Q2 2022 Independent Bank Group Inc Earnings Call
Greetings and welcome to the independent bank group 2nd quarter 2022 earnings conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Langdale, vice president and investor relations.
Thank you Paul, and we begin. Good morning everyone. I am Paul Langdale, Executive Vice President of Corporate Development and Strategy for Independent Bank Group, and I would like to welcome you to the Independent Bank Group's second quarter, 2022 Arnons call. We appreciate you joining us. The related earnings press release in the slide presentation can be accessed on our website at ibts.com. I would like to remind you that the marks made today may include forward looking statements. Those statements are subject to risks and uncertainties that could cause actual unexpected 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 this 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. We assume no obligation to publicly update guidance.
In this call we will discuss several financial measures considered to be non-GAAP under the SEC's rules. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are included in our release. I am joined this morning by David Brooks, our Chairman and CEO , Dan Brooks, 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 thanks for joining the call today.
For the second quarter, we announced suggested earnings of $1.27 per diluted share, as well as exceptional loan growth of 36% annualized for the quarter, excluding mortgage warehouse and PPP.
This record growth is driven by strong demand from our relationship bars across Texas and Colorado as our markets continue to experience strong economic and demographic growth.
Then we'll provide some additional color.
Only geographic and product type breakdown of the long growth while Michelle will touch on rates and since the impacts.
On the hold of this record growth was propelled by substantial investments we made in attracting season lenders to our bank over the past few years. These lenders have in turn built and developed strong teams of producers underneath them. At the same time we've also greatly enhanced.
our infrastructure in both credit and lending support to ensure our producers have been able to pursue new lending opportunities while maintaining our long-standing credit culture that has guided us through previous downturns.
Today.
We have the strongest talent bench we have ever had in history of our company. And the Successional Growth Corps is a direct result of that fact.
During the quarter, we were also encouraged by the resilience of our core deposit base in the face of successive fed hikes.
Net interest income grew by 5.2% versus the prior quarter, while the NIM expanded by 29 basis points to 3.51%. Aided by the granularity of our funding coupled with a rise in loan yields.
In addition, the volatility in equity markets gave us the opportunity to repurchase over 1.6 million shares of our common stock during the quarter, consistent with our longstanding philosophy of returning excess capital 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. Note that slide six shows selected financial data for the quarter.
Second quarter adjusted net income totaled $53.3 million or $1.27 per diluted share, an increase of $1.2 million over the linked quarter.
Net interest income was 138 million for the quarter, which increased 6.9 million from the late quarter.
This increase was primarily due to the significant lung growth during the quarter, which saw the redeployment of much of our excess liquidity sooner than anticipated.
The NIM excluding purchase loan accretion was 3.45%, that 32 basis points from the linked quarter.
This increase was driven by deployment of liquidity from significant lung growth during the quarter and slightly offset by rise in deposit costs.
While our balance sheet is still somewhat asset sensitive, this deployment of cash to loans has reduced asset sensitivity as compared to previous quarters.
Total non-interest income was $13.9 million for the second quarter, an increase of $1 million versus the linked quarter. The change was due to first quarter having included a $1.5 million loss on sale of loan, offset by a $536,000 decrease in mortgage banking revenue in Q2.
Mortgage production and mortgage warehouse revenues continue to be adversely impacted by lower volumes due to the rising rate environment.
Non-interest expense totaled $85.9 million for the second quarter. The increase of $3.5 million versus the linked quarter was mostly driven by an increase in salaries and benefits expense, which includes $1.1 million of termination expenses for the departure of an executive officer, as well as elevated health insurance and recruitment expense.
Slide 19 shows our deposit mix and cost.
Deposits total 15.1 billion at quarter end, which is a flat increase over the linked quarter.
The TAR on slide 20 illustrates the change by vertical and shows the stability of our core deposit accounts with the year-to-date decrease coming from brokerage and specialty treasury deposits as well as seasonality in public funds.
Capital ratios are presented on slide 22.
The company's consolidated capital ratios remain within our target levels with a common equity tier 1 capital ratio of 9.81% and a total capital ratio of 12.24%.
Hangeable Common Equity with 7.63% at quarter end.
These ratios are down from March 31 due to the execution of our stock buyback plan acquiring $115 million during the second quarter.
That concludes my comments. I will turn it over to Dan to discuss the loan portfolio.
Thanks Michelle.
Overall, loans help for investment, excluding mortgage warehouse purchase loans with 13 billion at quarter end compared to 12 billion in the late quarter. In the late quarter. in the linked quarter.
