Independent Bank Group Inc (IBTX) 2021 Q3 法說會逐字稿

Greetings, and welcome to the Independent Bank Group Third Quarter 2021 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce Paul Langdale, Executive Vice President, Corporate Development and Strategy. Thank you. You may begin.

Good morning, everyone. I am Paul Langdale, Executive Vice President of Corporate Development and Strategy for Independent Bank Group, and I would like to welcome you to the Independent Bank Group Third Quarter 2021 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 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 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 am joined this morning by David Brooks, our Chairman and CEOt; Dan Brooks, our Vice Chairman; and Michelle Hickox, Executive Vice President and CFO.

At the end of their remarks, David will open the call to questions. And with that, I'll turn it over to David.

Thanks, Paul. Good morning, everyone, and thanks for joining the call today.

For the third quarter, we reported EPS of $1.21 per share, grew tangible book value of $34.79 per share and maintained healthy asset quality with net charge-offs near 0 for the quarter. We are pleased to see the continuation of loan growth at about 5% for the quarter, which was consistent with our expectations of a slower summer being followed by accelerating demand into the fall.

Likewise, deposit growth remained strong at 12.1% annualized for the quarter, further bolstering our liquidity position and increasing our optionality in managing the funding costs.

During the quarter, we also repurchased a total of 217,772 shares of our common stock at an average price of $69.80 per share. This is consistent with our long-standing commitment to return capital and deliver returns to our shareholders.

With that overview, I'll now turn the call over to Michelle for more detail on the operating results for the quarter.

Thank you, David. Good morning, everyone.

Note that Slide 6 shows selected financial data for the quarter. Our third quarter adjusted net income was $52.6 million or $1.22 per diluted share compared with $59.6 million or $1.38 per diluted share for the third quarter last year and $58.2 million or $1.35 per diluted share for the linked quarter.

Net interest income was $128.6 million in the third quarter compared to $132 million in the third quarter last year and down slightly from $129.3 million in the linked quarter.

Accretion income was down $1.2 million from the linked quarter and $3.2 million from the prior year and totaled $4 million in Q3. PPP fees were also lower at $4 million in Q3 versus $5.1 million in Q2. These decreases were partially offset by interest income on growth in the securities portfolio and interest-bearing cash. There are approximately $6.5 million of deferred PPP fees remaining to be recognized, and we expect 75% of that will be recognized in Q4.

The NIM, excluding accretion, was 2.91%, down 11 basis points from the linked quarter. The decrease is primarily due to continued increases in liquidity, which impacted the margin by 7 basis points.

Total noninterest income was $16.9 million for the third quarter, an increase of $970,000 compared to the linked quarter. The increase in noninterest income over the linked quarter is primarily due to an increase of $745,000 in mortgage banking revenue.

Noninterest expense totaled $80.6 million for the third quarter an increase of $2.6 million over the linked quarter. This was driven by increases of $2.7 million in salary and benefit expense.

This quarter includes unusually high expense for senior staff signing bonuses as well as bonuses paid to employees that have leaned in on PPP.

Contract labor increased $550,000 from Q2 due to the initiation of several infrastructure projects. In addition, deferred loan costs were down $890,000 from Q2. As loan volume picks up, we would expect this to return to a normal run rate.

Expenses related to the PPP forgiveness continued to impact the noninterest expense run rate and totaled $2.1 million in Q3, including consulting, contract labor and bonuses. PPP expenses should decrease significantly in Q4 with only a small impact expected in 2022.

Slide 19 shows our deposit mix and costs. Total deposits were $15.5 billion as of quarter end, with total noninterest-bearing deposits up by $279.1 million from the linked quarter and $726.4 million from the third quarter of 2020.

Interest-bearing deposit costs decreased from 45 basis points in Q2 to 40 basis points in Q3. With the sustained growth in our core deposits, we continue to evaluate and pursue opportunities to optimize our funding costs where appropriate.

Capital ratios are presented on Slide 21. In the third quarter, the company's consolidated capital ratios remained strong with a common equity Tier 1 capital ratio of 11.06% and a total capital ratio of 13.64%.

