Q3 2019 Earnings Call
Greetings and welcome to the independent Bank Group third quarter 2019 earnings call.
This time all participants are in listen only mode. A question answer session will follow the formal presentation.
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I would now like to turn the conference over to your host Mr., Paul Langdale, Vice President Investor Relations for independent Bank.
Thank you you may begin.
Good morning, everyone I'm, playing deal Vice President Investor Relations Officer for Independent Bank Group and I would like to welcome you to the independent Bank Group third quarter 2019 earnings call.
We appreciate you joining us the related earnings press release in a slide presentation can be accessed on our website at <unk> Dot com.
I'd 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 five of the text in the release or page two 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 only be a statement of management's beliefs at the time. The statement is made and we do not publicly update guidance.
This call we will discuss the number of financial measures considered to be non GAPP under the Fccs 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 ended their remarks, David will open the call the questions with that I'll turn it over to David.
Thanks, Paul Good morning, everyone and thank you for joining today's call.
Briefly cover some of the third quarter highlights Michel will provide detailed operating results and Dan will discuss loan portfolio and I'll be back at the end closing remarks to open it up for questions.
Independent Bank group had another solid quarter with adjusted earnings per share of $1.35 and adjusted return on average assets at 1.56% for the quarter.
Our consistent earnings growth reflects that we operate with a focus presence important best markets in the country.
Organic loan growth was 5.6% for the quarter and six in half percent annualized year to date.
Our disciplined approach to growth demonstrates the continued commitment to the conservative credit culture that has served us well for over three decades.
Asset quality metrics remain at historically strong levels.
Nonperforming assets, representing just 12 basis points.
Total assets at quarter end. Additionally, our deposit growth effort continues to show results with organic deposit growth.
7.7% annualized for the quarter.
I will turn I'll now turn it over to Michelle.
We will provide additional details and operating results for the quarter.
Thank you David Good morning, everyone. Please note that on slide five of the presentation include selected financial data for the quarter.
Our third quarter adjusted net income was 57.8 million or dollar 35 per diluted share compared with 36 point sixmillion or dollar 20 per diluted share for the third quarter last year.
82.9 billion or dollar 22 per diluted share for the linked quarter.
You can see on slide seven net interest income was 125.4 million in the third quarter up from 86.3 million in the third quarter 2018, and down from 129.6 million in the linked quarter.
The net interest margin was 3.84% for the third quarter compared to four point, 11% for the linked quarter and 3.94% third quarter last year.
Total accretion income decreased 6.4 million from the second quarter of 2019, which explains most of the decrease in them in net interest income.
Then in X all purchase loan accretion decreased six basis points from the linked quarter, primarily due to lower yielding assets related to pricing competition I was.
Total noninterest income was 27.3 million compared to 12.7 million in the third quarter of 2018 in 16.2 million in the linked quarter.
The 14.6 million dollar increases compared to the linked quarter includes 6.8 million and gains on the sale of consumer and residential mortgage loan pool, which were acquired in the guarantee deal as well as a 1.5 million dollar game in the fell in the bridge.
Mortgage banking revenues also increased by 1.1 million from the linked quarter, reflecting increased demand, partly driven by refinance activity due to the interest rate environment.
Additional increases for the linked or were related to mortgage warehouse swap fee income and other miscellaneous fees.
Total non interest expense was 76.9 million for the third quarter, a decrease of 1 million from the linked quarter.
Position expense increased by 5.7 million and includes a 6.9 million dollar charge for guarantees debit card provider contract, which was terminated after the operational conversion in July .
In addition, we recorded impairment on her right of use assets were close branch NCR AIGH investment funds totaling 1.2 million during the quarter.
These increases were offset by 2 million 2.9 million decrease in salaries and benefits and a 3.1 billion dollar decrease in FDIC insurance expense for the small bank assessment credit.
Well, it's a $1.5 million decrease in operational losses from the second quarter.
Slide 17 shows our deposit composition in cost.
Deposits were 11.7 billion ended September 32019.
Organic deposit growth was 225 million or 7.7% annualized for the quarter.
