Independent Bank Group Inc (IBTX) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Independent Bank Group First Quarter 2018 Earnings Conference Call. My name is Brian, and I will be your operator for today. (Operator Instructions) As a reminder, this conference call may be recorded.

It is now my pleasure to hand the conference over to Mr. James Tippit, Executive Vice President of Corporate Responsibility for Independent Bank Group. Sir, you may begin.

Good morning, everyone. I'm James Tippit, Executive Vice President of Corporate Responsibility for Independent Bank Group, and I would like to welcome you to the Independent Bank Group First Quarter 2018 Earnings Call. We appreciate you joining us. The related earnings press release and a slide presentation can be accessed on our 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 will be only a statement of management's beliefs at the time statement is made, and we do not publicly update guidance.

In this call, we will discuss a number of financial measures considered to be non-GAAP under the SEC's rules. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are included in our release.

I'm joined this morning by David Brooks, our Chairman, CEO and President; Dan Brooks, our Vice Chairman and Chief Risk Officer; and Michelle Hickox, Executive Vice President and CFO. At the end of their remarks, we will open the call to questions.

With that, I will turn it over to David.

Thank you, James. Good morning, everyone. We appreciate you joining us for today's call. As usual, I will briefly touch on some highlights for the quarter, then Michelle will cover the operating results. Dan has some comments about the loan portfolio, and I will be back at the end with closing remarks and to open it up for questions.

Independent Bank is off to a strong start in 2018. Earnings remained solid. First quarter adjusted net income was $29.2 million, which is a 15.5% increase from fourth quarter 2017, and 82.8% increase from first quarter 2017.

Adjusted ROA was 1.37% and adjusted return on tangible equity was 17.34%, both record levels for these ratios. A quarterly earnings and annual trend chart is on Page 6 of the slide deck for your convenience.

Loans held for investment grew 14% for the first quarter, which we believe is especially strong given that our Q1 loan growth has historically been slower compared to the remainder of the year. Credit quality metrics, which have been a foundation of our company, continue to be at historically low levels.

In this increasing rate environment, funding sources and deposit pricing have become an industry-wide issue. We were pleased that our NIM improved during the quarter despite increased competition for deposits and accelerated betas on deposit pricing.

Now let me turn it over to Michelle to provide more details on the operating results for the quarter. Michelle?

Thank you, David. Good morning, everyone. Please note that Slide 5 of the presentation includes selected financial data for the quarter.

Our first quarter adjusted net income was $29.2 million or $1.03 per diluted share compared to $16 million or $0.84 per diluted share for the first quarter of last year and $25.3 million or $0.90 per diluted share for the linked quarter.

As you can see on Slide 7, net interest income increased to $74 million in the first quarter from $47.9 million in the first quarter 2017 and decreased from $75.3 million for fourth quarter 2017. The linked quarter decrease is related to a decrease in acquired loan accretion, which was $2.5 million in Q4 2017 versus $740,000 in Q1. The net interest margin improved to 4% for the quarter, up 3 basis points from the previous quarter at 3.97%.

The adjusted margin, net of acquired loan accretion, was 3.96% compared to 3.84% in the fourth quarter, an increase of 12 basis points. The margin benefited from a change in earning asset mix, as we deployed over $200 million in average cash balances into loans during the quarter. This change in mix explains 9 basis points of the increase. Average loan yield for the quarter, net of accretion income, was 5.11% and benefited from increases in target loan rates as well as increases in variable loan rates post the federal reserve rate increase.

Total noninterest income increased to $9.5 million compared to $4.6 million in the first quarter last year and decreased from $13.6 million in the previous quarter. The increase from last year is primarily due to increased service charge income, mortgage income and earnings from the mortgage warehouse purchase program, which was acquired in the Carlile acquisition.

As it relates to the decrease from the linked quarter, if you recall, we recognized a gain on the sale of the non-Colorado branches of approximately $3 million as well as a gain on the sale of repossessed assets of approximately $1 million during the fourth quarter 2017.

