle Hickox, Executive Vice President and CFO. At the end of their remarks, we will open the call to questions.
With that, I will turn it over to David.
Thank you, James. Good morning everyone. We appreciate you joining us for today's call. As usual, I will briefly touch on some highlights for the quarter, then Michelle will cover the operating results. Dan has some comments about the loan portfolio, and I will be back at the end, with closing remarks and to open it up for questions.
Independent Bank is off to a strong start in 2018. Earnings remain solid, first quarter adjusted net income was $29.2 million, which is a 15.5% increase from fourth quarter 2017 and an 82.8% increase from first quarter 2017. Adjusted ROA was 137 and adjusted return on tangible equity was 17.34%, both record levels for these ratios. A quarterly earnings and annual trend chart is on page 6 of the slide deck for your convenience.
Loans held for investment grew 14% for the first quarter, which we believe is specially strong, given that our Q1 loan growth has historically been slower compared to the remainder of the year. Credit quality metrics, which have been a foundation of our company, continue to be at historically low levels.
In this increasing rate environment, lending sources and deposit pricing have become an industry-wide issue. We were pleased that our NIM improved during the quarter, despite increased competition for deposits, and accelerated betas on deposit pricing.
Now let me turn it over to Michelle, to provide more details on the operating results for the quarter. Michelle?
Thank you, David. Good morning everyone. Please note that slide 5 of the presentation includes selected financial data for the quarter. Our first quarter adjusted net income was $29.2 million or $1.03 per diluted share compared to $16 million or $0.84 per diluted share for the first quarter of last year, and $25.3 million or $0.90 per diluted share for the linked quarter.
As you can see on slide 7, net interest income increased to $74 million in the first quarter from $47.9 million in the first quarter 2017 and decreased from $75.3 million for fourth quarter 2017.
The linked quarter decrease is related to a decrease in acquired loan accretion, which was $2.5 million in Q4 2017 versus $740,000 in Q1. The net interest margin improved to 4% for the quarter, up 3 basis points from the previous quarter at 3.97%. The adjusted margin, net of acquired loan accretion was 3.96% compared to 3.84% in the fourth quarter, an increase of 12 basis points. The margin benefitted from a change in earning asset mix, as we deployed over $200 million in average cash balances into loans during the quarter. This change in mix explains 9 basis points of the increase. Average loan yield for the quarter, net of accretion income, was 5.11% and benefitted from increases in target loan rates, as well as increases in variable loan rates, post the Federal Reserve rate increase.
Total non-interest income increased to $9.5 million compared to $4.6 million in the first quarter last year, and decreased from $13.6 million in the previous quarter. The increase from last year is primarily due to increased service charge income, mortgage income and earnings from the mortgage warehouse purchase program, which was acquired in the Carlile acquisition.
As it relates to the decrease from the linked quarter, if you recall, we recognized a gain on the sale of the nine Colorado branches of approximately $3 million, as well as a gain on the sale of repossessed assets of approximately $1 million during the fourth quarter 2017.
Total non-interest expense increased $16.9 million from the first quarter last year, and decreased $4.6 million from the prior quarter. The increases from prior year, were due to increases in salaries and benefits, occupancy, data processing, acquisition related expenses and other line items related to the Carlile acquisition. The net decrease from the linked quarter is primarily due to lower salaries and benefits, as well as lower acquisition expenses, which was offset by an increase of $1.1 million to other non-interest expense.
Acquisition and salary expenses were higher in fourth quarter 2017, due to the core system conversion, termination of branch leases, as well as severance and retention payments made to the former Carlile employees. However, some of the savings we realized from the termination of Carlile employees was offset by seasonal personnel expense, related to annual salary adjustments and payroll taxes, as well as the hiring of several new lenders across our markets. The increase in other non-interest expense was primarily due to an increase in charitable contributions, as well as loan related expenses that are not expected to recur at this level of the remainder of the year.
