Q3 2023 Independent Bank Group Inc Earnings Call
Hello, and welcome to the Independent Bank Group Q3, 2023 earnings conference call if any once at the prior operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. You May press star one at any time he placed in the question queue.
As a reminder, this conference is being recorded it's now my pleasure to turn the call over to and keep the Perry Executive Vice President and Chief Legal Officer. Please go ahead.
Good morning, and welcome to the Independent Bank Group third quarter 2023 earnings call. We appreciate you joining us the related earnings press release, and Investor presentation can be accessed on our website at IR I financial dotcom.
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 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.
Please note that if we give guidance about future results that guidance is a statement of managements beliefs at the time. The statement is made and 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 world.
Reconciliations of these financial measures to the most directly comparable GAAP financial measures are included in our release.
I'm joined this morning by our Chairman and Chief Executive Officer, David Brooks, Our Vice Chairman, Dan Brown, and our Chief Financial Officer, Paul Langdale at the end of their remarks, David will open the call to questions and with that I will turn it over to David.
Thank you. Thank you good morning, everyone and thanks for joining the call today.
<unk> third quarter earnings totaled $32 $8 million or 79 per diluted share.
During the quarter, we were pleased to see healthy organic core loan growth of four 5% annualized as demand began to pick up in our markets. While we did see some additional uptick in deposit costs due to the intra quarter fed increase we're pleased that our overall loan book yields continue to March upward.
As at this point, we believe that we are around the bottom right now.
We also were able to decrease our loan to deposit ratio to 92, 7% at quarter end compared with 95, 1% at prior quarter end by growing our certificates of deposit and paying off some short term <unk> advances and borrowings at quarter end, our balance <unk> advances outstanding was.
Lower than the end of last year.
This comfortably positions our balance sheet to navigate an environment with sustained macroeconomic uncertainty and allows us to continue to serve our customers and communities throughout the economic cycle.
Fee income remains stable quarter over quarter and year over year.
In addition.
Our focus on expense discipline resulted in total noninterest expense declining to $81 3 million for the quarter.
As Dan will discuss credit metrics remain excellent and low nonperforming assets and net charge offs totaling just one basis point annualized for the quarter.
While we remain watchful for any signs of stress in our markets credit trends indicate.
That we continue to be supported by the strong foundation of Conservative underwriting that we have maintained over three decades capital ratios ended the quarter at healthy position with the tier one capital ratio at 10, 1% of total capital ratio at 11, 89%.
Notably our TCE ratio also remained strong at 735% as of September 30 with.
With that overview I'll now turn the call over to Paul to give some more details on the financials.
Thanks, David and good morning, everyone net income for the quarter was $32 8 million or <unk> 79 per diluted share compared to $33 1 million or <unk> 80 per diluted share in the linked quarter net interest income was $109 million for the third quarter compared with $113 $6 million in the linked quarter.
During the quarter, we saw incremental upward pressure on deposit costs due to the fed hike as well as incremental noninterest bearing attrition. These factors were partially offset by increases in loan yields.
Net interest margin was 260% for the third quarter down 11 basis points from the linked quarter NIM was primarily impacted by the attrition of noninterest bearing deposits as well as higher rates paid on interest bearing balances, which were not offset by a corresponding increase in earning asset yields.
While NIM came in at the lower end of our expectations. We are encouraged that our modeling and trends indicate a likely bottom for NIM around these levels.
Thus, we expect NIM to further stabilize in the fourth quarter and we expect that NIM should begin expanding in the first quarter of 2024 as earning assets continue to reprice.
The exact trajectory of NIM will be influenced partially by external factors, but we are encouraged by the stabilization of noninterest bearing deposits following quarter end and the healthy sales pipelines, we are seeing for both higher yielding loans and lower cost deposits.
Total adjusted uninsured deposits declined in the third quarter to 29, 9% from 31, 1% in the linked quarter.
Uninsured deposits are currently paid highly competitive rates limiting additional downside risk to deposit costs for the bank as short term rates peak.
We also continued to pay down our higher rate borrowings such as <unk> advances and our holding company line of credit in the third quarter, while increasing broker deposits, which remained less expensive than short term borrowings at this point in the cycle.
Total borrowings were just $546 6 million at September 30, lower than the total borrowings were at year end 2022.
