Independent Bank Group Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

There are 10 speakers on the call.

Operator

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.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 We intend such statements to be covered by Safe Harbor provisions for forward looking statements.

Operator

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 rules. Reconciliations of these financial measures to the most directly comparable GAAP financial measures are included in our release.

Operator

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.

Speaker 1

Thank you, Ankita. Good morning, everyone, and thanks for joining the call today. For the Q1, we reported a GAAP Net loss of $37,500,000 or $0.91 per diluted share, which includes the impact of the $100,000,000 legal settlement expense That was previously disclosed on February 27. 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 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.

Speaker 1

Excluding this one time legal expense, adjusted net income for the quarter was $44,100,000 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 strong balance sheet and a resilient asset quality with non performing assets of just 32 basis points of total assets and net charge offs of just 4 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 Q1 compressed our net interest margin by 32 basis points to 3.17.

Speaker 1

We remain encouraged by the continued repricing of our maturing loans in the mid-7s. This repricing should be A consistent tailwind to our adjusted loan yields, which expanded by 32 basis points in the Q1 to 5.33. 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 $84,900,000 down $3,500,000 from the 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.

Speaker 2

Thank you, David, and good morning, everyone. Starting with the balance sheet this morning, total assets increased by $540,000,000 from the linked quarter To $18,800,000,000 which was primarily driven by excess liquidity held on balance sheet funded by short term FHLB advances. On balance sheet cash increased to $1,050,000,000 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.

Speaker 2

Quarter end non interest bearing balances were $4,150,000,000 down from $4,740,000,000 at year end 2022. Average non interest bearing balances during the Q1 were $4,401,000,000 and most of the non interest bearing deposit attrition Occurred prior to the end of February as depositors saw higher rates. A portion of these deposits were moved off balance sheet To our wholly owned subsidiary Private Capital Management. During the quarter, approximately $184,000,000 of deposits flowed to Private Capital Management to be deployed in market based liquidity management strategies. An overall AUM at Private Capital Management increased By $235,000,000 their largest quarter on record.

Speaker 2

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 $217,000,000 for the linked quarter or 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 $197,000,000 in brokered CDs Was opportunistically executed in February when market rates fell below 5%.

Speaker 2

The weighted average rate for brokered CDs added in the Q1 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 This included the replacement of $556,000,000 of non brokered specialty treasury deposits. Public funds balances increased by $101,000,000 from year end. As anticipated, the cost of brokerage funds has dropped meaningfully And we have begun to strategically replace maturing FHLB advances with brokered funds as appropriate.

Speaker 2

So far in the Q2, we have added $162,000,000 to brokered funds at an average rate of 4.9% in 3, 6 9 month tenures. Due to this, FHLB utilization has begun to decline during the Q2. As noted on Slide 19, Adjusted uninsured deposits, which excludes fully collateralized public funds deposits, totaled $5,260,000,000 For 37.4 percent of deposits at March 31, 2023. As of quarter end, we have $5,500,000,000 of immediate borrowing capacity between the FHLB, the Fed and Fed funds lines, enough to cover all uninsured deposits. We also maintain access to multiple contingent sources of deposit funding with more than $7,000,000,000 of additional capacity, Which brings total contingent funding capacity to over $12,000,000,000 Other borrowings increased by $70,500,000 during the quarter As a result of the company drawing $100,000,000 on our holding company line of credit to facilitate the repayment of the $30,000,000 tranche Subordinated debt redeemed at quarter end that had moved to floating, as well as to facilitate the repayment the payment of the legal settlement expense discussed in David's remarks.

Speaker 2

Since quarter end, we have repaid $32,500,000 on the holding company line of credit and we expect to retire the remainder of this balance by the end of the third 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 percent and a total capital ratio of 11.85 percent atquarterend. Additionally, the TCE ratio remains strong at 7.31%. Moving on to the income statement, Net interest income decreased by $13,900,000 from the linked quarter and $3,200,000 from the Q1 of 2022. NII was impacted by slower loan growth and increased funding costs during the quarter. While net growth was impacted by Q1 seasonality, Yields continue to benefit from gross production and adjustments in pricing.

