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Independent Bank Group Inc
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Greetings, and welcome to the Independent Bank Group Second Quarter 2022 Earnings Conference 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.
It is now my pleasure to introduce your host, Paul Langdale, Executive Vice President of Investor Relations. Thank you. Paul, you may begin.
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’s second quarter 2022 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.
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 am joined this morning by David Brooks, our Chairman and CEO; Dan Brooks, Vice Chairman; and Michelle Hickox, Executive Vice President and CFO. At the end of their remarks, David will open the call to questions.
With that, I will turn it over to David.
Thanks Paul. Good morning everyone and thanks for joining the call today. For the second quarter, we announced adjusted earnings of $1.27 per diluted share as well as exceptional loan growth of 36% annualized for the quarter, excluding mortgage warehouse and PPP.
This record growth was driven by strong demand from our relationship borrowers across Texas and Colorado as our markets continued to experience strong economic and demographic growth. Dan will provide some additional color on the geographic and product type breakdown of the loan growth while Michelle will touch on rates and subsidy impacts.
On the whole though, this record growth was propelled by substantial investments we’ve made and attracted seasoned lenders to our bank over the past few years. These lenders have in turn built and developed strong teams of producers underneath them. At the same time, we’ve also greatly enhanced our infrastructure in both credit and lending support to ensure our producers have been able to pursue new lending opportunities while maintaining our long-standing credit culture that has guided us through previous downturns.
Today, we have the strongest talent bench we have ever had in the history of our company and this exceptional growth quarter is a direct result of that fact. During the quarter we were also encouraged by the resilience of our core deposit base in the face of successive Fed hikes. Net interest income grew by 5.2% versus the prior quarter while the NIM expanded by 29 basis points to 3.51% aided by the granularity of our funding, coupled with a rise in loan yields.
In addition, the volatility and equity markets gave us the opportunity to repurchase over 1.6 million shares of our common stock during the quarter, consistent with our long-standing philosophy of returning excess capital to our shareholders.
And with that overview, I'll now turn the call over to Michelle for more detail on the operating results for the quarter.
Thank you, David. Good morning, everyone. Note that Slide 6 shows selected financial data for the quarter. Second quarter adjusted net income totaled $53.3 million or $1.27 per diluted share, an increase of $1.2 million over the linked quarter. Net interest income was $138 million for the quarter, which increased $6.9 million from the linked quarter. This increase was primarily due to the significant loan growth during the quarter, which saw the redeployment of much of our excess liquidity sooner than anticipated.
The NIM excluding purchase loan accretion was 3.45% up 32 basis points from the linked quarter. This increase was driven by deployment of liquidity from significant loan growth during the quarter and slightly offset by rise in deposit cost. While our balance sheet is still somewhat asset sensitive, this deployment of cash to loans has reduced asset sensitivity as compared to previous quarters. Total non-interest income was $13.9 million for the second quarter, an increase of $1 million versus the links quarter. The change was due to first quarter having included a $1.5 million loss on sale of loan offset by a $536,000 decrease [ph] in mortgage banking revenue in Q2.
Mortgage production and mortgage warehouse revenues continue to be adversely impacted by lower volumes due to the rising rate environment. Non-interest expense totaled $85.9 million for the second quarter. The increase of $3.5 million versus the linked quarter was mostly driven by an increase in salaries and benefits expense, which includes $1.1 million of termination expenses for the departure of an executive officer, as well as elevated health insurance and recruitment expense.
Slide 19 shows our deposit mix and cost. Deposits totaled $15.1 billion at quarter end, which is a slight increase over the linked quarter. The chart on Slide 20 illustrates the change by vertical and shows the stability of our core deposit accounts with the year-to-date decrease coming from brokered and specialty treasury deposits as well as seasonality in public funds.
Capital ratios are presented on Slide 22. The company’s consolidated capital ratios remain within our target levels with a common equity tier one capital ratio of 9.81% and a total capital ratio of 12.24%. Tangible common equity was 7.63% at quarter end. These ratios are down from March 31st due to the execution of our stock buyback plan acquiring 115 million during the second quarter. That concludes my comments.
I will turn it over to Dan to discuss the loan portfolio.
