Independent Bank Group Inc (IBTX) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Independent Bank third-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, today's call is being recorded.

I would now like to turn the conference over to Robb Temple, Executive Vice President. Sir, you may begin.

Good morning. Welcome to the Independent Bank Group conference call to discuss financial results for the third-quarter 2014. I am Robb Temple of Independent Bank, and would like to thank you for joining us this morning. I will go over a few housekeeping items, and then hand it over to Torry Berntsen, our President and COO, to lead the presentation. David Brooks, our Chairman and CEO, is on a long planned trip and is unavailable today.

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 at 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 be only 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. Torry Berntsen will open with his thoughts regarding the third-quarter results. Michelle Hickox, our Chief Financial Officer, will lead you through the quarter's operating results and some balance sheet highlights. Torry will then close the presentation and open the phone lines for questions.

I will now turn it over to Torry.

Thanks, Robb. Good morning, everyone, and welcome to Independent Bank's third-quarter 2014 earnings conference call. We continued to execute our strategies during the quarter. Specifically, we are very excited about having converted Bank of Houston to our core operating system in early August, a quick timeframe from our closing in mid-April. We are also pleased about obtaining regulatory approval and closing the Houston City acquisition earlier than expected on October 1.

Total assets on a pro forma basis are now approximately $4.1 billion as of September 30. The operational conversion for Houston Community is scheduled for early December, allowing us to have it mostly integrated prior to 2015. We are also thrilled to have closed two transactions in the dynamic Houston market this year. Overall, we intend to continue to be an active acquirer, looking to add to our footprint in the major markets across the state.

We are also pleased to have completed the $65 million subordinated debt offering in July. Due to demand, we increased the offering from $60 million to $65 million, and we were able to raise the offering at the attractive rate of 5 7/8. A portion of the capital raised was used for the Houston Community transaction, and the remainder gives us financial flexibility going forward.

With that said, some highlights from the third quarter include the following -- core earnings continue to grow, increasing sequentially and on a year-over-year basis through both organic and acquisition growth. On a sequential basis, core earnings grew 5.8%. As we have mentioned in the past, the third-quarter historically has been a slower one for us, and we experienced some similar characteristics this year.

Loans held for investment increased at an annualized rate of 6.5% during the third quarter. More importantly, however, our annualized organic growth rate for the first nine months of the year was 24.2%, consistent with historical trends. The pace of our loan growth moderated from the second quarter, due to a higher-than-normal payoffs, the sale of the SBA portfolio we acquired in the Bank of Houston transaction and competitive pressure in our markets. Despite the environment, we remain disciplined in our approach to credit underwriting and pricing, which we believe will serve us well in the future.

Asset quality remains very strong. We fully understand the need for conservative underwriting and effective credit administration during periods of increased competition. The third-quarter asset quality ratios continue to reflect our strong credit culture, and are, again, at historically low numbers.

We remain encouraged with the continued progress in our efficiency ratio. On a core basis, it was 56.87% for the third quarter. We expect continued improvement as we realize all the cost savings from our acquisitions.

Our year-to-date rate on total deposits dropped to 38 basis points. We have also further strengthened our treasury management efforts by recently hiring a new head of the group with a broad base of experience. As I will summarize at the end of the call, we continue to feel good about 2014 and the first nine months of the year.

Now I would like to ask Michelle to go over our third-quarter results.

Thank you, Torry, and good morning, everyone. As noted in the earnings release, our third-quarter core net income was $9.5 million or $0.58 per diluted share compared with second-quarter core net income of $9.0 million or $0.57 per diluted share.

I would like to highlight a few things regarding earnings. Net interest income increased during the third quarter to $32.4 million compared to $31.4 million for the second quarter. The increase in net interest income primarily reflects increased interest income on loans, due to larger average loan volumes in the second quarter. The increase in income was partially offset by the additional interest expense on the $65 million of subordinated debt issued in July.

Our net interest margin was 4.04% for the third quarter compared to 4.26% for the second quarter. The subordinated debt accounted for 9 basis points of the decrease, with the remainder primarily due to a decrease of 23 basis points in our loan yield. Third-quarter loan yield has been impacted by an increase in floating rate loans in the competitive landscape.

The yield on interest-earning assets was 4.60% for the third quarter compared to 4.76% for the second quarter. The cost of interest-bearing liabilities, including borrowings, increased to 0.73% for the third quarter from 0.64% in the second quarter, primarily due to the cost of the subordinated debt issued in July.

Total noninterest income increased approximately $1.1 million compared to the second quarter. The increase is primarily attributable to the sale of the SBA portfolio acquired in the Bank of Houston transaction. Historically, Independent Bank has not been an active SBA lender.