It was partially offset by 27.7 million transfer in connection with the branch sale in July .
Average cost of interest bearing deposits with 156 basis points up 30 basis points in the third quarter of 2018 and up three basis points from the linked quarter.
Well deposit cost peaked in July they started trending down a few basis points each month in August and September .
Actively monitoring deposit products in cost and have lowered rates on certain accounts option promotional products.
That concludes my comments I will turn it over to Dan to discuss credit metrics and give color on the loan portfolio.
Thanks, Michelle good morning.
Panic loan growth was $152.9 million for 5.6% annualized for the quarter <unk>.
Overall loans held for investment not including mortgage warehouse purchase loans grew to 10.9 billion at September 32019, compared to 10.8 billion at June 32019, Slide 10 illustrates in your loan growth comparisons.
Slide 11 shows the composition of our loan portfolio and our commercial real estate portfolio.
As of September 32019, commercial real estate makes it the 1.0% problems, which has declined from 51.4% in the linked quarter.
Erie continues to be well diversified and types of collateral with the largest segments in office and retail.
Slide 12, further breaks down retail theory portfolio by property type.
Mortgage warehouse purchase loans averaged $434.1 million for the quarter ending September 32019.
Compared to $295.9 billion for the quarter ending June 32019, representing an increase of approximately $138.2 million for 46.7% for the quarter.
That's great partly reflects seasonality and the impact of lower mortgage rates during the quarter as well as our focus on growing as lot of business. This year.
Credit quality metrics remained strong with total nonperforming assets decreasing to 18.4 million, 4.12% of total assets at September 32019, compared to 28.
0.0 million dollars, 4.19% of total assets at June 32019.
The decrease in nonperforming assets is primarily due to $4.5 million and Oreo sales and $5.6 million of charge offs onto commercial credits, which were partially reserve in prior periods.
Despite these two specific charge offs overall charge offs remained low at point to 1% annualized for the third quarter.
Third point, a 1% annualizing the linked quarter important one 4% annualized in the third quarter 2018.
Provision for loan loss expense was $5.2 million for the third quarter, an increase of 494000 over the linked quarter.
Provision expenses, primarily reflective of the growth in our loan portfolio as well as charge offs that specific reserves taken during the respective period.
Provision expense was elevated this quarter due to <unk> commercial credits, which were charged off in excess of us POSIDUR jurors placed on in previous periods.
One of these loans at the same loan that was partially reserved in the linked quarter. The other being an energy loan that is good work out for several quarters.
These are all the comments I have related to loan portfolio. This morning, so with that I'll turn it back from today.
Thanks, Dan.
With the successful conversion of the guarantee Bancorp acquisition behind US now we are taking advantage of this period of broke through quite on the M&A front to ensure the company's well position for our next phase of growth due to that in.
We focused our teams on ensuring our people processes technology and systems are ready to take independent bank group into the future.
This fine tuning of our infrastructure is designed to facilitate healthy future growth, while maintaining a conservative culture of risk management that has served us well for over three decades.
While we carry out this infrastructure initiative, we continue to have strategic conversations go the banks.
In attractive markets.
We will we take the long view with regard to our company and believe that continuously building strong lasting relationships with customers employees and potential partners.
Serve our shareholders' interests.
As we embark on the next chapter of our company's history, we will continue to strive to maintain a discipline focus inboard thinking mentality that we believe will continue to create sustainable long term value for all of our shareholders.
Thank you for taking time to join US today, and we'll now open the line two questions operator.
Thank you at this time of the conducting a question and answer session. If he'd like to ask a question. Please press star one under telephone keypad, a confirmation TONBELLER indicate your line is in the question can you.
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Our first question comes from the line of Brett Robertson with Piper Jaffray. Please proceed with your question.
Hey, good morning, everyone.
Good morning, Brett.
Wanted to I guess first just talk about the the charge offs in the quarter. I mean, you guys a fad better energy exposure then then.
Most of your peer banks can you give us maybe just a little color on on the net charge offs and then just talking about energy generally how do you feel about the remaining portfolio that you got.
