Q4 2020 Independent Bank Group Inc Earnings Call
Greetings and welcome to the independent Bank group fourth quarter, 'twenty 'twenty earnings call.
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Now my pleasure to introduce Paul Langdale, Senior Vice President director of corporate development Bank.
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 fourth quarter 2020 earnings call. We appreciate you joining us the related earnings press release, and the slide presentation can be accessed on our website at <unk> Dot 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 six of the text of 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 of that guidance is the statement of management's beliefs at the time of the statement is made and we assume no obligation to publicly update guidance in this call. We will discuss the 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.
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I am joined this morning by David Brooks, Our Chairman CEO, and President Dan Brooks, Our Vice Chairman and Chief Risk Officer, and Michelle Hickox Executive Vice President and CFO at the end of the 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 the call today.
Our company's fourth quarter results represent a strong finish to a difficult year with healthy fourth quarter. Adjusted net income of $1 34 per share and adjusted return on tangible equity of $16 three 3% full year of 2020 net income of $201 2 million reflects the value of our <unk>.
Daniel or community banking model, and our ability to adapt to a changing economic environment, reflecting on the past year, I'm, especially proud of how our employees across Texas and Colorado Rose to the occasion during 2020 to serve our customers and communities under trying circumstances.
As Dan will discuss further our credit quality metrics remained strong and reflect our conservative credit culture and disciplined underwriting standards. We continue to be encouraged by how well our portfolio is holding up though as always we are vigilantly monitoring for any emerging risks as general macroeconomic uncertainty persists.
Our capital ratios are at historically strong levels with a total capital ratio of 13, 32% and our robust liquidity position continues to be augmented by organic deposit growth of 20, 154% annualized in the fourth quarter.
During the quarter. We also took advantage of our recently reauthorized share repurchase program and repurchased 109548 shares of our stock for an aggregate cost of $5 $7 million.
With that overview I'll turn the call to Michele 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 six.
Fourth quarter adjusted net income was 58 million of our $1 34 per diluted share compared with $56 8 million or $1 32 per diluted share for the fourth quarter last year, and $59 6 million or of $1 38 per diluted share for the linked quarter.
Net interest income was $132 8 million in the fourth quarter up from $128 1 million in the fourth quarter of last year and up from $132 million in the linked quarter.
While net interest income was negatively impacted by year over year reduction of $4 million in purchase accounting accretion. This was more than offset by a continued reduction in funding costs during the quarter and earning asset growth that was primarily driven by increased mortgage warehouse loans as well as cash held at other banks due to continued deposit growth.
The adjusted NIM, excluding all loan accretion was $3 two 4% for the fourth quarter compared with 3.49% from the fourth quarter last year and 332% in the linked quarter.
The core margin decreased by eight basis points from the linked quarter due primarily to lower asset yields as well as increased balance sheet liquidity.
Total noninterest income was $19 9 million for the fourth quarter compared to $25 $2 million in the linked quarter, while mortgage production remained strong in gain on sale margins compressed only slightly mortgage banking revenue was impacted by fair value adjustments on loans and derivative hedging instruments of $4 3 million due to.
The treasury rate increases during the fourth quarter.
Noninterest expense totaled $75 2 million for the fourth quarter, an increase from $73 4 million in the linked quarter professional fees increased 493000, and charitable contributions were at 300000 from the linked quarter.
The fourth quarter noninterest expense also includes $1 3 million of unusual items due to P. T O. The paid out because of the pandemic and two of crude contract terminations.
Slide 22 shows our deposit mix and cost total deposits were $14 4 billion as of quarter end, an increase driven by organic deposit growth of $747 million or 20, 154% annualized for the quarter.
We estimate of approximately $395 million of deposits related to the P. P. P. Borrowers remains on the balance sheet as of December 31.
Capital ratios of presented on slide 24.
In the fourth quarter of the company's consolidated capital ratios continue to grow with the common equity tier one ratio increasing by nine basis points to 10, three 3% and the total capital ratio increasing by three basis points to 13, three 2% for the quarter.
