Independent Bank Group, Inc

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 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 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 the PPP. This record growth was driven by strong demand from our relationship borrowers across Texas and Colorado, as our markets continue to experience strong economic and demographic growth. Dan will provide some additional color on the geographic and product-type breakdown of the loan growth, while Michelle will touch on rates and sensitivity impacts. On the whole, though, this record growth was propelled by substantial investments we've made in attracting seasoned 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 longstanding credit culture that has guided us through previous downturns. Today, we have the strongest talent bench we have ever had in the history of our company, and this exceptional growth quarter 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 linked quarter. This increase was primarily due to the significant loan 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%, up 32 basis points from the linked quarter. This increase was driven by deployment of liquidity from significant loan growth during the quarter and slightly offset by a 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 slight increase over the linked quarter. The chart 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 brokered 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%. tangible common equity with 7.63% at quarter end. These ratios are down from March 31st 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 held for investment excluding mortgage warehouse purchase loans were $13 billion at quarter end, compared to $12 billion in the linked quarter. Excluding the impact of PPP loans, core loan self-earned investment increased by $1.1 billion over the linked quarter, which represents a 36% annualized rate of loan growth. Growth in real estate lending categories accounted for the majority of new loans booked during the quarter, with energy and CNI accounting for about 11% and 7% of 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%, multifamily at 15%, and single-family residential at 13%. Geographically, new loan production was well distributed between our markets, with none of our four regions accounting for more than one-third of total growth. Average mortgage warehouse purchase loans decreased to $467.8 million in the second quarter, down from $549.6 million in the prior quarter. This decrease was primarily driven by upward pressure on mortgage rates resulting in decreased demand, lower 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% of total assets at quarter end. Other real estate owned increased to 12.9 million during the quarter due to the addition of an office property in the Houston market that had been discussed on last quarter's call. Net charge-offs totaled nine basis points annualized during the quarter. At June 30, 2022, The allowance for credit losses on loans is $144.2 million or 1.11% of loans held for investment, excluding mortgage warehouse loans. There was no provision expense for the quarter, primarily due to changes in the COVID-related economic factors in our CECL model offset by strong loan growth. 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. 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 loan 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 in 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. Operator?

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

One moment, please, while we poll for questions. Thank you. Our first question is from Brad Millsaps with Piper Stadler. Please proceed with your question.

hey good morning hey good morning brad um thanks for taking my question um michelle maybe just wanted to start with uh the margin you know some nice expansion it looks like you guys you know benefited quite a bit from next change um just wanted to uh kind of see kind of what your outlook was there maybe specifically around loan yields um looks like core were maybe up seven basis points or so i think you've mentioned in the past maybe 15 of your loans repriced immediately can you just Kind of talk about that and what that kind of means for, you know, kind of for the NIM going forward.

Yeah, actually, that's increased a bit. It's probably closer to 17% now, Brad, of loans that would reprice immediately. You know, 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, you know, given where we are on Liquidity, we expect that those will most likely, as we continue to have loan growth and need funding, that those betas will return to probably normal levels, which is closer to 30% to 35% on interest-bearing deposits. Our modeling shows that we'll still get some benefit, probably a few basis points of expansion, third and fourth quarters. Of course, the risk there is that our betas could be higher, and that would be the risk to that outlook.

Loan yields, Brad, we've been able to push loan rates up over 200 basis points from the start of the year. Obviously, that's a competitive battle out there. We have a good strong so far in July. The average rate of loans coming on was 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 and knowing what 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, absent any deposits coming in?

Yeah, just, you know, given the loan growth we had this quarter, we discontinued growing the bond portfolio, and it's remained flat. And 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. Good morning, Greg. It's great to see you all so 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 the opportunity to actively revert 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 tbvs will probably be a little less active in the you know back in the second half of the year is the way we think about it um we still have availability if we need it but i would think we 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-recurring, so that will come out next quarter. But any thoughts on kind of the forward run rate of expenses?

Yeah, so our health insurance has been running, you know, higher than we anticipated, which I think has been consistent with some others that I've heard just kind of post-pandemic claims. We also made some opportunistic hires on our production team, so that required some recruitment, signing bonus 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.

Okay. So around $85 billion or so?

Yeah, maybe 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, with the great loan growth, your reserve is now close to 115 basis points, ex-PPP, ex-warehouse. How should we think about that going forward? I mean, 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 downside?

I think we'll continue. Obviously, we used, or as you said, the ratio dropped down that 110-115 range. You know, I think anything, Brady, you know, 1 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-loss provision for the second half, 1% of kind of whatever our growth is is a good way to think about it.

All right, great. Thank you, guys. Hey, thanks, Brady.

Thank you. Our next question is from Brandon King with Truist Securities. Please proceed with your question.

Hey, good morning. Good morning, Brandon. Good morning. Yes, so I wanted to get a better sense of your expectations for deposit growth in the back half of the year and was wondering if potentially if loan growth exceeds deposit growth, what is the capacity or willingness to use borrowings to fund loan growth?

In our plan, we plan that we'll be able to fund the loan growth with deposits. We've made significant investments in our treasury teams and our retail teams. If you look at our core deposits, they have grown a bit this year. We still do have access to our specialty treasury deposits. We let some of those run off in the first quarter. 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 to FHLB if that was where we needed to go sort of as the last resort.

I think our philosophy, Brandon, would be to continue to take care of our customers and our markets. And if that leads us to growing loans at 8%, 9% or whatever that level is, yes, we will fund that growth. We're going to continue to take care of our clients and our markets.