As David mentioned, we repurchased $15.2 million or about 218,000 shares of our common stock during the quarter in addition to the redemption of a $40 million tranche of 5.75% subordinated debt.

That concludes my comments this morning, so I will turn it over to Dan to discuss the loan portfolio.

Thanks, Michelle. Overall, loans held for investment, excluding mortgage warehouse purchase loans, were $11.5 billion at quarter compared to $11.6 billion in the linked quarter. Excluding the impact of PPP loans, core loans held for investment increased by $129.7 million over the linked quarter. Loan growth continues to be driven by broad-based relationship lending to our customers across Texas and Colorado.

PPP loans on balance sheet totaled $243.9 million at quarter end, down from $490.5 million in the linked quarter. Average mortgage warehouse purchase loans decreased slightly to $838.5 million for the quarter, but remained near the second quarter average balance of $850.5 million.

Credit quality metrics continue to remain strong overall. Total nonperforming assets increased to $82.8 million or 0.44% of total assets at quarter end, which was due primarily to the addition of 2 commercial relationships totaling $17.8 million and 1 commercial real estate loan totaling $11.7 million. There were nearly 0 net charge-offs for the third quarter.

At September 30, 2021, the allowance for credit losses on loans is $150.3 million or 1.34% of loans held for investment, excluding PPP and mortgage warehouse loans.

These are all the comments I had related to the loan portfolio this morning.

So with that, I'll turn it back over to David.

Thanks, Dan. We remain encouraged by the loan growth prospects into the fourth quarter, and our pipelines continue to be supported by strong demand from relationship bars across our footprint. We are also encouraged by the momentum of building from the new hires we have made over the past year, especially when it comes to growing our middle-market C&I business.

In addition to this organic growth trajectory, we are continuing to invest in our infrastructure to ensure we are well positioned to capitalize on strategic M&A opportunities when they present themselves. We have expanded our Executive leadership team to include John Turpen as Chief Risk Officer, and we're pleased to announce the promotion of Michael Hobbs to President and Chief Operating Officer. These additions deepen our executive leadership team in preparation for continued growth into the future.

The Texas and Colorado economies remain 2 of the most attractive markets in the country, and our teams of bankers continue their disciplined approach of winning new business and expanding existing relationships each day. I'm grateful to all our employees for their tireless dedication to our customers and communities and I remain excited for the opportunities we see on the road ahead.

Thank you for taking the time to join us today. We'll now open the line to questions. Operator?

(Operator Instructions) Our first questions come from the line of Michael Young with Truist Securities.

I wanted to just start off on the loan growth side. You mentioned that summer was a little slower, but curious what you're seeing now as we kind of head into the fall. And would you expect higher growth in the fourth quarter to kind of get you to that high single-digit level that you talked about maybe in the back half? Just any updated thoughts or color around pipeline, all of that would be helpful.

Sure. I think if you look at our second quarter growth, Michael, around 12%, this quarter around 5%, that was -- production was pretty close in the third quarter to what it was in the second quarter. But we had a pretty significant pickup in paydowns. And again, that's just happens, cyclical. Again, it's hard to predict.

But that said, the pipeline looks really good for the fourth quarter. So if our -- if we've grown 17% in the last 2 quarters, which averages 8.5%. And I think something like that, 8% or so, is what we're expecting. And then depending on the payoff levels, it could vary a little from there. But we're still thinking high single digits in the fourth quarter, which would get us for Q2, 3 and 4 on average at 8% or better.

Okay, David. That's helpful.Maybe one for Michelle, just on expenses. You called out the higher PPP-related expenses and then some of the onetime senior management moves during the quarter. Should we expect some of that $2.5 million or so to come back out. So we're closer to maybe $78 million, $78.5 kind of million run rate from here?

Yes. I think in the fourth quarter, Michael, we're going to have about $1.3 million of PPP expenses come out of the run rate. We did have unusually high bonus expense related to some senior positions we added. But I wouldn't say pull that out at this point just because we are continuing to add people in the end of the year, it makes a little more difficult to bring people on without paying those signing bonuses. So I think I would stick closer to $79 million for fourth quarter.