As David mentioned, we did utilize our stock repurchase plan during the fourth quarter acquiring $5 7 million in shares.
That concludes my comments 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 6 billion at quarter end down slightly from the linked quarter.
Excluding PPP loans of $804 4 million loans held for investment decreased year over year by $87 2 million, primarily as a result of the economic dislocation caused by the pandemic.
While new loan originations continued to show recovery from earlier in the year commercial real estate loan pay offs remained elevated in the fourth quarter.
Mortgage warehouse purchase loans averaged $1 2 billion for the quarter up from.
$894 $9 million from the linked quarter.
Our mortgage warehouse continues to see robust demand due to the low interest rate environment.
Slide 17 provides additional detail on our pandemic loan modifications.
Of the $2 6 billion of loan balances that receive temporary payment relief during the pandemic only $205 7 million remain in active deferral as of January 15 2021.
Loans with active payment deferrals, representing just one 7% of overall loans held for investment.
This number of includes loans that have been restructured with payment deferral mechanisms under section 40, <unk> of the cares Act.
The largest group of loans remaining on deferral of our hotel credits and we remain confident in the strength of this conservatively underwritten book.
Our credit quality metrics continue to reflect the overall strength of the portfolio with total nonperforming assets of 52.0 of million or two 9% of total assets at December 31 2020.
Nonperforming assets increased over the linked quarter due to the addition of a $12 6 million energy loan that has been discussed in prior quarters as well as to commercial real estate loans totaling $15 nine.
These additions were offset by a $3 5 million of energy charge offs.
And the renewal of.
The $15 7 million commercial real estate loan that was discussed last quarter.
Net charge offs remained low at 11 basis points annualized for the fourth quarter.
And were primarily driven by the previously mentioned energy charge offs that had been fully reserved against in prior quarters.
As you know we elected to defer the adoption of seasonal last March with the expectation of adopting yet as of 12 31 2020.
On December 27, 2020, new legislation extended the adoption day to January one 2022.
The FCC has indicated they will not object to an early adoption date of January one 2021, and therefore, we have elected to adopt Cecil and record our day, one return earnings adjustment as of that date.
Our 2020 provision was calculated using the incurred loss model and we will use the seasonal model going forward for 2021 provisions. These.
These are all of the comments I have related to loan portfolio of this morning, So with that I'll turn it back over to David.
Thanks, Dan looking back at 2020, our community banking model enabled us to effectively manage risk and deliver another year of consistent financial performance, despite an unprecedented operating environment.
Most importantly, this allowed us to support our customers and serve our communities when they need us most.
We are also proud to the continued to enhance shareholder value by growing tangible book value per share, increasing our dividend and reauthorizing our share repurchase program.
Looking ahead, our company is well positioned to win new business and participate in the economic recovery across our footprint.
The uncertainty remains we are encouraged by what we're seeing on the ground in Texas, and Colorado, and we look forward to seizing opportunities for continued growth and shareholder value creation as the new year unfolds.
Thanks, again for taking time to join the call today, we will now open the lines of questions operator.
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Yeah.
Our first questions come from the line of Matt Olney with Stephens. Please proceed with your questions.
Hi, Thanks, Good morning, guys.
Good morning, Matt.
I want to start with the core loan growth ex PPP and the warehouse.
Look pretty immaterial in the fourth quarter would love to hear about the pushes and pulls on this in the fourth quarter with respect to Paydowns originations and then expectations for 2021.
Matt we had.
<unk>.
The large amount of headwind from pay downs in the fourth quarter, our loans at the end of the year, we went back and tracked.
Booked approximately $3 billion of new fundings.
In 2020.
We had about $3 billion of pay offs in 2020 and so.
We ended up being relatively flat or virtually flat for the year.
And that compares to the year before where we actually had positive of 19 positive loan growth I believe our total fundings of around $3 2 billion. So the falloff in fundings.