Good morning, Brett This is Dan I'll answer that question yeah. The to charge offs. We had during the quarter are really a continuation of the to that we've had previously reserved identified as sub standard nonperforming loans.
And then substantially reserved and just recognize those this quarter I.
I would say on this particular energy loan. This is the last of the ones that adds some hair on it from the previous downturns, we work through that.
As it relates to the rest of the energy portfolio. As you know we began the process a continuing to.
Look at good opportunities and build some book after we added a chain and January of this year and have had a really.
Good run there as you note energy portfolio is less than 2% of our book at this point and been very selective a insurance picking the best of class companies that we've added at this point.
Management, James that have proven ability.
To manage through the downturn the leverage of those types of new credits being added is less than two times.
With low advance rate so we feel very good about the book.
Okay. That's that's good color and then wanted to talk about the margin Michel can you maybe give us some color around you know the cost of funds from air particular can you lowered that [noise].
Quite a bit and just maybe your your outlook on the margin and how you see that playing out over the next few quarters.
Yeah, you know there there's lots of moving parts and I would say this year, it's been a challenge related some margin.
<unk>.
Do you think that we are going to get a benefit from being able to lower our cost to fund.
No we already have seen a trend it's a short trend right in October , but we have lower deposit rates significantly we've been aggressive working with our relationship managers.
Trying to get those exception rights that we made his rates were going up and lowered we've lowered our promotional product right and so.
I anticipate that and Casa deposits could go down as much as 10 basis points. This quarter just based on the trend I'm seeing right. Now you know the other side of that though is loan yields which is really where and what the less pressure on our margin this quarter and I will tell you. It doesn't look like we're seeing that say.
And at least that's far again, it's a short timeframe that yields going on if the rates that they were at the end of last quarter.
So if we can hold that up and if we'll get it will continue to see and the yield curve.
I think we'll be able to I'm guessing that our margin. This this quarter will be you know stable to maybe down a couple of basis points I don't think it's going to a contract as much as they did in Q3 and again I'm talking what I call core margin X all of our accretion which was down six basis points this quarter.
Okay, and then if I can say can one last one I'm sorry.
Yeah, I was just going to address accretion our accretion income was a little higher than what I expected it to be this quarter. So.
So I still think it's probably going to Iran. About 7 million a quarter yeah for the next couple of orders anyway.
Okay. That's helpful. And then if I can sneak one last one obviously a lot of noise on the expense [noise] numbers can you give us maybe michel it kind of a core rate going forward always for the fourth quarter.
And yeah. So if you add back the FDIC credit that we got this quarter and I have that what I would call or adjusted expenses were right about $68 million and we did have some lag and cost saves on the data processing side related to guarantee we're having to continue some of their systems.
For a little longer than what we expected.
We got through conversion really well, but just having access to some information so that we weren't able to get some of that out that's probably half a million dollars a corridor and legal actually was higher than what I expected it to be.
We had some more branding costs. So you know, that's where kind of the expenses were a little higher than what I got it to last quarter and we are starting makes and investments in infrastructure, particularly risk management those types of things. So I think going forward like 67 million, it's probably a good number for this quarter going into 20, you know.
First quarter is always a bit higher just because of comp adjustments and those types of things, probably a 3% to 5% increase.
There are 20 is a good number to you.
Okay, great appreciate the color.
Hey, Thanks, Brett.
Thank you. Our next question comes from line of what do you play with KBW. Please proceed with your question.
Morning, guys.
Hey, good morning.
So looking at expenses again that FDIC benefit did you recognize the entire benefit this quarter. It could we see some more benefit next quarter.
Yeah. That's it so going forward, we should return to our regular run right, which is a little over a million dollars a quarter.
Got it.
And then with deposit costs is there any is there any opportunities to run off some higher costing deposits or.
Well the decrease in <unk> cost, primarily just come from cutting rates across the board.
I think it'd be a combination of those things what do you we'd been able to.
Really hold down our rates is Michelle said, we've lowered all our promotional rates as rates have come down.
And we're seeing renewals on some of our promotional season. The 60, 70% range, thereby we are running those who aren't willing to roll or leaving a him. So to that extent I guess, you could consider that U.S. running off some higher yielding deposits.
