Independent Bank Group, Inc. (NASDAQ:IBTX) Q4 2023 Earnings Call Transcript

Independent Bank Group, Inc. (NASDAQ:IBTX) Q4 2023 Earnings Call Transcript January 23, 2024

Independent Bank Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Independent Bank Group’s Fourth Quarter 2023 Earnings Call. [Operator Instructions]. Please note, this conference is being recorded. I’ll now turn the conference over to Ankita Puri, EVP and Chief Legal Officer. Ms. Puri, you may now begin.

Ankita Puri: Good morning, and welcome to the Independent Bank Group fourth 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.ifinancial.com. I would like to remind you that remarks made today may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and expected results to differ. We intend such statements to be covered by Safe Harbor provisions for forward-looking statements. Please see Page 5 of the text in the release or Page 2 of the slide presentation for our Safe Harbor statement. All comments made during today’s call are subject to that statement. Please note that if we give guidance about future results, that guidance is a statement of management’s beliefs at the time the statement is made and we assume no obligation to publicly update guidance.

In this call, we will discuss several financial measures considered to be non-GAAP under the SEC’s rule. 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 Brooks, 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.

David Brooks: Thank you, Ankita. Good morning, everyone, and thanks for joining the call today. Fourth quarter earnings totaled $14.9 million or $0.36 per diluted share. Excluding the one-time impact of the $8.3 million FDIC special assessment and other one-timers, our adjusted fourth quarter earnings were $25.5 million or $0.62 per diluted share. During the quarter, we were pleased to see the continuation of healthy organic core loan growth, which came in seasonally strong at 11% annualized, as pent-up demand from our relationship borrowers drove originations higher. For the full year, loan growth totaled 4.2%. This healthy growth will help support NII on a going forward basis, and was driven by the needs of our core customers growing Texas and Colorado economies.

Credit quality remains excellent, with low non-performing assets and net charge-offs totaling just one basis point annualized for the second quarter in a row. And our capital ratios ended the quarter in a healthy position, with a tier one capital ratio of 9.93%, the total capital ratio at 11.57%. Notably, our TCE ratio strengthened to 7.55% as of December 31, and we grew tangible book value by 5.8% to $32.90 cents per share. With that overview, I’ll now turn the call over to Paul to give more details on the financials.

Paul Langdale: Thanks, David, and good morning, everyone. As David mentioned, net income for the quarter was $14.9 million, which includes $8.3 million related to the FDIC special assessment, and $4.8 million of OREO-related charges that Dan will discuss in more detail. Adjusted income for the quarter was $25.5 million or $0.62 per diluted share, compared to $32.6 million or $0.79 per diluted share in the linked quarter. Net interest income was $106.3 million in the fourth quarter, compared with $109 million in the linked quarter. Our NIM for the quarter was impacted several basis points more than expected by the incremental loan growth during the quarter, as we carried higher amounts of marginal liquidity to support the loan fundings.

Encouragingly, we saw deposit costs peak during the quarter, and we have started to reprice some of our marginal liquidity downward as brokered rates have moved meaningfully lower. Of the $2.5 billion of brokered funds noted on Slide 20, the weighted average rate is 5.36%. Approximately $1.8 billion of the brokered portfolio is in CDs, while the remainder is in money market funds tied primarily to an index. Of the CDs, $1.3 billion will mature by the end of May, and currently, we are repricing these new brokerage CDs below 5% on an all-in basis. As soon as the Fed moves, the index-brokered funds will move in tandem as well. Additionally, the overwhelming majority of our public funds book is indexed to Fed funds, which will move immediately with rate cuts.

We have almost $2.1 billion in promotional CDs, $1.1 billion of which are our 5.5% APY six-month promotional CDs, with a weighted average life of between three and four months. Beginning today, we have reduced the renewal rate on these six-month CDs to 5.15% APY, consistent with the market, which should also help drive expenses down. In addition to our enhanced liability sensitivity, which will be reflected in our IRR and one-year GAAP disclosures, we also expect to continue repricing our fixed rate loan portfolio upward. Our modeling indicates steadily expanding earning asset yields over the course of the year in both flat and downright scenarios. We anticipate that these factors acting in concert will allow us to grow NIM and NII from quarter to quarter throughout 2024 and beyond.