The substantial contingent funding capacity available to us and the low level of borrowing utilization strengthens our balance sheet against any subsequent shocks and positions us well to capitalize on sustained growth in earning asset yields.
To that end contractual maturities of our fixed rate loans are poised to grow in 2024, even as even as payoffs remain at low levels. This should provide a consistent tailwind to loan yields and help support NII, even as near term rates remain at their peak.
Provision expense was 340000 for the third quarter, which was impacted by improvements to Moody's macroeconomic scenarios.
Going forward, we expect provision that represents about 1% of total loan growth. This is of course dependent on all else being held equal in the seasonal model, which could of course be impacted by further changes to the macroeconomic forecast or any specific reserves.
Noninterest income was $13 6 million for the quarter down slightly from adjusted noninterest income of $14 1 million for the linked quarter.
Noninterest expenses totaled $81 3 million for the quarter down from $85 $7 million in the linked quarter third quarter noninterest expense was partially impacted by a $2 $2 million reduction in expenses related to executive compensation.
We continue to pursue expense discipline and gear the organization appropriately for the current environment.
These are all the comments I have today, so with that I'll turn the call over to Dan.
Thanks, Paul.
Core loans held for investment excluding mortgage warehouse loans increased by $154 7 million or four 5% annualized in the third quarter.
New loan production came in roughly in line with our expectations as deal activity is starting to pick up across our markets in Texas and Colorado.
Average mortgage warehouse purchase loans were $425 9 million for the quarter up from $413 2 million in the prior quarter.
We saw relative stability in these balances on the month to month basis, and we currently anticipate these balances to remain stable in the fourth quarter. Despite the seasonality.
Credit quality metrics continued to remain strong during the third quarter.
Nonperforming assets totaled just 33 basis points of total assets at quarter end.
The bank had just a single basis point of annualized charge offs for the quarter.
Overall asset quality trends remain stable and while we are always vigilant against emerging risks. We currently do not see any areas of concern across the loan portfolio.
These are all the comments I had related to the loan portfolio. This morning, so with that I'll turn it back over to David.
Thanks, Dan.
As we enter the fourth quarter, we remain encouraged by the trends we're seeing in our business.
Healthy loan growth has returned the NIM seems to be stabilizing at its bottom our fee income remains consistent credit trends remained strong and we continue to exercise discipline on our expenses.
We are especially encouraged by the continued strength of our four high growth markets across Texas, and Colorado, which are each buoyed by positive positive demographic trends and capital inflows insulate them from the broader macro macroeconomic activity.
Most of all though our success in growing the bank in this challenging environment is made possible by the incredible team.
We have across our footprint.
I'm, especially grateful to every one of our employees, who show up each day to carry the torch of the culture that we've built over these three decades and have never strayed from the mission of.
Providing exceptional service to our customers and communities.
The economic cycle.
Thank you for taking the time to join us for the call today.
We will now open the line to questions operator.
Thank you well now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It maybe that's starting to pick up your handset.
Before pressing star one one moment, please while we poll for questions.
First question is coming from Brady Gailey from <unk>. Your line is that right.
Hey, Thanks, good morning, guys.
Hey, good morning Brady.
So I just wanted to I mean, the expenses came up.
Got better and I think you guys had previously expected.
I think I saw the release there was some maybe incentive reversals.
Some other noise in the quarter. So I was just wondering.
As you look at forward expenses, especially as we.
Head into next year.
How are you thinking about the run rate.
Expenses stable here or are they modestly growing.
Yeah. Thanks for the question Brady, we certainly are continuing to focus on expense discipline across the company and just mindful of really gearing the company for the current environment.
You noted a couple of one time items and the third quarter, but I think $83 million to $84 million is a good run rate for noninterest expenses for the fourth quarter and beyond we do expect to be able to hold expenses down in 2024, we will have some growth, but we will have some offsets on the other side. So we're well.
Confident in being able to hold that flat at that 80 384 rate for at least a few quarters.
Okay, Alright, and then credit.
Credit quality remains just so clean for you guys.
The market does see the above average commercial real estate exposure and they're just a little nervous I know you guys have looked at stress testing and then when you have a rate reset that goes notably higher what that does to cash flow and et cetera. So maybe just give us an update on how you guys are thinking about.
The health of the commercial real estate portfolio as we head into 'twenty four.