A higher cost deposits and then.
And then as rates continue to come down, but we're able to adjusting to you adjust so we're we're actually isn't a shelf said earlier encouraged about our ability so for being pretty aggressive on driving those costs down we saw good pick ups deal in the last half of last.
Quarter and seems to be doing even better now so getting the full benefit of that here in October .
Got it that's helpful and last from me onto the energy portfolio.
See some modest growth, what's what's the sort of target yard you all have for that portfolio in terms of that represent the one or total loans. So.
Thank you said, it's 2% right now do you hope it gets up 5%, maybe a couple of years.
Yeah, I think our view generally is.
As we tried to good use other verticals that are not see every a mortgage warehouse and energy and see an eye and equipment finance and these other lines.
We generally it's at around 5% each ultimately is our bucket. So I think energy you know.
In the 4% to 5% of total loans is it too now so, but we think thats going to take some time, that's not going to be next quarter. We have as you know we hired a team from another bank in the Fort worth area last year, they've got a lot of good early success here moving some relationships and.
And the doing as Dan said, some deals that we consider to be some of the best credits we booked in.
Seven years now that we've been in the energy lending business. The stuff. We're booking now is better structured you know more conservatively structured with better coverage.
So we feel good about that I think ultimately though.
We peaked out in 2014 [noise].
<unk> history at about between seven and 8% of our loan portfolio.
We did not expected to go back to that level at least in the near term future will be targeting around the around 5% overtime same thing with mortgage warehouse.
5% of average outstanding balances of our loan portfolio feels about right us.
Great. Thanks, guys.
Hey, thanks.
Thank you. Our next question comes from line of Michael Young with Suntrust Robinson Humphrey. Please proceed with your question.
Hey, good morning, everyone.
You're only Michael.
Wanted to ask you know just on the total loan growth side, what was the level of payoffs and Paydowns. This quarter. It wasn't called out so I didn't know if it was higher.
Given kind of the backup in rates, if you guys saw elevated levels without.
No. It was really pretty much the way we didn't see it run all year, nothing extraordinary normal amount to pay offs and refinances and so consequently, our yeah, 5.5% long way, while wasn't at the pace than we'd expected going into the quarter or going into the year. We've just seen as we've talked.
About previously not I've over a number of our peers talking about is the competitions gotten really difficult out there there's been some competition on pricing and structure that we're just not comfortable with actual we passed on some deals and let some deals refinance or pay off.
Could it kept that where we willing to do things that are out of our normal credit policy in credit character.
So yes, we look forward I really think probably a 6% given where the economy is now given the way.
Some non bank insurance company non bank.
Lenders wells some banks are they pay ups that people are taking it leading us to believe that you in our markets. We're still seeing good growth is not is.
Not a exuberant was you know you're going after two years ago, but it's still very strong good pipeline of of economic activity out there, but we're being cautious given where we are in this cycle and.
And so.
Yeah were.
So while the pass up a little bit this year over last year, there they didn't really pretty level over last quarter.
Okay. So the slower growth through a function of the competition not.
If we saw.
Our inability to get cheaper deposits kind of into the future would you guys look to you know maybe accelerate growth a little bit too to grow and I are little more or is that still you just kind of don't think the markets, where you wanted to be right now.
Yeah I think.
We feel like.
We're just trying to tell you what we see on the ground.
I'm, an optimist as you probably remember Michael and I, you know I always tend to think we can you grow at 8% when the markets you know right now bought it six and so I.
I certainly think weaken we have a team that's built to grow the bank more quickly go through our loan portfolio more quickly, but we just haven't seen those opportunities.
Get through the pipeline could do I credit process and get on books as quickly as we thought they would go into the year and it's a it's a matter of all the thing you've talked about.
Already so yeah, I think going forward, 6% to better a better target for us.
Okay, and then just on diesel Michel I didn't know if you.
I had any early thoughts around that and what that might mean in terms of onetime true up in the first quarter on the reserve or higher provisioning levels potentially in 2020.
