MCKINNEY, Texas–(BUSINESS WIRE)–Independent Bank Group, Inc. (NASDAQ: IBTX) today announced net income of $33.1 million, or $0.80 per diluted share, for the quarter ended June 30, 2023, compared to net income $52.4 million, or $1.25 per diluted share for the quarter ended June 30, 2022 and to net loss of $37.5 million, or $0.91 per diluted share for the quarter ended March 31, 2023. Adjusted net income for the quarter ended June 30, 2023 was $33.7 million, or $0.82 per diluted share, compared to $53.3 million, or $1.27 per diluted share for the quarter ended June 30, 2022 and $44.1 million, or $1.07 per diluted share for the quarter ended March 31, 2023.
The Company also announced that its Board of Directors declared a quarterly cash dividend of $0.38 per share of common stock. The dividend will be payable on August 17, 2023 to stockholders of record as of the close of business on August 3, 2023.
- Resilient credit quality with nonperforming assets of 0.32% of total assets and net recoveries of 0.03% annualized for the quarter
- Decreased loan to deposit ratio to 95.1% at quarter-end compared to 99.8% at prior quarter-end
- Continued expense discipline with total adjusted (non-GAAP) noninterest expense of $84.5 million for the quarter with total reported noninterest expense of $85.7 million
- Strong liquidity, with cash and available for sale securities representing approximately 13.6% of assets at June 30, 2023, and with the ability to access considerable sources of contingent liquidity
- Capital remains strong, with ratios well above the standards to be considered well-capitalized under regulatory requirements, with an estimated total capital ratio of 11.95%, leverage ratio of 8.92%, and (non-GAAP) tangible common equity (TCE) ratio of 7.37%
“During the second quarter, we were pleased to maintain a strong foundation of resilient asset quality and a healthy balance sheet supported by our talented relationship bankers operating across Texas and Colorado. In addition, a rebound in retail mortgage originations helped bolster fee income, while our continued focus on expense discipline helped us reduce adjusted noninterest expenses,” said Independent Bank Group Chairman & CEO David R. Brooks. “Looking ahead, we are encouraged by the strength of our loan and deposit production pipelines, which are supported by the continued economic tailwinds in our four great markets. As we have for over three decades, we will remain keenly focused on disciplined execution, the pursuit of healthy growth, and delivering exceptional service to our customers across Texas and Colorado.”
Second Quarter 2023 Balance Sheet Highlights
- Total loans held for investment, net of mortgage warehouse purchase loans, were $13.6 billion at June 30, 2023 and March 31, 2023 and $13.0 billion at June 30, 2022. PPP loans totaled $3.3 million, $3.5 million and $26.7 million as of June 30, 2023, March 31, 2023 and June 30, 2022, respectively. Loans held for investment excluding PPP loans and mortgage warehouse loans increased $23.2 million, or 0.7% on an annualized basis, during second quarter 2023.
- Average mortgage warehouse purchase loans were $413.2 million for the quarter ended June 30, 2023 compared to $298.0 million for the quarter ended March 31, 2023, and $467.8 million for the quarter ended June 30, 2022, an increase of $115.2 million, or 38.7% from the linked quarter and a decrease of $54.6 million, or 11.7% year over year. The change from the prior year is reflective of decreased demand and lower volumes related to mortgage rate increases for the year over year period while the linked quarter change reflects an increase in volumes and improved margins.
- Nonperforming assets totaled $60.5 million, or 0.32% of total assets at June 30, 2023, compared to $60.1 million or 0.32% of total assets at March 31, 2023, and $82.9 million, or 0.46% of total assets at June 30, 2022.
- Nonperforming loans totaled $37.9 million, or 0.28% of total loans held for investment at June 30, 2023, compared to $37.3 million, or 0.27% at March 31, 2023 and $69.9 million, or 0.54% at June 30, 2022.
- The slight increase in nonperforming loans from the linked quarter reflects an increase in loans 90 days past due and still accruing primarily due to three residential real estate loans totaling $1.5 million that are in process of collection or workout offset by normal paydowns and principal reductions while the linked quarter increase in nonperforming assets also reflects an $805 thousand branch facility which was closed and moved to other real estate during the quarter offset by a $1.0 million writedown of another real estate owned property.
- The decrease in nonperforming loans for the year over year period primarily reflects the partial paydown and sale of a $9.3 million commercial nonaccrual loan and the payoff and partial charge-off of a $10.7 million commercial nonaccrual loan, both occurring in fourth quarter 2022, as well as the foreclosure of an $11.7 million commercial real estate property. The change in nonperforming assets from the prior year reflects a $1.2 million charge-off as well as the writedown on the foreclosure discussed above and a $1.2 million writedown on another other real estate property, offset by the branch location discussed above that was moved to other real estate owned during second quarter 2023.
