Independent Bank Group, Inc

Good morning and welcome to the Independent Bank Group first 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.ifinancials.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 belief 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'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. With that, I will turn it over to David.

Thank you, Ankita. Good morning, everyone, and thanks for joining the call today. For the first quarter, we reported a gap net loss of $37.5 million, or $0.91 per diluted share, which includes the impact of the $100 million legal settlement expense that was previously disclosed on February 27th. This one-time payment settles litigation ongoing since 2009 involving Stanford International Bank and related entities that was inherited in connection with our 2014 acquisition of Bank of Houston. This settlement will resolve all current and potential future claims related to the Stanford entities, and we believe this settlement to be in our shareholders' best interest as it enables us to avoid the cost, risk, and distraction of protracted litigation. Excluding this one-time legal expense, adjusted net income for the quarter was $44.1 million, or $1.07 per diluted share. Our core operating business continues to maintain a healthy level of profitability despite the challenges presented by the volatile macroeconomic and interest rate environment. Our underlying business is buoyed by a strong balance sheet and a resilient asset quality with non-performing assets of just 32 basis points of total assets and net charge also just four basis points annualized. In addition, We continue to maintain robust capital levels with an estimated total capital ratio of 11.85% and a TCE ratio of 7.31%. Those sharper than anticipated funding cost pressures for the first quarter compressed our net interest margin by 32 basis points to 317. We remain encouraged by the continued repricing of our maturing loans in the mid sevens. This repricing should be a consistent tailwind to our adjusted loan yields, which expanded by 32 basis points in the first quarter to 533. While accumulating the benefit of higher loan yields will be more gradual, our pursuit of incremental expense discipline is far more immediate. Adjusted non-interest expense for the quarter was $84.9 million, down $3.5 million from a linked quarter due to the continued realization of benefits from our expense management initiatives. And with that overview, I'll turn the call over to Paul to give more details on the financials.

Thank you, David. And good morning, everyone. Starting with the balance sheet this morning, total assets increased by $540 million from the length quarter to $18.8 billion, which was primarily driven by excess liquidity held on balance sheet funded by short-term FHLB advances. On balance sheet cash increased to $1.05 billion at quarter end. The company decided to strategically increase our liquidity position out of an abundance of caution and in response to the macroeconomic environment, which is consistent with our philosophy of conservatism in gearing the balance sheet. On the liability side, non-interest bearing deposit balances decreased steadily throughout the quarter as depositors sought higher yielding alternatives for their cash balances. Quarter-end non-interest-bearing balances were $4.15 billion, down from $4.74 billion at year-end 2022. Average non-interest-bearing balances during the first quarter were $4.40 billion, and most of the non-interest-bearing deposit attrition occurred prior to the end of February as depositors sought higher rates. A portion of these deposits were moved off balance sheet to our wholly-owned subsidiary, Private Capital Management. During the quarter, approximately 184 million of deposits flowed to private capital management to be deployed in market-based liquidity management strategies. And overall AUM at private capital management increased by 235 million, their largest quarter on record. Since these deposits remain in our ecosystem, we expect to have the opportunity to recapture some of these funds on balance sheet in the future. Slide 20 shows the deposit funding vertical trends. Interest-bearing branch deposits were down 3% or $217 million for the quarter, which was mostly a result of seasonality and yield-seeking behavior early in the year. From February 28 through quarter end, interest-bearing branch deposits reversed this trend and increased. The increase of $197 million in brokered CDs was opportunistically executed in February when market rates fell below 5%. The weighted average rate for brokered CDs added in the first quarter was 4.73%. The onset of broader industry events in mid-March meaningfully impacted the pricing and availability of both brokered and non-brokered specialty liquidity. During this time, we opted to instead utilize less expensive short-term FHLB advances to supplement funding. This included the replacement of $556 million of non-brokered specialty treasury deposits. public funds balance has increased by $101 million from year end. As anticipated, the cost of brokered funds has dropped meaningfully following quarter end, and we have begun to strategically replace maturing FHLB advances with brokered funds as appropriate. So far in the second quarter, we have added $162 million in brokered funds at an average rate of 4.9% and three six- and nine-month tenors. Due to this, FHLB utilization has begun to decline during the second quarter. As noted on slide 19, adjusted uninsured deposits, which excludes fully collateralized public funds deposits, totaled $5.26 billion, or 37.4% of deposits, at March 31, 2023. As of quarter end, we have $5.5 billion of immediate borrowing capacity between the FHLB, the Fed, and Fed Funds line. enough to cover all uninsured deposits. We also maintain access to multiple contingent sources of deposit funding with more than $7 billion of additional capacity, which brings total contingent funding capacity to over $12 billion. Other borrowings increased by $70.5 million during the quarter as a result of the company drawing $100 million on our holding company line of credit to facilitate the repayment of the $30 million tranche of subordinated debt redeemed at quarter end that had moved to floating. as well as to facilitate the repayment of the legal settlement expense discussed in David's remarks. Since quarter end, we have repaid $32.5 million on the holding company line of credit, and we expect to retire the remainder of this balance by the end of the third quarter. Regulatory capital levels remain healthy and well in excess of well-capitalized minimums, with a common equity Tier 1 ratio of 9.67%, a Tier 1 ratio of 10.03%, and a total capital ratio of 11.85% at quarter end. Additionally, the TCE ratio remains strong at 7.31%. Moving on to the income statement, net interest income decreased by $13.9 million from the linked quarter and $3.2 million from the first quarter of 2022. NII was impacted by slower loan growth and increased funding costs during the quarter. While net growth was impacted by first quarter seasonality, Yields continue to benefit from gross production and adjustments in pricing. The average loan yield net of acquired loan accretion and PPP income was 5.33% for the quarter, up 32 basis points from the linked quarter. Funding costs, as discussed, were impacted by the remixing of non-interest bearing to interest bearing balances during the quarter, as well as higher liquidity levels held on balance sheet. Non-interest income increased by 1.5 million compared to the linked quarter, which included the recognition of a $318,000 benefit claim related to the BOLI portfolio. Adjusted noninterest expense was $84.9 million, a decrease of $3.5 million versus the linked quarter. The primary drivers of the reduction in noninterest expense were lower salaries and benefits expense as well as lower professional fees. Looking ahead, we will continue to maintain expense discipline and explore additional targeted opportunities to strategically reduce noninterest expense through initiatives. These are all the comments I have today. So with that, I'll turn the call over to Dan.