Total borrowings were just $621.8 million at December 31, a slight increase from the linked quarter. Still, borrowings remain at a low level relative to earlier in 2023. Additionally, we may explore utilizing VTFP during the first quarter to replace higher cost FHLB advances as one-year OIS has evolved favorably to FHLB rates. The substantial contingent funding capacity available to us, and 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. We reported a provision of $3.5 million for the fourth quarter, which supported the net growth we experienced during the quarter, despite an improvement in the MEVs in the CECL model.

Going forward, we expect provision that represents about 1% of loan growth. This is, of course, dependent on all else being held equal in the CECL model, which could, of course, be impacted by further changes to the macroeconomic forecast or specific reserves. Adjusted non-interest income was $12.4 million for the quarter, down slightly from adjusted non-interest income of $13.4 million for the linked quarter. Adjusted non-interest expense totaled $83.8 million for the quarter, up from $81.3 million in the linked quarter. Going forward, I expect non-interest expense to be between $85 million and $86 million per quarter. These are all the comments I have today. So, with that, I’ll turn the call over to Dan.

Dan Brooks: Thanks, Paul. Core loans held for investment, excluding mortgage warehouse loans, increased by $383.6 million or 11% annualized in the fourth quarter. For full year 2023, loans grew by $569.9 million or 4.2%. Growth for the fourth quarter and for the full quarter was supported by demand from our core customers across our markets in Texas and Colorado. Average mortgage warehouse purchase loans were $408.4 million for the quarter, down 4.1% from the third quarter averages. Overall, we saw relative stability in these balances on a month-to-month basis, and we anticipate these balances to generally remain stable moving forward. Credit quality metrics continued to remain strong during the fourth quarter. Non-performing assets were down one basis point to 0.32% of total assets at quarter end.

And the bank, again, had just a single basis point of annualized charge-offs for the quarter. For the full year of 2023, net charge-offs also totaled just one basis point of average loans. We were successful in moving a property held in ORE out of the bank during the quarter, which resulted in a loss on sale of $1.8 million. We also took a $3 million write-off related to the one repossessed property remaining in ORE as we position that property for an eventual sale. This is consistent with our overall philosophy of disposing of ORE in an expedited manner. Overall, asset quality trends are very positive, and while we are always vigilant against emerging risks, we currently do not see any areas of concern across the loan portfolio. We are particularly encouraged that classified assets fell by 34% from $191.1 million at September 30, to $126 million at December 31, due both to payoffs and upgrades.

Total classified loans plus ORE bank capital was just 6.2% at year-end, indicative of the overall health of the portfolio, even in a higher rate environment. These are all the comments I have related to the loan portfolio this morning. So, with that, I’ll turn it back over to David.

David Brooks: Thanks, Dan. While 2023 was a difficult year for our company and our industry, we’re happy to be through it, and we remain very encouraged heading into 2024. We expect earning asset yields to continue their march upward, while short duration funding cost pressures have already begun to abate as the forward curve points to meaningful rate cuts on the horizon. As Paul noted, we have already been able to reprice some of our marginal funding down in the first quarter, and we expect to see NIM expansion and NII growth in the first quarter. In addition, we will maintain our discipline on the expense front, reallocating expenses to only the most strategic investments in our franchise. And to that end, we are excited to announce that we are opening our first full service branch in San Antonio in the first quarter.

This will allow our talented team already operating there to better serve our customers with a full spate of deposit products. Our company is fortunate to be supported by the growing Texas and Colorado economies, both of which are experiencing sustained inflows of labor and capital that insulate them from broader macroeconomic volatility. We’re able to capitalize on this position of strength because across four of the most dynamic metropolitan markets in the country, because of the incredible teams that we have across our footprint. I’m perennially thankful to our employees, all of whom are committed to serving our customers and communities by working together to provide outstanding service and fostering meaningful, lasting relationships. Thank you for taking the time to join us today.

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

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Brandon King with Truist Securities. Please proceed with your questions.

Brandon King: Hey, good morning. Thanks for taking my questions.

David Brooks: Good morning, Brandon.

Brandon King: Yes. So, Paul, appreciate all the commentary around NII and deposits, but I was hoping to get a better sense of how you’re thinking about the pace of NII growth in 2024.

Paul Langdale: I think in the first and second quarters, Brandon, we’re going to see an inflection in NII, some growth that’ll accelerate through the back half of 2024 and then continue to accelerate through 2025. As we think about our balance sheet today compared to where it was even just a quarter ago, we have substantially enhanced liability sensitivity, as I mentioned in my prepared remarks. That’s going to prepare us to really capitalize on any rate cuts that we see over the next six to eight quarters, as well as just get the natural lift that we would have even in a flat rate environment from our earning assets repricing. So, what we’ve tried to do strategically is prepare ourselves for any scenario that the Fed throws at us to benefit from after 2023.