Less than 10% 20 over 19, but the the payoffs accelerated and covered up the the.
The loan growth that we had.
That said, we're seeing some positive early signs here early in the year January the the pay offs seem to be trending down we had positive loan growth.
Ex PPP and ex warehouse.
We're early in the year. So we're encouraged to us what we've indicated before we did our planning round. This year, which is the mid single digit loan growth ex.
<unk> ex warehouse for 'twenty, one and then accelerating to an upper single digit for 'twenty two and beyond.
We really believe in a normalized environment Matt debt.
We get in the markets. We're in and also we are.
Sure.
We've hired ahead of of.
Middle market commercial for Texas very talented executive.
Who's been in this market for her entire career in.
And somebody that we can release that we are going to build a significant team around here in 2021. So we think that a combination of the markets that we're in Matt as well as this team, we're adding building in the middle market commercial as well as the investment on the retail side.
Debt all of that will yield us the ability long term debt continue to grow at rates that we were growing at prior to the pandemic, which upper single digits.
Okay.
That and then as a follow up I wanted to ask about the the mortgage warehouse I think you said of the average balances right. We're around $1 2 billion.
Up again, just a strong year for the warehouse would love to hear what the Crystal ball says about the outlook here I think we're all trying to figure out where the volumes will settle out once we get beyond this current search.
Yeah, as we're thinking about that Matt.
The volumes were continued as you said it would be really strong in the in the fourth quarter. We feel good about the quality of the of the mortgage companies were doing business with feel like we've really been able to.
By building the team that we built the leadership in that area.
Been able to build strong and important relationships with these companies and in essence, Matt the goal.
These quality relationships is to move up in the funding stack. If you will so that as their volume tapers off they take that away from other participants before they take it away from from you and.
So in that regard, we think we've made a lot of progress.
And we're seeing it here early in the in the first quarter that our average outstandings have not come down as much as we would've expected.
That said our planning for this year is that on average about.
About $1 billion, we think is a good landing place as the market calms down for us So around 1 billion in average outstandings quarter by quarter.
Right now it looks like it will be a little higher than that maybe in the first quarter.
But for planning purposes, we're thinking of $1 billion and show the fair, Yes, I think thats right. Okay.
If I could sneak in one more with the warehouse any color on.
Pricing.
Whether it's settled down or if it's stabilized or improved at all of the last few months.
Matt This is Dan the pricing in the mortgage warehouses.
It's stable.
Always been pressure on it and we expect as we look at this year that that will continue to be there, but I think as David said the relationships we built.
Puts us in a good position I think the hold pretty well on the pricing.
For now.
Okay, great. Thank you guys okay.
Great. Thanks, Matt.
Thank you. Our next question is coming from the line of Brad Millsaps of Piper Sandler. Please proceed with your questions.
Hey, good morning.
Hey, good morning breath of her head.
Maybe just wanted to just start with asset quality I think.
Previously you guys thought there'd be around.
At $80 million adjustment whenever you.
When you did adopt Cecil.
I guess first do you think that would be about the same and kind of how does that impact your decisions around or how you're thinking about provisioning.
In 'twenty one.
So yeah, Brad So we are going to record our day, one adjustment now as of one 121, which is a different day. One so we're in the process of finalizing that number primarily because of the PCI loans. We're looking at the status of that and making sure that we're accounting for those correctly as of day.
One but.
But based on what we know today I expect that the you know last year, we disclosed that would be about an $80 million adjustment.
It shouldn't be much different than that it could be a little less because we did have some larger PCI loans that paid off during 'twenty that we don't have it in that number anymore. So.
My best guess would be of $70 million to $80 million adjustment at this point on top of what we have in the reserve.
For loan loss provision this year.
Yeah, I think I mean, I think bandwidth concur I think we believe that we are fully reserved and.
Wouldn't expect to have significant provisioning in 'twenty one.
I agree with that.
Okay, Great. That's helpful and then Michele I was writing quickly around.