Thanks Michelle. Overall loans held for investment excluding mortgage warehouse purchase loans were $13 billion at quarter end compared to $12 billion in the linked quarter. Excluding the impact of PPP loans, core loans held for investment increased by $1.1 billion over the linked quarter, which represents a 36% annualized rate of loan growth.
Growth in real estate lending categories accounted for the majority of new loans booked during the quarter with energy and C&I accounting for about 11% and 7% of new commitments greater than $1 million respectively. Of new real estate loans, no category accounted for more than 17% of growth and new commitments greater than 1 million, with the largest drivers in their approximate shares being retail at 17%, multifamily at 15%, and single family residential at 13%. Geographically, new loan production was well distributed between our markets with none of our four regions accounting for more than one third of total growth.
Average mortgage warehouse purchase loans decreased to $467.8 million in the second quarter down from $549.6 million in the prior quarter. This decrease was primarily driven by upward pressure on mortgage rates resulting in decreased demands, lower volumes, and shorter hold times across the mortgage industry.
Credit quality metrics remained healthy. Total nonperforming assets increased $82.9 million or 0.46% of total assets at quarter end. The real estate owned increased to $12.9 million during the quarter due to the addition of an office property in the Houston market that had been discussed on last quarter's call. Net charge offs totaled 9 basis points annualized during the quarter.
At June 30, 2022, the allowance for credit losses on loans is $144.2 million or 1.11% of loans held for investment excluding mortgage warehouse loans. There was no provision expense for the quarter, primarily due to changes in the COVID-related economic factors in our CECL model offset by strong loan growth.
These are all the comments I had related to the loan portfolio this morning. So with that, I'll turn it back over to David.
Thanks Dan. While our loan growth was exceptionally strong in the second quarter, we are anticipating growth to moderate in the third quarter. Given this, we expect to grow our core loan portfolio at the high single digit level for the remainder of 2022. I am grateful to our teams across Texas and Colorado for their strong performance this quarter in achieving record loan growth.
As I mentioned earlier, the talent across our organization has never been as strong as it is today. Over the past several years, we have made significant investments, not only in our production areas, but in our teams across the organization to strengthen our infrastructure and ensure sustainable growth. Looking across our markets, the economies that we serve continue to exhibit both resilience and rapid growth and we remain encouraged by these tailwinds as a significant number of companies and talented individuals continue to relocate to Texas and Colorado.
Building a high performance bank in growth markets has been the hallmark of our strategy since the IPO and we look forward to continuing our disciplined execution and pursuit of new opportunities on the road ahead.
Thank you for taking the time to join us today. We will now open the line to questions. Operator?
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Brad Milsaps with Piper Sandler. Please proceed with your question.
Hey, good morning.
Hey, good morning, Brad.
Thanks for taking my question. Michelle, maybe I just wanted to start with the margin, you know, some nice expansion. It looks like you guys benefited quite a bit from mix change. I just wanted to kind of see kind of what your outlook was there, may be specifically around loan yields. It looks like core were maybe up 7 basis points or so. I think you've mentioned in the past maybe 15% of your loans repriced immediately. Can you just kind of talk about that and what that kind of means for kind of for the NIM going forward?
Yes, actually that's increased a bit. It is probably closer to 17% now, Brad of loans that would reprice immediately. Looking at our modeling and then you can tell our betas have lagged a bit from where they have been historically, so that's been beneficial for us. But given where we are on liquidity, we expect that those will most likely as we continue to have loan growth and needs funding, that those betas will return to probably normal levels, which is closer to 30% to 35% on erring deposits. Our modeling shows that we will still get some benefit, probably a few basis points of expansion third and fourth quarters. Of course the risk there is that our betas could be higher and that would be the risk to that outlook
Loan yields Brad are, yes we've been able to push loan rates up over 200 basis points from the start of the year. Obviously that's a competitive battle out there. We have a good strong so far in July the average rate of loans coming on was over 5% and we expect that to continue to go up during the year. And so our modeling indicates as Michelle said that we'll continue to get some benefit from the rising rate environment and knowing what we know now.
Great. And just as a follow up to that, just in terms of the bond portfolio Michelle, do you think that's sort of reached a peak and you'll sort of use that to kind of fund growth over the near term absent any deposits coming in?