The provision for loan loss expense was $2.7 million for the quarter, an increase of $672,000 from the first quarter 2017 and $798,000 from the linked quarter. Generally, provision expense correlates with net loan growth and the level of charge-offs or specifics reserves during the quarter. Slide 14 in the deck, illustrates our provision expense and charge-offs in each reported period. Total charge-offs continue to be minimal.
Income tax expense was $6.8 million for first quarter 2018, which is an effective tax rate of 19%, compared to $6.7 million, an effective tax rate of 30% for first quarter 2017, and $18.2 million for the fourth quarter, an effective tax rate of 48.7%. The fourth quarter was impacted by the $5.5 million remeasurement of our deferred tax assets, due to the enactment of the new tax law. Our effective rate in Q1 was also positively impacted, due to the vesting of employee stock grants at a higher fair value than had previously been expensed over the vesting period, similar to what occurred in Q1 2017.
Deposit composition and costs are illustrated on slide 16. Deposits increased to $6.8 billion at March 31, 2018 compared to $6.6 billion at December 31, 2017. Public funds have decreased slightly to 11.5% of total deposits from 11.9% of total deposits at December 31, 2017. Non-interest bearing accounts make up 27.1% of the deposit mix at March 31.
The average cost of interest bearing deposits has increased to 82 basis points, up from 58 basis points at March 31, 2017, and up from 70 basis points for fourth quarter 2017. While betas on most retail deposit products have continued to be low, deposit pricing has been more challenging since the December Fed rate increase. Betas on deposits have accelerated as compared to the previous Fed rate increases in the past two years.
We have generally not increased our stated rates on deposit products. However, we continue to monitor our rates, relative to competitors in our markets, and have added some additional deposit products with increased rates, in addition to exception pricing for relationships with large balances.
We have also experienced increases in rates on corporate deposits that are indexed to the Fed Funds rate.
That concludes my comments this morning. So I am going to hand it over to Dan, to discuss credit metrics and give some color on the loan portfolio. Dan?
Thanks Michelle. Good morning everyone. Organic loan growth was strong for first quarter, with loans held for investment, not including mortgage warehouse, growing $218 million or 14% annualized. Slide 10 illustrates annual loan growth comparisons.
Slide 11 shows the composition of our loan portfolio and our commercial real estate portfolio. As of March 31, 2018, commercial real estate makes up 52% of total loans. As represented in the graph, CRE continues to be well diversified in types of collateral, with the largest segments in office and retail. Slide 12 further breaks down the retail CRE portfolio by property type, with 61% in small strip centers, and only 6% in big box stores. The average retail loan size is about $1.4 million, with only 38 loans over $5 million in this portfolio. This portfolio is well diversified across our footprint, with weighted average debt service coverage ratio of 1.89 and an LTV of 58% on loans over $500,000.
Slide 12 also shows the trend of CRE cost ratios to capital. Total CRE to the banks regulatory capital was up slightly to 382% at March 31, 2018, from 374% at December 31, 2017. We have a mature credit risk review process, which we believe, helps mitigate the risks inherent in this level of CRE lending.
Mortgage warehouse purchased loans totaled $125 million at March 31, 2018, down approximately $40 million from $165 million as of December 31, 2017. The decrease is related to seasonality of mortgage activity, as well as the impact of increased interest rates on mortgage business.
Credit quality metrics continue to be strong. Total non-performing assets were down slightly to 0.23% at March 31, 2018, from 0.26% at December 31, 2017. This decrease is due to the payoff of a non-accrual loan totaling $2.1 million and other real estate dispositions of $1.6 million, offset by non-accrual loans added during the quarter, totaling $1.9 million.
We have been able to sell much of the other real estate acquired in the Carlile deal. Charge-offs continue to be low at 0.01% annualized for the quarter. The allowance for loan losses increased by 2 basis points to 64 basis points from 62 basis points of total loans last quarter, as our provision increased to cover loan growth this quarter.
As of March 31, 2018, we have recorded a discount for the acquired loan portfolio of approximately $21.1 million. The recorded allowance for loan loss, plus the remaining fair market value discount on loans acquired is approximately 0.95% of total loans held for investment, as of March 31, 2018.