Total noninterest expense increased $16.9 million from the first quarter last year and decreased $4.6 million from the prior quarter. The increases from prior year were due to increases in salaries and benefits, occupancy, data processing, acquisition-related expenses and other line items related to the Carlile acquisition.

The net decrease from the linked quarter is primarily due to lower salaries and benefits as well as lower acquisition expenses, which was offset by an increase of $1.1 million to other noninterest expense.

Acquisition and salary expenses were higher in fourth quarter 2017 due to the core system conversion, termination of branch leases as well as severance and retention payments made to the former Carlile employees. However, some of the savings we realized from the termination of Carlile employees was offset by seasonal personnel expense related to annual salary adjustments and payroll taxes as well as the hiring of several new lenders across our markets. The increase in other noninterest expense was primarily due to an increase in charitable contributions as well as loan-related expenses that are not expected to recur at this level the remainder of the year.

The provision for loan loss expense was $2.7 million for the quarter, an increase of $672,000 from the first quarter 2017 and $798,000 from the linked quarter. Generally, provision expense correlates with net loan growth and the level of charge-offs are specific reserves during the quarter.

Slide 14 in the deck illustrates our provision expense and charge-offs in each reported period. Total charge-offs continue to be minimal. Income tax expense was $6.8 million for first quarter 2018, which is an effective tax rate of 19%; compared to $6.7 million, an effective tax rate of 30% for first quarter 2017; and $18.2 million for the fourth quarter, an effective tax rate of 48.7%.

The fourth quarter was impacted by the $5.5 million remeasurement of our deferred tax asset due to the enactment of the new tax law. Our effective rate in Q1 was also positively impacted due to the vesting of employee stock grants at a higher fair value than had previously been expensed over the vesting period, similar to what occurred in Q1 2017.

Deposit composition and costs are illustrated on Slide 16. Deposits increased to $6.8 billion at March 31, 2018, compared to $6.6 billion at December 31, 2017. Public funds have decreased slightly to 11.5% of total deposits from 11.9% of total deposits at December 31, 2017.

Noninterest-bearing accounts make up 27.1% of the deposit mix at March 31. The average cost of interest-bearing deposits has increased to 82 basis points, up from 58 basis points at March 31, 2017, and up from 70 basis points for fourth quarter 2017. While betas on most retail deposit products have continued to be low, deposit pricing has been more challenging since the December Fed rate increase. Betas on deposits have accelerated as compared to the previous Fed rate increases in the past 2 years.

We have generally not increased our stated rates on deposit products, however, we continue to monitor our rates relative to competitors in our markets and have added some additional deposit products with increased rates in addition to exception pricing for relationships with large balances. We have also experienced increases in rates on corporate deposits that are indexed to the Fed Funds rate.

That concludes my comments this morning. So I'm going to hand it over to Dan to discuss credit metrics and give some color on the loan portfolio. Dan?

Thanks, Michelle. Good morning, everyone. Organic loan growth was strong for first quarter with loans held for investment, not including mortgage warehouse, growing $218 million or 14% annualized. Slide 10 illustrates annual loan growth comparisons.

Slide 11 shows the composition of our loan portfolio and our commercial real estate portfolio. As of March 31, 2018, commercial real estate makes up 52% of total loans. As represented in the graph, CRE continues to be well diversified in types of collateral with the largest segments in office and retail.

Slide 12 further breaks down the retail CRE portfolio by property type with 61% in small strip centers and only 6% in big box stores. The average retail loan size is about $1.4 million, with only 38 loans over $5 million in this portfolio. This portfolio is well diversified across our footprint with a weighted average debt service coverage ratio of 1.89 and an LTV of 58% on loans over $500,000.

Slide 12 also shows the trend of CRE concentrations to capital. Total CRE to the bank's regulatory capital was up slightly to 382% at March 31, 2018, from 374% at December 31, 2017. We have a mature credit risk review process, which we believe helps mitigate the risk inherent in this level of CRE lending.

Mortgage warehouse purchase loans totaled $125 million at March 31, 2018, down approximately $40 million from $165 million as of December 31, 2017. The decrease is related to seasonality of the mortgage activity as well as the impact of increased interest rates on mortgage business.

