Independent Bank Group Inc (IBTX) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Independent Bank Second Quarter 2014 Earnings Conference Call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference may be recorded.

I will now turn the call over to your host, Torry Berntsen. Please go ahead.

Thank you and good morning. Welcome to the Independent Bank Group Conference Call to discuss financial results for the second quarter 2014.

I am Torry Berntsen of Independent Bank and I'd like to thank you for joining us this morning. I will go over a few housekeeping items and then hand it over to David Brooks, our Chairman and CEO, to lead the presentation. We issued our earnings release this morning and a copy is posted on our website www.ibtx.com. We will be going over much of the release on this call. If you are having trouble accessing it, please call Eileen Ponce 469-742-9437 and we will email or fax you a copy.

Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We intend such statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the act. Please see Page 4 of the text in this morning's release for additional information about the risks associated with these forward-looking statements. Please also note that if we give guidance about future results, that guidance will only be a statement of management's beliefs at the time the statement is made. Predictions that we make may not continue to reflect management's belief 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 financial measures calculated and presented in accordance with GAAP are included in our earnings release.

At the conclusion of our remarks, we will open the telephone lines for questions. At that time, we will provide instructions for submitting your questions.

With those reminders out of the way, I would like to outline the agenda for this call. David Brooks will open with his thoughts regarding the second quarter results, Michelle Hickox, our Chief Financial Officer, will lead you through the quarter's operating results and some balance sheet highlights. David will then close the presentation and open the phone lines for questions.

I will now turn it over to David.

Thanks, Torry. Good morning and welcome to Independent Bank Group's Second Quarter 2014 Earnings Conference Call.

We are pleased with our results from the second quarter and our continued strong momentum. We are also excited about closing the Bank of Houston deal earlier than expected on April 15 and the successful integration to date. It is a real tribute to our staffs and advisors at both institutions and to our interactions with the regulators. We are also delighted to have announced the Houston City acquisition in the second quarter. Our presence in the dynamic Houston market continues to grow. Overall, we intend to continue to be an active acquirer, looking to build out the Houston region and add to our footprint in the major markets across the state.

With that said, a few highlights include the following. Core earnings remained solid, increasing sequentially and on a year-over-year basis through both organic and acquisition growth. We expect improvement in core earnings with increasing loan volumes throughout the remainder of the year. Our organic loan production continues to be strong with loans held for investment increasing at an annualized growth rate of 25.6% during the second quarter. We continued to see increased loan demand and are particularly pleased with our growth in energy lending. Our downtown Dallas and Austin locations had another robust quarter.

Asset quality remained strong. We fully understand the need for conservative underwriting and effective credit administration during periods of strong loan growth. The second quarter asset quality ratios continued to reflect our strong credit culture and are at historically low numbers. We are very encouraged with the improvement in our efficiency ratio. On a core basis, it was 56.9% for the second quarter.

We also completed our core Jack Henry system conversion that will support and augment our growth for years to come. We have also further strengthened our technology efforts by adding a very experienced Chief Information Officer to our team.

Finally, we recently executed a successful subordinated debt offering, strengthening our capital base. And we are also very pleased with the achievement of an investment grade rating with respect to our debt. As I will summarize at the end of the call, we feel very good about 2014 and the first six months of the year.

Now, I'd like to ask Michelle to go over second quarter results.

Thank you, David. Good morning, everyone.

As noted in the earnings release, our second quarter net income was $9 million or $0.57 per diluted share compared with first quarter net income of $5 million or $0.39 per diluted share. I would like to highlight a few things regarding earnings.

Net interest income increased during the second quarter to $31.4 million compared to $22.1 million for the first quarter. The increase in net interest income reflects increased loan volume both organic and from the Bank of Houston acquisition.

Our net interest margin was 4.26% for the second quarter compared to 4.17% for the first quarter. The increase is primarily due to a decrease in excess liquidity and the benefit of Bank of Houston's lower cost of deposits. Our percentage of demand deposits relative to total deposits has increased as a result of the acquisition.

The yield on interest earning assets was 4.76% for the second quarter compared to 4.74% for the first quarter. The cost of interest bearing liabilities, including borrowings dropped to 0.64% for second quarter 2014 from 0.71% for first quarter 2014, and 0.93% for second quarter 2013 due to a lower cost of deposits and FHLB advances and the repayment of indebtedness over the last year.

Total non-interest income increased $785,000 compared to the first quarter. The increase is attributable to increased mortgage fee and service charge income and an increase in the cash surrender value of bank owned life insurance related to the Bank of Houston transaction.