Our next questions come from the line of Brad Milsaps with Piper Sandler.

David or Dan, I was just curious if you guys could talk about the new loans that are coming on the books, kind of what rates you're seeing in terms of new loan generation? And then maybe as a follow-up for Michelle. If we were to get an increase in the Fed funds rate later next year, what do you think IBTX's leverage would be to 25, 50, 75 basis points higher Fed funds rate in terms of the margin?

Brad, this is David. Let me start out saying that one of the -- one of our takeaways from the quarter was that the pricing pressure on the new loans coming on was a little more significant than we felt like -- than what we'd really seen earlier in the year. And so that affected our yields a little more than we expected as well.

So we're seeing things when you were from 3.5% to 4% is a broad range. But whereas I felt like earlier in the year, on balance, we were booking loans in the upper 3s, and I felt like we were down 10 to 20 basis points from that -- of what the book that we're putting on in the third quarter. Dan can give any additional color there, but...

No, I don't have any additional color to add on that, Dave.

Okay. So that's kind of what I think on the loan yields, Brad, just a little tougher sledding. And maybe a little more headwind there than we'd expected. But Michelle?

I think as it relates to your question about NIM, Brad, the real question is, with all in the market, how much Fed funds increase is going to impact longer-term rates. And I'm not sure -- we are currently more asset sensitive than we have been since I've been here, maybe the history of the bank. So we will benefit from a Fed funds increase. But I'm really not sure how much that will impact longer-term rates, at least in the next year, just given the liquidity in the market.

Michelle, that's helpful. Would you anticipate -- with long rates up a bit here, would you anticipate you guys getting more aggressive and adding to the bond portfolio with some of your liquidity that you've got? I mean, I think on average, it was approaching $3 billion in the quarter.

We expect it to be over $2 billion by the end of this year. So we continue to put money in the bond portfolio, especially considering that we continue to see deposits come in and liquidity is growing on our balance sheet. And I think we will continue to do that into '22 as long as it makes sense and to offset loan growth. It really doesn't make sense to leave that money sitting at Fed earning 8 basis points. And I'm -- I guess I'm more convinced now that the liquidity is going to stick around maybe longer than I thought a year ago.

And then to be clear, you expect liquidity to be closer to $2 billion or the bond portfolio to be closer to $2 billion?

The bond portfolio will be a little over $2 billion at the end of the year. And then I expect that we'll continue to grow it through '22 relative to the balance sheet.

Got it. Helpful. Okay. And then just final question for me. I was curious if Dan could offer any more color on the 3 loans that went to nonaccrual this quarter. Just any sense for loan-to-values there? Any kind of theme? Just any other color that might give us a sense of kind of how you guys are thinking about maybe loss rates or resolution there?

Yes, thanks, Brad. In the normal course of the resolving credits, in some cases, you'll have a payoff and others, you'll see an upgrade. And in some cases, they'll actually migrate into the nonaccrual category because they are a longer resolution.

I would say the credits that migrated in the third quarter were not unusual in any regard with material equity in them. And so our expectation is that there would not be any loss exposure that's not accounted for in CECL. Notably, those loans were already on the classified loan list. And in total, when you take all of the nonaccruals, that number remains at a low level, really.

Our next questions come from the line of Brady Gailey with KBW.

I just wanted to start on the buyback. It was good to see you all be a little active there in the quarter. You bought it back at basically 2x tangible book value. I know the stock is higher than that today. So how do you think about continued buybacks from here?

Brady, we're going to continue to look for opportunities to buy our stock back. And given that the M&A activity has been slower than we expected, given that we continue to accumulate capital more quickly than we're able to grow the bank, if you will, or more quickly than we need to support the growth of the bank is the right way to say that. And then we're going to continue to do that. We have our Board meeting later in the week. So we're not -- the Board will decide the dividend later in the week, but we're going to continue to look at opportunities to give back, and we're going to continue to be active and opportunistic just depending on how the stock is trading.

