Independent Bank Group Inc (IBTX) 2021 Q2 法說會逐字稿

Greetings, and welcome to Independent Bank Group Q2 2021 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn this conference over to your host, Mr. Paul Langdale. Thank you, sir. You may begin.

Good morning, everyone. I am Paul Langdale, Senior Vice President and Director of Corporate Development for Independent Bank Group, and I would like to welcome you to the Independent Bank Group's Second 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, CEO and President; 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. With that, I will turn it over to David.

Thanks, Paul. Good morning, everyone, and thank you for joining us on today's call. Our company's second quarter results represent a strong return to organic growth with our teams delivering 12.4% annualized growth in our core loan book for the quarter as the Texas and Colorado economies continue to rebound. This loan growth is both broad-based geographically across our markets as well as in terms of product type.

Most importantly, this growth represents the disciplined execution of our teams in building relationships, winning business and taking care of our customers. For the second quarter, we reported EPS of $1.35, grew tangible book value per share and maintained robust liquidity. Additionally, credit metrics remained resilient, with nonperforming assets representing just 29 basis points of total assets at June 30. Given the strength of our company's position, our Board has elected to again raise the dividend to $0.34 per share in line with our long-standing philosophy of providing returns to our shareholders.

And 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. Selected financial data for the quarter is on Slide 6.

Our second quarter adjusted net income was $58.2 million or $1.35 per diluted share compared with $49.1 million or $0.90 per diluted share for the second quarter last year and $60.1 million or $1.39 per diluted share for the linked quarter. Net interest income was $129.3 million in the second quarter, up from $128.4 million in the second quarter last year and down slightly from $129.7 million in the linked quarter. The slight reduction in net interest income over the linked quarter was primarily due to lower accretion income, which was $5.2 million in the second quarter compared to $6.2 million in Q1. This decrease was partially offset by interest income on loan growth in the securities portfolio. PPP fees of $5.1 million were recognized in Q2 versus $4.8 million in Q1 with approximately $10.5 million of fees remaining to be recognized. We estimate around half of these will be recognized in 2021 with the remainder in early 2022.

The adjusted NIM, excluding all loan accretion, was 3.02% for the second quarter compared with 3.29% from the second quarter last year and 3.13% in the linked quarter. The margin decreased by 11 basis points from the linked quarter, due primarily to continued increases in levels of liquidity, which impacted the margin by 15 basis points. The average loan yield increased 3 basis points from Q1, excluding the impact of accretion. Total noninterest income was $15.9 million for the second quarter compared to $18.6 million in the linked quarter. The reduction in noninterest income over the linked quarter is due to lower origination volumes in the retail mortgage operation, coupled with compression and gain on sale margins. Noninterest expense totaled $78 million for the second quarter, an increase of $2.9 million over the linked quarter, which was primarily driven by increases of $1.2 million of occupancy and $1.4 million other noninterest expense.

Occupancy expense was up due to completion of several branch refreshes during the quarter as well as an unusual amount of small equipment purchases for upgrades and return to work. I do not expect that to recur at that level. Other noninterest expense includes an increase in operations losses of $261,000, loan-related expenses of $365,000 and $422,000 in travel and entertainment expense as relationship managers returned to meeting with customers on more normalized levels. There's approximately $1.3 million of consulting and contract labor expense related to PPP forgiveness and the quarterly run rate that will continue through 2021.

Slide 19 shows our deposit mix and costs. Total deposits were $15.1 billion as of quarter end, with total noninterest-bearing deposits up by $168 million from linked quarter and $650 million from the second quarter of 2020. We brought back $350 million of reciprocal deposits that were off balance sheet at March 31, 2021. Those were offset by decreases in specialty treasury deposits, including broker-dealer and correspondents that were earning higher rates than desired. Capital ratios are presented on Slide 21.