Total non-interest expense increased $9.3 million compared to the first quarter. This increase is primarily related to the Bank of Houston transaction. Total merger and acquisition costs for the quarter were approximately $5.5 million including $4 million for compensation and bonus expense related to the transaction. The provision for loan loss expense was approximately $1.4 million for the quarter, an increase of $126,000 compared to the first quarter. The increased provision is reflective of the loan growth experienced during the quarter. I should also reiterate the point that loans acquired in the Bank of Houston transaction have been recorded at an estimated fair market value as of the date of the acquisition and do not have an allowance as of June 30, 2014.

As you review the balance sheet, there are a few things to note regarding loans. For the second quarter, organic growth of loans held for investment was 6.4% from March 31, 2014, or 25.6% on an annualized basis. In addition, we added $787 million in loans from the Bank of Houston transaction. The composition of the overall loan portfolio continues to diversify as projected. C&I now represents 19.9% of the portfolio. Our energy outstandings were $199 million as of June 30, 2014, and we believe this will continue to be a growing area of our loan portfolio. Our Houston Energy presence added to our lending activity in the second quarter and is expected to be a revenue synergy from the acquisition.

As loans continue to grow, we maintained rigorous focus on asset quality. Total non-performing assets represented 0.39% of total assets at June 30, 2014, compared to 0.51% of total assets at March 31, 2014, and 1.27% at June 30, 2013. Additionally, total non-performing loans represented 0.37% of total loans at June 30 compared to 0.39% at the end of March and 0.43% a year ago.

We continue to focus on attracting and growing our core deposits. Total deposits were $2.85 billion at June 30, 2014, compared to $1.89 billion at March 31, 2014, with $821 million of this increase through the acquisition of Bank of Houston. The average cost of interest bearing deposits decreased by 2 basis points during the second quarter to 0.49% compared to 0.51% for first quarter 2014 and decreased by 9 basis points compared to 0.58% during the second quarter 2013. We benefited from Bank of Houston's lower cost of funds.

That concludes my outline of the highlights for our financial statements and I'll turn it back over to David.

Thank you, Michelle.

As noted in my earlier remarks, we feel like we accomplished a lot during the second quarter. We continue to believe in our business and footprint, loan demand is up and the growth across our franchise remains strong. The M&A environment in Texas continues to be very active, as evidenced by our recent announcement of our intention to acquire Houston City, the parent of Houston Community Bank. I regularly have conversations around cities and areas that we're interested in and where we envision our growth. We intend to continue building out our footprint as strategic opportunities arise. However, we will remain disciplined in our approach to these acquisitions.

In conclusion, we know that there are competitive challenges ahead, but we believe that our strong financial position and commitment to our proven business model communities and employees will yield positive results and enhance shareholder value.

With that, we will open the call to questions. Operator?

(Operator Instructions) John Pancari, Evercore.

Just wanted to get a little bit more color on the drivers of the loan growth in the quarter, can you just talk about how much of the -- what you're seeing in C&I versus CRE and maybe a little bit more of the regional color as well?

Our most active areas, John, have been Dallas and Austin. Obviously, we had a partial quarter of Houston, they are continuing to see good growth there as well. But, so more of the metro areas, we're seeing -- because of that we're seeing a nice mix of C&I. Our C&I portfolio now is up to 20%.

So 20%. It's actually at 20% right now, John.

Yes, which was our target. We mentioned a year ago -- 15 months ago when we went public that we wanted to get our C&I up to 20%, about half that energy. It's not quite half energy at this point, but the energy has been a strong driver of the growth. I would say, more general C&I has also participated in the growth. And then on the CRE front, a lot of -- I would say, user real estate -- owner-occupied real estate, and then some investment type real estate as well. John, if that helps.

John, it's Torry. I think it's really across the board in terms of CRE and C&I and again as David pointed out, the component of the energy side, and then some of those metro areas are really seeing the most significant growth.

What's the size of (multiple speakers)?

We're also seeing -- one other area, John, I would mention we're seeing terrific growth on the home construction, interim construction lending, as well.

Okay, all right. And what's the size of the energy book as of the end of the quarter?

We had about $330 million in commitments outstanding, some of which we had sold participations off. Our total outstanding energy loans in the quarter were about $200 million.

Okay, good. And then in terms of the loan growth, just how we can think about the outlook. Your end of period balances came in well above the average loan balance, and I know there could be something impacted by the merger, but not too much since you closed the merger in April. So, is the end of period balance indicative of what we should expect where loans can trend from here?