Excluding the impact of PPP loans, core loans help for investment increase by $1.1 billion over the linked quarter, which represents a 36% annualized rate of loan growth.
Growth and real estate lending categories accounted for the majority of new loans booked during the quarter. For more information, see the oil, Bill Meara laughs at a
With energy and CNI accounting for about 11% and 7% and new commitments, greater than 1 million, respectively.
Of new real estate loans, no category accounted for more than 17% of growth in new commitments greater than 1 million.
with the largest drivers in their approximate shares being retail at 17%.
multi-family at 15%, and single-family residential at 13%.
Geographically, new loan production as well to share between our markets with none of our four regions accounting for more than one third of total growth. for more than one third of total growth.
Adverse Mortgage Warehouse purchase loans decreased at $467.8 million in the second quarter, down from $539.6 million in the prior quarter.
This decrease was primarily driven by upward pressure on mortgage rates resulting in decreased demand, lowered volumes, and shorter hold times across the mortgage industry.
Credit quality metrics remain healthy.
Total non-performing assets increased to 82.9 million or 0.46% total assets a quarter end. Total non-performing assets increased to 84.46% total assets a quarter end.
The real estate I own increased to 12.9 million during the quarter due to the addition of an office property in the Houston market that I've been discussed on last quarter's call.
Net charge offs totals, nine basis point annualized during the quarter.
At June 30, 2022, the allowance for credit losses on loans is 144.2 million or 1.11% of loans on loan childcare that due to loan sales shameful and fund sell of? began to have a full foundation revenue discount yesterday due to a single dollar in debt that due to fee fraudsiefese bios that due procurement. Medal promoter Director Brothers He has the same 0 Moltes neither raised the adequate financial bill. On November 31. falls at oom. In Gruber's mailover on Fridayetiool dropping duetambell 30 sixty a.m. death toll is 6 over 4 minutes ? 0rops ????ok 30 sloppy f 60 h s y i c f t f s p m s c v s y ft c h just x ? you
There was no provision expense for the quarter, primarily due to changes in the COVID-related economic factors in our Cecil model, or set by strong long growth.
These are all the comments I have related to the long port playlist I'm going to be wanting to do something with that.
Thanks, Dan. While our loan growth was exceptionally strong in the second quarter, we are anticipating growth to moderate in the third quarter. Given this, we expect to grow our core loan portfolio at the high single-digit level for the remainder of 2022.
I am grateful to our teams across Texas and Colorado for their strong performance this quarter in achieving record-long growth.
As I mentioned earlier, the talent.
across our organization has never been as strong as it is today.
Over the past several years, we have made significant investments, not only in our production areas,
But in our teams across the organization to strengthen our infrastructure and ensure sustainable growth.
looking across our markets.
The economies that we serve continue to exhibit both resilience and rapid growth. We remain encouraged by these tailwinds as a significant number of companies and talented individuals continue to relocate to Texas and Colorado.
Building a high performance bank in growth markets has been the hallmark of our strategy since the IPO and we look forward to continuing our disciplined execution and pursuit of new opportunities in the road ahead.
Thank you for taking the time to join us today. We'll now open the line to questions.Once again, we'll open the door to public this IFPRR.
Thank you.
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One moment please, while we pull for questions.
Thank you. Our first question is from Brad Millsaps with Piper Stadler. Please proceed with your question.
Take good morning.
Hey, good morning, that.
Thanks for taking my question. Michelle maybe just wanted to start with the margin, some nice expansion. Looks like you guys benefited quite a bit from mixed change. Just wanted to see what your outlook was there, maybe specifically around loan yields. Looks like core were maybe up seven basis points or so. You know what latest
I think you've mentioned in the past maybe 15% of your loan and repricity. Can you just kind of talk about that and what that kind of means for the men going forward?
Yeah, actually, that's increased a bit. It's probably closer to 17% now, Brad has learned that would repress immediately. And looking at our modeling, and you can tell our betas have lagged a bit from where they have been historically. So that's been beneficial for us. But given where we are on liquidity, we expect that those will most likely, as we continue to have low growth in the understanding that those betas will return to probably normal levels, which is closer than 30 to 35%.
200 pages points from the start of the year. Obviously that's a competitive battle out there. Obviously that's a competitive battle out there.
Yeah.
We have a good strong so far in July . The average rate of loans coming on is over 5%. And we expect that to continue to go up during the year. And so our modeling indicates, as Michelle said, that we'll continue to get some benefit from the rising rate environment.
No one will we know now.