In the second quarter, the company's consolidated capital ratios continued to grow with the common equity Tier 1 capital ratio increasing by 20 basis points to 11.4%, and the total capital ratio increasing by 10 basis points to 14.23% for the quarter. We called a $40 million tranche of subordinated debt last week on July 20 that had a rate of 5.75%. This had minimal impact on pro forma capital ratios.

That concludes my comments. I will now turn it over to Dan to discuss the loan portfolio.

Thanks, Michelle. Overall, loans held for investment, excluding mortgage warehouse purchase loans, were $11.6 billion at quarter end compared to $11.7 billion in the linked quarter. Excluding the impact of PPP loans, core loans held for investment increased by $333 million over the linked quarter. As David mentioned, this loan growth was driven by broad-based relationship lending to our customers across Texas and Colorado, and was underwritten with the same discipline on rates and structure that has guided our bank for over 3 decades.

PPP loans on balance sheet totaled $490.5 million at quarter end, down from $912.2 million in the linked quarter. Average mortgage warehouse purchase loans decreased to $850.5 million for the quarter, reflecting the reduction in demand versus prior quarters in line with the broader mortgage market. Overall, our credit quality metrics continue to remain strong, with total nonperforming assets of $53.1 million or 0.29% of total assets at June 30, 2021. Net charge-offs were 13 basis points annualized for the second quarter and were primarily driven by the charge-off of 2 commercial credits that had been previously reserved for. At June 30, 2021, the CECL allowance for credit losses on loans is $154.8 million or 1.40% of loans held for investment, excluding PPP and mortgage warehouse loans. These are all the comments I have related to the loan portfolio this morning.

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

Thanks, Dan. As we enter the second half of 2021, loan demand remains strong, and we anticipate that we'll be able to achieve high single-digit loan growth for the remainder of the year. In addition to this continued organic growth, we are well-positioned to capitalize on strategic, financially attractive and well-structured M&A transactions as the opportunities present themselves. Our company operates in 4 of the strongest markets in the country. And looking ahead, we remain committed to the disciplined execution of our strategy to grow opportunistically, especially as the Texas and Colorado economies continue to be supported by strong secular tailwinds, attracting capital and talent. Thank you for taking the time to join us today.

We'll now open the line to questions. Operator?

(Operator Instructions)

Our first question comes from the line of Brad Milsaps with Piper Sandler.

Michelle, maybe I wanted to start on the expense side of the equation. I was writing quickly there, but it sounds like you expect the -- some of the increased occupancy expenses to come -- to pull back while some of those PPP consulting fees will remain at least through the end of the year, would you expect expenses to kind of fall back into that sort of $76 million, $77 million range or am I way off base there?

I think that's fair, Brad. Yes, in occupancy, I think there's a little over $1 million of costs that we recognized in Q2 that shouldn't repeat at that level. The run rate is a bit higher than what I guided to last quarter because our expenses related to the PPP repayments for people that were paying on contract labor to help with that as well as some of the software solutions that we're using are more than we expected to be for a longer period of time. And so I think that's probably good. It's probably $76.5 million to $77 million in expense run rate for now.

Great. That's helpful. And then maybe just moving to the balance sheet, David, obviously, some really good loan growth in the quarter. You guys are still sitting on a lot of cash. Just Michelle, I was just kind of curious what is your plan there to sort of kind of wait for the loan growth to continue to accelerate and redeploy it there? Or might you grow the bond portfolio additionally with some of that excess cash and liquidity you have?

Yes. Given the minimal amount of return we get with money sitting in the -- at the Fed, even with rates on securities coming back a bit this past month. We're continuing to deploy our excess cash into the securities portfolio. Right now, our plan is it would be close to $2 billion by the end of the year. But obviously, we monitor that, and that will depend on loan growth as well.

Our next question comes from the line of Michael Young with Truist Securities.

I wanted to maybe just start on the loan growth front. Obviously, very good net production this quarter, but curious about kind of just the outlook in terms of payoffs and paydowns. We've seen a lot of pressure from other banks in that area. Are you guys seeing any of that? And is that kind of the -- maybe the reason for the high single-digit growth versus -- if that's lower, could it be -- could it actually be stronger growth than that on a core basis?