Credit quality metrics continue to be strong. Total nonperforming assets were down slightly to 0.23% at March 31, 2018, from 0.26% at December 31, 2017. This decrease is due to the payoff of a nonaccrual loan totaling $2.1 million and other real estate dispositions of $1.6 million, offset by nonaccrual loans added during the quarter totaling $1.9 million. We've been able to sell much of the other real estate acquired in the Carlile deal. Charge-offs continue to be low at 0.1% annualized for the quarter.

The allowance for loan losses increased by 2 basis points to 64 basis points from 62 basis points of total loans last quarter as our provision increased to cover loan growth this quarter. As of March 31, 2018, we have recorded a discount for the acquired loan portfolio of approximately $21.1 million. The recorded allowance for loan loss plus the remaining fair market value discount on loans acquired is approximately 0.95% of total loans held for investment as of March 31, 2018.

That concludes my discussion on loans this morning. So I'll hand it back over to David to conclude the call.

Thanks, Dan. We believe that first quarter results set us up for a successful 2018. Our loan growth was strong for Q1. Our earnings levels remain at historic highs. As discussed last quarter, we did implement some human resource initiatives and are investing some of our tax savings in our people. By targeting benefits to attract and retain employees and reduce turnover, we believe that this investment in human resources adds long-term value to our company. Managing risk is a cornerstone of prudent banking and we remain vigilant in reviewing and mitigating risk across all the company disciplines. Our enterprise risk committee continues to enhance existing risk management systems and establish new systems and mitigation strategies as necessary.

We are excited. We will soon welcome the Integrity Bancshares employees to Independent Bank. Integration is going well, with teams from both banks working hard towards an expected close later this quarter.

As always, we continue to be focused on consistent strong earnings performance and enhancing shareholder value. And we believe our first quarter results demonstrate our commitment to these goals and position us for a successful year. Thank you for joining us today, and we will now open the call to questions. Operator?

(Operator Instructions) And our first question will come from the line of Brady Gailey with KBW.

This is Mike Belmes on for Brady. So you guys had a really good Q1 loan growth. Could you guys maybe provide some color on kind of what you're seeing in your markets? And if maybe we can kind of expect this 14% pace for the remainder of the year?

Thanks, Mike. We did have an unusually, from a seasonal standpoint, strong quarter loan growth wise. Really nothing -- gosh, I guess, nothing abnormal to say about that other than just good demand across our footprint. Several of our markets outperformed, if you will, in the first quarter. So there's nothing specific or abnormal to point to it. In terms of the way we think about it, it is probably 1 quarter isn't enough of a trend to point us toward a higher ongoing run rate. We are confident in a 12-percentish kind of loan growth, low double-digit growth that we've been guiding to. We're hopeful. Loan growth in the second quarter looks good as well. And -- so we'll see how the year plays out, but I think it's early in the year. And with the uncertainties of what's going on from a regulatory standpoint and global affairs and all that, there's a lot of uncertainty in the market as well. So it's a little early to guide to a higher loan growth.

Appreciate it. And I guess kind of a follow-up to that. Have your customers been only concern of seeing any impact to the business, kind of maybe with global trade and so forth? Or is it kind of not really transpiring at this point?

We haven't seen anything with our customers at this point. It's been business as usual. Good usage on the lines of credit. People are investing in their businesses. We had some expansions and things like that, that were in the loan growth numbers. So people are generally optimistic in -- but that was my comment a moment ago is there are just a lot of things globally at play: the talk of trade restrictions and things are probably not helpful to the economy broadly, and similarly, Texas and Houston is a big port city. And any talk of restrictions wouldn't be positive for the economy generally, but we have not seen it so far. Our customers remain optimistic.

And I guess, just one last question from me. We did see deposit costs kind of tick up. Kind of maybe if you could give some color on what you're seeing with your commercial depositors. You kind of mentioned that the retail betas remain low. And then, I guess, what percent of the deposit base is what you would say indexed?