Total noninterest expense decreased $3.2 million compared to the second quarter. This decrease is primarily related to fewer costs related to the Houston transaction. Recall that approximately $3.9 million of compensation expense was recognized in the second quarter for bonuses and stock grants for retaining Bank of Houston employees.

Remaining acquisition and related expenses for the third quarter were approximately $1.1 million, down from $1.5 million in the second quarter. Increases in occupancy, data processing, communications, and other noninterest expenses are primarily related to having Bank of Houston for a full quarter, as well as additional expenses related to integration.

The provision for loan loss expense was $976,000 for the quarter, a decrease of $403,000 from the second quarter. The decrease provision reflects continued improved asset quality metrics as well as reduced loan growth compared to the prior quarter. As it relates to loans, for the third quarter, organic loans held for investment grew 1.6% from June 30, 2014, or 6.5% on an annualized basis.

As Torry mentioned earlier, in addition to selling the Bank of Houston SBA portfolio, we experienced a higher amount of payoffs relative to production than we have historically. Further, our disciplined approach to lending in the increasingly competitive environment also slowed production relative to earlier this year.

The composition of the overall loan portfolio continues to diversify as projected. C&I increased slightly to 20.3% of the portfolio. Our energy outstandings at the end of the quarter were essentially flat from the previous quarter at $199 million. Production and energy continued to be good. However, this line of business was affected by payoffs.

In the current lending environment, we maintained rigorous focus on asset quality. Total nonperforming assets represented 0.33% of total assets at September 30, 2014, compared to 0.35% of total assets at June 30, 2014, and 1.26% at September 30, 2013. Additionally, total nonperforming loans represented 0.29% of total loans at September 30 compared to 0.32% at the end of June, and 0.43% a year ago.

With respect to funding, total deposits were $2.81 billion at September 30, 2014, compared to $2.85 billion at June 30, 2014. Our public funds deposit experienced a seasonal decrease, which made up most of this decline. We continue to focus on growing our core deposit base, and as mentioned, have recently added an experienced Treasury Management Officer to oversee the entire branch network.

The average cost of interest-bearing deposits remains stable at 0.49% compared to the second quarter, and decreased by 5 basis points compared to 0.54% during third-quarter 2013. Our overall cost of deposits decreased to 0.35% third-quarter from 0.37% second-quarter. We increased our FHLB borrowings by $55 million in the third quarter to $324 million to take advantage of short-term rates and manage our interest rate risk.

As it relates to capital, as previously noted, we issued $65 million of subordinated debt in July 2014 at a 5 7/8 rate. The debt qualifies as Tier 2 capital; thus our total risk-weighted capital ratio increased from 11% in the second quarter to 13.36% in the third quarter, while our tangible common equity to tangible assets ratio stayed fairly stable at 7.32% in the third quarter compared to 7.25% for the second quarter.

That concludes my outline of the highlights for our financial statements. I will turn it back over to Torry.

Thanks, Michelle. As noted in my earlier remarks, we feel like we accomplished a lot during the quarter. We continue to believe in our business and footprint. Growth continues throughout our franchise. We are also seeing an increase in our loan pipeline consistent with historical trends, and remain optimistic that growth will accelerate for the remainder of the year.

There continues to be active M&A discussions in Texas. David is involved in many fluid conversations around the cities and areas that we are interested in and where we envision our growth. We intend to continue building out our footprint as opportunities arise. However, as we have said all along, we remain disciplined in our approach to acquisitions.

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

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

(Operator Instructions). Brady Gailey, KBW.

So the lower loan yield, is that more driven by competitive pressure in Texas? Or was it more driven by -- I know you mentioned the mix shift -- towards more variable rate lending? Which was the driving factor there?

You know, Brady, I think it's a combination of the two. As our C&I portfolio has gotten up to 20%, we have put on more variable. But also, I think it is the competitive pressures as well.

So, over time, we were probably seeing a five-year piece of paper more in the 4.5% range. We are starting to see those things now more in the 4.25%. There are situations out there where some of those five-year type pieces of paper are being priced at 4%. But we have tried to hold the line as best we can in that 4.5%; but for some of those good credits, we are looking at the 4.25%.

So I think it is a combination of both. It's us having 20% in the C&I book as well as competitive pressures in Texas.

And, I mean, with new loans coming on at 4.25% to 4.5%, your portfolio loan yield is 4.90%. So I am guessing that loan yield will continue to drift down over time?

Well, what you will have in the fourth quarter is you will have the benefit of Houston Community. So what we'll put on is over $200 million of loans in the fourth quarter. Their average yield, Michelle, is about 6%; and so that will balance out. So we think our NIM will sort of stay in the range where we are at for the fourth quarter.