Speaker 2

The average loan yield net of acquired loan accretion and PPP income Was 5.33 percent for the quarter, up 32 basis points from the linked quarter. Funding costs, as discussed, We're 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 $1,500,000 compared to the linked quarter, which included the recognition of a $318,000 benefit Claim related to the BOLI portfolio. Adjusted non interest expense was $84,900,000 a decrease of $3,500,000 versus the linked quarter. The primary drivers of the reduction in non interest expense were lower salaries and benefits expense as well as lower professional fees.

Speaker 2

Looking ahead, we will continue to maintain expense discipline and explore additional targeted opportunities to strategically reduce non interest expense through initiatives. These are all the comments I have today. So with that, I'll turn the call over to Dan. Thanks, Paul.

Speaker 1

Loans held for investment were 13 point $6,000,000,000 in the Q1. Loan growth excluding mortgage warehouse and PPP loans totaled $8,500,000 or 0.2 percent annualized New production during the quarter was subdued due to seasonal slowness in the Q1 as well as lower demand across our markets. Despite the lower growth, during the quarter we originated $599,000,000 of new commitments and $315,000,000 of which Funded during the quarter. We continue to see opportunities in the pipeline and we continue to underwrite with the same discipline that has guided us through past economic cycles. Average mortgage warehouse purchase loans remain stable at $298,000,000 versus the linked quarter.

Speaker 1

Our expectation is for this business to continue to remain flat at current levels. Credit quality metrics continued to strengthen during the quarter. Total non performing assets decreased to $60,100,000 or 0.32 percent of total assets at quarter end. Other real estate owned decreased to $22,700,000 due to an impairment of the $1,200,000 recognized during the quarter. Net charge offs totaled just 4 basis points annualized for the Q1.

Speaker 1

We continue to see the loan portfolio exhibit resilience in the face volatile macroeconomic conditions and we remain confident in the strength of our credit quality as we enter the 2nd quarter. 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. Looking ahead, we remain focused on optimizing our franchise to navigate a complex macroeconomic and banking landscape.

Speaker 1

We remain encouraged by the continued gross loan production and the repricing of our fixed rate loans, and we will continue to focus on opportunities to strategically Play both defense and offense on the deposit base. While loan production was seasonally lower in Q1, We are seeing solid opportunities in the pipeline and still expect to grow loans at 4% to 5% annualized rate for the remainder of the year. In the Q2, we will continue to optimize our expense base for the current environment. We expect to achieve targeted expense reduction

Speaker 3

Our first question comes from the line of Brad Milsaps with Piper Sandler. Please proceed with your question.

Speaker 4

Hey, good morning.

Speaker 2

Hey, good morning, Brad and Bradlyn.

Speaker 4

Thanks for taking my questions. I was just curious, Paul, a lot of movement With the balance sheet at the end of the quarter, I'd be curious if you'd be able to provide us sort of spot deposit rates and maybe even spot loan rates And maybe how that might inform your margin outlook as you think about sort of all the moving parts as we kind of move through the next couple of quarters?

Speaker 2

Sure, Brad. Happy to provide some color on that. On the earning asset side, our loan yields are coming on in the mid-7s. We've reliably seen that for the last couple of months and we expect that pace to continue based on what we see in the pipeline. On the deposit side, the marginal funding that we're adding to our balance sheet is just under 5%.

Speaker 2

We've tried to manage that rate Relative to the liquidity available in the market and relative to our strategy, and so that's our expectation to hold funding at that level Depending on the trajectory, of course, of monetary policy.

Speaker 4

Okay. Maybe just drilling down a little bit further, I mean, you had Total deposit cost of, I think, around 170 basis points, interest bearing costs were a little over 2.4%. If you thought about where those numbers kind of move to at the end of the quarter, given all the moving parts, are you seeing The pace of the beta slowdown or would you expect something similar to what you saw in the Q1?