Yes. If you noticed our deposit growth during the quarter, Mike, it was -- it mostly came right at the end of the quarter. You saw we had -- our liquidity levels were much lower than they have historically been. And we did see a shift out of noninterest-bearing into interest-bearing deposits, and most of that is coming from the specialized treasury group that we talked about, I think, for the past year. The incremental cost of those deposits is over 2% now. So that's why we're seeing such an impact on our deposit cost. Most of that amount, which I think is up to about $900 million or probably 75% of that amount, is tied to an index.

And our next question will come from the line of Michael Rose with Raymond James.

So maybe we could start with expenses. I know Michelle, you mentioned there were some charitable contributions and some higher loan fees and you wouldn't expect those to recur -- reoccur in future quarters at the same level. Can you just kind of tell us what the dollar amount was? And then maybe, how we should think is a good expense run rate if we back out those items?

Yes, it was probably -- Michael, it was probably $0.5 million of expense related to those 2 items that I wouldn't anticipate recurring the remainder of this year. A good run rate for us at this point is probably a little over $43 million, if you're just looking at IB only. Of course, that will change once we close on Integrity. We did have some nonrecurring costs related to payroll as well, but some of the initiatives related to human resources will probably add $350,000 a quarter to our salaries and benefits run rate as well.

Okay. That's helpful. And then you had called out 6 loans that were added to nonaccrual this quarter. Can you give us some color around what types of loans those were? What industries? And if you think there's anything indicative of a trend?

This is Dan. Yes, the 6 loans, as you can tell, were not very large, and they really were spread across the types of loans we had. So no specific trending. There were no new energy loans in that group. And then there will be a mix between C&I and real estate. So even residential side was just broadly across the spectrum of what we did. So no trends.

Okay. And then maybe finally for me, David, you talked about the warehouse growing to about $500 million over the next couple of years. Is that still in the ballpark? And then separately, I noticed that energy loans were up a little bit this quarter. Are you -- are those existing clients drawing down? Or are you guys trying to re-energize that portfolio at these levels -- these oil price levels?

Yes, I'll start with the second question first, Michael. We are seeing some new requests in energy, and we are intentionally focused on growing that portfolio. It's taken a little longer to see the bottom and begin to trend up than we had expected, but we believe we're going to see some positive tailwind from energy this year, just based upon what we're seeing in the market. So those were new requests that we booked during the quarter.

And then on our mortgage warehouse, obviously, we're fighting some pretty big headwinds regarding, and then I think our peer banks here in Texas experienced the same thing in the first quarter. Our averages weren't down as much as the quarter -- as the year-end to the first quarter end would indicate, but still down $20 million or so in the quarter on average. Yes, our goal objective would be to grow that portfolio to around $0.5 billion over the next couple of years. We're going to -- we've got a lot of pedaling to do to get that done. We're evaluating and looking at how to grow that area and invest in that area, but we're also realists when it comes to what the market is in this raising -- rising rate environment. And depending on what the economy does in the next couple of years, I think will determine how successful we are in that. But we're still -- that's still our objective, Michael, I'll say it that way.

And our next question will come from the line of Brett Rabatin with Piper Jaffray.

Wanted to, I guess, first just make sure on the discount accretion, can you -- on the remaining $21 million, maybe, Michelle, can you give us any thought on the pace in the next few quarters? And how you kind of see that playing out over the next 2 years?

I think, this Q1 is probably indicative of what I would say a normal accretion level is. I mean, if you look back at Q4, that was -- we had some extraordinary payoffs, but I think this quarter was pretty much a normalized quarter. Now we could see some more lumpiness if we have some loans that pay off. I think maybe we're anticipating a couple. But generally, I would look at the run rate as similar to what it has been this quarter, and that's probably good over the next couple of years.

Okay. And then I wanted to ask -- I know you've been adding lenders, can you talk maybe about that and just what you -- what you're adding in terms of industry expertise? And if that might help C&I growth? And then, I was also maybe hoping for some -- just some commentary around loan origination rates kind of relative to the existing book?