I think so, John. Obviously we had a really strong first six months in organic loan growth but our pipeline is still good. We've indicated our goal, short and mid-term, has been to grow 18% to 20%. We're on the outside the top end of that and we feel good about where we are and for the balance of the year.

Okay, good. And then lastly, just on the margin, quickly, just wanted to get a little bit of color, given how competitive it is in Texas, I wanted to get a little bit of color around where you're bringing on new loans in your portfolio in terms of the average new origination yields by C&I and CRE possibly? Thanks.

I think we're still seeing the CRE loans, John, in the 4.25% to 4.75% range with fees. So, pretty good yields on those. We are seeing energy loans generally in the 3%s, mid-3%s, mid-to-upper 3%s with fees and fees on use, we are generally leading those credits and getting deposits. And so we're getting some treasury management and other type of opportunities there. And then, so yes, floating rates in the 3.5% to 4% range and real estate loans in 4.25% to 4.75%. It's very competitive out there, John, as you alluded to especially on the price side, and we just see a lot of banks obviously hungry for growth and there's a lot of growth going on in Texas. So it's a great place to be, there is a lot of business out there, but we're also seeing some of the larger banks come down market a little bit where they can get better yield. So that's putting some pressure more in that $10 million to $20 million type originations, we're seeing some of the banks in that space that we hadn't seen before. So, it is going to continue to be difficult from a pricing standpoint. We're going to continue to see pressure on loan pricing.

Hey, John, the C&I stuff is typically prime plus the spread. So, obviously it's floating and with shorter maturities.

Okay. All right. Thank you.

Brad Milsaps, Sandler O'Neill.

Just want to see if you guys could make some comments around expenses. I know with the Bank of Houston deal closing, things are a little muddled linked quarter, but just curious how successful were you in implementing some of the cost savings into the run rate and what do you feel like you've got to continue to pull ends, try to get a sense of run rate expenses as you move into the back half of the year?

Great question. Michelle, would you take a shot at that first?

Sure. Hi, Brad. I think it was a really noisy quarter as you alluded to, and there are a lot of expenses related to the acquisition on Bank of Houston. But we really haven't gotten the benefit of all of our cost saves yet, because we actually are going to do their conversion this coming weekend. And so really, it will be closer to the end of the third quarter before we start really getting at least most of the compensation cost benefits out of that deal. So really I expect our expenses, the run rate to improve, at least related to Bank of Houston for the end of the year. And I think if you back out -- you back out kind of the expenses we pointed out as non-core for the quarter, that should stay fairly consistent through the remainder of the year.

Okay. So, 3Q might be relatively consistent with the core in second quarter and then you would start to see it maybe a fall off from there?

We'll really get the benefit in the fourth quarter, we'll really see the benefit in the fourth quarter.

Yes, we'll have most, Brad, I think of the cost efficiencies that we're getting from the Bank of Houston deal, you'll see fully implemented in the fourth quarter. The computer conversion as Michelle said this weekend. So, we will begin -- once we get their IT system online with ours and consolidated, then you begin to see some of the personnel saves that we've talked about. And so, you get part of it in third and fully see it in the fourth.

Okay, okay. And then just a follow-up on John's question, regarding the NIM and I'm sure we'll see this when you file the 10-Q, but just curious how you're -- now that you have Bank of Houston on the balance sheet and you guys have talked about this previously, but how your sensitivity to higher interest rates, may or may not have changed now, now you've got almost a full quarter with those guys on your books?

Michelle?

It really hasn't changed much, Brad. I think first quarter on a pro forma basis, we were about -- well, actually Independent Bank alone was just a little bit liability sensitive, but really neutral. When we did a pro forma with them, we were slightly asset sensitive, but still pretty neutral and I think that's going to be about the same as the end of June. It has not really changed.

Okay, great. Thank you.

We've moved to neutral to just very slightly liability sensitive to slightly asset sensitive we think now, Brad, with the floating portfolio of Bank of Houston.

And that comes with having that C&I portfolio, Brad, be close to 20% right now.

Great. Thank you, guys.

Matt Olney, Stephens.

I wanted to ask about if there is any update on the hiring of new commercial lenders. I know that's been an important part of the story over the last two years and didn't know if there is an update there.