Speaker 2

The betas in the Q1, Brad, were driven significantly by the non interest bearing remixing trends that we saw into interest So adding those interest bearing funds, we didn't expect the magnitude of non interest bearing mix shift in the Q1. Was really driven by accelerated yield seeking behavior that coming out of the Q4 really accelerated into January February. But most of the NIM pressure I think has happened in the Q1 and following quarter end we've seen a stabilization in funding costs, Leads us to anticipate that NIM will bottom out in Q2 and start expanding in Q3 and beyond as earning asset yields begin

Speaker 5

to climb. So it's hard to

Speaker 2

give an exact range given the dynamism and the environment, but we certainly don't anticipate the kind of betas and NIM compression in Q2 that we saw in Q1.

Speaker 4

And Paul, just to kind of final follow-up, would you expect, I think, to get a loan beta around 38% in the quarter? Obviously, you've been talking about the repricing characteristics we've been on book for a while. Do you expect that to continue to step up and is it heavily more heavily weighted One quarter versus another, or is it just going to kind of be this sort of gradual climb as we move through the year?

Speaker 2

It's weighted heavier in the back half of the year in 2023 than in the front half of the year. We have seasonal slowness usually, especially in the Q1. So the amount of bulk repricing that we get in the Q1 is reliably less than in the back half of the year when we expect to see the most growth. I will say that we certainly do expect given our loan growth guide to see those earning assets, especially loan yields Pickup and the more production we have and the more net growth we have,

Speaker 6

the more that will impact the yield.

Speaker 2

Okay, great. Thank you guys.

Speaker 4

I'll hop back in queue.

Speaker 1

Hey, thanks Brett.

Speaker 3

Thank you. Our next question comes from the line of Brandon King with Truro Securities. Please proceed with your question.

Speaker 7

Hey, good morning.

Speaker 2

Good morning, Brad.

Speaker 7

See, I had another question on deposits. I know before is the goal to match deposits with loan growth, but wanted to get updated thoughts on your outlook for Where you see deposits trending for the remainder of the year?

Speaker 2

Our focus, Brandon, really remains on growing the core deposit base. We believe that we've equipped our teams with the tools necessary to successfully compete both offensively and defensively against what we're seeing in the market. It's important to note also that relationship deposits do factor into our lending decisions and we believe that our ability to produce loans also translates ability to produce deposits. We're going to be very focused on making sure that we can grow deposits and can fund loans with deposit growth. Obviously, the accelerated attrition that we saw in Q1, we don't expect to repeat in Q2 because we've seen some stabilization since quarter end.

Speaker 2

Given what we've cast our teams with and given what we're seeing in the market, we think we're in a good position to grow the product in Q3.

Speaker 7

Okay. And I know you mentioned in the commentary as far as the deposits moving kind of off balance sheet, but still within the bank. What do you think it would take for those deposits to come back and kind of when do you anticipate that happening?

Speaker 2

I think it depends entirely on the trajectory of monetary policy and specifically the yield in the treasury market. Most of the liquidity management products out there are based On treasury yields and a laddered treasury strategy. So as we see the Fed hit the terminal rate, especially if we have some economic storm clouds on the horizon, I think there'll be an opportunity for banks to be very competitive on rate versus the treasury market, but it'll just depend again on the trajectory of inflation and monetary policy.

Speaker 7

Okay. And there's nothing, I guess, internally that you plan on doing to kind of encourage those deposits coming back sooner rather than later?

Speaker 2

I think it depends on the idiosyncratic beliefs and behavior of the customers and what they're specifically looking for. Obviously, we have Opportunities to incentivize customers to return that cash on the balance sheet. But as of right now, it's a relationship driven strategy that we really focus on Understanding the individual customer, their needs, and we really want to provide them with a total suite of solutions that fits what they're looking for.

Speaker 6

Okay.

Speaker 7

I will hop back in the queue. Thanks for taking my questions.

Speaker 3

Thank you. Our next question comes from the line of Brett Rabatin with Hovde Group. Please proceed with your question.

Speaker 8

Hey, good morning, gentlemen.

Speaker 2

Good morning, Brad.

Speaker 9

Good morning, Brett.