Obviously, going into 2015, if the interest rates remain where they are and things are, from a competitive perspective, we will probably see the margins drift a little bit.

Okay. (multiple speakers) And -- go ahead, Michelle.

Yes, I just wanted to point out that the 4.25% that Torry is talking about doesn't include when we get a fee. And so the yield actually on our portfolio without fees is a little lower than what you mentioned. It's probably at 4.65% right now. And usually 20 to 30 basis points for fees are what we earn each quarter.

Okay. And (multiple speakers) --

So just keep that in mind.

Okay. And can you remind us what -- why is the Houston Community, that 6% yield, why is that higher than the average?

Well, we have a lot of smaller loans. Of their $200 million in loans, roughly the average loan size is around $60,000. So they tended to have a little bit of a smaller end of the market, and they have been able to hold their rates higher. They have had some number of long-time customers, et cetera.

Okay. And then, lastly, a lot of people are talking about energy this quarter, just with the price of oil dipping to $80. I know you all said energy balances were flat, but can you just give us an update on what you are seeing in that sector? And if there is anything being driven by this volatility in the price of oil?

You know, we've seen that pipeline. There is still activity there. That pipeline is probably not as robust as it was, but we are very confident with our whole energy portfolio. I will give you a couple of highlights, as I know there have been a lot of questions on energy overall, in terms of what you guys are talking to companies about.

Our energy book is about 6% of the portfolio. We don't do any oilfield services, no midstream. We are focused on proven production lending. Our long-term price deck -- and I know that is a question that everybody has been asking -- is in the mid-70s. We are regularly surveying our peer group, and our deck is really conservative -- conservatively in line with that.

From an advanced rate, our advance rate is under 60%. We are predominately in the Texas-based companies, which we think is very strong. Oil represents about 80% of our portfolio. And another point that we've highlighted all along, we're really the lead bank [and arrange not] over 90% of our energy commitment. So we like to find the deals; we like to be in charge of the deals and structure them from that perspective.

Very experienced management team, including our manager has been in the business for over 30 years; our lenders, on average, 5 to 20 years; our credit people, our credit -- lead credit person on the energy side has got 30 years of experience as well.

So we are very comfortable where we are at in terms of the pipeline, as I mentioned before. There is still a pipeline. It is probably not as strong as it was when we have had conversations in the past.

Okay. Great. Thanks for the color.

Brad Milsaps, Sandler O'Neill.

Just wanted to see if you guys could touch on some of the moving parts of expenses, as you closed Houston City. And then I guess you converted Bank of Houston during the quarter. It looks like core expenses were maybe up $600,000 -- $700,000. Does that reflect pretty much all the cost savings you are going to get from the Bank of Houston deal? Any potential for those taking another step-down in the fourth-quarter, excluding the Houston Community Bank?

We'll get a little, Brad, on that. As I think I've mentioned, as we go through the process of bringing banks onboard, it is really right after the conversion that you are getting some of the benefits in terms of the headcount. So we still have anywhere between 15 and 20 people on our books right now, that won't be on our headcount as we start in 2015, as we go through these various conversions.

A few of those people represent still from Bank of Houston. The vast majority are on the Houston Community side. So we think we will be in a position to really reap the benefits of the two acquisitions starting in 2015.

But to answer part of that question, too, Brad, I mean, we did have some expenses in third-quarter that we probably didn't even anticipate related to integration, just with us having to have people on the ground in Houston as we did the conversion, and to get them integrated, that we do think will subside going forward as well.

So those two points, Brad, kind of make the fact that there's room to go there, so, even if you look at our efficiency ratio, at about that 56%. As we fully integrate the two acquisitions, that will come down next year.

Okay, great. And just to remind -- I think you guys guided to something closer to 35% cost-saves in the Houston Community Bank deal. Is that -- does that still seem to feel pretty good based on where you are today? And can you remind me what is the conversion date for that one?

The conversion date for it is actually December 5th. So we will have them operationally converted before year-end. And I think all but about two people will be gone at the end of the year. And there are a couple that we are keeping through February on the loan side, just for integration purposes.

So, yes, I think the cost-save on Houston Community, we still feel pretty good about. And the majority of that will be at 100% by second-quarter of next year.

Yes, Brad, we feel great about both acquisitions, both in the timing -- well, first, in the quality of the acquisitions, but also in the timing of when we have been able to close. And also, thirdly, from a conversion standpoint. We are very excited that we could close Houston Community in the beginning of October, and then convert it in the beginning of December. So, again, 2015, we are looking to have all the costs removed and you will have a good run rate year.

Got it. And then just one follow-up. Any new hires or teams in the quarter that you guys added, of note?