Hey, good morning, Brady This is Dan.
I would say gave some good color at the last quarterly call, but we continue to feel very good about the book that we have and as we've discussed before that is related to just sticking to the core philosophy that we've had over the years and.
The result in the granularity, where you seen with average sizes of 2 million or less than the theory book and strong markets, where we've got strong NOI growth and as.
As you know we've been our highest theory bank over the last 30 years through each cycle with the same topic discipline that we've employed over the last five years in particular as we headed into the current conditions and we believe that will continue to serve us well.
Brady This is David.
One additional comment just you know our structure is a little different here, our credit and lending teams work together as a team credit is not a support to our growth function. It is part and parcel to how we grow our bank and credit and.
Risk sits at the table on all the decisions and it has a bigger hand in our company that I think is typical across our regional bank competitors. So it just puts a little different inflection or our.
Risk filter and how we structure deals and how we don't stray from what we've done for the last 30 plus years.
Yep, Okay, and then finally for me. So you know the margin will be flattish next quarter and then in 'twenty four it should start.
The increase just from the loan yield going off and deposit funding cost staying flat.
Yeah, how to think about the magnitude of how much upside could be in the margin next year.
Yeah, it's going to depend a lot on external factors and specifically rates and what happens there I'd say in a flat rate environment. If you assume that the fed holds overnight rates, where they are right now and we continue to gain a little bit of pricing power due to where the longer durations of the curve are going or at least heading in for the last quarter.
Or are we would expect to be able to see some nice expansion and in 2024, it's going to be more gradual on the way up obviously than it was on the way down.
But we do expect especially given what we have repricing and what's in the pipeline to see some nice lift in the margin, especially in this well.
Back half of 2024, Yeah, Brady I, Paul and I were talking about this yesterday actually and it's.
We know pretty well contractually, what's going to reprice and we can we know kind of what we think our loan growth is going to look like all of those things, where we had a challenge I think are the entire markets at a challenge has been predicting deposit costs right at peak.
You know predicting.
Deposit betas, and what's going on with competition and what the fed's going to do in the long into the curve coming up and all of those things that we don't control. So yeah. We were just being a little bit cautious we do know the nimble inflect positively in <unk> and 'twenty four.
But really the things as Paul said that.
Rates and deposit pressure and all that.
Believe it's leveling out it appears to be leveling out but yeah.
It's been pretty dynamic the changes this year I will add though Brady that we have a nice setup for the fourth quarter. The bulk of our loan production came in the last two weeks of the quarter.
We're already up for the fourth quarter about $100 million in loan volume. So we were pretty optimistic about our ability to see that stability and that inflection in 2024.
Okay, alright, great. Thanks for the color guys.
Thanks, Greg.
Thank you next question is coming from Stephen Scouten from Piper Sandler Your line is now lives.
Hey, good morning, everyone I appreciate it.
Thank you.
You guys just spoke to kind of your understanding of the contractual repricing in your loan book can you give any detail in regards to the magnitude of those expectations and 24 that that might help us kind of.
Do the math, a little bit better for the potential upside to the NIM.
Yeah, absolutely. So we had about $442 million Stephen of gross loan production in the third quarter I expect that to go up to be a little above $500 million in the fourth quarter and we expect over $2 billion of contractual role in the fourth I'm, sorry in 2024, and so I think.
If you look at pay downs pay offs, where the cash flow coming off. The book is you should have anywhere between two and 3 billion of repricing activity in 2024 for our latest models.
Okay and on the average what's sort of the kind of roll off roll on yields there or what kind of what kind of spread are you picking up over the.
The old loans versus the new lines.
Hey, Stephen This is Dan I'll answer that one.
Seeing pricing averaging in the high sevens on new and renewed credits and.
Honestly with the long end of the market, we expect to continue to be smart on adjusting rates. According to that as we move forward, but I would say high Sevens is the quick answer to that today.
Versus rollout around yes around four decline okay.
Great that's fantastic.
And then maybe just the last thing for me I think you guys kind of spoke to some stability you're seeing on the non interest bearing deposits, maybe even since quarter end.
So how are you.
I guess, what what are you seeing there specifically and maybe do you think that can stabilize or do we still likely have just a a decline, but a slower pace of decline.