Brett, David here. We hired net 6 new additional lenders in the first quarter this year as well as the pretty robust fourth quarter growth we had. And we're doing that as we figure out -- we talked about last year in Colorado what we're going to do there as we added a lot of talent there. We've also added here in North Texas and across our footprint, with the idea that we have to build capacity to continue to grow our organic loans at the pace that we would expect to do so. No real specialties. I'd say, generalist lenders, real estate, C&I we've added. We've talked about the last couple of quarters we added an equipment finance leasing area, and we do expect to continue to build that out over the next few quarters. And so we'll see some tailwind there on the C&I side. We continue to be and we've talked about this and the strategy hasn't changed, and that is we are looking for opportunities to grow our C&I loans and to decrease over time the percentage of CRE we have in our book on a relative basis. But we're going to take care of our customer base and do what we've historically done. We've done it well. And -- so I think we'll continue to see good lending hires.

And if -- to the earlier question that another analyst asked, Brett, we -- if there is tailwind above low double-digit loan growth, it will be because of these hires and this expansion that we're doing to our team. Again, too early to say whether -- how that looks over the next 2 years, say, but we are building our bench, if you will, in anticipation of continuing to be able to meet our growth targets.

Okay. And then any color around maybe originated loan yields? And then I guess there were some comments or thoughts last year about whether or not banks would -- the industry would kind of compete away the tax reform, any updated thoughts on that?

Sure. It's -- we're encouraged early. Loan yields have been going up. We've been able to get generally higher rates as rates have been coming up here, which is encouraging. And I think, Michelle may have mentioned it earlier in her comments that, that's how we saw those few bps increase in NIM for the quarter. While our deposit costs were coming up, we were also able to generate new loans at a higher rate that offset that. And to me, that's indicative that the banks -- the competition so far is acknowledging that rates are going up and that we should get higher rates on our loans if we're going to be paying north of 2% on deposits, that we have to get something more than 4.75% on loans. And so we are seeing almost all of our -- anything that has any fixed duration at all, is in the 5, mid-5s. And up and all of our floating rate stuff, obviously, is coming up. We have seen a mix, a little bit of a change, a trend.

I still look at the loan packages weekly along with the senior loan committee and seeing a definite shift toward more floating rate loans as opposed to fixed rate. And that showed up a little bit just at the margin by 1% or 2% mix shift toward floating rates on our asset side of our balance sheet in the first quarter. So that really goes to something we talked about over the last couple of years, Brett, and that is we think the bank's are a little more asset sensitive than maybe the model shows. Because of our fast pace of loan growth, those loans reprice and turn over pretty quickly quarter-by-quarter. So as we see a raising -- rising rate environment that we've seen over the last year, we've been able to bring in more of our credits on a floating rate basis and those are replacing other credits that are paying off that might have been fixed rates. And so we're seeing a trend we think the right direction there, which should help our NIM as well going forward.

And our next question will come from the line of Matt Olney with Stephens.

Just going back to the core loan yield discussion. David, I heard your commentary about repricing some of those loans higher, so it's definitely good to see that. I just wanted to clarify, Michelle, is that 16 basis point increase of loan yields? Is it a clean number or is there anything unusual in that first quarter number?

No, I don't think there's anything unusual. You mean like a nonaccrual payoff or something like that? No, that should be pretty clean.

Okay. Good. And then, going back to the credit discussion, provision expense was a little bit higher than we expected. Obviously, the loan growth was a big part of that. Can you just clarify, was there anything else beneath the surface, any increase of classified loans, criticized loans that may have helped drive that provision higher than expectation this quarter?

Matt, the provision actually was exactly as we had it budgeted in our budget. So it was right in line with what we expected in. And as you said, primarily supported our loan growth, which was higher than we had modeled for the quarter. And then, also, just broadly a trend toward we're getting late in the credit cycle, and we want to make sure that -- as we push -- I think we had in our numbers. Maybe Dan, in his comments earlier, talked about our loan discount on acquired loans in addition to our provision on our own originated loans, totals about 95 bps right now, I think. And so we'd like to see that number continue to move toward 1% or greater, as we get later in the credit cycle. And so no specific trends in nonaccruals.