That concludes my discussion on loans this morning, so I will hand it back over to David to conclude the call.
Thanks Dan. We believe that first quarter results set us up for a successful 2018. Our loan growth was strong for Q1. Our earnings levels remain at historic highs. As discussed last quarter, we did implement some human resource initiatives and are investing some of our tax savings in our people, by targeting benefits to attract and retain employees and reduce turnover, we believe that this investment in human resources adds long term value to our company. Managing risk is a cornerstone of prudent banking, and we remain vigilant in reviewing and mitigating risks across all the company disciplines, our enterprise risk committee continues to enhance existing risk management systems, and establish new systems and mitigation strategies as necessary
We are excited we will soon welcome the Integrity Bancshares employees to Independent Bank. Integration is going well, with teams from both banks working hard towards an expected close later this quarter. As always, we continue to be focused on consistent strong earnings performance and enhancing shareholder value, and we believe our first quarter results demonstrate our commitment to these goals, and position us for a successful year.
Thank you for joining us today, and we will now open the call to questions. Operator?
[Operator Instructions]. And our first question will come from the line of Brady Gailey with KBW. Your line is now open.
Hey good morning. This is Mike [indiscernible]on for Brady.
Good morning Mike.
Hey Mike.
Good morning. So you guys had a really good Q1 loan growth. Could you guys maybe provide some color on kind of what you are seeing in your markets, and maybe we can kind of expect this 14% pace for the remainder of the year?
Thanks Mike. We did have an unusually -- from a seasonal standpoint, strong quarter, loan growth wise. Really nothing -- I guess, nothing abnormal to say about that, other than just good demand across our footprint. Several of our markets outperformed, if you will, in the first quarter. So there is nothing specifically abnormal to point to. In terms of the way we think about it, it's probably one quarter isn't enough of a trend to point us toward a higher ongoing run rate. I mean, we are confident in a 12%-ish kind of loan growth, low double digit growth that we have been guiding to. We are hopeful, loan growth in the second quarter looks good as well, and so we will see how the year plays out. But I think it's early in the year, and with the uncertainties of what's going on from a regulatory standpoint and global affairs and all that, there is a lot of uncertainty in the market as well. So it's a little early to guide to a higher loan growth.
Appreciate it. And I guess kind of a follow-up to that, have your customers been only concerned and seen any impact to the business, kind of maybe with global trade and so forth, or is it kind of not really transpiring at this point?
We haven't seen anything with our customers at this point. It has been business as usual, good usage on the lines of credit. People are investing in their businesses. We had some expansions and things like that, that were in the loan growth numbers. So people are generally optimistic, but that was my comment a moment ago. There are just a lot of things globally at play, the talk of trade restrictions and things are probably not helpful to the economy broadly, and similarly, Texas and Houston is a big port city, and any talk of restrictions wouldn't be positive for the economy generally. But we have not seen it so far, our customers remain optimistic.
Thanks. And I guess, just one last question for me. We did see deposit costs kind of tick up. Kind of maybe, if you could give some color on what you are seeing with your commercial depositors, you kind of mentioned that the retail betas remain low; and then I guess, what percent of the deposit base is what you would say, indexed? Thanks.
If you noticed, our deposit growth during the quarter, Mike, it was -- it mostly came right at the end of the quarter. You saw, we had our liquidity levels were much lower than it has historically been, and we did see a shift out of non-interest bearing into interest-bearing deposits, and most of that is coming from the specialized treasury group that we talked about for the past year. The incremental cost of those deposits is over 2% now. So that's why we are seeing such an impact on our deposit costs.
Most of that amount, which I think is up to about $900 million or probably 75% of that amount is tied to an index.
Great. Thanks.
Thanks Mike.
Thank you. And our next question will come from the line of Michael Rose with Raymond James. Your line is now open.
Hey, good morning guys. How are you?
Good morning Michael.