Around kind of some of your expense commentary it sounds like the expenses might've been roughly flat absent maybe a few things the kind of went against you. This quarter first I guess is that kind of a fair assessment and then secondly, kind of how would you feel about expense growth going into <unk>.
And this year.
Yeah, I think that's accurate Brad if you look at our core schedule of at least we reported $74 8 million and noninterest expense for the quarter core but that does the it's still include that $1 3 million of the P. T O in the contract terminations that I mentioned earlier.
And then if you you know that with my guidance, we figure it will have 3% expense growth in 'twenty, one I think that puts us at about a $75 million run rate and non interest expense going forward.
Great. That's helpful. And then maybe just final question for David.
The minutes you and you mentioned that you bought back a small amount of stock in the in the fourth quarter.
Just kind of curious what the.
The shares trading.
And the <unk> would you guys.
Consider buying the stock back what do you think.
David capital here for potential M&A, maybe maybe a better used just kind of curious your thoughts around capital management.
Yeah. Thanks, Brett.
Our view is that with the the volatility in the stock debt our stock trading below two times tangible knowing.
On the other side you mentioned, an alternative uses as M&A, which we're very keen on and have been in our history of public companies you know.
That said the.
The price expectations from sellers from high quality sellers of the best markets are still pretty pretty robust and so when we balance it up it feels like.
Our stock at below two times tangible.
We should be more active.
North of two times tangible.
Then I think we begin to lean more toward hang onto it with.
With an eye toward M&A and strategic M&A. So that's the.
It outlines of yes, we will be active.
This year when our stock is trading below two times tangible.
Lot more clarity now about risk.
The elections behind us.
The.
Pandemic the vaccines of rolling out so regardless of your view about specifically when we will get the herd immunity and everything I think.
We have a better handle on risk now than we had early in the fourth quarter. As an example, when our stock was trading in the fifties and we were a little more hesitant.
To be Super aggressive there pending what was going to happen in the election and all of that so so.
Hopefully that gives you a little clarity.
No. Thanks, I appreciate all of the color I'll hop back in queue. Thank you.
Okay. Thanks.
Thank you. Our next question is come from the line of Brady Gailey with <unk>. Please proceed with your questions.
Hey, Thank you good morning, guys.
Hey, good morning Brady.
I wanted to ask about.
The other side of mortgage not the mortgage warehouse, but your traditional gain on sale mortgage fees out of them.
Fee income if you back out.
The hedging adjustments I mean, it looks like the last couple of quarters, that's been running you know of.
A little on top of $13 million of quarter, So a very very nice level.
I know, it's tough to forecast.
Cost of debt into 2021, but how much downside do you think we could see.
Mortgage fees, just as that market calms down a little bit in 'twenty, one versus 2020.
Yeah as you said Brady that mortgage volume is really hard for a day. It because it's so you know based on rates really I mean I can tell you is through January of their volumes were still really good and navigate down down a bit from where they were in December which is sort of seasonally unusual rate usually it takes a bit for them to get going again.
And I think that's what we've got had seen before is that we thought you know they wouldn't go back to where they had been previously because we really built out that team and that group and added lenders.
So we're thinking they'll they'll they could go back down to 25% less volume, but you know that's not really what we're calling for this year I expect that they will continue to have good volume.
For the first half of the year anyway.
Alright Thats fair.
The Michelle on the topic of the margin there I know you've been talking about.
Margin compressing down modestly which is what has happened.
Of the $3 44 base this quarter.
How should we think about the margin excluding any sort of any sort of noise from PPP forgiveness of the kind of that core margin compression.
Compression is still the right way to think about it into 'twenty one.
It is and when I.
When we talk about core margin I am explaining all of our purchase accounting accretion, which will continue to have in PPP fees, which we anticipate we will get most of our PPP income on the first round in this probably first and second quarter.
Based on our modeling and our you know our outlook for this year. We think our margin is probably going to compress a couple of basis points, a quarter or so Ted compressed eight basis points over the year. That's my early outlook anyway, just given our loan yields currently are coming on.