We feel really good about the loan growth for the quarter. We think the high upper single-digit estimate for the second half of the year accounts for the summertime and the normal lull in closings in the summer. So you could see a little bit of a pullback here in the third quarter and then probably accelerate again in the fourth quarter is how we would see it in the pipeline right now. But the loan growth, the net loan growth we had for the quarter was really a function of increased production, more than a reduction in payoffs or paydowns, while they normalize a little bit, we're not down materially from what they were in the first quarter.

What we saw was over $800 million of net production for the quarter, which was a couple of hundred million more than we've been seeing. We've been running kind of in that $600 million to $650 million a quarter and having similar sized paydowns this year -- this quarter -- second quarter, the pay off -- paydowns were a little under $600 million, and our net production was well over $800 million. So we got -- that's how we ended up with a net 12.5%.

It also was very well spread. Our 45% of the new production was in our core CRE just our customers in our markets spread across all the different product buckets. And then about 20% of it was in construction lending. As you know, the single-family market and our -- in Texas and Colorado was just at historic high levels. So we're seeing a lot of single-family construction. We're also seeing multifamily construction, some neighborhood retail construction, just all the markets and product types that we've always done well in been over 20% of the new production was in our new C&I funded debt. And we had a lot more commitments than that, but that's the funded portion. And then the rest of it would have just been we've got a portfolio product for jumbo single-family, some retail, we're seeing some pickup in retail consumer demand as well. So really a very strong base.

And then in terms of geographically, it was about 2/3 Texas, 1/3 Colorado, which is right in line with our balance sheet. So evenly spread in Texas across our 3 major markets. And so our team did a really good job. They've been hustling. Everybody has been working hard for 18 months, and it's been frustrating that we haven't had been able to show the net loan growth. But I think this quarter is a reminder, Michael, that what we've been saying for 8 years as a public company that we're both an organic growth company and a strong acquirer when the right opportunities come around. So we're not in a situation where we feel like we have to go do M&A to keep the accretion train moving or whatever we. We can grow organically. We are going to grow organically. I think we've been consistent in saying that this quarter was, I think, a welcome reminder that we can still grow our company organically, we're in the best markets in the country.

Okay. Great. Thanks for all the color. I really appreciate it. I guess my second question was maybe just on loan pricing and how that kind of compares to the back book or how -- what kind of pressure, I guess, maybe do we expect over the back half of this year? And then when will we kind of see stability in those loan yields?

Yes. We're encouraged by that as well. Michael, that I believe I'll let Michelle give the exact number, but I believe our -- the net loan production for the quarter came on at 2 or 3 bps higher than...

Well, average loan yields this quarter were up 3 basis over previous quarter as we've got PPP loans paid off. And our new production and our loans held for investment, obviously, those rates are a lot higher than 1%. I think our -- the last time I looked, Michael, the loan yields were coming in, maybe still 10 to 15 basis points lower than what our overall average yields are ex fees right now. So I thought that was good to see the increase in the average yield this quarter. If we can maintain that stability. I think that's good outlook for our NIM.

Our next question comes from the line of Brady Gailey with KBW.

Yes, it's Brady Gailey. So I wanted to start with the dividend. It's great to see another increase. It seems like you have been increasing it a lot recently. But the payout ratio is still pretty modest. It's only about 25% to 30%. How do you think about kind of continued dividend increases from here? And is there a landing zone you want to be at as far as the dividend payout ratio?

Our current philosophy, Brady, has been to pay out about 25% of our trailing earnings. To your point though, our Board is really having a lot of discussion around, is 25% the right number, given that we're generating capital, even with our growth rate, we're still generating capital more quickly than we can deploy it. So we've been watching and expecting that there would be some strategic opportunities on the M&A front. So we haven't been in a huge hurry to be buying back our stock. We've talked about at the prices it was trading at. And so yes, dividend is one way we can continue to trend toward paying back more. I think our Board is looking at that payout ratio now, whether 25% is the right number, given the M&A, given the possibility of stock buybacks, we've been comfortable with the 25% level.