Yeah, we're still not in a position where we can disclose a number at this point it but I would I mean that thought process around we don't believe it's going to be a significant number or impact capital at this point, a especially on went out and all our originated portfolio. We don't think that number is going to be significant yeah. We will have to take a.
So reserve against the acquired loan portfolios, which at this point is primarily just guaranteed.
But again, we don't think that number will have a significant impact on capital at this point.
Okay. Thanks.
Hey, Thanks Bye.
Thank you. Our next question comes from the line as Matt Olney Stephens. Please proceed with your question.
Hey, Thanks when everybody.
Hey, good format.
Oh I go back to the core NIM discussion and it sounds like Michel you expect the core NIM pressure and the fourth quarter to be little bit less than we thought in the third quarter I. Just want appreciate if the fed does move next weekend and cut rates again does does does your commentary already assumed that.
Or or if the fed does move next week and cut rates could get the core margin compression levels in the fourth quarter.
Approach that third quarter levels, which was down like that.
Yeah, It doesn't really assume anything Matt, but I don't think it changes my commentary and you know what it really problem it.
It's probably more likely it would benefit us if fed lowers rates again, because then I think that gives us more opportunity to press down deposit costs, while I'm not sure that.
On the loan yields side that will be impacted that much at this point. So I would say you know, it's most likely going to be stable the down a couple of basis points, either way I mean, whether they lower whether they go.
Okay.
And then really.
No I'm sorry go ahead David.
No I I really think that as Michelle said I think further drops.
By the fed lots, a chance to lower our deposit rates and loan rates seem to have hit the deck pretty early in the you know in the downturn here and so yes, while rates certainly the floating rates will continue to go down would continue to go down a buying more given the balance in our portfolio loan.
Great and barge going forward just allows us to catch up from this kind of whiplash, we had in the second third quarter.
And it's why I think you as Michelle said, we think the worst of NIM compression was a third quarter for us gets better in the fourth quarter. Eventually you know we should level out that's certainly what our model tells us and we just got surprised I think like lot of banks did this quarter with the loan pricing pressure. So we've been there.
Are you happy with the success, we've had getting deposit rates down we think that will continue but the loan rates you know there already extremely competitive and I don't think [noise].
Other than the floating rate loans that loan.
Fixed rate core you know three to five your fixed rates are going to go down lower than where they are youre.
Okay.
Okay. That's that's great and then on on the fee side. It was another great quarter of fees in Threeq, you and even if I take out some of the items that you call out the the branch sale of alone. So it looks like it was still a really good quarter of fees or anything else you you'd call out there was particularly heavy in the third quarter, but just trying to get good runway.
For the fees going into the fourth quarter, and specifically I think in the past and the more try you've had some hedging volatility within that anything to call out within the mortgage pace.
No I think the I think the hedging on the mortgage is finally stabilized. So it's really not impacting mortgage had a really good quarter like most banks you know with the right environment you know they they're doing really well I think that they're probably going into the it looks like about the same in the fourth quarter.
And I mean, maybe down just a bit different seasonality that we didnt have some good swap fee income probably three to $400000 more than normal and then yeah. We sold the trust Department, that's about a half a million dollars in fee income that so I would say maybe down you know seven or $800000.
It was this format, it's probably a good run rate.
Okay.
That's all for me thanks, guys.
Hey, Thanks, Matt.
Thank you, ladies and gentlemen, as reminder, if you'd like to join the question Q. Please press star one on your telephone keypad. Our next question is a follow up from the line up right Robertson with Piper Jaffray. Please.
Please proceed with your question.
Hi, Thanks, David I, just want to go back to comment you made.
And your prepared remarks talking about M&A and and wanted to hear maybe a little more color around that and what your one what you're seeing and then.
If you had your preference in argue expanding more in Texas, Colorado are your and filling or new markets Kinda give us maybe a little color. If you can on just what you want to accomplish now what you're seeing out there.
Sure Yeah, and you know a big part of our story last six years going on seven years now bread is has been the M&A piece and so we continue I continue to work diligently on that both assisting in close touch with the banks here in Texas that where they were interested in.
And.
Given the volatility in the markets it seems like.