Good morning. So maybe we could start with expenses? I know Michelle you mentioned, there were some charitable contributions and some higher loan fees and you wouldn't expect those to reoccur in future quarters at the same level. Can you just kind of tell us what the dollar amount was, and then maybe, how we should think as a good expense run-rate, if we back out those items? Thanks.
Yeah, it was probably, Michael -- it was probably $0.5 million of expense related to those two items that I wouldn't anticipate recurring the remainder of this year. A good run rate for us at this point is probably a little over $43 million, if you are just looking at IB-only. Of course, that all changed, once we close on Integrity. We did have some non-recurring costs related to payroll as well, but some of the initiatives related to human resources will probably add $350,000 a quarter to our salaries and benefits run rate as well.
Okay, that's helpful. And then, you had called out six loans that were added to non-accrual this quarter. Can you give us some color around what types of loans those were, what industries? And if you think, there is anything indicative of the trend?
This is Dan. The six loans, as you can tell, were not very large, and they really were spread across the types of loans we had. So no specific trending. There were no new energy loans in that group, and then, there would be a mix between C&I and real estate, so even residential was just broadly across the spectrum of what we did. So no trends.
Okay. And then maybe finally for me, David, you talked about the warehouse loan of about $500 million over the next couple of years. Is that still in the ballpark? And then separately, I noticed that energy loans were up a little bit this quarter, are those existing clients drawing down or are you guys trying to reenergize that portfolio at these levels -- OREO price levels? Thanks.
Yeah, I will start with the second question first, Michael. We are seeing some new requests in energy and we are intentionally focused on growing that portfolio. It has taken a little longer to see the bottom and begin to trend up than we had expected, but we believe we are going to see some positive tailwind for energy this year, just based upon what we are seeing in the market. So those were new requests that we had booked during the quarter.
And then, on our mortgage warehouse, obviously, we are fighting some pretty big headwinds regarding -- and I think our peer banks here in Texas experienced the same thing in the first quarter. Our averages weren't down as much as the quarter -- as the year-end to the first quarter end would indicate, but still down $20 million or so in the quarter on average.
Yes, our goal objective would be to grow that portfolio to around $0.5 billion over the next couple of years. We are going to -- we have got a lot of pedaling to do, to get that done. We are evaluating and looking at how to grow that area and invest in that area. But we are also realist [ph] when it comes to what the market is, in this rising rate environment, and depending on what the economy does the next couple of years, I think will determine how successful we are in that. But we are still -- that's still our objective, Michael, I will say it that way.
Great. Thanks for taking my questions.
Hey, thanks Michael.
Thank you. And our next question will come from the line of Brett Rabatin with Piper Jaffray. Your line is now open.
Hi, good morning everyone.
Good morning Brett.
Hey Brett.
Wanted to, I guess first, just make sure -- on the discount accretion, can you -- on the remaining $21 million, maybe Michelle, can you give us any thought on the pace on the next few quarters, and how you kind of see that playing out over the next two years?
I think this Q1 is probably indicative of what I would say, a normal accretion level is. I mean if you look back at Q4, we had some extraordinary pay-offs. I think this quarter was pretty much a normalized quarter. Now, we could see some more lumpiness, if we have some loans that pay off, I think maybe we are anticipating a couple. But generally, I would look at the run rate is similar to what it has been this quarter, and that's probably good over the next couple of years.
Okay. And then wanted to ask, I know you have been adding lenders, can you talk maybe about that and just what you are adding in terms of industry expertise, and if that might help C&I growth, and then also maybe hoping for just some commentary around loan origination rates, kind of relative to the existing book?
Brett, David here. We hired net six new additional lenders in the first quarter of this year as well as the pretty robust fourth quarter growth we had, and we are doing that, as we figure out -- we talked about last year in Colorado, what we are going to do there, so we added a lot of talent there. We have also added here in North Texas and across our footprint. And with the idea that we have to build capacity to continue to grow our organic loans, at the pace that we would expect to do so.