Yes. All right. And then on the energy front, I know energy lending is not a big piece of what you guys do. I mean it's still only 2% of loans. It is up, $80 million in the last couple of quarters, has gone from $200 million to $240 million and now, $280 million. Should we think about the energy portfolio kind of continuing to expand at a pretty nice clip here?

I think, Brady -- this is Dan. I would view that as just a continuation of the efforts that we've applied with our team that was added a couple of years ago that came out of one of our peer banks. And they've had opportunity really to get engaged in significant great credits that have afforded us the opportunity to be a part of those. I think we'll continue to see some growth in there. I don't think it will be outsized. I think it will be comparable to what we've seen as those opportunities present themselves to us. So there will be some growth. I don't think I would consider that to be any acceleration of that growth.

Okay. And then finally for me, David, just on M&A. You just mentioned it's been a little slower than maybe you guys had thought. We saw a big splash of a deal with Johnny Allison buying Happy, which I thought may have been a good deal for you all just given all the excess funding that, that could have brought to Independent. And maybe just a general update on M&A. Why do you think it's been slower? And do you guys remain active in chasing targets?

I would say it this way, Brady. We remain active in engaging relationships with smaller banks that we admire, that are in our footprint, that are in higher growth markets. That's one of the challenges if you acquire a large to your balance sheet footprint that's not in a growth market, then you really, I think, limit your growth opportunities going forward.

Liquidity is important, core deposits are critically important. But as Michelle was mentioning, we've been -- we think -- we felt like we were being aggressive this year and adding to our bond portfolio, our loan growth has returned to more historic levels, and we're still sitting on $3 billion of liquidity. We came into the year opened that we could deploy that and get that down to a lesser number, hasn't happened. So that gives us an opportunity as well to think about the funding side of the balance sheet and can we -- the things we can do to improve our cost of funds. And so we're looking at all those -- evaluating all those opportunities.

And so I would -- yes, certainly, acquisitions have been a part of our track record. We continue to be interested in growing. But our focus has been, as we've talked about this morning, on organic growth, on really building an infrastructure, making sure that we position the company to be in great shape for whenever that next opportunity comes along. And so that's really been our focus and the focus of our time and of our noninterest expenses.

Our next questions come from the line of Brett Rabatin with Hovde Group.

Wanted to go back to the securities portfolio question, Michelle. And just talking about -- you mentioned that it would be $2 billion by the end of the year. I was curious what you had bought during 3Q and then what you're looking at and what you -- how you think that might impact the bond portfolio yield?

And then kind of as it relates to that, it would seem like your margin would actually potentially move up if you're deploying excess liquidity that's yielding 10 basis points to something north of 1%. Any thoughts on that as well?

That's true if we can finally get ahead of the liquidity, right? Our bond portfolio is very conservative, Brett. We continue to buy mortgage-backed agencies. I think we've bought some treasuries this quarter. And generally, those yields have been averaging 1.30%. So I think the current yield in our portfolio sits a little less than 2%. So it has trended down this year. But as you say, it is a lot better than the 8 basis points that we can earn at Fed.

Okay. So any thoughts on the margin potentially at least having some offset to lower loan yield production going forward?

I've kind of gotten out of the business of predicting the margin just because it looks -- it made me wrong all year long, and that's continued to push it down.

As David said, we're continuing to look at ways that we could possibly continue to push our cost of funds down. If we could redeploy the liquidity even into the investment portfolio, that would be an offset or even better, we'll be deploying it into loans. So I think there is some upside, but I'm not going to predict that the margin is going to increase at this point.

Yes. Fair, fair enough. I know it's been hard to predict with liquidity rising. The other thing I was curious about -- I'm sorry. Go ahead, Michelle.

What I would continue to emphasize is that we are just looking at ways to grow. Rather than focusing on margin, looking at ways to grow net interest income, right, and then letting the margin work itself out.

Okay. And then David, you gave an outlook for the fourth quarter around loan growth. And I guess one of the things I was curious about was the increase in the unfunded commitment reserve, 6.1% versus 1.7% in the prior quarter for construction and energy. And so I'm curious as we think about 2022, would seem like construction could be a category that grows. Any thoughts on where the portfolio might be growing more from here? Is it construction? Is it -- I know you've been wanting to grow C&I. What are the buckets that you think will have more growth as we go into next year?