Great, and just as a follow up to that.
Just in terms of the bond portfolio, Michelle, do you think that's sort of reached a peak and you'll sort of use that to kind of fund growth over the near term, you know, absent any deposits coming in?
Yeah, just given the loan growth we had this quarter, we discontinued growing the bond portfolio and it's remained flat. We could.
reinvest some cash flows for the remainder of the year, but I expect it probably will be a bit smaller by the end of the year.
Okay, great. Thank you guys. I'll hop back into you.
Hey, thanks, Brett.
Thank you. Our next question is from Brady Gailey with KBW. Please proceed with your question.
Thank you, good morning guys.
Come on, break.
It's great to see you also active on the buyback in the quarter. Maybe just thoughts on how you're thinking about the buyback for the back half of the year.
Yeah, we were pleased with opportunity.
to actively refer to our stock at prices that we felt were disproportionately low.
We still have some authorization left for the year. I think we'll be, given what's going on with prices now and PBV will probably be a little less active in the back in the second half of the year is the way we think about it. We still have availability if we need it. As pet coral lines that follow, hosts will need language that bilinguals in their..
But I would think we did a lot of our buying for the year in the second quarter.
Okay.
All right, and then if you look at expenses, they came a little heavier than my estimate. I know the 1.1 million is non-returring so that'll come out next quarter, but any thoughts on kind of the forward run rate of expenses. Tell you what, if you have some concerned with expenses.
Yeah, so our health insurance has been running, hardly we anticipated, which I think has been consistent with some others that have heard just kind of post-pandemic claims. It's just kind of post-pandemic claims.
We also made some opportunistic hires on our production team, so that required some recruitment, signing veterans expense that we had not anticipated in our original plan. But having said that, I think if you pull out that non-recurring termination expense, that run rate is good for the rest of the year, for third and fourth quarter.
So around 85 billion or so.
Yeah, it might be a little less than that, but that's probably a good number to use.
Okay, all right. And then as you look at the provision, you know, your reserve with the great love growth, your reserve is now close to 115 basis points on x PPP x warehouse. How should we think about that going forward? I mean, it's your credit is still so clean for you all, but at the same time, the economic outlook is fairly uncertain. Is that should the percentage ratio be flat from here? Or do you think there could be some more downsides?
I think we'll continue. Obviously, we
we used, or as you said, the ratio dropped down that 110, 115 range. You know, I think anything, Brady, you know, one to 120 is a broad range, probably is good, given our asset quality. That said, we're paying attention to the economy, and I think the way to think about it going forward is we're expecting high single-digit growth for the back half of the year.
And in our planning, we're thinking 1%, you know, as we think about a low-lost vision for the second half, 1% of kind of whatever our growth is, we get way to think about it.
All right, great. Thank you guys.
Thank you guys.
Thank you. Our next question is from Brandon King with Truest Security. Please finishition of our special institute.
Hey, good morning.
Morning, Brad.
Yes, so I wanted to get a better sense of your expectations for the positive growth in the back half of the year.
And I was wondering if you had participated in the long road.
exceeds the pilot growth, what is the capacity or willingness to use borrowings to fund long growth?
Yeah, so in our plan, we plan that we'll be able to...
Fundal ungrows with deposits. We've made significant investments in our treasury teams and our retail teams. And they have, and if you look at our core deposits, they have grown a bit this year. We still do have access to our specialty treasury deposits that we let some of those run off in the first quarter. And we can access those if we need to, but they are more expensive, so that's not our preference. And we have plenty of borrowing capacity, the SHLB, if that was where we needed to go, or the last resort.
energy loan increase in the quarter so I just wanted to get a sense of what you think that could go in the second half of the year and what you're seeing in your market and with your customers.
but they're not segmented.
Yeah, Brandon, this is Dan. I'll take that one. We certainly expect continued broad base growth in the second half of the year. If you look at the...
growth we had in the second quarter just at a high level. Really a continuation of what we do well in our strong markets.
The production was granular and diversified across asset class and geography. We expect that to be the same as we go through the second half of the year.
We're so....
specifically on energy as well.
We have been very successful at lending to well-established upstream, E&P, a little bit of midstream as well. We made a higher, you might note from previous calls, of a senior energy lender in Houston and really had some nice traction in the second quarter. We've added seven new relationships through that officer in the last, or in the first part of the year and would expect we'll continue to get traction there and with the others.
As you'll know, perinow standings are about 450 million, which is still less than 4% of the loan book. I do think that that will continue to grow and we expect to see some nice opportunities as of your place out.