There was nothing below the surface that you guys would consider a trend or anything like that. Just some miscellaneous credits that Dan mentioned earlier, 4 or 5 credits that -- across. And look we're -- our portfolio is $6.5 billion. And if you make $6.5 billion worth of loans, you're occasionally going to have to work with a customer on a repayment program or something. It just is the nature of our business. We think we do it pretty well. Our numbers hold up well over time. But -- so we're really -- our loan loss provision is right in line with what we expected for the quarter given the growth and where we are.

Okay. That's helpful, David. And then, the last question from me. Any update you guys can provide for us on the Integrity Bank acquisition? Any preliminary results that you've seen over the last few months? Or any trends you can give us?

No, I think they're right in line with what we expected to be. The integration is going really well. They've got a lot of very talented bankers over there. We're excited to get the deal closed. We're anxious to close it. We believe that will happen here later this quarter. And we're working toward that. So no, only positive trends. We have been able to talk to them about -- they work very closely with us on deposit pricing and all that. We think they've got some upside in their deposit growth there, and -- that they may not have needed under their model as an independently operated bank, but now rolling in and becoming a part of our group, we're pulling all the deposit levers we can. And so they work closely, but just an example of a specific thing we've been able to do is to talk to them about our philosophy on deposit pricing and how we want to do that and hoping that as they head toward the merger here, they can -- could grow their deposits as well.

(Operator Instructions) And our next question will come from the line of Michael Young with SunTrust.

Just wanted to start on the loan-to-deposit ratio to 96% ex kind of the warehouse, I believe. Where are you kind of willing to let that go over time? Do you want to hold it steady? Or are you willing to let it trend back up to 100% at some point in time? And then also, just kind of as we think about the mortgage warehouse and it growing, do you want to fund that with FHLB borrowings or core deposits? Or kind of what's the general strategy there?

As it relates to the warehouse, we actually have been funding it with FHLB advances for -- I think we started it in the fourth quarter doing that. As far as the loan-to-deposit ratio, it had been -- since we've been a public company, it had been right around 100%. It only -- it dropped after we did the Carlile deal. So I think we're comfortable with it at that level. And as our trends happen over the year, it could trend back up to 100%. I don't think we're really interested in it going much over that. But I think the range that it's been in since we've been a public company, I think we've been quite comfortable with that.

Okay, great. And just as we think about future hiring, I understand you're trying to add some capacity to accelerate loan growth, but are any of these specific hires more related to deposit gathering niche? Or should we expect to see that going forward at any point in time?

We have continued to invest in our treasury management side of the business as well, Michael, to make sure that we've got a great team effort between treasury management and make sure we get the right product, services available to the relationship officers. And then building that camaraderie, if you will, between the treasury and the relationship officers on the ground. We have not made any specific hires on the lending side related to their deposit generation abilities. But we are focusing on hiring lenders who do have relationships and that are relationship bankers and that do fund a good portion of their own loan growth with their own deposit growth. We put a premium on that. We've changed and are changing our structure of our incentive compensation with more focus on deposits. I mean, I think that's the industry question right now that faces all of us, Michael, is how are we going to generate core deposits here going forward to fund the loan growth for banks like ours that grow loans at a fairly good pace.

And one of the things Michelle was talking about, our loan-to-deposit ratio being in the mid-90s, we have -- a part of that has been that we're generating core deposits as quickly as we can. We'll take all -- obviously all of those we can get, but we have been a little more cautious. You see our trend in public funds has continued to be down as a percentage. We can turn that spigot on any time we want. We could have a 90% loan-to-deposit ratio if we chose to do it. It doesn't make sense in this raising -- rising rate environment. I'm having difficulty with my speech this morning. But anyway, in this rising rate environment, it is -- we think it just made sense to let some of the more expensive funding run off to continue protect our NIM. So as Michelle said, if we run the bank in the 90% to 100% range loan-to-deposit ratio and are able to manage our cost of funds, keep it as under control as we can, then we think that's to the benefit of the shareholders at the bottom line.