Speaker 8

I wanted to, I guess, first start on expenses And the expense levels are obviously something that you're focused on this year, and the numbers in 1Q on a core basis were A little better than I expected. Can you talk maybe, Paul or David, about what you think you'll achieve from here on the expense side and Just a good way to think about maybe the efficiency ratio relative to what you're trying to get done on the revenue side. Thanks.

Speaker 2

Sure, Brett. I'm happy to talk to expenses. Obviously, we remain focused on notching incremental expense discipline. That is something that we have expressed a clear intent to continue to focus on over the last several calls. So if you look at our expenses in Q1, they are seasonally a little bit lower than they typically are.

Speaker 2

I would expect the expense run rate to Around $88,000,000 for the remainder of the year. Midway through the Q1, we did have our merit increases. So that does impact the run rate on a go forward basis. The trajectory of expenses and the magnitude of savings that we can realize is going to be dependent upon the That we see across our expense base. Obviously, we're looking under every rock and making sure that we're being mindful During the organization for the current economic environment.

Speaker 8

Okay. That's helpful. And then On capital, I

Speaker 1

want to make sure

Speaker 8

I understood that correctly. You repaid the $30,000,000 of sub debt post quarter, is that was that correct?

Speaker 2

No, we repaid that at quarter end. So it is

Speaker 8

At quarter end, okay.

Speaker 2

And that was 3 month LIBOR plus 2.83%. So that was a little over 8%

Speaker 8

And so would the plan be to replace that in the near term?

Speaker 2

We continue to accrete enough capital to be able to not replace that little $30,000,000 tranche.

Speaker 8

Okay. And then any thoughts on capital generally, just that I think some banks are thinking about running with excess capital Just due to some uncertainty, is there any specific capital ratio that you're focused on? And maybe what capital level would you be trying to Target, maybe later this year or in the environment?

Speaker 1

Yes, Brett. Let me address it from a high level just Where I believe the Board is and what our strategy is, how we're thinking about it, we have continued to approve our dividend at its current level that we came into the year with, we finished Q4 of 2022 and into 2023 with Our dividend level, we expect to keep that constant for the foreseeable future in the next few quarters as we observe what's going Macroeconomically, as Paul has said, we have a buyback in place You approved, but we're not expecting to be active with it for the foreseeable future. And part of that is What you alluded to, Brett, that is we're watching closely what's going on with the economy. The markets Seems to be pricing in now at least a moderate recession and some rate declines in the back half of the year. Yes, we're not making any assumptions around that, but we're watching and preparing.

Speaker 1

And so we're going to allow capital to accrete, as Paul just said, here in the next few quarters and continue to strengthen that ratio. We're not expecting, as Paul said, to add any additional Sub debt or capital at this time and we feel really good about where we are. As far as specific capital ratios, Paul, you may have a thought on that, but I think broadly we feel good where we are, Brett, and we expect those to accrete up over the next few quarters.

Speaker 2

The only thing I would add, Brett, is that we continue to target PPE ratio north of 7%. That's something I think you'll see continue to increase we accrete capital over the remainder of the year.

Speaker 1

Yes. We like that from that standpoint, Brett, particularly the fact that we have a small bond portfolio And a relatively insignificant AOCI charge at this time. So we think that puts us in a good spot from an overall capital That's Danforth.

Speaker 8

Okay. That's helpful. Thanks so much for the color.

Speaker 1

Okay. Thanks, Brent.

Speaker 3

Thank you. Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.

Speaker 5

Hey, good morning, everyone. Thanks for taking my question. To go back to deposits, I think like every bank, you're seeing a mix shift into Obviously, higher cost deposits. Any sense from a modeling perspective where you think that mix shift Kind of troughs, like where does DDA trough? And then if you can just kind of update us on beta expectations, cumulative through the cycle?

Speaker 5

Thanks.

Speaker 1

Thanks, Mike. I'll let Paul and Analag, good morning.

Speaker 2

Sure, Michael. Thanks for the question. As I mentioned earlier, the Pace of non interest bearing attrition was really accelerated through the 1st part of the Q1 due to yield seeking behavior since quarter end. We've seen that pace Slow down meaningfully and begin to stabilize. So based on what we know today, there could be some incremental pressures.