Yes, David noted Stephen it's really difficult to predict the directionality of noninterest bearing deposits, but from what we've seen since quarter end quarter to date for Q4, we were within $10 million to $11 million of our balances at quarter end. So we've seen very good stability there this quarter and we're obviously optima.
Mistake that that we'll be able to knock some wins in our deposit sales pipeline as well our treasury teams are working very hard on making sure that they're getting in front of the customers in that we're winning business, it's a very competitive environment.
But we feel pretty confident and where we are for the fourth quarter, but as far as a long term trajectory it's difficult to ascertain given there's so many exogenous factors going on in the cycle.
Yeah, absolutely understood well thanks for all the color I appreciate it guys.
Thanks, Steve.
Thank you. Your next question is coming from Michael Rose from Raymond James Your line is now live.
Hey, good morning, guys. Thanks for taking my questions.
Just given where your capital levels are I mean is there a thought process around restructuring the bond portfolio and maybe using some of the excess cash that will roll off.
You have a lot of the loan and the Securities book here.
To do that or just wanted to get some general thoughts just given the duration has continued to extend out.
Obviously, Michael we've looked at different scenarios, but as it stands today, we don't have any intention of pursuing a bond portfolio restructuring I don't think that's something that that we would consider where we're in a mode to really preserve and accrete capital at the moment, we think that's the right place to be at this point in the cycle and so that's that's not a <unk>.
Utilization of capital that I think is high on our priority list.
Even though you would get some meaningful NIM benefit from it.
Okay I appreciate that Paul and then just as a follow up just wanted to talk about the warehouse.
The balances came in I think a little bit higher than what we've seen from some of the other players that are in the in the space.
You know just with average balances actually being up Q on Q I just wanted to get any sort of outlook you might have for the warehouse as we move forward.
Michael This is Dan I'll take that one as well.
I think we communicated last quarter that we expected them to be.
Certainly flat at these higher levels that we have experienced early part of the year. We continue to think that's going to be the right look as we move forward into 'twenty for we would have had the opportunity to pick up some really.
Really nice customers in that space you have some normal seasonality that takes place in the fourth quarter and the first quarter, but on average we expect.
24 to be.
At these kind of levels on average as we move forward.
Very helpful. And then maybe just a quick one finally for me just just on the office book I. Appreciate all the color you guys continue to provide in the in the slides you have a sense for what the reserve allocation is against that portfolio are not break it out that way I just wanted to get some thoughts there. Thanks.
We don't break it out separately from the rest of the CRE book to.
To the extent there are any.
No.
Downgrades or issues that come up on that it gets picked up in the seasonal model, but there's not a separate allocation for that.
Were there any downgrades in that portfolio this quarter.
So we're not.
Okay Alright.
Alright, Thanks for taking my questions and I'll hop back.
Thanks, Mike.
Thank you next question is coming from Brandon came from true of Securities. Your line is now live.
Hey, good morning.
Good morning, Brandon.
So I'm trying to put together the pieces for you know how do we think about NIM going forward and if you could just give us your thoughts on loan yields and how they are projecting going forward could we see similar increases quarter over quarter over the next couple of quarters as we saw in there.
Third quarter.
I would expect the increase in the loan yield to actually expand is that as I mentioned earlier Brandon the bulk of our loan production for Q3 came in the last two weeks of the quarter. So all of those pricing resets the big up pricing activity happened at the end of the quarter that sets us up nicely for Q4 to see some more expansion in the loan yields.
We would also expect that the 100 plus million of production, we've seen a net growth that we've seen so far this quarter will set us up nicely to see the loan yields continued to expand and as Dan mentioned, we're constantly looking at the curve and looking at where competitive pressures are obviously, having some other banks go to the sidelines gives us some.
On the pricing side.
More so than I think you saw in Q3.
Okay.
And I'm not sure if you've done this exercise but could.
Could you give us a sense of when you think that rate of change in loan yields would peak I guess sometime in 2024.
Oh gosh that would be.
It's again, so dependent on external factors.
Yeah, I wouldn't want to give you a guide and then have a rate cut common blow it up but we certainly.
Would expect that that rate of change will continue at least through 2024.
Okay. Okay.
And then how are we thinking about how you think about deposit growth from here and I'll start with the loan to deposit ratio declined in the quarter is at 93%.
You can maintain kind of at that level.
