Independent Bank Group Inc
NASDAQ:IBTX
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Independent Bank Group Inc
Earnings Call Analysis
Q3-2023 Analysis
Independent Bank Group Inc
Independent Bank Group delivered stable third-quarter earnings with a net income of $32.8 million or $0.79 per diluted share. The bank navigated the economic uncertainties by focusing on core loan growth, which stood at an annualized rate of 4.5%, and maintaining a lower loan-to-deposit ratio, which decreased to 92.7% from 95.1% in the previous quarter. They further strengthened their financial position by decreasing short-term borrowings like Federal Home Loan Bank (FHLB) advances. A strong emphasis on expense control led to a decline in total noninterest expense to $81.3 million for the quarter.
The net interest margin (NIM) faced a downward adjustment to 2.60%, an 11 basis point decline from the linked quarter, chiefly due to a rise in deposit costs driven by the Federal Reserve's interest rate hike and attrition of noninterest-bearing deposits. Notwithstanding, the bank foresees stabilization in the NIM moving into the fourth quarter, with expectations set for expansion in early 2024 as long-term assets reprice. This outlook is supported by healthy pipelines for higher-yielding loans and lower-cost deposits, indicating an inflection point for the bank's interest income landscape.
Independent Bank Group reported robust credit metrics with nonperforming assets comprising merely 33 basis points of total assets and annualized charge-offs at a nominal one basis point for the quarter. Stability in asset quality underscores the effectiveness of the bank's conservative underwriting practices. Furthermore, the bank's strong footprint in four high-growth markets across Texas and Colorado, bolstered by favorable demographic trends and capital inflows, positions it well for resilience and growth despite broader economic challenges.
Provision expense stood at $340,000 for the quarter and is expected to be around 1% of total loan growth in future periods, contingent on the prevailing macroeconomic forecast and the current expected credit loss (CECL) model. Noninterest income experienced a slight reduction to $13.6 million from $14.1 million in the linked quarter, indicative of a minor adjustment rather than a significant trend.
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Hello, and welcome to the Independent Bank Group Q3 2023 Earnings Conference Call. [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.
Good morning, and welcome to the Independent Bank Group's 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 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.
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 our NIM. We also were able to decrease our loan-to-deposit ratio to 92.7% quarter end compared with 95.1% at prior quarter end by growing our certifies of deposit and paying off some short-term FHLB advances and volumes. At quarter end, our balance on FHLB advances outstanding was lower than the end of last year. This comfortably positions our balance sheet to navigate an environment with sustained macroeconomic uncertainty and allows us to continue to serve our customers and communities throughout the economic cycle.Income remains stable, both quarter-over-quarter and year-over-year. In addition, our focus on expense discipline resulted in total noninterest 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 1 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 3 decades. Capital ratios ended the quarter in a healthy position with the Tier 1 capital ratio at 10.21%. A 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.
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 modelling 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 cost for the bank as short-term rates peak. We also continue to pay down our higher rate borrowings such as FHLB advances and a holding company line of credit in the third quarter while increasing broker deposits, which remain 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 Daniel.
Thanks, Paul. Core loans of 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 has started 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 a 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.
Thanks, Dan. As we enter the fourth quarter, we remain encouraged by the trends we are seeing in our business. At loan growth has returned. The NIM seems to be stabilizing at its bottom. Our fee income remains consistent. Credit trends remain strong, and we continue to exercise discipline on our expenses. We are especially encouraged by the continued strength of our 4 high-growth markets across Texas and Colorado, which are each void by positive demographic trends and capital inflows insulate them from the broader macroeconomic activity. Most of all, though, our success in growing the bank in this challenging environment is 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 3 decades, and we never straightened 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?
We'll now be conducting a question-and-answer session. [Operator instructions] Our first question is coming from Brady Gailey from KBW.
Expenses came a lot better than I think you guys had previously expected. I think I saw the release, there were some maybe incentive reversals and some other noise in the quarter. So I was just wondering, as you look at forward expenses, especially as you head into next year, how are you thinking about the run rate? And are expenses stable here? Are they modestly growing?
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 onetime items in the third quarter, but I think $83 million to $84 million is a good run rate for noninterest 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 8,384 rate for at least a few quarters.
And then credit quality remains just so clean for you guys. I think the market does see the above-average commercial real estate exposure and just a little nervous. I know you guys have looked at stress testing and when you have a rate reset that gets 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.
I would say we gave some good colour at the last quarterly call, but we continue to feel very good about the book that we have. And as we've discussed before, 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 average sizes of $2 million or less in the CRE bank. In strong markets where we've got strong NII 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 5 years in particular, as we headed into the current conditions, and we believe that will continue to serve us well.
One additional comment, 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.
And then finally for me. So 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?
It depend a lot on external factors and specifically rates and what happens there. I'd say in a flat rate environment, if you assume that the Fed holds overnight right where they are right now, and we continue to gain a little bit of pricing power due to where the longer durations of the curve are going or at least heading for the last quarter. We would expect to be able to see some nice expansion in 2024. It's going to be more gradual on the way up, obviously, than it was on the way down. But we do expect, especially given what we have repricing and what's in the pipeline to see some nice lift in the margin, especially in the back half of 2024.