Speaker 2

The Fed is the terminal rate, but All in, we don't expect to see the big move down in non interest bearing balances that we saw in Q1 repeat itself. So if If non interest bearing being a percentage of the deposit book it is today, I'd expect that ratio to gradually come down maybe another 11% to 2% Over the coming 12 months, although I wouldn't expect any significant non interest bearing runoff relative to what we've seen in Q1. From a beta standpoint, as I mentioned earlier, betas will slow down given that we've already passed on a meaningful amount of deposit costs Increases to our customers. It has been our stated strategy since the beginning of this rate hike cycle to play defense Our interest bearing balances and make sure that we're taking care of our customers. If we pay rate to anyone, we would like it to be to our core customers.

Speaker 2

So that's why you've seen us have a little bit sharper betas over the last couple of quarters relative to the interest bearing branch book. And I think given where we are in the cycle right now, you'll see those betas meaningfully slow.

Speaker 5

Very helpful. And Paul, I think you mentioned that you expected deposit balance growth in the second quarter. Appreciate that. I would expect that given commentary around maybe some of those deposits that kind of moved off balance sheet potentially coming back on that we should expect Yes, continued growth through the year and you guys I assume the expectation would be to keep that loan to deposit ratio sub 100%?

Speaker 2

Yes, absolutely. We do expect to keep the loan to deposit ratio under 100% and we are employing In the deposit book, we like to maintain a reasonable mix shift, especially among the broker deposits, Keep it relatively short duration, use a laddered strategy, use a number of different products. We really do believe that strategically achieving granularity across the deposit Look, both in our core deposits and in our wholesale flavored deposits is something that will benefit us long term and Really dovetails well with our conservatism in gearing the balance sheet. So that's something I think you should expect us to continue to do over the coming quarters.

Speaker 5

Okay, great. And then maybe just finally for me back to expenses. Appreciate the color on the kind of expense Run rate, maybe just holistically, if you can kind of balance, for us cost saving efforts with investments As you continue to grow the franchise and just how you balance that maybe in the context of How do you think about the efficiency ratio kind of when we get into the intermediate term now that Funding cost profiles have definitely changed. Just trying to get some holistic color on how you balance investments versus savings. Thanks.

Speaker 1

Sure, Michael. It's obviously the same conundrum that every management team has across the country right now, Given the economic environment, but we've made significant investments in our infrastructure over the last couple of years. As you know, we've spoken about it Clearly, in technology and process improvement, risk, enterprise risk management build out, things like that, That we continue to do and continue to invest in and we're not going to back away from our commitments there and our strategy there. We're clearly, as we think about the next few years, assessing what the highest priorities are and moving ahead on those Projects, but then at the same time looking at our organization In our org chart division by division and just understanding where we've invested and what that investment It was going toward in terms of our the high level objectives of our company. So I think it's a healthy process that we go through on a regular basis anyway of Investing and then assessing, investing and then assessing how we're doing there.

Speaker 1

So we're continuing to go through that process. As you know, we really started it last fall and just we expected that it was going to be a difficult environment in 'twenty three and so it's playing out how we expected and we'll just continue to be diligent around that. We're not going to do anything from a cost Cutting standpoint that harms our franchise or our long term value, we believe deeply in the markets we're in. We believe deeply in Our team on the field who are day to day interacting with our customers, We've got terrific customer base in our markets. As you know, we don't have national business lines and things like that.

Speaker 1

Our strategy is really focused on the 4 great markets we're in, dealing with our customers in those markets. And Whatever we have to invest in to meet the needs, as Paul said earlier, to make sure we've got the product set and the technology and everything that our customers need. And at the same time, being mindful that we're running a business here and we need to run a high performing business and we're committed to doing that.

Speaker 5

Appreciate the color. Thanks everyone.

Speaker 1

Thanks Mark.

Speaker 3

Thank you. Our next question comes from the line of Brady Gailey with KBW. Please proceed with your question.

Speaker 9

Hey, thanks. Good morning, guys. Good morning. I know we've talked about the components of the net interest margin, but when you look overall at the net margin, how do you think that trends from here? I know in the past we've talked about once the Fed pauses, Your CRE loan yield will catch up and you could actually see some NIM expansion, but how do you think about the overall NIM from here?