My suspicion, Brett, is that we're going to see a balanced -- continued balance in the growth that we're seeing. There's really not one area that we're focused on and we're seeing more opportunities. There's certainly a lot of construction going on in Denver and Colorado front range in all our Texas markets by virtue. If you drive around, there are a lot of cranes and things. So construction is a part of what we're seeing. But I don't think of it as being dominant.

But I'd say the biggest change, if there is a change in our mix, is that C&I is really picking up and kicking in. The people we've hired, the great teams that we've hired across Texas and adding to our team in Colorado are really getting some traction, and we expect that to be a big part of what we see in fourth quarter and really in '22 and beyond. Strong growth there. And then really just what we've always done well, which is strong real estate and small business lending and medical practice lending and all those things that we've done well.

And the real estate really across the board. McKinney, because of our airport here as an example, we're seeing tremendous industrial growth out by the airport, a new Amazon facility there and people opting to bring their goods through McKinney's airport as opposed to DFW or Love Field. So those are just some of the -- a little bit of color behind what we're seeing, but good balance across the portfolio on growth.

Okay. Appreciate the color there. And then maybe just the last thing, around the mortgage warehouse. I would assume that seasonality plays its usual impact in the fourth quarter. Any sense of the magnitude that you're looking at in terms of how that might play out?

You're right. With seasonality, you could see their average balances drop a bit, but I think they've done a good job of adding some new customers. And so we still think that $800 million average is good for this quarter.

(Operator Instructions) Our next questions come from the line of Matt Olney with Stephens.

I wanted just to stick on the mortgage warehouse discussion. David, you mentioned some comments about loan yield pressure in the third quarter versus the first half of the year. I assume that was more on traditional commercial loans. If so, any comments about the warehouse yield pressure?

Yes. My comments were more based upon our traditional commercial loan strategy. I do think there's been a lot of competition in the mortgage warehouse that -- Michelle, I don't have a -- do have you have a handle on their yields compared...

Yes. I think they've come down a bit from the beginning of the year, but I don't know that it's that significant.

Okay. And then, Michelle, circling back to the commentary about the investment securities portfolio and maybe adding some more balance in the fourth quarter. I think right now, investment security is around 10% of earning assets. Any more color as far as the tolerance of where this could go as we move into 2022?

Yes, we don't really have a limit. I think historically, that balance has run around 7% of our balance sheet just because we've had such a high loan-to-deposit ratio. We'll just -- we'll continue to evaluate that, Matt, and put any excess liquidity in there to offset the loan growth. So it could grow to $2.5 billion by the end of next year, but really, we'll evaluate that as the year goes along.

Yes. Understood. And then, I guess, my last question is around the allowance ratio. I think we're now at 1.34% once I strip out the warehouse and PPP. Just trying to appreciate where this could go. I think the original CECL adoption allowance was around 1.37%-ish, but that did include maybe a PCD mark. So how should we think about that reserve ratio over the next few quarters?

Yes. Matt, our take on it, as we've been saying, is that we'll grow into it. Our asset quality trends -- Dan can share some of that here in a moment, but our asset quality trends I think will be a tailwind and then the economic factors that go into the model are going to be a tailwind, we think, in '22. So as we look out at the loan growth rates, we're looking at -- with the information we have today, we're not expecting to take a material loan loss provision even in '22.

And so depending on the assumption for loan growth, we think loan growth in '22 is 7%, 8% core loan growth in '22. And when we factor all that out, the loan loss reserve certainly will -- or the ratio would drift down. Dan, any comments you've got on the tailwinds and -- but we certainly don't think we're going to need 1.34%. And so we're going to be willing to let that drift down. I don't -- we haven't talked about a lower limit. But obviously, we're just going to work with the CECL model and comply with whatever the results are, as all the banks are doing.

So Dan, any comments on that or...