- Net (recoveries) charge-offs were (0.03)% annualized in the second quarter 2023 compared to 0.04% annualized in the linked quarter and 0.09% annualized in the prior year quarter.
Deposits, Borrowings and Liquidity
- Total deposits were $14.9 billion at June 30, 2023 compared to $14.1 billion at March 31, 2023 and compared to $15.1 billion at June 30, 2022.
- Estimated uninsured deposits, excluding public funds deposits totaled $4.6 billion, or 31.1% of total deposits as of June 30, 2023 compared to $5.3 billion, or 37.4% as of March 31, 2023.
- Total borrowings (other than junior subordinated debentures) were $1.2 billion at June 30, 2023, a decrease of $957.3 million from March 31, 2023 and an increase of $670.5 million from June 30, 2022. The year over year increase primarily reflects the use of short-term FHLB advances to strategically increase the bank’s liquidity position offset by the redemption of $30.0 million of subordinated debentures. The linked quarter change reflects reductions in FHLB advances of $925.0 million as well as a $32.5 million paydown on the Company’s line of credit.
- The Company continues to be well capitalized under regulatory guidelines. At June 30, 2023, the estimated common equity Tier 1 to risk-weighted assets, Tier 1 capital to average assets, Tier 1 capital to risk-weighted assets and total capital to risk-weighted asset ratios were 9.78%, 8.92%, 10.13% and 11.95%, respectively, compared to 9.70%, 9.01%, 10.05%, and 11.88%, respectively, at March 31, 2023 and 9.81%, 9.28%, 10.17%, and 12.24%, respectively at June 30, 2022.
Second Quarter 2023 Operating Results
Net Interest Income
- Net interest income was $113.6 million for second quarter 2023 compared to $138.0 million for second quarter 2022 and $127.9 million for first quarter 2023. The decrease from the linked quarter and prior year was primarily due to the increased funding costs on our deposit products and FHLB advances due to Fed rate increases over the last year offset to a lesser extent by increased earnings on interest earning assets, primarily loans and interest-bearing cash accounts. The prior year decrease also reflects lower acquired loan accretion and PPP fees earned for the year over year period. The second quarter 2023 includes $870 thousand in acquired loan accretion compared to $2.3 million in second quarter 2022 and $1.0 million in first quarter 2023. In addition, net PPP fees of $17 thousand were recognized in second quarter 2023 compared to $837 thousand in second quarter 2022 and $15 thousand in first quarter 2023. Total fees left to be recognized were $69 thousand as of June 30, 2023.
- The average balance of total interest-earning assets grew by $1.0 billion and totaled $16.8 billion for the quarter ended June 30, 2023 compared to $15.8 billion for the quarter ended June 30, 2022 and increased $425.8 million from $16.4 billion for the quarter ended March 31, 2023. The increase from the prior year is primarily due to higher average loans of $1.0 billion due to organic growth for the year over year period but also due in part to a $244.1 million increase in average interest-bearing cash balances offset by a $247.0 million decrease in average taxable securities balances. The slight increase from the linked quarter is primarily due increased average interest-bearing cash balances and to a lesser extent average loan balances.
- The yield on interest-earning assets was 5.14% for second quarter 2023 compared to 3.83% for second quarter 2022 and 4.98% for first quarter 2023. The increase in asset yield compared to the linked quarter and prior year is primarily a result of increases in the Fed Funds rate. The average loan yield, net of acquired loan accretion and PPP income was 5.51% for the current quarter, compared to 4.18% for prior year quarter and 5.33% for the linked quarter.
- The cost of interest-bearing liabilities, including borrowings, was 3.37% for second quarter 2023 compared to 0.50% for second quarter 2022 and 2.63% for first quarter 2023. The increase from the linked quarter and prior year is reflective of higher funding costs, primarily on deposit products and FHLB advances as a result of Fed Funds rate increases. In addition, deposit funding costs were also higher due to promotional campaigns for certificate of deposit accounts.
- The net interest margin was 2.71% for second quarter 2023 compared to 3.51% for second quarter 2022 and 3.17% for first quarter 2023. The net interest margin excluding acquired loan accretion was 2.69% for second quarter 2023 compared to 3.45% second quarter 2022 and 3.14% for first quarter 2023. The decrease in net interest margin from the prior year and linked quarter was primarily due to the increased funding costs on deposits and short-term advances resulting from continued Fed rate increases over the year, offset to a lesser extent by higher earnings on loans due to organic growth and rate increases and higher earnings on interest-bearing cash balances due to rate increases for the respective periods.