Speaker 2

So Brady, as I discussed a little bit earlier, we saw an accelerated NIM compression in the Q1 due to Predominantly the mix shift as well as some funding cost pressures, we don't expect to see that repeat in the second quarter. We do expect to see NIM bottom in the Q2 and the magnitude of the decline from Q1 to Q2 will be less than it was from Q4 to Q1. But on the whole, it's hard to handicap exactly where the bottom is. From Q3, Q4 onward, we do Back to see NIM expansion because we do believe that we've hit close to the peak in terms of our funding costs With the Fed assuming a Fed terminal rate of just above 5%. Ultimately, the fixed rate loan Those yields will continue to expand on loans and that will continue to drive our NIM upward through cycle.

Speaker 2

So it's a little bit different due to the short duration nature of our CRE book. We'll have that continued yield loan yield expansion over the next 3 to 4 years.

Speaker 9

All right. That's helpful. And then Paul, on your expense guidance of $88,000,000 per quarter for the rest of the year, Does that incorporate any further cost cutting or is that just where you see it as of now? And if you did decide to do Further cost cuts that would be a benefit to that number?

Speaker 2

There could be upside to that number, Brady, but it's going to be dependent on the opportunities we identify And our ability to really execute on them.

Speaker 9

Okay. And then lastly for me, I know independent is a pretty big commercial real estate lender And the market seems to be concerned about CRE over the next couple of years. But I mean, you guys have a great track record over a lot of cycles In commercial real estate, maybe just your updated thought on CRE over the next couple of years?

Speaker 1

Good morning, Brady. This is Dan. I'll take that one. As you can imagine, we continue to scrub that portfolio and Stress it, in particular, the ones that are maturing in the next couple of years for higher rates in an effort to identify any potential risks There and in short, we're confident based on that, that we will continue to see it perform well in any slowdown. As you know, we've always employed a disciplined approach to growing our book.

Speaker 1

We've avoided holding outsized pieces of credits, which Limits the impact to any individual credit that we have. We relied on cash equity, which stays in the deal versus appraised equity, which we have seen Time and again through downturns that makes a difference. We've not used trended rents and underwriting, which I know some Banks have been prone to do. We just think that sets you up for some issues when you have contraction in that. For the most part, we have secondary sources of repayment that are vetted.

Speaker 1

And as you know, we stay in the markets that we're in with our known borrowers, Which those strongest markets in the country, as David mentioned, have seen strong NOI growth With material increase in rents and occupancy over the last 5 years, so the coverages provide significant cushion in NOI and a Strong debt service coverage. We have been stressing the book as most banks have been, In particular for those that are maturing here in the next couple of years, and I would say those have average rates Currently in the high 4s with FX rates and our stressing of that all the way up to the high 7s Indicates that that book is going to perform really well in there and the few that will have some work with the customers Have strong guarantor support with Verified Liquidity. So again, we feel very confident in that at this point. A couple of add ons I would have there, Brady. One is, I think what Dan is saying at On a granular level is playing out a little bit at the higher, more strategic level.

Speaker 1

We saw, for instance, In our loan growth, we generated right out about the amount of loans in the Q1 that we expected, But we had an unusual number of pay downs in the Q1 and that was driven by mostly asset sales That was driven by the cap rates continuing to be lower in our markets Than what I think sellers may be expected. So for instance, there are investment groups and wealthy families that are getting offers on properties That are at lower cap rates than what you would expect given our interest rate environment. So it speaks to the strength of the underlying markets and that's The point I'm making with that is we've seen these pay downs are coming from asset sales at really strong prices. And as Dan said, as we've seen these loans reset pricing and things, the NOIs have been very robust, the growth in the last 3 or 5 years since we made the loan or since that last price reset to where it is today. So we're not Seeing pressure there.