But we also have an eye toward continuing to increase the dividend as time goes by. So I think that's our bias, if you will, our lean is towards continuing to increase the dividend. And then with the volatility we've seen in bank stock prices pulling back here, there may be opportunities for us to be opportunistic on the stock buyback as well. We certainly would have been in the market last week with the volatility we saw, had we not been blacked out for the earnings.

So we're going to continue to look to be opportunistic there and our M&A discussions continue to be positive. I'm surprised, I think, as anyone is that we haven't seen more announcements here and by late July, we're well into the third quarter now. And I think there's a lot of discussion, a lot of dialogue going. But every Board is taking a look at their situation and trying to ascertain what the best pathway forward is. And I think you'll see opportunities and activity here in the in the second half of the year, but we're in the second half of the year now, so we'll see.

And David, on the M&A topic, just from talking to other banks, it seems like it could be an issue with sellers' expectations just being pretty elevated. I mean do you think that's one of the biggest reasons why we haven't seen more M&A in Texas?

I do. I do think that, Brady, I think pricing -- I think the volatility of the stock prices has been a little bit of a damper on activity as well. The private companies are going, "gosh, what if we announce a deal at a certain price and then the market trades all bank stocks down 10% the next week and then all of a sudden, I didn't get a premium for my company." And so there's those kind of discussions going on. And I think people are -- I am encouraged that people are being thoughtful around finding a partner that makes sense for you and negotiating a deal that's a win-win. And so those are the discussions we're in. And as I mentioned a moment ago, we're going to be patient. We've been disciplined in our M&A approach for 25, 30 years now, and I don't think now is the time to jump out and lead the league in hitting.

And then last question for me, David. It was interesting to see the press release you all put out, I think, last week or maybe the week before about hiring John Turpen from -- I know who was recently at TCBI. But maybe just a comment on that hire and kind of what he brings to IBTX.

Yes. So we aspire. I think you have to set the stage, Brady first, that we aspire to continue to grow. We're a growth company, we're continuing to look not only at our organic growth but strategic opportunities. So I've said that we could easily be a $30 billion company by the end of next year and then growing from there. So as we aspire to continue to grow, we felt like we need to continue to add and expand our team, our leadership team. We got to know John during the Texas Capital merger discussions last year, really thought highly of him. He's a seasoned executive with a terrific background from U.S. Bank and other large companies. And the truth of the matter is we're a big community bank, and we've grown up from a small community bank into a bigger community bank. And as we become a regional bank, Brady, I think it's important that we continue to add and expand our leadership.

We've got new leadership in areas like human resources and marketing. An opportunity to pick up a seasoned risk guy who can come in and help us build a deeper and better infrastructure around compliance and enterprise risk management, all those things and with a view toward how it's done in U.S. Bank and other bigger companies, I think it was an important hire for us and I think you'll continue to see us add to our team, expand our team as time goes forward as we build that leadership for the future.

Our next question comes from the line of Matt Olney with Stephens.

I was going to ask about the mortgage warehouse, been pretty volatile so far first half of the year. I would love to hear about your thoughts on balances for the back half of the year.

Sure. Yes. We were hopeful that we could land it in that $900 million to $1 billion range. The markets pulled back a little faster than we expected 3 or 4 months ago and -- so it looks like we're going to settle in here in the $800 million-ish range. That's where we've been trending here the last couple of months and talking with Jim White who runs that business for us, that's roughly where we think we'll be now for the balance of the year. It's been very competitive in that space. As you know, as the business has come back, a lot of banks have been aggressive in trying to hold on to market share and that's led to a little more competition on the pricing side. And so our guys are doing a great job of working with our customers. We have -- we use the opportunity of that expanded world of mortgage that was going on in the last year. to upscale some relationships and get into some stronger credits, then we're in there slugging it out for fundings with everyone else. And so it looks like we're going to land around $800 million.