- Total noninterest income increased $218 thousand compared to second quarter 2022 and increased $1.3 million compared to first quarter 2023.
- The change from the prior year quarter reflects an increase of $469 thousand in service charge income offset by decreases of $242 thousand in mortgage banking revenue, $196 thousand in mortgage warehouse purchase fees and $359 thousand in other noninterest income. In addition, a $367 thousand gain on sale of vacant land was recognized during second quarter 2023.
- The change from the linked quarter primarily reflects the gain on sale of land discussed above, as well as increases of $624 thousand in mortgage banking revenue and $211 thousand in mortgage warehouse purchase fees due to increased volumes and improved margins over the quarter.
- Total noninterest expense decreased $220 thousand compared to second quarter 2022 and $103.7 million compared to first quarter 2023. As previously disclosed in first quarter 2023, a non-recurring litigation settlement expense of $102.5 million was recognized related to an inherited receivership litigation.
- The net decrease in noninterest expense in second quarter 2023 compared to the prior year is due primarily to decreases of $4.2 million in salaries and benefits expense and $2.3 million in professional fees offset by increases of $1.6 million in occupancy expenses, $1.4 million in communications and technology expense and $2.2 million in FDIC assessment. In addition, impairment expense of $1.0 million was recorded in second quarter 2023 on an other real estate property.
- Excluding the non-recurring expense discussed above, the decrease in noninterest expense in second quarter 2023 compared to the linked quarter is due primarily to decreases of $1.3 million in professional fees and $1.9 million in other noninterest expense, offset by a $1.1 million increase in FDIC assessment.
- The decrease in salaries and benefits from the prior year is due primarily to $4.2 million in lower combined salaries, bonus and employee insurance expenses due to the fourth quarter 2022 reduction-in-force and overall strategic efforts to reduce costs, as well as lower contract labor costs of $1.1 million and lower mortgage commissions and incentives of $484 thousand. Furthermore, second quarter 2022 includes $1.1 million in severance and stock grant amortization related to the separation of an executive officer. In addition, deferred salaries expense, which reduces overall expense, was $2.5 million lower compared to prior year quarter due to lower loan origination activity.
- The increase in occupancy expenses from the prior year was primarily due to higher depreciation and property tax expense due to the opening of the second phase of the Company’s headquarters campus in second quarter 2022. The increase in communications and technology expense from prior year was due to higher data processing costs and software expense for the year over year period.
- The increase in FDIC assessment compared to prior year and linked quarter was due to increases in the assessment rate charged by the FDIC which took effect in 2023, as well as an increase in the liquidity stress rate.
- The decrease in professional fees compared to the prior year and linked quarter was due primarily to lower consulting fees and legal fees.
- The decrease in other noninterest expense compared to the linked quarter is primarily due to decreases of $638 thousand in loan-related costs, $649 thousand in impairment-related charges, and decreases in various other miscellaneous expense accounts.
Provision for Credit Losses
- The Company recorded $220 thousand provision for credit losses for second quarter 2023, compared to zero provision for second quarter 2022 and $90 thousand provision for the linked quarter. Provision expense during a given period is generally dependent on changes in various factors, including economic conditions, credit quality and past due trends, as well as loan growth and charge-offs or specific credit loss allocations taken during the respective period.
- The allowance for credit losses on loans was $147.8 million, or 1.08% of total loans held for investment, net of mortgage warehouse purchase loans, at June 30, 2023, compared to $144.2 million, or 1.11% at June 30, 2022 and compared to $146.9 million, or 1.08% at March 31, 2023.
- The allowance for credit losses on off-balance sheet exposures was $4.9 million at June 30, 2023 compared to $4.7 million at June 30, 2022 compared to $4.8 million at March 31, 2023. Changes in the allowance for unfunded commitments are generally driven by the remaining unfunded amount and the expected utilization rate of a given loan segment.
- Federal income tax expense of $8.7 million was recorded for the second quarter 2023, an effective rate of 20.8% compared to tax expense of $13.6 million and an effective rate of 20.6% for the prior year quarter and income tax benefit of $11.3 million and an effective rate of 23.1% for the linked quarter. The higher effective rate for the first quarter 2023 is due to the Company being in a loss position as a result of the settlement of the Stanford litigation.