No real specialties; I would say, general list lenders, real estate, C&I, we have added -- we have talked about the last couple of quarters, we added an equipment finance leasing area, and we do expect to continue to build that out over the next few quarters. And so we will see some tailwind there on the C&I side. We continue to be and we have talked about this and strategy hasn't changed, and that is -- we are looking for opportunities to grow our C&I loans, and to decrease over time, the percentage of CRE we have in our book on a relative basis. But we are going to take our customer base and do what we have historically done, we have done it well, and so I think, we will continue to see good lending hires.
And to the earlier question that another analyst asked, Brett, if there is tailwind above low double digit loan growth, it will be because of these hires and this expansion that we are doing to our team. Again, too early to say whether -- how that looks over the next two years say, but we are building our bench, if you will, we are in anticipation of continuing to be able to meet our growth targets.
Okay. And then, any color around maybe originated loan yields and then, I guess, some comments or thoughts last year about whether or not banks would -- or the industry would kind of compete away with a tighter form. Any updated thoughts on that?
Sure. We are encouraged early. Loan yields have been going up. We have been able to get generally higher rates, as rates have been coming up here, which is encouraging, and I think Michelle may have mentioned it earlier in her comments that, that's how we saw those few bps increase in NIM for the quarter, while our deposits costs are coming up, we are also able to generate new loans at a higher rate, that offset that, and to me, that's indicative that the banks -- the competition so far is acknowledging that rates are going up, and that we should get higher rates on our loans, if we are going to be paying north of 2% on deposits, that we have to get something more than 4.75% on loans. And so, we are seeing almost all of our -- anything that has any fixed duration at all, is in the mid-5s and up and all of our floating rate stuff obviously is coming up.
We have seen a mix, a little bit of a change of trend. I still look at the loan packages weekly, along with the senior loan committee and seeing a definite shift towards more floating rate loans, as opposed to fixed rate, and that showed up a little bit, just at the margin by a percent or two, a mix shift toward floating rates on our asset side of our balance sheet in the first quarter. So that really goes to something we talked about over the last couple of years, Brett, and that is -- we think, the bank is a little more asset sensitive than maybe the model shows, because of our fast pace of loan growth, those loans reprice and turn over pretty quickly quarter-by-quarter.
So as we see a rising rate environment that we have seen the last year, we have been able to bring in more of our credits on a floating rate basis, and those are replacing other credits that are paying off, that might have been fixed rates. And so, we are seeing a trend, we think, in the right direction there, which should help our NIM as well going forward.
Okay. Great. Appreciate all the color.
Hey, thanks Brett.
Thank you. And our next question will come from the line of Matt Olney with Stephens. Your line is now open.
Hey, thanks. Good morning guys.
Good morning Matt.
Just going back to the core loan yield discussion. David, I heard your commentary about repricing some of those loans higher. So it's definitely good to see that. I just want to clarify, Michelle, is that 16 basis point increase of loan yields, is it a clean number or is there anything unusual in that first quarter number?
No. I don't think there is anything unusual, I mean, like a non-accrual payoff or something like that. That should be pretty clean.
Okay, good. Thank you. And then, going back to the credit discussion, provision expense was a little bit higher than we expected. Obviously, the loan growth was a big part of that. Can you just clarify, was there anything else beneath the surface, any increase of classified loans, criticized loans that maybe have helped drive that provision higher than expectation this quarter?
Matt, the provision actually was exactly -- we had it budgeted in our budget. So it was right in line with what we expected, and as you said, primarily supported our loan growth, which was higher than we had modeled for the quarter. And then also, just broadly a trend toward, we are getting late in the credit cycle, and we want to make sure that we -- as we push, I think we had in our numbers, maybe Dan in his comments earlier, talked about our loan discount on acquired loans, in addition to our provision on our originated loans, totals about 95 bps right now, I think, and so, we'd like to see that number continue to move toward 1% or greater, as we get later in the credit cycle, and so no specific trends in non-accruals.
There is nothing below the surface, that you guys would consider a trend or anything like that, just some miscellaneous credits that Dan mentioned earlier, 4-5 credits across, and look, we are a portfolio of $6.5 billion, and if we make $6.5 billion for loans, you are occasionally going to have to work with the customer on a repayment program or something. That is the nature of our business. We think we do it pretty well. Our numbers hold up well over time. So we are really -- our loan-loss provision is right in line with what we expected for the quarter, given the growth in where we are.