Okay. Great. And then, Michelle, you had mentioned already that the securities balances could potentially get up to $2 billion at the end of the year as you deploy some of the liquidity. I'm curious about that liquidity. Is there a level you're trying to get this down to? I think the overnight levels are around $2.5 billion at June 30 or 16% of average earning assets. What are you targeting within the overnight levels?

Yes, that's a lot higher than we would like for it to be, Matt. I think pre-pandemic, we were closer to $700 million. And really, what we'd like to do is deploy it back into our loan portfolio, but obviously, we can't do that overnight. And so we'll continue to put it in the investment portfolio as we need to. Also being mindful of the fact that if rates go up, we do have to pay attention to unrealized losses. And so we're trying to be careful there and make sure we're investing wisely.

Okay. So Michelle to clarify, maybe $700 million might be a longer-term target, but I assume that will take a while to get there beyond just the back half of the year. Is that...

Right. I think we're going to continue to have some excess liquidity through the remainder of this year, Matt, it's probably a good outlook.

Our next question comes from the line of Brett Rabatin with Hovde Group.

I wanted to ask -- I joined a few minutes late, so you may have covered this to some degree, but I wanted to ask about fee income and then I noticed that there was other kind of dropped off a little bit. And so I didn't know if there was anything of note there. And then I just wanted to ask about the mortgage banking outlook. And how you felt about gain on sale margins from here and production levels? Obviously, just comment on the warehouse.

Yes. Mortgage has been impacted more from margin decreases. I think it's down about 30 basis points from Q1, Brett. And so their volumes are down just a bit, but they're really mostly being impacted by margin. The volumes are at least through the end of June, July have stayed pretty steady. I really hate to give an outlook on mortgage because it's a -- it is volatile at times, but I think probably Q3, I would expect they'll be similar to where they were in Q2. And then generally, fourth quarter is a bit seasonal and will go down a bit.

That's what drove the fee income.

Yes. You're right. That's primarily our fee income, lined as mortgage.

Okay. And Michelle, there was a little dip in other. Was there anything noteworthy in the other bucket?

I think the biggest thing in other has to do with some of our derivative mark-to-market spread, so nothing really of note there. Those can be volatile as well, depending on where interest rates are.

Okay. And then, David, my other question was just you gave some commentary around M&A that was helpful about the volatility of the bank stock market and sort of impacting maybe some stuff happening. Is there anything else that's hindering more M&A happening in the state, whether it's the sellers wanting to see if the economy continues to strengthen? Or is there anything else that's really kind of slowing down, which you would consider to be a more robust M&A environment?

Yes, you touched -- you just touched the other point, I think, and that is that the markets have really improved, right? And we didn't see -- I think another thing that's impacted is we didn't see the credit problems or the depth of a recession that normally would have shaken -- would have tested peoples to underwriting, and put it that way. And we didn't see that this time. And I really believed when we were talking a year ago, that we -- I think everyone thought we were going to see more of a credit differentiation between different banks and their credit underwriting and all that.

And we didn't see that. And so I think that's, a, that's allowed everyone to kind of continue to perform at a higher level. And then I think people are generally optimistic right now about the future. And so it's kind of like, wow, we've been through this difficult period of pandemic and now we're getting into the best economy and strong growth, especially for banks in Texas and Colorado, for example, that looks -- it's pretty good for banks.

And so there's no real impetus in some cases. that I think a lot of us expected a year ago that we would see a deeper, more pressure on banks loan portfolios, more pressure, really kind of testing everyone's underwriting the last 2 or 3 years, and we just didn't see that. So there really hasn't been a differentiation on the credit side, which is good for our business, good for banks. Overall, I think good for the economy, but it has continued to provide pretty solid ground for people to stand on. So there isn't -- there's no pressure, I guess, Brett, right now. It seems like for people to do anything. And so I think that's another thing that's kind of slowing it down as people are going gosh, it's sunny, the pathway ahead is sunny and let's kind of run our own company and see what we can do.