The Company is required, under generally accepted accounting principles, to evaluate subsequent events through the filing of its consolidated financial statements for the quarter ended June 30, 2023 on Form 10-Q. As a result, the Company will continue to evaluate the impact of any subsequent events on critical accounting assumptions and estimates made as of June 30, 2023 and will adjust amounts preliminarily reported, if necessary.
About Independent Bank Group, Inc.
Independent Bank Group, Inc. is a bank holding company headquartered in McKinney, Texas. Through its wholly owned subsidiary, Independent Bank, doing business as Independent Financial, Independent Bank Group serves customers across Texas and Colorado with a wide range of relationship-driven banking services tailored to meet the needs of businesses, professionals and individuals. Independent Bank Group, Inc. operates in four market regions located in the Dallas/Fort Worth, Austin and Houston areas in Texas and the Colorado Front Range area, including Denver, Colorado Springs and Fort Collins.
A conference call covering Independent Bank Group’s second quarter earnings announcement will be held on Tuesday, July 25, 2023 at 8:30 am (ET) and can be accessed by the webcast link, https://www.webcast-eqs.com/independentbankgroup07252023_en/en or by calling 1-877-407-0989 and by identifying the meeting number 13739682 or by identifying “Independent Bank Group Second Quarter 2023 Earnings Conference Call.” The conference materials will also be available by accessing the Investor Relations page of our website, https://ir.ifinancial.com. If you are unable to participate in the live event, a recording of the conference call will be accessible via the Investor Relations page of our website.
From time to time the Company’s comments and releases may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties and are made pursuant to the safe harbor provisions of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and other related federal security laws. Forward-looking statements include information about the Company’s possible or assumed future results of operations, including its future revenues, income, expenses, provision for taxes, effective tax rate, earnings (loss) per share and cash flows, its future capital expenditures and dividends, its future financial condition and changes therein, including changes in the Company’s loan portfolio and allowance for credit losses, the Company’s future capital structure or changes therein, the plan and objectives of management for future operations, the Company’s future or proposed acquisitions, the future or expected effect of acquisitions on the Company’s operations, results of operations and financial condition, the Company’s future economic performance and the statements of the assumptions underlying any such statement. Such statements are typically, but not exclusively, identified by the use in the statements of words or phrases such as “aim,” “anticipate,” “estimate,” “expect,” “goal,” “guidance,” “intend,” “is anticipated,” “is estimated,” “is expected,” “is intended,” “objective,” “plan,” “projected,” “projection,” “will affect,” “will be,” “will continue,” “will decrease,” “will grow,” “will impact,” “will increase,” “will incur,” “will reduce,” “will remain,” “will result,” “would be,” variations of such words or phrases (including where the word “could,” “may” or “would” is used rather than the word “will” in a phrase) and similar words and phrases indicating that the statement addresses some future result, occurrence, plan or objective. The forward-looking statements that the Company makes are based on its current expectations and assumptions regarding its business, the economy, and other future conditions. Because forward-looking statements relate to future results and occurrences, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. The Company’s actual results may differ materially from those contemplated by the forward looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Many possible events or factors could affect the Company’s future financial results and performance and could cause those results or performance to differ materially from those expressed in the forward-looking statements. These possible events or factors include, but are not limited to: 1) the effects of infectious disease outbreaks, including the ongoing COVID-19 pandemic and the significant impact that the COVID-19 pandemic and associated efforts to limit its spread have had and may continue to have on economic conditions and the Company’s business, employees, customers, asset quality and financial performance; 2) the Company’s ability to sustain its current internal growth rate and total growth rate; 3) changes in geopolitical, business and economic events, occurrences and conditions, including changes in rates of inflation or deflation, nationally, regionally and in the Company’s target markets, particularly in Texas and Colorado; 4) worsening business and economic conditions nationally, regionally and in the Company’s target markets, particularly in Texas and Colorado, and the geographic areas in those states in which the Company operates; 5) the Company’s dependence on its management team and its ability to attract, motivate and retain qualified personnel; 6) the concentration of the Company’s business within its geographic areas of operation in Texas and Colorado; 7) changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and loan charge-offs generally; 8) concentration of the loan portfolio of Independent Financial, before and after the completion of acquisitions of financial institutions, in commercial and residential real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate; 9) the ability of Independent Financial to make loans with acceptable net interest margins and levels of risk of repayment and to otherwise invest in assets at acceptable yields and that present acceptable investment risks; 10) inaccuracy of the assumptions and estimates that the managements of the Company and the financial institutions that the Company acquires make in establishing reserves for credit losses and other estimates generally; 11) lack of liquidity, including as a result of a reduction in the amount of sources of liquidity the Company currently