Okay, that's helpful David. And then the last question for me, any update you guys can provide for us on the Integrity Bank acquisition? Any preliminary results that you have seen over the last few months or any trends you can give us?
No, I think they are right in line with what we expected to be. The integration is going really well. They have got a lot of very talented bankers over there. We are excited to get the deal closed. We are anxious to close it. We believe that will happen here later this quarter, and we are working towards that. So only positive trends we have been able to talk to them about. They work very close with us on deposit pricing, and all that. We think they have got some upside in their deposit growth there, and -- that they may not have needed under their model, as an independently operated bank, but now rolling in and becoming a part of our group. We are pulling all the positive levers we can, and so they were closer [ph]; just as an example of a specific thing we have been able to do, is talk to them about our philosophy on deposit pricing, and how we want to do that, and hoping as they head toward the merger here, they can grow their deposits as well.
Okay. That's helpful. Thank you.
Thanks Matt.
Thank you. [Operator Instructions]. And our next question will come from the line of Michael Young with SunTrust. Your line is now open.
Hey, good morning.
Good morning Michael.
Just wanted to start on the loan-to-deposit ratio to 96%, ex kind of the warehouse I believe. Where are you kind of willing to let that go over time? Do you want to hold it steady, or are you willing to let it trend back up to 100% at some point in time? And then also, just kind of -- as we think about the mortgage warehouse and that growing, do you want to fund that with FHLB borrowings or core deposits or kind of what's the general strategy there?
As it relates to warehouse, we actually have been funding it with FHLB advances for -- I think we started it in the fourth quarter doing that. As far as the loan-to-deposit ratio, it had been -- since we have been a public company, it had been right around a 100%. It only dropped after we did the Carlile deal. So I think we are comfortable with it at that level, and as trends happen over the year, it could trend back up to 100%. I don't think we are really interested in it going much over that. But I think, the range that it has been, since we have been a public company, I think we have been quite comfortable with that.
Okay, great. And just as we think about future hiring, I understand you are trying to add some capacity to accelerate loan growth, but you know, are any of these specific hires more related to deposit gathering niche, or should we expect to see that going forward at any point in time?
We have continued to invest in our treasury management side of the business as well, Michael, to make sure that we have got a great team effort between treasury management, and make sure we got the right product services available to the relationship officers, and then building that camaraderie, if you will, between the treasury and the relationship officers on the ground. We have not made any specific hires on the lending side related to their deposit generation abilities.
But we are focusing on hiring lenders who do have relationships, and -- that our relationship bankers and that do fund a good portion of their own loan growth, with their own deposit growth, and we put a premium on that. We have changed, and are changing our structure of our incentive compensation, with more focus on deposits. I mean, I think that's the industry question right now that faces all of this, Michael, is how are we going to generate core deposits here going forward to fund loan growth for banks like ours, that grow loans at a fairly good pace, and one of the things Michelle was talking about, our loan deposit ratio being in the mid-90s, we have -- part of that has been that -- we are generating core deposits as quickly as we can.
We will take all, obviously all of those we can get. But we have been a little more cautious. You would see our trend in public funds continue to be down, as a percentage. We can turn that, just pick it on [ph] any time we want, we could have a 90% loan-to-deposit ratio, if we chose to do it. This doesn't make sense in this rising rate environment. I am having cold feet with my speech this morning. But anyway, in this rising rate environment, it is -- we think it just made sense to let some of the more expensive funding run-off, to continue to protect our NIM. So as Michelle said, if we run the bank in the 09% to 100% range loan-to-deposit ratio and are able to manage our cost of funds, keep it as -- under control as we can, then we think that's to the benefit of the shareholders at the bottom line.
Okay, great. And then one last one, just as we look at kind of M&A interest from here, is there a greater focus or would you be more willing to look at kind of a rural bank that might have a core sticky deposit base, but less asset growth capability?