Paul and I were talking about this yesterday actually, and we know pretty well contractually what in size, and we know kind of what we think our loan growth is going to look like, all those things. Where we had a challenge, I think the entire market had a challenge has been predicting deposit costs to predicting deposit betas and what's going on with competition and what the Fed is going to do and the long end of the curve coming up and all those things that we don't control. So we're just being a little bit cautious. We do know the NIM will inflect positively in '24. But really, the things as Paul said, that rates and deposit pressure and all that, we believe it's levelling out. It appears to be levelling out, but it's been pretty dynamic in the changes this year.
I will add, though, Brady that we have a nice setup for the fourth quarter. The bulk of our loan production came in the last 2 weeks of the quarter. We're already up for the fourth quarter, about $100 million in loan volumes. So we're pretty optimistic about our ability to see that stability and that inflection in 2024.
Our next question is coming from Stephen Scouten from Piper Sandler.
You guys just spoke to kind of your understanding of the contractual repricing on your loan book. Can you give any detail in regards to the magnitude of those expectations in '24 that might help us kind of do the math a little bit better for the potential upset in there?
Yes, absolutely. So we had about $442 million, Stephen, of gross loan production in the third quarter. I expect that to go up to be a little above $500 million in the fourth quarter, and we expect over $2 billion of contractual roll in 2024. And so I think if you look at paydowns, payoffs, where the cash flow coming off the book is you should have anywhere between $2 billion and $3 billion of repricing activity in 2024 for our latest models.
And on the average, what's sort of the kind of roll on yield there? What kind of spread are you picking up over the old loans versus [indiscernible].
I'll answer that one. We're seeing pricing averaging in the high 7s on new and renewed credits. And honestly, with the longing of the market out, we expect to continue to be smart on adjusting rates supporting for that as we move forward, the I'd say high 7s is the quick answer to that today versus [indiscernible] around 4%.
And then maybe just the last thing for me. I think you guys’ kind of spoke to some stability you're seeing on the noninterest-bearing deposits, maybe even since quarter end. So what are you seeing there specifically? And maybe do you think that can stabilize? Or do we still likely have just a decline but a slower pace of decline.
Yes. As David noted, Stephen, it's really difficult to predict the directionality of noninterest-bearing deposits. But from what we've seen since quarter end, quarter-to-date for Q4, we will within $10 million, $11 million of our balances at quarter end. So we've seen very good stability there this quarter. And we're obviously optimistic that we'll be able to map some wins in our deposit sales pipeline as well. Our treasury teams are working very hard on making sure that they're getting in front of the customers and that we're winning business. It's a very competitive environment. But we feel pretty confident in where we are for the fourth quarter. But as far as a long-term trajectory, it's difficult to ascertain given there's so many exogenous factors going on in the cycle.
Next question is coming from Michael Rose from Raymond James.
Just if I start with the bond book. I noticed that the duration is now up to 7.7 years. Just given where your capital levels are, I mean, is there a thought process around restructuring the bond portfolio and maybe using some of the excess cash that will roll off the loan and the securities book here to do that? Or just wanted to get some general thoughts just given the duration continue to extend out.
Obviously, Michael, we've looked at different scenarios, but as it stands today, we don't have any intention of pursuing a bond portfolio restructuring. I don't think that's something that we would consider. We're in a mode to really preserve and accrete capital at the moment. We think that's the right place to be at this point in the cycle. And so that's not a utilization of capital that I think is high on our priority list even though you would get some meaningful NIM benefit from it.
I appreciate that, Paul. And then just as a follow-up, just wanted to talk about the warehouse. The balances came in, I think, a little bit higher than what we've seen from some of the other players that are in the space. Just with average balance is actually being up Q-on-Q. I just wanted to get any sort of outlook you might have for the warehouse as we move forward?
I think we communicated last quarter that we expected them to be certainly flat at these higher levels that we have experienced early part of the year, we continue to think that's going to be the right walk as we move forward into '24. We've had that opportunity to pick up some need, really nice customers in that space. You have some normal seasonality that takes place in the fourth quarter and the first quarter, but on average, we expect ‘24 to be at these kind of levels on average as we move forward.
Do you have a sense for what the reserve allocation is against that portfolio? Or do you not break it out that way? Just wondering if you get some thoughts there.
We don't break it out separately from the rest of the CRE book. To the extent if there are any downgrades or issues that come up on that, it gets picked up in the CECL model, but there's not a separate allocation for that.
Were there are any downgrades in that portfolio this quarter?
They were not.
Next question is coming from Brandon King from Truth Securities.
I'm trying to put together the pieces for how we think about NIM going forward. And if you could just give us your thoughts on loan yields and how they're projecting going forward, could we see similar increases quarter-over-quarter over the next couple of quarters as we saw in the third quarter?