Yes, just given the loan growth we have this quarter we discontinued rolling the bond portfolio and it’s remained flat. We could reinvest in cash flows for the remainder of the year, but I expect it probably will be a bit smaller by the end of the year.
Okay, great. Thank you, guys. I'll hop back in queue.
Hey, thanks, Brad.
Thank you. Our next question is from Brady Gailey with KBW. Please proceed with your question.
Thank you. Good morning guys.
Good morning, Brady.
It was great to see you’re also active on the buyback in the quarter. Maybe just thoughts on how you're thinking about the buyback for the back half of the year?
Yes, we were pleased with our opportunity to actively repurchase stock at prices that we felt were disproportionately low. Yes we still have some authorization left for the year. I think we'll be given what's going on with prices now and PPP we’ll probably be a little less active in the back in the second half of the year is the way we think about it. We still have availability if we need it. But I would think we did a lot of our buying for the year in the second quarter.
Okay, all right. And then if you look at expenses, they came a little heavier than my estimate. I know the $1.1 million is non-recurring so that that'll come out next quarter, but any thoughts on kind of the forward run rate of expenses?
Yes, so our health insurance has been running higher than we anticipated, which I think has been consistent with some others that I've heard, just kind of post pandemic claims. We also made some opportunistic hires on our production team and so that required some recruitment signing bonus expense that we had not anticipated in our original plan. But having said that, I think if you pull out that non-recurring termination expense, that run rate is good for the rest of the year for third and fourth quarter.
Okay. So, around $85 million [ph] or so?
Yes, maybe a little less than that, but that's probably a good number to use.
Okay, all right. And then as you look at the provision your reserve what’s the great loan growth your reserve is now close to 115 basis points ex-PPP, ex-warehouse, how should we think about that going forward? I mean, it's -- your credit is still so clean for you all, but at the same time, the economic outlook is fairly uncertain. Is that, should the percentage ratio be flat from here or do you think there could be some more downside?
I think we'll continue. Obviously we used or as you said, the ratio dropped down that 110, 115 range. I think anything Brady 1 to 120 is a broad range probably is good given our asset quality. That said we're paying attention to the economy and I think the way to think about it going forward is, we're expecting high single digit growth for the back half of the year. And in our planning we're thinking 1% as we think about our loan loss provision for the second half 1% of kind of whatever our growth is, is a good way to think about it.
Okay, all right, great. Thank you, guys.
Hey, thanks, Brady.
Thank you. Our next question is from Brandon King with Truist Securities. Please proceed with your question.
Hey, good morning.
Good morning, Brandon.
Good morning. Yes. So I wanted to get a better sense of your expectations for deposit growth in the back half of the year, and was wondering if your potentially if loan growth exceeds deposit growth, what is the capacity or willingness to use borrowings to fund long growth?
Yes, so in our plan we plan that we'll be able to fund the loan growth with deposits. We've made significant investments in our treasury teams and our retail teams and they have, and if you look at our core deposits, they have grown a bit this year. We still do have access to our specialty treasury deposits that we let some of those run off in the first quarter and we can access those if we need to, but they are more expensive so that's not our preference. And we have plenty of borrowing capacity of FHLB if that was where we needed to go sort of as the last resort. So…
I think our philosophy brand would be to continue to take care of our customers and our markets and if that leads us to growing loans 8%, 9%, or whatever that level is, yes we will fund that growth. We're going to continue to take care of our clients and our markets.
Okay. And the loan growth side of things, energy loan increased in the quarter. So I just wanted to get a sense of where you think that could go in the second half of the year and what you're seeing in your markets with your customers within that segment?
Yes, Brandon, this is Dan. I'll take that one. We certainly expect continued broad based growth in the second half of the year. If you look at the growth we had in the second quarter, just at a high level, it was really a continuation of what we do well in our strong markets. The production was granular and diversified across asset class and geography. We expect that to be the same as we go through the second half of the year.
Specifically on energy as well, we have been very successful at lending to well-established upstream EMP a little bit of midstream as well. We made a higher, you might note from previous calls, of a senior energy lender in Houston and really had some nice traction in the second quarter. We’ve added seven new relationships through that officer in the last or in the first part of the year and we expect we’ll continue to get traction there and with the others. As you'll know our current outstandings are about $450 million, which is still less than 4% of the loan book. I do think that that will continue to grow and we expect to see some nice opportunities as the year plays out.