10 to 12 basis points lower than our overall average yields.
We are trying to invest some of our excess liquidity in our securities book that those yields currently are about 135, so while that's not great. It is better than what we're earning at Fad. So just trying to boost our net interest income of a bit there.
Okay.
Alright, and then finally for me I just wanted to ask what all of them.
Bank M&A it seems like.
You know everybody is expecting 21 to be a fairly robust year for bank of America, especially in Texas.
David I just heard your comments about the sellers' expectations are still pretty robust.
With your stock under two times, then maybe you just look the continued to buy it back, but although I'd say the market maybe anticipated and you guys kind of re inclusion in your traditional bank M&A game.
So we're just a little bit of color on how you.
I think bank M&A, one fold of Texas or do you think RBC ex will be active.
Yes, our desire is to be active Brady as we had been in the past there are a lot of discussions going on across the market.
And I'm encouraged by that.
On the other hand.
Our list of targets.
Our call it $2 billion to $10 billion asset.
High quality companies in the major markets in Texas and Denver.
That's not.
That's not a really long list, there's probably eight or 10 companies and.
Given that it.
We are involved I'm encouraged I do think theres going to be M&A in Texas.
Here in the first quarter.
The second quarter and through the year I.
I think it's just early to tell.
So much of it as you alluded to Brady.
Depends on how the market's trading generally and our stock prices are doing and how you of sellers.
Sellers' expectations are but but we're looking for high quality company that wants to be of part of what we're doing.
And we wanted to do of smart deal with the right company.
I am optimistic debt.
That's going to happen for us this year, but.
That said we are.
We're not.
Kind of the joke around here is we don't need the practice so we're.
We're going to do of smart deal with the right company, we don't need to do a deal just to say Oh geez, we can still do M&A.
We're going to grow the company, we're continuing to build out our infrastructure.
And in building our platform to be of $25 $30 billion company, which is still where we believe we'll be in three or four years.
And kind of really focus as well on building out that middle market executing on our retail strategy and getting back to our view of more robust organic growth rate as of the core of our company. That's always been the core of independent different than some of acquirers.
We're an organic growth company first and then we layer in.
The high quality material M&A on top of that.
When when we get the opportunity so I'm optimistic about it but also realistic debt.
The.
There aren't just three or four great companies out there going Oh, we're ready ready it takes work and continuing to build relationships.
And then the timing has to be right. So.
Alright that makes sense. Thanks, David.
Thanks Brady.
Thank you. Our next question is comes from the line of Brett.
The appetite of the hub the group. Please proceed with your questions.
Hey, good morning, David Michelle.
And Brett the threat.
Most of my questions have been asked but wanted to circle back around on loan growth and the organic growth story can you talk about maybe higher.
Hires maybe late in the year and then what the prospects you think might be for 'twenty, one and then thinking about that the core mid single digit loan growth for 'twenty, one is that going to be more in specialty lines of business or maybe you can give us some color. If you go ahead of just on.
How do you think the organic growth with the.
Bucket and so coming from.
Sure.
To give more color on that Brett.
We did continue to build out and we will further along in building out the retail team.
So we've hired a leader there Kenyon Warren in and then a strong team of leaders with Kenyan.
We had a strong presence already in Colorado on the retail side.
So that's going very well the.
The biggest hires we made.
Recently was was the addition of <unk>.
Of.
As I mentioned earlier, Tiffany case, and who is the longtime Texas.
<unk> in middle market commercial lending.
And she she joined us.
I believe beginning of the year end is the steady building out her team now.
Sure.
We are talking with the lenders across Texas.
Particularly in Houston, as an example, where we.
We expect to be active there building out the team as well and so it's the early days, but I expect by the second half of this year when we kind of look out breath of by the second half of this year, we should have some tailwind.
Particularly in the middle market share.
Syed on the loan growth.