Speaker 1

And the final comment I'll make about the CRE portfolio, just to emphasize again what Dan said, Is that our loan sizes, our loan holds are just different than what a lot of banks that have a big CRE concentration or a large CRE concentration have. Our average hold sizes are much smaller. We have many more loans against many different properties. So diversification of risk by not only asset class, but within the So again, and I understand right now we're facing a potential, as Paul said earlier, storm clouds on the horizon That people are concerned about it and we get it. And to some extent, it's going to have to play out, right?

Speaker 1

And so that investors and And folks can see exactly how different banks' asset quality holds up. We continue to be very confident in how ours will hold up And but we'll just have to play it out the next few quarters and see how the economy does. But we remain confident in not seeing any difficulties on the horizon at this point.

Speaker 9

That's good color. Thanks guys.

Speaker 1

Thanks Brady.

Speaker 3

Thank you. Our next question comes from the line of Matt Olney with Stephens Inc. Please proceed with your question.

Speaker 6

Hey, thanks. Good morning, everybody.

Speaker 1

Good morning, Matt.

Speaker 6

Paul, thanks for all the commentary on

Speaker 8

the deposit costs and the margin. I'll take a swing at

Speaker 6

the topic too. If I assume a deposit beta that moderates in 2Q from what we saw in 1Q and if I assume that the NIB outflow, the Pressure there kind of eases up quite a bit in the Q2 as well. I'm still getting a margin that drops below 3% in the 3rd quarter, And that would still be kind of less than that margin pressure that you talked about in the Q1.

Speaker 8

I just want to make sure

Speaker 6

I'm thinking about this right as As far as kind of where that margin could ultimately cost? Thanks.

Speaker 2

The core NIM ex accretion is going to depend upon a variety of factors, Matt. Obviously, we have a few offsets relative to our costs redeeming that tranche of sub debt. As I noted, we did repay part of the borrowings That we had at the end of last quarter as well. So while we do still expect some incremental NIM compression, We do believe it should hold in a reasonable area around 3. So that's our expectation going into Q2.

Speaker 6

Okay. Thanks for that, Paul. And you mentioned you paid down a part of that FHLB more recently. Any color on kind of what that balance is Currently?

Speaker 2

I don't have the updated balance right in front of me, but we continue to use short term advances On the FHLB front, what we did, Matt, in the back half of March is we really focused on using short duration FHLB advances so that we could replace Those funds selectively with brokered and core deposits as we pursued our growth initiatives in that category. The funding markets were very dislocated In the last 2 weeks of March and the cost for both broker deposits and specialty deposits were significantly higher than where they are today. So we waited for those rates to come down at quarter end and added those started adding those funds back after quarter end.

Speaker 6

And Paul, on that note, How favorable is that trade as you move back into some of those specialty products over the last few weeks relative to FHLB? Any context How much more favorable that is versus the FHLB?

Speaker 2

So it's not meaningfully favorable over FHLB. It's probably a spread of about 15 basis points Today, but it was very favorable related to versus the brokered market in mid March.

Speaker 6

Got it. Okay. That's helpful, Paul. Thanks for that. And then, other questions have been addressed.

Speaker 6

I guess just lastly on The mortgage warehouse, I think Dan mentioned, expect some stability there. Just any color on stability versus end of period or average, quite the delta we saw in the Q1? Thanks.

Speaker 1

Yes. Matt, this is Dan. Good morning. I think we indicated in there that we averaged right around almost $300,000,000 for the quarter. We actually saw a significant increase In March and ended the quarter above $400,000,000 we continue to be at that level here in April.

Speaker 1

As we have Indicated in the past, we expect it to be fairly flat for the year and following the rest of the market, but we did see some increase As you will see there.

Speaker 6

Okay. All right. Thank you, guys.

Speaker 5

Thanks, Matt.

Speaker 3

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Brooks for any final comments.

Speaker 1

Thank you. I appreciate everyone joining this morning. We remain encouraged about the position of our company relative to being nimble Whatever comes our way for the balance of the year and we expect that we'll continue to see good growth and We're confident in our team and confident in our ability to execute in this environment and looking forward to what the next few quarters brings and I appreciate everyone's interest. Always happy to be available. If you need us for anything, feel free to reach out.

Speaker 1

Hope everyone has a great day.

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Earnings Conference Call
Independent Bank Group Q1 2023
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