Okay, thanks for answering my questions.
Hey, thanks Brandon.
Thank you. Our next question comes from Matt Olney with Stephens. Please proceed with your question.
Hey, thanks. Good morning. I was going ask about the mortgage warehouse. I think the average balances were down around 15%, which would be a little bit below some of your peers this quarter. Any color on the underperformance in 2Q and what's the outlook from here?
Hey, Matt, this is Dan, I’ll take that one as well. We expect at this point, the volume to be essentially flat for the balance of the year. Yes, I think it has come down as we've seen in many cases just given the current environment of rates, but we continue to hold our own and expect that to be, to be flat as we play out the year.
And just to follow up on that, flat from these average balances or the end of period balances? And then you also mentioned and gave your prepared remarks some shorter hold times, was that a comparison from this year or from last year you're seeing shorter hold times?
Yes. So I think that's a comparison to last year, Matt, and in terms of yes, for the balance of the year our average balances for the second quarter, we expect that to be flat through the balance of the year. And the retail mortgage also has been soft, softer than we expected, that’s why the fee income is down for second quarter. But we expect that to be flat for the balance of the year, both warehouse and retail more used to be flat at their second quarter levels in the third and fourth quarter.
Okay, got it. And as far as the interest rate sensitivity, I think you mentioned in the prepared remarks that as the excess liquidity levels have come down then the benefits of higher rates as you kind of model that also come down, anything more specific as far as the 100 basis point shock analysis. I think you called for 6% growth of NII in March 31st, anything preliminary you can disclose as far as the June 30 numbers?
Yes, we’re actually filing our Q today. I think it's a little over 4% is what we're reporting that in there.
Okay. Thanks for that, Michelle. And, and just to clarify something, Michelle, you mentioned before, as far as the funding plan for the back half the year, it sounds like you don't expect to access the wholesale deposit markets. But if the loan growth exceeds that the guidance of the high single digit, then that becomes more of a reality, am I getting that right?
Yes, that would be accurate or fair that if we exceed where we're guiding to for loan growth, we might have to access either brokered or go back and get more specialty treasury or again, we could use that FHLB advances. But given our current outlook, I think we can fund it with our core deposit customers.
Okay, thank you, guys.
Hey, thanks Matt.
[Operator Instructions] Our next question comes from Michael Rose with Raymond James. Please proceed with your question.
Hey, good morning. Just following up on some of the deposit questions, your loan to deposit ratio is about 86%. You've run higher than kind of that in the past. Obviously a good group, a good growth in the treasury deposits this quarter. I know the public funds is a little bit of a seasonal headwind, but where do you start to get a little bit uncomfortable? I mean, would you be comfortable running it back to where you had historically in the, the high 90s, low 100% range or is the goal to keep it kind of around these levels just based on some of the verticals you built out like treasury? Thanks.
Good morning, Michael. I think we believe that a more normal run rate for us is in the 85%, 90% range loan to deposit. We don't know what's coming down the road economically et cetera, but we can certainly sustain a higher loan to deposit of 85%, 86%, but I would -- it would not be our strategy and say it this way, it would not be our strategy to run the bank at a 100% loan to deposit. We'd much rather, we feel more comfortable around 90%. That said, as Michelle said a moment ago, we have access to tremendous amounts of liquidity if we need it and it's just a matter of obviously funding at the best part of the curve that we can that generally is with core deposits. So we're working hard on the core deposit side. We've invested, as Michelle said, heavily in that treasury and so we're going to we think we can fund it with core deposits and keep our loan to deposit ratio around 90%.
Very helpful. And then maybe just going back to the buyback, I think you have about $44 million left after this quarter. Would you expect to use that or are you at a point where you might fall short just given cash to assets is fairly low at this point?
We certainly have the cash. I think it's really more kind of watching the economy and what's coming down the pike, because we bought back so much stock, our capital ratios were down a little bit this quarter. We expect that to build back over the course of the year. Again I don't know what's going to happen in the markets and how the markets are going to trade. So it's a little hard for me to predict, but I would say our bias would be less toward buying our stock back at this point just given how much we have already repurchased, our desire to have our capital ratios continue to grow this year and go in to fund the growth that we have. So we certainly have the liquidity to repurchase our stock, but it -- right now it looks to us like there'll be little activity in the second half on that.