We added one senior lender in Austin. And that is somebody that came from one of the other large banks. And then going forward, we are talking to a number of teams primarily in the Dallas and the Austin areas, and to a little bit of a lesser extent than Houston. But we are encouraged by the conversations we are having with those folks. But if you look at it in the third quarter, we spent an awful lot of time just getting the Houston Community deal closed, and again, getting it closed ahead of schedule.

Got it. Thanks, Torry. Thanks, Michelle.

Bye, Brad.

Thanks, Brad.

(Operator Instructions). John Moran, Macquarie.

Hey, a quick question just on the paydowns that were elevated this quarter. Presumably most of those came out of the C&I book. Was that predominately energy?

I think it's -- a fair amount was on the energy side; but again, it was across the board. You actually experienced a number of things on the real estate side. Many people had low bases in properties that they had acquired, and it was a chance to sell.

And then also from a competitive standpoint, there are some banks out there that are just willing to lend on appraised value. So people have gotten their appraisals increased and the ability to take things out based on just that. So, it really is a combination of both in terms of frothy prices on the real estate side as well as on the energy side.

And you know, we should point out that, assuming that we had had the same payoffs -- when we talk about loan growth, et cetera -- assuming we had had the same payoffs in the second quarter, and we had not sold that SBA portfolio for the $12 million, the annualized growth for the third quarter would have been 15-point -- roughly 15%, which was actually more than it was for the comparable quarter last year of 11.5%. So, again, if you normalize the payoffs to the prior quarter and not deduct that SBA portfolio, the growth would have been 15% on an annualized basis.

Got it. Based on what you are seeing so far in 4Q, is this sort of elevated level of payoffs continuing? Or are things kind of back to a more (multiple speakers) --?

Through what we have seen in October, it has been more of a normalized situation. And even if you think about what we are seeing, our pipeline has improved, we expect the fourth quarter to be stronger. However, not to the extent of our first and second quarter, but clearly in line with what we have seen from -- or what we have said from an historical guidance perspective.

Okay. And then, hey, Torry, can you give us a quick update? I know that, historically, you guys were kind of targeting 20-ish-pecent on C&I in total, with 10%, I think, of the book coming out of energy. We are kind of there on C&I now. And energy, I think you mentioned was 6% of the book. So any sense of kind of where C&I could go? Where you're targeting?

Yes. We've said, John, and in some later conversations, probably more to the 25% level. And then we still see energy in that 10% to 12%.

Okay. So 25% total C&I with energy --

Right.

-- priced at 12%. Okay. And then maybe shifting gears real quick, I think in the prepared remarks, you guys mentioned something around deposit strategy and bringing in a Treasury Management person recently. Any kind of update that you could give in terms of what the strategy would be there, and how you are going to kind of focus on growing core deposits?

Well, as I said, we recently hired a new Head of Treasury; working on new avenues for gaining deposits, including reaching out more to the law firms, CPA firms, title companies, other institutions not necessarily on the lending side. We continue to do, and we are putting in more mechanisms to really garner deposits from those, our lending customers. And we are doing a much better job attracting that.

As I mentioned, C&I now represents 20% of the portfolio. So we should start seeing some pickup in deposits on the operating accounts. And our Treasury Management products are all in a very good order and we have been highly touted for them. And then the Houston Community side, we will pick up something from a loan-to-deposit ratio there, and that they were 70% loan to deposit. And that should help us going forward. But we are putting in a number of initiatives and plans through the Treasury Management efforts.

Got it. And then, a last one for me, just -- and I know we will get it in the Q, but do you guys have any update on asset liability sensitivity?

I will let Michelle go and then I will jump in.

Yes, we are still fairly neutral, although we have moved to a more asset-sensitive position. But still pretty neutral at this point, John.

Okay, terrific. Thanks very much, guys.

Thanks, John.

Thanks, John.

Brett Rabatin, Sterne, Agee.

Most of my questions have been answered. I just wanted to go back to the deposit thoughts. And just thinking about as you go into 2015 -- I know the deal is going to help some, but just thinking about the loan-to-deposit ratio, would it make sense or should we assume that the loan-to-deposit ratio kind of hovers in the 90% to 100% range? Or can you give us any color on kind of where you want to get that over the next year maybe?

Ideally, we would like to be in that 90%, but I think you are right to estimate that we will be in that 90% to 100% range, with the goal of being in the 90% to 95%.

Okay. Great. Thanks for the color.

Bye, Brett.

Thank you. I'm showing no further questions at this time. I would like to turn the conference back over to Torry Berntsen for closing remarks.

Well, thank you. We appreciate everybody calling in. And if you have any questions, Michelle and I are available all day, and we are happy to go through this in more detail with you. And, again, thanks for joining the call and we appreciate all the support. Have a great day.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.