Okay. And then on the loan growth side of things, energy loans increased in the quarter, so I just wanted to get a sense of where you think that could go in the second half of the year and what you're seeing in your markets and with your customers within that segment.

Yeah, Brandon, this is Dan. I'll take that one. We certainly expect continued broad-based 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. 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 hire, 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 office here. in the first part of the year, and we expect we'll continue to get traction there with the others. As you'll know, current outstandings 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 the year plays out.

Okay. Thanks for answering my questions. Thanks, Brent.

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 peers this quarter. Any color on the underperformance 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 to follow up on that, flat from these average balances or the end of period balances, and then you also mentioned and gave a pair of remarks, some shorter hold times. Was that a comparison from earlier this year or from last year you're seeing shorter hold times?

Yeah, so I think that's a comparison to last year, Matt. And in terms of, yes, for the balance of the year, our average balance is for the second quarter. We expect that to be flat through the balance of the year. And the retail mortgage also – It's been softer than we expected. That's why the fee income is down for second quarter. But we expect that to be flat for the balance of the year, both mortgage warehouse and retail mortgage to be flat at their second quarter levels in the third and fourth quarter.

Okay. Got it. And 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 kind of 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 NII in March 31st. Anything preliminary 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% is what we're reporting in there.

Okay. Okay. Thanks for that, Michelle. And just to clarify something, 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 if the long growth exceeds 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 loan 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.

Okay. Thank you, guys.

Hey, thanks, Matt.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Our next question comes from Michael Rose with Raymond James. Please proceed with your question.

Hey, good morning. Just following up on some of the deposit questions, your loaner deposit ratio is about 86%. You know, you've run higher than kind of that in the past. Obviously a good group, a good growth in the Treasury deposits this quarter. I know the public funds 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% range, or is the goal to keep it kind of around these levels just based on, you know, some of the verticals that you've 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 loan-to-deposit. We don't know what's coming down the road economically, et cetera, but we can certainly sustain a higher loan-to-deposit than 85%, 86%, but I would it would not be our strategy and say this way, it would not be our strategy to run the bank at a hundred percent loan to deposit. You know, we'd much rather, we feel more comfortable around 90%. Um, that said, as Michelle said a moment ago, we have access to tremendous amounts of liquidity if we need it. And, um, it's just a matter of obviously, you know, funding at the, you know, at the best, uh, 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, you know, treasury and, and, uh, um, so we're, we're gonna, we think we can fund it with core deposits and, and keep our loan to deposit ratio on 90%. Very helpful. Um, and then maybe just going back to the buyback, I think you have about 44 million left after this quarter. Um, Would you expect to use that or are you at a point where you might fall short just given cash to assets 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. 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. 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, but right now it looks to us like there'll be little activity in the second half on that. Okay, perfect. And maybe finally for me, just for Dan, can you just give us an update on the commercial credit that moved to Oreo? I assume that properties being marketed and should be out of Oreo here in the next quarter or so. 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 imminent on that I would say because there are other non-performing loans in there you see is just slightly for the quarter we expect some of those to resolve here in the back half of the half of the year which I think will

Perfect. Thanks for taking all my questions.

Hey, thanks, Matt.

Thank you. Our next question is from Brett Ravitan with Private Investment. Please proceed with your question.

Hey, good morning, David and Michelle. Good morning, Brett. Hi, Brett. Wanted to ask on the loan production this quarter, you know, what's your... rates might have been on fixed and floating rate production and then just thinking about spread compression if that's something that you know you're worried about as we think about additional rate hikes from here and how you're planning on um making loans relative to the competitive landscape yes our uh rates were going up rapidly during the quarter uh bread and uh so as i said um you know 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-ish, and then floating rates probably a hair below that. Obviously, they'll float, and so we're 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 increasingly higher rates as the quarter goes along. There's always a lag effect in the pipeline on the loans because you start working with a borrower on a project and it's sometimes 30 to 90 days later before your funding. So we're dealing with that, with floating commitments and things like that. But that continues to be the challenge. But as Michelle said, I think we're not worried about compression. The loan book itself now, Michelle, is yielding about 430. Yeah.

435, 440, close to that.

Yeah, so 435, 440. So we're putting on loans at more than 70 beds higher than our book rate. So we're going to drive up the loan yields as the year goes along and then obviously balancing that with a generation of core deposits and funding. Michelle voiced earlier that we think We've got a few basis points of increases in them coming each quarter for the balance of the year.

Okay. That's great color. Good to hear. The other thing, maybe a question for David Brooks. I think a lot of people are trying to figure out what credit risk might look like as this quote recession looms. I guess some folks have talked about Class B office space, inside loops, and things like that. I'm curious if there were any loan categories that you might be less inclined to be aggressive with adding to the portfolio going forward, just given how you see credit risk from here for the environment.

This is Dan. I'll take that one. I think in general, as I described earlier, our production is... always diversified by asset class, while we have primarily that growth within CRE, as you may note. In regards to asset classes, the office space is one that I suspect all of 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 ones that have created even more concern in the market. Beyond that, I think we're keeping an eye on... The assisted living memory care space, I think it has continued to lag. I think the pandemic certainly made that even more challenging for banks who are very active in that space. We have minor exposure in there, but we're keeping an eye on that as well. But beyond that, I don't know of any specific asset classes I would say that 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 the floor back over to management for any closing comments.

Well, thanks for joining the call this morning. We're excited about the balance of the year, kind of watching anxiously as others are developments on the macro economic front, but happy, very pleased with where we are. Feel great about our credit quality as Dan was alluding 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 great day. Thanks.