Yes. I would just add, I think the -- as David said, the growth will naturally bring that down some, but we don't expect it to change a great deal in the course of the next year.

I do want to circle back on the asset quality side. I think the bigger picture here beyond a couple of credits that were downgraded to nonperforming in the quarter is the strength of asset quality here. Overall, it remains very strong. We indicated in 2020 midyear that we expected the portfolio to perform very well during the course of the recession. And we did expect some great migration that would be attributable to the deferrals and pandemic. That is, in fact, what we saw in 2020. And then earlier this year, we also said that we expected improvement in grades in the back half of this year, and that is exactly what we've seen.

Criticized and classified loans have steadily declined each of the last 3 quarters from payoffs and upgrades with more in process for the next few quarters. And in fact, we had a 15% decrease in criticized loans in Q3 alone.

Overall, the nonaccrual portfolio, we still expect several of those to resolve in the next few quarters with either no loss or any potential loss exposure already accounted for in the CECL reserve.

So as David indicated, we don't expect any material change or provisions to be made, especially with the tailwinds of improving economy.

Our next questions come from the line of Brett Rabatin with Hovde Group.

David, I just had one follow-up around talent. And you talked about doing some hiring, obviously, at the senior management level, and doing some infrastructure build. Can you maybe give us any color on how many lenders you've added this quarter or this year relative to the existing production base and how you think about that and maybe going forward as well?

Brett, I actually don't have an updated number. There's been activity and continuing activity weekly on that. But we've had hired a material number of new middle market C&I lenders. Our team in Texas has expanded, continues to expand and we've added to our teams in Houston, in Dallas-Fort Worth, in Denver, Colorado, a number of new team members there as well.

So I'm sorry, I don't have a number. We can get that back to you, Brett, exactly what that -- what our net-- what our growth hires and then what our net hires are for the year. But it's material and it's part of the reason why we are continuing to be encouraged about our growth even as we focus on the infrastructure and making sure that we have our back of house in order as well.

Our next questions come from the line of Michael Young with Truist Securities.

Just wanted to ask on the residential real estate portfolio. That's been sort of a trying or running off here over the last year, maybe plus a little bit. Any just general thoughts on -- is that just a duration risk kind of concern? Or could we expect that book to sort of flatten out or start to grow at any point in 2022? Just thoughts around that would be helpful.

I'll take that one, Michael. This is Dan. The -- as you would expect, with the rates down, we certainly saw some refinances out, which is why I think you've seen it decrease somewhat there. On that side, we would expect to continue to book those as we have historically. And I think the overall, the balance of that portfolio should remain pretty flat as we move forward.

In the normal course, because of us providing mortgages to our customers that we know, they will acquire and then ultimately, from time to time, sell them or refinance them. So the refinances may slow, but I expect that we won't see a big change in that portfolio balance as we move forward.

There's been a little bit of headwind, Michael, on -- in that particular portfolio. We had -- when we purchased Guaranty Bank in Colorado, they had a relationship with the mortgage company there that they had taken a lot of larger single-family loans and we didn't continue that relationship because we have our own mortgage entity.

And so a lot of those loans, as time went by, had refinanced out. And so that creates some headwind in that portfolio. I think, as Dan said, we expect it to level out. And certainly, we'll be opportunistic to look for ways to grow it a little bit, but that's not going to be a big part of our growth engine, but we also don't expect it to be a lot headwind.

Okay. Really helpful. And Michelle, just as I look at expenses for 2022, kind of know the normal cadence and kind of growth rate that IBTX has experienced in the past, but obviously, inflation potentially is a risk factor to the expense picture. Have you guys done any early work on that or any thoughts, high level, just kind of on what that can mean for IBTX?

Yes. We're actually in the process of finalizing our budget for next year right now. But I think for your purposes, a 3% over total for the year '21 expenses is probably a good place to start.

Thank you. There are no further questions at this time. I would like to turn the call back over to David Brooks for any closing remarks.

Thank you. Appreciate your time this morning and look forward to getting back out on the road this fall and particularly next spring and look forward to seeing you sitting down around the table somewhere. Thanks for your time.

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.