Thanks for answering my questions.
Thanks, Brian .
Thank you. Our next question comes from Matt Olney with Stevens. Please proceed with your question.
Hey thanks good morning. I was going to ask about the mortgage warehouse. I think the average balances were down around
15% which would be a little bit below some of your pierges quarter. Any color on the performance in 2Q and what's the outlook from here?
Hey Matt, this is Dan, I'll take that one as well. We expect at this point the volume to be essentially flat for the balance of the year. Yeah, I think it has come down as we've seen in many cases just given the current environment of rates.
But we continue to hold our own and expect that to be flat as we play out the year.
And just follow up on that flat from these average balances or the end of period balances. And then you also mentioned, I think in prepare to mark some shorter hold times. Was that a comparison from order this year or from last year you're seeing shorter hold times? Or from last year you're seeing shorter hold times?
Yeah, so I think that's the comparison last year, Matt. And in terms of, yes, for the bounce of the year, our average bounces for the second quarter, we expect that to be flat through the bounce of the year. And the retail mortgage also has been soft. Software than we expected. That's why the fee income is down for second quarter. But we expect that to be flat for the bounce of the year, the bounce of the year.
mortgage warehouse and retail mortgage to be flat at their second quarter levels in the third and fourth quarter.
Okay.
As far as the interest rate sensitivity, I think you mentioned in the prepared remarks that as the excess liquidity levels have come down, then the benefits of higher rates as you model that have also come down. Anything more specific as far as the 100 basis point shock analysis? I think it called for 6% growth of NIII on March 31st. You can see where it went in love with NI Project and putting the clutch i risks is probably enough. I think by the way, it looks like you're solving your problem, which are ya? I will not care about your problem and not you need to model it this way but
You can disclose as far as the June 30 numbers. Yeah, we're actually filing our queue today. I think it's a little over 4% of what we're reporting that in there.
Okay.
Thanks for that, Michelle. Just to clarify, Michelle, you mentioned before as far as the funding plan for the back half of the year.
It sounds like you don't expect to access the wholesale deposit markets
But at the long growth exceeds that the guidance of the high single digit, then that becomes more of a reality. Am I getting that right?
Yeah, that would be accurate or fair. That if we exceed where we're guiding to for lung growth, we might have to access either broker or go back and get more specialty treasury. Or again, we could use that FHLB advances. But given our current outlook, I think we can fund it with our core deposit customers. I think we can fund it with our core deposit customers.
fair that if you know if we exceed where we're guiding to for a loan growth we might have to access either broker or go back and get more specialty treasury or again we could use that FHLV advances but given our current outlook I think we can fund it you know with our core deposit customers.
Thank you, guys. Okay, thanks, Matt.
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Our next question comes from Michael Rose with Raymond James. Please proceed with your question.
Hey, good morning. I'm just following up on some of the deposit questions. Your loan or deposit ratio is about 86%. You run higher.
And kind of that in the past, obviously a good group, a good growth in the treasury deposits of this quarter. I know the Pollock Fund is a little bit of a seasonal headwind, but where do you start to get a little bit uncomfortable? I mean, would you be comfortable running it back to where you had historically in the high 90s low 100% ranger? Or is the goal to keep it kind of around these levels to space on some of the verticals that you built out like treasury? Thanks.
Good morning, Michael. I think we believe that a more normal run rate for us is in the 85, 90% range long to deposit.
you know, we don't know.
what's coming down the road economically, etc. But we can certainly sustain a higher loan deposit than 85-86%.
It would not be our strategy to run the bank 100% loan to deposit. We'd much rather we feel more comfortable around 90%. That said, as Michelle said a moment ago, we have.
The access of theVAxd.
You can't miss a mouse or a quarrel if you need it.
It's just a matter of obviously you're funding at the best.
part of the curve that we can and that generally is with core deposits. So we're working hard on the core deposit side. We've invested, as Michelle said, heavily in that treasury. And also putting the floor down.
And so we're moving on.
We think we can fund it with court deposits and keep our own deposit ratio on 90%. And keep our own deposit ratio on 90%.
Very helpful. And then maybe just going back to the buyback, I think you have about $44 million left after this quarter.
Would you expect to use that or you had a point where you might fall short just given cash to assets is fairly low at this point? This is fairly low at this point. This is fairly low at this point.