(Operator Instructions)

Our next question comes from the line of Michael Rose with Raymond James.

I just wanted to go back to loan growth. The core C&I kind of ex PPP and energy. It looks like that was a little over 40% of your growth this quarter, really strong. What drove that? Was it increased line utilization picking up. We've seen that nudge up a little bit higher? Is it just market share gains and then any differentiation on the C&I side between Denver and Texas?

I think it is really broad-based across the C&I front. We have added new teams, as we've talked about, and new team members in Texas and in Denver. So really nothing that remark one of them. We are getting a lot of traction in that C&I space, where we've been hiring, but really, not a lot of color, Michael, that I can add other than we've just been gaining market share. The market is growing well. The new teams we've hired over have brought new relationships with them. And so we're seeing at the margin that really is impacting our net loan growth.

Great. And just to kind of follow up on that. So if I go back a couple of years pre the MOE announcement, you guys have talked about one of the strategic initiatives as you got bigger was to grow C&I relative to commercial real estate, which is kind of being the company's bread and butter for a long period of time and get that CRE concentration sub-300%. Can you just give us -- and I know you're making progress. So can you just give us an update on what the longer-term expectations would be for the loan book and the complexion of it as we enter the next couple of years?

Sure. And I think, Dan, what are our numbers right now on the...

310% and 90% on the loans -- we're at or below the threshold.

Yes. So we've come way down and balancing our book the last couple of years, Michael. And so we're right on track with where we expect to be there. We've done that, as we said, look, we've got to introduce a broader portfolio set other than just commercial -- CRE, commercial real estate lending, and we've done that. We continue to do a great job in CRE, continue to -- that's the bread and butter of regional community bank, of course. But by introducing -- we've seen some traction in energy in the last couple of quarters. Again, selective high quality, but an opportunity to add there to a small book. Same thing on commercial C&I, we've always had a good engine in Colorado, but we've been building one in Texas now. It's getting traction. So those are the things that have allowed us to balance up the book.

And I think you'll continue to see that become more balanced over time. And we'll look, as we've talked about, Michael, I know you. And I have talked in the past, we would love an opportunity to acquire a bank that has a bigger C&I book or a special product or something that they've got expertise in that would be additive to us, similar to our Guaranty acquisition where we picked up some expertise in retail, some expertise in middle market. C&I picked up a nice wealth management strategy. So acquisitions like that, where we can pick up a team, a company and a team that has maybe a little different skill set maybe than we had in the past. And so that's what we're looking to do. I think we've been successful. We're right on track with where we hope to be 3 years ago when we began moving this direction. And I think in a couple of years, you'll see us be even more balanced.

Very helpful. And then maybe just finally for me, another negative provision this quarter reserve release. The environment continues to improve here. I know there's some concerns about the delta variant and things like that. But it does seem like the reserve level has room to come down. Could we potentially see some additional releases as we move forward? And just remind us where you were post day 1 CECL and if you think you can get back there maybe even potentially below just given the improving outlook?

Michael, this is Dan. I'll take that one. Our intention, as we've said in the past, is always to continue to grow into what the CECL reserve is today. You're correct. The credit provision that we took during the quarter was clearly driven by the improvement in the Moody's forecast that we all work toward and I would say we'll continue to monitor what Moody's does as it relates to the delta variant. But what I think is the best way to say it is, based on what we know today, no new provisions are expected in the latter half of the year, and we'll just have to continue to monitor what economic conditions do and determine what impact that would have. But we expect no additional new provisions, and we'll monitor what Moody's does and the impact of that as it relates to future quarters.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. David Brooks for closing remarks.

Thank you. I appreciate everyone joining us today. We -- I think, as I mentioned earlier, shown the value of our franchise that we've built over the last 33 years of being in great markets, being able to grow organically as well as being strategic when the opportunity presents itself. That's our pathway forward. I'm really proud of our team. We continue to add new team members and just really happy with where we are today and where we're headed. I appreciate your interest in our company and our story, and we'll talk to you soon. Bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.