Brandon King: Okay, that’s helpful. And is there any way you could potentially quantify how much higher maybe kind of exit rate 2024, 4Q 2024, how much higher NII could be relative to what it was this quarter?

Paul Langdale: If we think about it on a NIM basis, Brandon, I think we have the opportunity to get back to our historic levels of profitability by year-end 2025. It’s really a six to eight-quarter push for us. So, I think we’ll see some meaningful lift really accelerating, as I said, through the back half of this year.

Brandon King: Okay. And then within your NII expectations, what are you expecting on the loan growth front? That was pretty strong this quarter. Are you expecting potentially a slightly slower pace going forward?

David Brooks: Yes, Brandon, the loan growth was outsized this quarter and really just a lot of factors. Some deals from third quarter got pushed to the fourth, and a number of our longtime clients were being opportunistic to try to pick up some assets here before the rates start coming down and cap rates start coming down. But we’re expecting mid-single digit growth for the year. The pipeline is – we indicated that the fourth quarter pipeline was really strong going into the quarter. First quarter, we’ve still got a nice pipeline, but it’s not like it was going into the fourth quarter. So, we do expect that growth to moderate mid-single digits, 4% to 6%, in that range. We do expect also – we’ve done a lot of work the last couple of quarters in terms of our treasury and our relationship officers and helping them understand the dynamic of growing deposits as well.

So, we’re going to – our base model budget and plan and commitment is to grow our deposits at the same rate or approximately the same pace or faster than we grow our loans this year. So, we know, understand the value and the importance of continuing to grow that core deposit base as we grow the loans. We expect both to be mid-single digits.

Brandon King: Thank you. I’ll hop back in the queue.

Operator: Our next question is from the line of Brady Gailey with KBW. Please proceed with your questions.

Brady Gailey: Hey, thanks. Good morning, guys. I know it’s tough to forecast nowadays, but when you look at your sensitivity to down rates, like say in a down 100 basis point scenario, what does the model say about how much that could benefit spread income?

Paul Langdale: So, our GAAP, just for example, Brady, has doubled quarter to quarter. So, we’ve substantially, as I said, enhanced liability sensitivity. I think you’ll get meaningful double-digit pickup in net income for even a down 100 rate environment.

Brady Gailey: All right. And then, Paul, I heard your comment about getting back to kind of your historic profitability level by the end of next year, so the end of 2025. How do you guys think about historic profitability? Like what is that in terms of ROA or ROE, or whatever metrics you guys focus on?

David Brooks: I think that as we think about it, Brady, by second half of 2025, depending on how much and how quickly the Fed rates come – pull rates down, we should see us be able to achieve a more historic NIM in the mid three. So, 350, 360 in that range is what our forward models show in the back half of 2025. That happens more quickly if rates come down more quickly. But again, just, I think what we think of the middle of the road assumption gets us to that level. At that level, given what we’ve done with our cost structure, we would get back into that 120, 125 return on assets, and then that should translate depending on what the capital level is, of course would put us somewhere in the mid-teens, 15% to 16% ROTCE. So, those are the numbers we think we will be back at by second half of 2025.

Brady Gailey: All right. That makes sense. And then finally for me, I know Independent has been a great organic grower of the years, but also a pretty good bank buyer. And if you look at what’s happened with the long end of the curve, like the 10-year bond yield went from 5% to basically 4% now. So, that kind of helps with the interest rate mark piece of M&A. But maybe just an update on, is M&A thawing here? Do you expect it to be active this year? Do you expect IBTX to be still involved and interested in M&A?

David Brooks: Yes, we remain interested. We remain close to a lot of really – there are a lot of really high-quality banks, as you mentioned like us that have struggled with margin and some of the banks have struggled with bigger AOCI marks, as you alluded to, Brady. So, this does help immensely. We’ve been obviously focused on our own situation mostly, trying to get our earnings and NII and NIM back to more – moving back toward historic levels. But we remain interested. I do think there will be some M&A. I think right now there seems to be more of a, let’s just wait and let this settle out for another quarter or two. So, my guess is probably back half of 2024, and we will definitely be interested and be a participant in that. Obviously, we need to perform and we need our own stock to perform well in order to be at that table, but we expect to be there.