Organic loan growth. So we think our loan growth we expect here.
In the second half of 'twenty, one into 'twenty, two is going to be more balanced than it historically has although we're still seeing a lot of great real estate opportunities and transactions.
But.
We expect and are seeing.
A little more floating rate youll flavor to what we're adding as Michelle said.
We're adding.
Ed.
A little below what.
Adding loans, a little below what our current portfolio of rate is.
A 10 basis points or so so it is not.
A year ago or I guess early in the pandemic.
With the competition last summer, we were adding loans of 25, and 30 basis points below our portfolio rate. That's narrowed now at eight or 10 basis points. So I think that's a contributing factor to what Michel said about the NIM.
But as you know.
When we have $11 $5 billion book and we're adding.
<unk>.
50 or $100 million of.
A month to that then.
It takes a while for.
At eight or 10 basis points, the math doesn't.
<unk> of loan yields overall down quickly as long as you can you add loans in and around.
Slide 10 basis points below the total portfolio yield.
Okay.
That's helpful and then just back on the margin.
Maybe I appreciate the color on the core margin commentary Michelle any.
You know what.
What's difficult to predict and to some degree but any color around the state of the margin in the first half of the year, how you expect that maybe the bank.
The P P forgiveness to play out in the first half of the year and then any thoughts around the state of the discount accretion at least for the for the early quarters.
You know that PPP number Brett as you know right now we think that most of it is going to come in this quarter, we would have had.
A good amount of pay offs. It came in in January and I think that will continue through the second quarter I really can't predict the impact it will be a few basis points increase in our margin and there'll be a bit lumpy purchase accounting accretion.
The discontinue at a similar rate it'll just continue to go down I think it was a little less than $7 million in the fourth quarter, that's going to continue to trail.
Look at it going down a couple of hundred thousands of dollars a quarter of what I would expect at this point that number has become pretty stable.
Okay.
Great appreciate all the color.
Okay. Thanks Brooks.
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Our next question is coming from the line of Michael Rose with Raymond James. Please proceed with your questions.
Hey, good morning, everyone.
Hey, good morning Marshall.
Hey, just had a question on the increase in classified balances this quarter, they're still really low as the percentage of loans, but just wanted to see what drove that increase was the some of the kind of COVID-19 impacted sectors sectors, just the classifying them.
Hey, Michael this is Dan.
Yes, as you noted it was only up slightly really from the third quarter.
The little bit of C&I and there are some.
Some hotel as you might expect would be part of that but.
Those would be the two primary categories.
Okay, and then maybe just one last one for me so the just back to the mortgage warehouse. So it's grown essentially every quarter. Since you guys kind of got in the business couple of years ago.
If we're assuming growth is going to be on the health for investment side kind of lower than it has been historically or at least during this period is there any reason that you might want to get a little bit more aggressive in the warehouse and maybe can you just give us an update on a number of customers.
Et cetera. Thanks.
Yes.
I don't know the number of customers right off hand.
We can get that to you Paul can get that to you later today for sure.
Our core belief is that mortgage warehouses of terrific business when it's in the right proportion to your to your balance sheet and to your income and because of the volatility it's still the business we are cautious around.
Like a lot we have great customers in it but we don't want it to be two or $3 billion. So.
Our core view is average outstandings around $1 billion give or take is a good place to where we want to be in and low.
I do think theres an opportunity to be.
To be aggressive in that business right now if you if one wanted to be we are choosing not to be.
Okay. That's all I had thanks, everyone.
Thanks, Mike.
Thank you there are no further questions at this time I would like to hand, the call back over to management for any closing comments.
Really appreciate everyone joining us today and if there are no further questions. We'll conclude the fourth quarter earnings call. I appreciate everyone of your interest in independent Bank group and hope to hope the.
The world allows us to be out on the road the seeing you in person. The sometime later this year so.
In the meantime be well.
Thank you that does conclude this morning's call you may disconnect. Your lines at this time. Thank you for your participation and.
Have a great day.