Great question, Michael. We continue to be in active discussions across the footprint on merger and acquisitions. I have been a little surprised. Just broadly, not specifically, but broadly across the market that we haven't seen more announcements here in the first four months of the quarter or of the year rather. But I do think there are a lot of activities, lot of discussions, a lot of people, kind of considering what their strategy is going to be the next couple of years, both smaller and larger banks. So I remain encouraged broadly, I guess, an overall comment for us, broadly about our ability to continue to find quality institutions to partner with, and our first choice and priority would be in the major markets we are in, Dallas, Fort Worth, Austin, Houston, San Antonio and Denver, front range Colorado, those would be our primary target areas, and that's where we are working hard to find partners.
That said, you correctly allude to a lever we have, if we need it, going forward, and that is, we can always find a partner in a part of the state that's not maybe growing economically as fast as these major markets are, that control your big blocks of core deposits at good funding prices, banks that are 40% or 50% loan-to-deposit ratio and those obviously would be an opportunity for us to bring in core deposits.
I would say that's not high on my priority list right now, but it is always a possibility for us, as we see how the deposit markets and core deposit growth plays out, we much prefer to grow our own. We are working hard on that, as I mentioned earlier, we continue to make a lot of investments and we work a lot every week on strategy around deposit growth. But that said, we could do what you described in the future, if that made sense for overall balance sheet and strategy.
All right. Thanks.
Hey, thanks Mike.
Thank you. And our next question will come from the line of Brian Zabora with Hovde. Your line is now open.
Thanks. Good morning all.
Hey, good morning Brian.
Hey, just a question on loan growth, a follow-up. How much was from the Denver market this quarter?
Interestingly, we did have some growth in the Denver front range market this quarter, but not really what we think we will see in second quarter and beyond, in terms of growth there. So good question, but the outperformance if you will, that drove us to a 14% loan growth, was really in Texas in the first quarter. But we think, we are encouraged by that actually in a different sort of way, that we think -- our outside loan growth came in about half of our markets that we serve, and the other half are equally dynamic and have a lot of loan growth in the pipeline. So we think we have got upside there in Denver front range and parts of Texas, that maybe didn't grow as quickly in the first quarter.
So we take that as an encouraging sign, that if we were able to grow 14% for the quarter with three of our five markets doing well, and a couple of them didn't have their best quarters in the first quarter. So I mean, overall, good.
Okay. Thanks for all those details. And just mortgage, residential mortgage, kind of fee income line, you did pretty well considering the usual seasonality in the first quarter. So just your thoughts on the pipeline there, and could we continue to maybe see in the back half of the year or maybe year-over-year growth in mortgage gain on sale?
Obviously, a lot of that depends on, what happens with rates, both short term rates, the Fed controls, and the longer term rates that determine more the fixed long term mortgage rates. We did feel good about our first quarter. We are very high on our team, our mortgage team across two states. We are continuing to add lenders, we are continuing to add leadership there and in that area of the bank, and we are encouraged about our ability to outperform the market. Now what the market is, we will determine right on a relative basis, how we do. But yes, we do think, we will do better than the market generally, with the team we are putting together.
Great. That's all I had. Thanks for taking my questions.
Hey, thanks Brian.
Thank you. And I am showing no further questions in the queue. So I will hand the call back over to Mr. David Brooks, Chairman, Chief Executive Officer and President, for some closing comments and remarks.
Thank you. Hey, I appreciate everyone joining this morning. I think you can tell, we feel good about our first quarter. I think it's right in line with what we expected for the year. We think our model, our ability to get Integrity Bank in here in the second quarter, and get that integrated in the second half of the year, as we continue to build on our core earnings, our ability to hire lenders and grow organically, is still strongly in place. And so, I'd say, we are encouraged at this point through one quarter of the year, and with no other questions, then we will let that conclude the earnings call and appreciate you listening and appreciate your interest in Independent Bank Group.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and you may now disconnect. Everybody, have a wonderful day.