Okay, great. And one last one, just as we look at kind of M&A interest from here. Is there a greater focus or would you be more willing to look at kind of a rural bank that might have a core sticky deposit base, but less asset growth capability?

Great question, Michael. We continue to be in active discussions across the footprint on merger acquisitions. I've been a little surprised, just broadly, not specifically, but broadly across the market that we haven't seen more announcements here in the first 4 months of the quarter -- of the year rather. And I -- but I do think there are a lot of activities, a lot of discussions, a lot of people kind of considering what their strategy is going to be the next couple of years, both smaller and larger banks. So I remain encouraged broadly, I guess, an overall comment first, broadly about our ability to continue to find quality institutions to partner with. And our first choice and priority would be in the major markets we're in: Dallas-Fort Worth, Austin, Houston, San Antonio and Denver, Front Range, Colorado. Those would be our primary target areas, and that's where we're working hard to find partners.

That said, you correctly allude to a lever we have if we need it going forward, and that is we can always find a partner in a part of the state that's not may be growing economically as fast as these major markets are, that control big blocks of core deposits at good funding prices, banks that are 40% or 50% loan-to-deposit ratio. And those, obviously, would be an opportunity for us to bring in core deposits. I would say that's not high on my priority list right now, but it is always a possibility for us as we see how the deposit markets and core deposit growth plays out. We'd much prefer to grow our own. We're going to -- we're working hard on that. As I mentioned earlier, we continue to make a lot of investments, and we work a lot every week on strategy around deposit growth. But that said, we could do what you described in the future if that made sense for our overall balance sheet and strategy.

And our next question will come from the line of Brian Zabora with Hovde.

Just a question on loan growth follow-up. How much was from the Denver market this quarter?

Interestingly, we had -- did have some growth in the Denver, Front Range market this quarter, but not really what we think we'll see in second quarter and beyond in terms of growth there. So good question. But the outperformance, if you will, that drove us to a 14% loan growth was really in Texas in the first quarter. But we think we're encouraged by that actually in a different sort of way, that we think our outsized loan growth came in about half of our markets that we serve and the other half are equally dynamic and have a lot of loan growth in the pipeline. So we think we've got upside there in Denver, Front Range and parts of Texas that maybe didn't grow as quickly in the first quarter. So we take that as an encouraging sign that if we were able to grow 14% for the quarter with 3 of our 5 markets doing well and a couple of them didn't have their best quarters in the first quarter. So I think overall good.

Okay. And just on the mortgage -- kind of residential mortgage, kind of fee income line, you did pretty well considering the usual seasonality in the first quarter. So just your thoughts on the pipeline there? And could we continue to maybe see in the back half of the year maybe year-over-year growth on mortgage gain on sale?

Obviously, a lot of that depends on what happens with rates, both short-term rates the Fed controls and the longer-term rates that determine more the fixed long-term mortgage rates. We did feel good about our first quarter. We are very -- we're very high on our team, our mortgage team across 2 states. We're continuing to add lenders. We're continuing to add leadership there in that area of the bank, and we are encouraged about our ability to outperform the market. Now, that -- what the market is will determine, right, on a relative basis how we do. But yes, we do think we will do better than the market generally with the team we're putting together.

Thank you. And I am showing no further questions in the queue. So I'll hand the call back over to Mr. David Brooks, Chairman, Chief Executive Officer and President, for some closing comments and remarks.

Thank you. Hey, I appreciate everyone joining this morning. I think you can tell we feel good about our first quarter. I think it's right in line with what we expected for the year. We think our model, our ability to get Integrity Bank in -- here in the second quarter and get that integrated in the second half of the year, to continue to build on our core earnings, our ability to hire lenders and grow organically is still strongly in place. And -- so anyway I'd say, we're encouraged at this point through 1 quarter of the year. And if no other questions, then we'll let that conclude the earnings call and appreciate you listening and appreciate your interest in Independent Bank Group.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and you may all disconnect. Everybody, have a wonderful day.