There have been some smaller deals this year and then of course, the legacy prosperity deal, but that what I'll call. The ones in between that you know a billion to 5 billion.
He is a lot of the banks that we're looking at I'm talking too.
Just doesn't seem to be a rush right now.
Sellers to sell into this environment. So I think that's going to continue to be slow for the next few quarters and in my view pending what happens with the markets in the election.
Then and then obviously having.
Other discussions for me I guess finish on that that topic first to say, it's not our intention to go outside of Texas, and Colorado with any other called downstream M&A and so we're not going to go by a 2 billion dollar bank and.
Arizona, or Arkansas, our or Louisiana.
You are the market expansion.
And then yes theres just it there continues to be a lot of conversation as I was all companies hours and the others are looking at a lot of headwind the next year or two in terms of NIM compression and fee income and how are you going to drive shareholder returns and so there are lot of other discussions going on Brett.
But.
You know, we we continue to.
Have discussions we continue to be approach you know by people talk about various kinds of partnerships and yeah, but as I continue to say that we'd be finish with this that we very much like a hand that we've got we're in Dallas Fort Worth Austin, Houston, Denver for the best markets in the country and.
We like that a lot and we think any move materially outside of our current footprint has been risk of kinda diluting, our great story and diluting our future in some ways and so we're being cautious around that.
Okay.
That's good color and then I want to go back to comments you made around gross [laughter], David and you know it sounds like you were surprised by somebody irrationality in the market, but you're expecting to be more more normalized you know when thinking about the growth over the next year or are you expecting some level of payoffs on the loan portfolio or can you give us some color on.
Kind of how you're thinking about originations versus existing book in kind of the challenge that back so habits or what's the payoff activity.
But when you take the last part of that first Brett.
I do not expect heightened levels of pay off but I don't think they're going to go down either I think we just continue as we look ahead to expect the same kind of pay off level, we've had and in the face of that we think we can grow around 6% or are you organic loan growth.
To the irrational pricing you mentioned I don't think it's going to become less irrational, but I just don't think it's going to it can become much more irrational I guess is this is my message. There. We expect it could you have the same kind of behavior in the market, but in the face of that we believe we can grow 6%.
There were going to be less.
Rational if that's proper grammar.
And then I think we can grow faster, but right now given you know kind of the difficult the ER and.
Yeah, there've been some rates would.
In upper threes fixed for five seven in 10 years out there and we just had chosen not to do that.
But I expect that to continue as long as the long into the curve is is as long as it is a I just don't think it's gonna get worse. So that was the point I was trying to make ready as we think the loans you've been booked in the last quarter and that we're looking into this quarter.
That's that's about as low as we think rates are going to go generally and then if we can press or deposit rates down at least we think we got some stability or protection there on the NIM.
Okay, [laughter] and then as a follow up to that you know I know you've been wanting to grow other pieces a loan portfolio to kind of diversify.
Away from commercial real estate to some degree can you just maybe talk about your expectations for equipment finance and general see an eye over the next year.
Yes, we we're going to continue to make progress on that I think we did see Siri began to come down this quarter for the first time, yeah, I think it would've been down last quarter, but we were doing stock buybacks and get our capital ratio was going down at the same time, we were diverse.
Fine.
But I think we're we're going to see it I think I believe a steady drop there may be a blip here and there a quarter dependent on what we do on stock buybacks and all that but I mean, given that you will see a trend down a we've mentioned mortgage warehouse, having some success. There we're having success in the energy side equipment finance is kind of slow but steady.
We always knew that would be a longer build.
And then our Cnineteen in Colorado continues do a great job, we're looking for ways to port that to Texas, and we think again none of these things are going to you don't move the needle on AR VR Siri rate's going to drop by 50 or 75 bips in any one quarter, but if we can just chip away at it.
510, 15, Bips a quarter in three or four years, we'll get we're going to be which has been guiding to all.
Okay, Great appreciate all additional color.
Hey, Thanks, a lot but.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Brooks from final comments.
[noise] I appreciate everyone dialing in this morning, and that's going to conclude our earnings call. We remain encouraged about the future the company, both near and long term. Thanks for your interest every day.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.