I think our.
Brendan I think are.
Our <unk>.
Loan growth will continue on and thereby you know we need to continue to grow deposits and we will do that.
As you know the our ability.
Two grow the deposits is.
Part of our relationship strategy. So we will we think we will continue to grow deposits and loans that you now equal rates in the mid single digits going forward, Yeah, and I'll just note brand and really during the third quarter that push for the loan to deposit ratio to come down that was a real deliberate strategy that we employed to trade a little bit of earnings for some back.
On sheet strength, which we think positions us very nicely to capitalize on the growth opportunities that we've seen we feel really comfortable with where the loan to deposit ratio is right now and we feel very comfortable with where the balance sheet as right. Now we think it gives us a lot of optionality at this point in the cycle.
Okay I'll hop back in the queue. Thanks for taking my questions.
Thank you.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Matt Olney from Stephens. Your line is that life.
Hey, Thanks, good morning, guys.
I don't have it.
On the margin.
Paul you gave us some good commentary about some tailwind to the margin throughout the quarter. Thank you mentioned some better loan growth at the end of <unk> and some better loan resets over the last few weeks of <unk> do you happen to have that margin by month in the third quarter just to help us get more comfortable with that margin stabilizing even even more so when the.
<unk> fourth quarter.
Yeah. The margin I don't have the numbers right in front of me, Matt, but I will tell you that the margin went up from August to September . So we did see a little bit of expansion intra quarter.
Okay, that's great that sounds looking for.
And then what about a lot of commentary on the margin and what about the NII any anything unique there are as we think about our forecast or should it follow the margin as far as being stable in the fourth quarter and then expanding it early next year.
I think given where we're holding cash levels I'd expect NII and margin to be a correlated pretty much obviously that'll depend on the magnitude of balance sheet growth. We get are we do we do certainly expect NII to be stable.
In the fourth quarter, and then to see some expansion in 2024 and throughout 2024.
Okay great.
And then on the deposit cost you mentioned Thats, obviously, the big the big variable here those deposit costs went up a little bit more than I was expecting and in through in <unk> and a little bit more than we've seen our peers any more commentary on kind of what we just saw in the third quarter and remind us of.
Of your deposits there that are index that have automatic resets if the fed moves in any commentary on on that as we think about forecast for next year yeah.
Yeah, absolutely a couple a couple of notes on deposit costs from the third quarter, primarily flipping from borrowings into deposits, obviously increased deposit costs more.
Than it otherwise would have.
But again, we were we were pretty deliberate about reducing those borrowings. So I think on an aggregate when you look at funding costs. While we did see we did take a little bit more expense to.
Pursue that balance sheet strength, we're comfortable with the position that we have as it pertains to index deposits, we've been much more deliberate about that cycle.
At $3 to 4 billion of indexed deposits that'll move immediately with the fed.
We would expect to be able to move rates pretty quickly if the fed cuts. So in any scenario, where you see fed cuts in 'twenty four that's been a materially help us in terms of the income statement that I add to that.
Okay, and all of that last point with kind of my follow up there maybe expand on that as far as kind of the the the ideal scenario for independent bank's margin and is with respect to the fed.
Next year, what would switch.
Lots of variables out there, but what what do you prefer to see.
Well, we certainly are trying to position the bank for any scenario. So we I'll just make a broad comment that we're trying to make sure that the balance sheet is well positioned to weather whatever the macro throws at it at that.
That's our objective first and foremost as it pertains to what benefits us. The most obviously the positive slope in the curve and some big cuts are going to help us meaningfully I think they're gonna help us more meaningfully than they've ever helped us before as a company and you know that that gives us some optimism and some hope that as we.
We start to see the macro stabilizing evolve when you start to see the long into the curve come up that if the fed is active in cutting next year, that's going to be really good for us.
Yeah.
Okay. Thanks, guys I appreciate it.
Hey, Thanks, Matt.
Thank you we've reached end of our question and answer session I'd like to turn the floor back over to David for any further or closing comments.
Thank you, Kevin and I appreciate it I appreciate everyone dialing in this morning, we are we continue to as Paul emphasize today positioning the company for whatever the future brings and we're in a good position.
We feel good about the growth in <unk> and pathway board and so thanks for joining us today and we look forward to seeing you out on the road take care.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.
Yeah.