Yes. Good question, Matt. We hired five new senior lenders as we talked about in the first quarter. So the pipeline on that slowed down a little bit in the second quarter and that was really as much by design. It takes a while to integrate those teams as they come on from a cultural and just a logistical standpoint, finding them places to be, and getting them all set up and integrating the technology et cetera. The teams we hired in the first quarter were particularly productive that's part of the growth story for the second quarter. They not only started in the first quarter, they were producing and moving a lot of business over in the second quarter, but we hired two new lenders in the second quarter primarily replacement and younger lenders so we didn't hire any new teams or anything in the second quarter. But we continue those discussions and expect that, that part of our story to remain the same over the balance of the year that we'll continue to hire some teams between now and end of the year.

And as far as the M&A initiative, I think some of your peers have had some problems getting their deals to the finish line, and obviously it hasn't been a problem for you guys, but any update in your overall M&A appetite?

As we've mentioned we closed Bank of Houston. We are on track to close our Houston Community Bank, Houston City's the parent. So you'll hear us using those interchangeably. But the Houston City parent company, we expect that to happen in the fourth quarter, no indications at this point that there's any problem with that timeline. We've been fortunate in our dealings both with sellers and with the regulators to be able to put together clean deals and get them through the system and approved.

But, we are obviously aware of some of the challenges from a regulatory standpoint and we're paying very close attention to that and doubling down our efforts to communicate well with our regulators and I think part of it has to do with size as well. At under $10 billion, and we've got a lot of run room between here and $10 billion. I think there's just a -- it's a little, you have a little more flexibility in getting things done when you get through the $10 billion and approaching $25 billion or greater than $25 billion, you just -- it gets a bit more difficult apparently from our observation. But that said we're not in any way feeling like we're special, we just have to keep working hard and doing the things.

But from an appetite standpoint, no, we continue to be active in the market having discussions. We want to do strategic deals, we want to do smart strategic deals, where there seems to be a movement away, which is our view, away from tangible book value multiples which are always important, and that is a multiple that people look at and think about, but capital levels vary so much and how strategic a deal is varies a lot.

We're really focused on earnings as the primary thing as we model and think about our acquisitions and that is what our -- what's the current bank earning, what are the potential earnings in our -- as a part of our system and we value accordingly and that's sometimes difficult when people are used to thinking well, geez, I can get 2 times book or 2.5 times book, but if that is 25 times trailing earnings, that's a hard deal to do.

Matt, on the other point on, as a follow-up to David, on Houston Community, we should have that fully integrated into our -- or the plan is to have that fully integrated into our computer systems or core system by the end of the year as well. So, everything will be on one platform at that point.

Okay. And then last question from me, as far as the tax rate, I guess the press release mentioned some of the 2Q expenses weren't deductible, what kind of effective tax rate should we looking at for the rest of the year?

Michelle?

It should be consistent what has been historical, Matt, it runs about 32.5% to 33%.

Okay. Thanks, guys.

(Operator Instructions) John Moran, Macquarie.

Maybe just a real quick, we could touch on the -- and I know it's a small piece of the overall pie, but on the fee side of things, a pretty good outcome on mortgage, I assume just seasonally strong. And then any sort of forward look that you could provide -- once Houston City comes in, if memory serves they had some or may have had some other fee streams that would be additive? Thanks.

Thanks, John. I think fees are -- were seasonally strong in second quarter, we're seeing obviously a lot of deal flow on the mortgage side. We're starting to see some benefit from our focus on treasury and our focus on wealth management initiatives, we're in the very early stages of those, so we're hopeful with, back half the year we're going to see some production out of those areas that are net positive to the bottom line.

And then, as you mentioned, Houston Community has done a good job of -- in their fee lines of business and so we'll see -- we don't know when in the fourth quarter, we'll be able to close that, so I don't think that will -- I don't expect that to have a lot of impact on this year's earnings. But certainly, we -- as Torry mentioned earlier, we expect to get them integrated both technology and overall into our system in the fourth quarter. So, we expect to see a full year of the benefit in 2015 of the fees and the cost savings on the Houston Community in full year 2015.

Perfect. That's helpful. Thanks, guys.

And I'm showing no further questions. At this time, I will now turn the call back over to management for closing remarks.

Good, thank you very much. We had a busy second quarter, all things though moving in the right direction in our view, and so we are continuing to work hard. We are pro forma, with the Houston Community acquisition, if we successfully close it in the fourth quarter that will put us at year end around $4.2 billion to $4.3 billion in assets. So, we've had significant growth in the last year and a half and we're optimistic that we're going to be able to continue to execute our strategy. So, we're excited about the back half of 2014, and we're really looking for to 2015 as well. So, appreciate everyone's support and will be available if anyone needs anything else. Thank you.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and everyone have a great day.