You know, we certainly have the cash. I think it's really more kind of watching the economy and what's coming down the pike. Our because we bought back so much stock, our capital ratios were down a little bit this quarter. We expect that to build back over the course of the year. All these Sleepingly
Again, I don't know what's going to happen in the markets and how the markets are going to trade. So it's a little hard for me to predict, but I would say our bias would be less toward buying our stock back at this point, just given how much we have already repurchased our desire to have our capital ratios continue to grow this year and to fund the growth that we have. So we certainly have the liquidity to repurchase our stock. That's about it.
Right now it looks to us like there'll be
Yeah, little activity in the second half on that
Okay, perfect. And maybe finally for me, just stuff for Dan, can you just give us an update on the commercial credit that moved to Oreo? I assume that this property is being marketed and should be out of...
Bore you out here in the next quarter or so. What's up, is that fair?
Yeah, Michael, this was the asset that we talked about in the last call where...
it was already a non-performing credit. It was adequately fully reserved for the amount of charge down that you saw we took was on that particular building. Yeah, I think the potential of getting it sold is always difficult to determine the timing on that. Obviously we're processing or have a firm that's working the leasing side of that and the potential sale of that, but there's nothing.
Eminent on that. I would say because they are other non-performing loans in their UCs just slightly for the quarter.
We expect some of those to resolve here in the back half of the year, which I think will reduce those numbers is our expectation at this point based on what we know.
Perfect. Thanks for taking all my questions.
Thanks, Bob.
Thank you. Our next question is from Brett Ravitan with Private Investor. Please pursue your question.
Hey, good morning, David Michelle. That's how you grew up. Yes, you. Good morning, Brad.
Thank you.
All right.
I wanted to ask on the loan production this quarter, you know, what your
rates might have been on fixed and floating rate production and then just
thinking about spray compression, if that's something that you're worried about as we think about additional retirees from here and how you're planning on.
making loans relative to the competitive landscape.
Yes, our rates were going up rapidly during the quarter and so as I said...
rates were going up rapidly during the quarter bread. And so as I said, we...
The loans we've put on so far in July have been, north of 5%, I think our fixed rate loans came on average in the second quarter mid fours. You know.
ish and then the floating rate's probably a hair below that. Obviously they'll float and so we're not.
I'm not concerned about those loans at all, but the trends are good and we think that we'll be able to continue to bring on.
loans at increasing the higher rates as the quarter goes along. And the pipeline, there's always a lag effect, right, in the pipeline on the loans because you start working with a borrower on a project and...
You know, it's sometimes 30 to 90 days later before your funding. So we were dealing with that.
floating commitments and things like that.
Bye.
You know, that's been the, the continues to be the challenge, but it's Michelle said, I think we're not worried about compression.
The loans, the loan book itself now in the show, you've been about 430? Yeah, 435, 440, 440. Yeah, so, you know, for the local 40, so we're putting on loans that 70, more than 70 bits higher than our book rates. So we're gonna drive up the, you know, the loan yield as the year goes along. And then, you know, obviously bouncing that with generation of quarter casuts and funding.
And Michelle, voice earlier that we think.
We've got a few basis points of the increases in...
them coming each quarter for the balance of the year.
That is great, Coler. Good to hear. The other question for David Brooks, I think a lot of people are trying to figure out what credit risk might look like. Is this quote recession, and some folks have talked about class B office space and things like that. I am curious if there are any loan categories that you might be less inclined to be aggressive with adding to the portfolio going forward.
in regards to asset classes, the office spaces one, I suspect all the banks including us are keeping a close eye on that book for us has performed really well. Obviously we took a property back, but in general that book is really solid. Again, we don't do downtown office buildings and the big metros places like that that have been, one that I've created, and will concern in the market. So, I'm sorry.
Beyond that, I think keeping an eye on...
The assisted-livering memory care space, I think it has continued to lag. I think the pandemic certainly made that even more challenging for Vice-Sewer Group active in that space. We have minor exposure in there, but we're keeping on allowing that as well. But beyond that, I don't know of any specific asset classes. I would say that we're, we'll be interested in curtailing. I think that just goes to the way that we approach credit.
all the time. We're always preparing for what might be a downturn.
Okay, great, appreciate all the color.
Hey, thanks, Brett.
Thank you. There are no further questions at this time. I'd like to turn this forward back over to management for any closing comments. Thank you.
Thanks for joining the call this morning here. We're excited about the bounce of the year. We're excited about the bounce of the year.
kind of watching anxiously as others are developments on the macro economic front, but happy very pleased to where we are. It's great about our criticality as Dan was really to a moment ago and you know, we're optimistic about the continued performance in markets we're in. So, appreciate everyone joining today and hope you have a good day. Thanks.
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