I would expect the increase in the loan yield actually expand. As I mentioned earlier, Brandon, the bulk of our loan production for Q3 came in the last 2 weeks in the quarter. So all of those pricing resets, the big up pricing activity happened at the end of the quarter that sets us up nicely for Q4 to see some more expansion in loan yields. We would also expect that $100-plus million of production we've seen of that growth that we've seen so far this quarter will set us up nicely to see the loan yields continue to expand. And as Dan mentioned, we're constantly looking at the curve and looking at where competitive pressures are, obviously, having some other banks go to the sidelines gives us some opportunity on the pricing side to push rates up a little bit. So we're being very deliberate and we're being very forceful in making sure that the bank is being fairly compensated for the risk it's taking in originating these loans. And so we feel comfortable with the directionality of loan yields at this point more so than I think you saw in Q3.
And I'm not sure if you don't this exercise, but could you give us a sense of when you think that rate of change in loan yields would peak, I guess, sometime in 2024.
Oh gosh, that would be -- again, it’s all dependent on external factors. I wouldn't want to give you a guide and then have a rate cut come and blow it up, but we certainly would expect that, that rate of change will continue at least through 2024.
And then how are you thinking about deposit growth from here? I know the loan-to-deposit ratio declined in the quarter is at 93%. I think you can maintain kind of that level.
Brandon, I think our loan growth will continue on and thereby, we need to continue to do deposits, and we will do that. It's the ability, to grow the deposits is part of our relationship strategy. So we think we'll continue to grow deposits and loans at equal rates in the mid-single digits going forward.
And I'll just note, Brandon, really during the third quarter, that push for the loan-to-deposit ratio to come down, that was a real deliberate strategy that we employed to trade a little bit of earnings for some balance sheet strength, which we think positions us very nicely to capitalizing the growth opportunities that we've seen. We feel really comfortable with where the loan-to-deposit ratio is right now, and we feel very comfortable with where the balance sheet is right now. We think it gives us a lot of optionality at this point in the cycle.
[Operator instructions]. Our next question is coming from Matt Olney from Stephens.
On the margin, Paul, you gave us some good commentary about some tailwinds for the margin throughout the quarter. I think you mentioned some better loan growth at the end of 3Q and some better loan resets over the last few weeks of 3Q. Do you happen to have that margin by month in the third quarter? Just help us more comfortable with that margin stapling even more so in the fourth quarter.
Yes, the margin -- I don't have the numbers right in front of me on that, but I will tell you that the margin went up from August to September. So we did see a little bit of expansion intra-quarter.
And then what about a lot of commentary on the margin, what about the NII, anything unique there as we think about our forecast? Or should it follow the margin as far as being stable in the fourth quarter and then expanding early next year?
I think given where we're holding cash levels, I'd expect NII and margin to be correlated pretty much. Obviously, that will depend on the magnitude of the balance sheet growth we get. We do certainly expect NII to be stable in the fourth quarter and then to see some expansion in 2022 and throughout 2024.
And then on the deposit costs, you mentioned that's obviously the biggest variable here. Those deposit costs went up a little bit more than I was expecting in 3Q and a little bit more than you've seen our peers. Any more commentary on kind of what we just saw in the third quarter? And remind us of your deposits that are indexed that have automatic resets at the Fed news. Any commentary on that as we think about forecast for next year?
Yes, absolutely. A couple of notes on deposit costs from the third quarter, primarily flipping from borrowings into deposits, obviously, increased deposit costs more than it otherwise would have. But again, we were pretty deliberate about reducing those borrowings. So I think on an aggregate, when you look at funding costs, while we did take a little bit more expense to pursue that balance sheet strength, we're comfortable with the position that we have. As it pertains to index deposits, we've been much more deliberate about that this cycle. We have $3 billion to $4 billion of indexed deposits that will move immediately with the Fed. We would expect to be able to move rates pretty quickly if the Fed cuts. So in any scenario where you see Fed cuts in '24, that's going to materially help us in terms of the income statement NII.
And Paul, that last point was on a follow-up there. Maybe expand on that as far as kind of the ideal scenario for independent banks margin and eyes with respect to the Fed next year? What's of variables out there, but what do you prefer to see?
Well, we certainly are trying to position the bank for any scenario. I'll just make a broad comment that we're trying to make sure that the balance sheet is well positioned to weather whatever the macro throws at it. That's our objective first and foremost. As it pertains to what benefits us the most. Obviously, the positive slope in the curve and some big cuts are going to help us meaningfully. I think they're going to help us more meaningfully than they have ever helped us before as a company. And that gives us some optimism and some hope that as we start to see the macro stabilize and evolve and you start to see the long end of the curve come up that if the Fed is active and cutting next year, that's going to be really good for us go.
We have reached end of our question-and-answer session. I'd like to turn the floor back over to David for any further or closing comments.
Thank you, Kevin. I appreciate it. I appreciate everyone dialling in this morning. We continue to, as Paul emphasized today, position the company for whatever the future brings, and we're in a good position. We feel good about the growth and pathway forward. And so thanks for joining us today, and we look forward to seeing you out on the road. Take care.
Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.