Okay, perfect. And maybe finally for me, just for Dan, can you just give us an update on the commercial credit that moved to OREO? I assume that this property is being marketed and should be out of OREO here in the next quarter or so, is that fair?
Yes, Michael. Yes, it was the -- this was the asset that we talked about in the last call, where it was already a non-performing credit. It was adequately fully reserved for the amount of charge down that you saw we took was on that particular building. Yes, I think the potential of getting it sold is always difficult to determine the timing on that. Obviously we're processing or have a firm that's working the leasing side of that and the potential sale of that, but there's nothing imminent on that.
I would say because there are other non-performing loans in there, you see it up just slightly for the quarter. We expect some of those to resolve here in the back half of the year, which I think will reduce those numbers as our expectation at this point, that’s what we know.
Perfect, thanks for taking all my questions.
Hey, thanks Mike.
Thank you. Our next question is from Brett Rabatin a Private Investor. Please proceed with your question.
Hey, good morning, David, Michelle. It sounds you’re good.
Hey, good morning, Brett.
Hi, Brett.
I wanted to ask on the loan production this quarter, what’s your rates might have been on fixed and floating rate production, and then just thinking about sprite [ph] impression, if that's something that you're worried about as we think about additional rate hikes from here and how you're planning on making loans relative to the competitive landscape?
Yes, our rates were going up rapidly during the quarter Brett, and so as I said, the loans we put on so far in July have been north of 5%. I think our fixed rate loans came on average in the second quarter, mid 4s-ish came in the floating rates, probably a hair below that. Obviously they'll float and so we're not concerned about those loans at all. But the trends are good and we think that we'll be able to continue to bring on loans that’s increasing -- higher rates as the quarter goes along. And the pipeline, there's always a lag effect right in the pipeline on the loans, because you start working with a borrower on a project and it's sometimes 30 to 90 days later before your funding. So we're dealing with that with floating commitments and things like that. But that's been the -- continues to be the challenge, but as Michelle said, I think we're not worried about compression. The loans, the loan book itself now and Michelle is yielding about 430?
Yes, 435, 440 close to that.
Yes, so 435, 440. So we're putting on loans at 70, more than 70 bps higher than our book rate. So we're going to drive off the loan yields as the year goes along and then, obviously balancing that with a generation of core deposits and funding. And Michelle voiced earlier that we think we've got a few basis points of increases in NIM coming each quarter for the balance of the year.
Okay, that's great color. Good to hear. The other thing, maybe a question for David Brooks, I think a lot of people are trying to figure out what credit risk might look like, is this core recession looms, and I guess some folks have talked about, Class B office space and side loops and things like that. I'm curious if there were any loan categories that you might be less inclined to be aggressive with adding to the portfolio going forward, just given how you see credit risk from here for the environment.
Yes, this is Dan. I'll take that one. Yes, I think in general, as I described earlier, our production is always diversified by asset class. While we have primarily that growth within CRE as you may note in regards to asset classes, the office space is one that I suspect all of the banks, including us are keeping a close eye on. That book for us has performed really well. Obviously we took a property back, but in general, that book is really solid and again, we don't do downtown office buildings in the big metros, places like that that have been ones that have created even more concern in the market.
So beyond that, I think we're keeping an eye on the assisted living, memory care space. I think it has continued to lag. I think the pandemic certainly made that even more challenging for banks who were very active in that space. We have minor exposure in there, but we're keeping an eye on that as well. But beyond that, I don't know of any specific asset classes, I would say that we're -- would be interested in curtailing. I think that just goes to the way that we approach credit all the time. Right? We're always preparing for what might be a downturn.
Okay, great. I appreciate all the color.
Hey, thanks, Brett.
Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any closing comments.
Well thanks for joining the call this morning. We’re excited about the balance of the year kind of watching anxiously if those are the developments on the macroeconomic front, but we’re happy, very pleased with where we are. We feel great about our credit quality as Dan was alluding to a moment ago and we are optimistic about the continued performance and market trends. So I appreciate everyone joining today and hope you have a good day. Thanks.