has; 12) material increases or decreases in the amount of deposits held by Independent Financial or other financial institutions that the Company acquires and the cost of those deposits; 13) the Company’s access to the debt and equity markets and the overall cost of funding its operations; 14) regulatory requirements to maintain minimum capital levels or maintenance of capital at levels sufficient to support the Company’s anticipated growth; 15) changes in market interest rates that affect the pricing of the loans and deposits of each of Independent Financial and the financial institutions that the Company acquires and that affect the net interest income, other future cash flows, or the market value of the assets of each of Independent Financial and the financial institutions that the Company acquires, including investment securities; 16) fluctuations in the market value and liquidity of the securities the Company holds for sale, including as a result of changes in market interest rates; 17) effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services; 18) changes in economic and market conditions, that affect the amount and value of the assets of Independent Financial and of financial institutions that the Company acquires; 19) the institution and outcome of, and costs associated with, litigation and other legal proceedings against one or more of the Company, Independent Financial and financial institutions that the Company acquired or will acquire or to which any of such entities is subject; 20) the occurrence of market conditions adversely affecting the financial industry generally; 21) the impact of recent and future legislative regulatory changes, including changes in banking, securities, and tax laws and regulations and their application by the Company’s regulators, and changes in federal government policies, as well as regulatory requirements applicable to, and resulting from regulatory supervision of, the Company and Independent Financial as a financial institution with total assets greater than $10 billion; 22) changes in accounting policies, practices, principles and guidelines, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the SEC and the Public Company Accounting Oversight Board, as the case may be; 23) governmental monetary and fiscal policies; 24) changes in the scope and cost of FDIC insurance and other coverage; 25) the effects of war or other conflicts, including, but not limited to, the conflict between Russia and the Ukraine, acts of terrorism (including cyberattacks) or other catastrophic events, including natural disasters such as storms, droughts, tornadoes, hurricanes and flooding, that may affect general economic conditions; 26) the Company’s actual cost savings resulting from previous or future acquisitions are less than expected, the Company is unable to realize those cost savings as soon as expected, or the Company incurs additional or unexpected costs; 27) the Company’s revenues after previous or future acquisitions are less than expected; 28) the liquidity of, and changes in the amounts and sources of liquidity available to the Company, before and after the acquisition of any financial institutions that the Company acquires; 29) deposit attrition, operating costs, customer loss and business disruption before and after the Company completed acquisitions, including, without limitation, difficulties in maintaining relationships with employees, may be greater than the Company expected; 30) the effects of the combination of the operations of financial institutions that the Company has acquired in the recent past or may acquire in the future with the Company’s operations and the operations of Independent Financial, the effects of the integration of such operations being unsuccessful, and the effects of such integration being more difficult, time consuming, or costly than expected or not yielding the cost savings the Company expects; 31) the impact of investments that the Company or Independent Financial may have made or may make and the changes in the value of those investments; 32) the quality of the assets of financial institutions and companies that the Company has acquired in the recent past or may acquire in the future being different than it determined or determine in its due diligence investigation in connection with the acquisition of such financial institutions and any inadequacy of credit loss reserves relating to, and exposure to unrecoverable losses on, loans acquired; 33) the Company’s ability to continue to identify acquisition targets and successfully acquire desirable financial institutions to sustain its growth, to expand its presence in the Company’s markets and to enter new markets; 34) changes in general business and economic conditions in the markets in which the Company currently operates and may operate in the future; 35) changes occur in business conditions and inflation generally; 36) an increase in the rate of personal or commercial customers’ bankruptcies generally; 37) technology-related changes are harder to make or are more expensive than expected; 38) attacks on the security of, and breaches of, the Company’s and Independent Financial’s digital infrastructure or information systems, the costs the Company or Independent Financial incur to provide security against such attacks and any costs and liability the Company or Independent Financial incurs in connection with any breach of those systems; 39) the potential impact of climate change and related government regulation on the Company and its customers; 40) the potential impact of technology and “FinTech” entities on the banking industry generally; 41) other economic, competitive, governmental, regulatory, technological and geopolitical factors affecting the Company’s operations, pricing and services; and 42) the other factors that are described or referenced in Part I, Item 1A, of the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2023, the Company’s Quarterly Reports on Form 10-Q, in each case under the caption “Risk Factors”; and The Company urges you to consider all of these risks, uncertainties and other factors carefully in evaluating all such forward-looking statements made by the Company.
Executive Vice President, Chief Financial Officer
Executive Vice President, Chief Marketing Officer