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Independent Bank Group, Inc (IBTX)

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Independent Bank Group. (IBTX)

Q2 2018 Results Earnings Conference Call

July 24, 2018, 08:30 AM ET

Executives

Mark Haynie - EVP, General Counsel

David Brooks - Chairman, President and CEO

Michelle Hickox - EVP and CFO

Daniel Brooks - Vice Chairman and CRO

Analysts

Rahul Patil - Evercore ISI

Michael Belmes - KBW

Brad Milsaps - Sandler O'Neill

Michael Rose - Raymond James

Michael Young - SunTrust Robinson Humphrey

Matt Olney - Stephens Inc.

Brett Rabatin - Piper Jaffray

Brian Zabora - Hovde Group

Presentation

Operator

Good day ladies and gentlemen and welcome to the Independent Bank Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Mark Haynie, Executive Vice President, General Counsel. You may begin.

Mark Haynie

Good morning everyone. I am Mark Haynie, Executive Vice President, General Counsel for Independent Bank Group and I would like to welcome you to the Independent Bank Group second quarter 2018 earnings call. We appreciate you joining us. The related earnings press release and a slide presentation can be accessed on our website at ibtx.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 five of the text in the release or page two 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 will be only a statement of managements' beliefs at the time the statement is made, and we do not publicly update guidance.

In this call, we will discuss a number of 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, CEO, and President; Dan Brooks, our Vice Chairman and Chief Risk Officer; 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.

David Brooks

Thank you, Mark. Good morning. We appreciate all of you joining us for today's call. As always, I will briefly touch on some highlights for the quarter, then Michelle will cover the operating results, and Dan is here to cover loan portfolio. I will be back at the end with closing remarks and to open it up for questions.

Profitability trends continue to improve through the first half of 2018. Second quarter adjusted net income was $32.2 million, which is a 10.3% increase from first quarter of 2018 and a 41.7% increase from second quarter of 2017.

Adjusted return on assets and adjusted return on tangible equity reached new levels at 1.14% and 17.94% respectively. At 18.5%, annualized loan growth for the quarter was very strong. We do expect organic loan growth to moderate in the second half of the year.

Asset Quality is foundation of our company and remains strong. Despite the outsized loan growth, credit metrics continue to be at historically low levels and our strong underwriting standards remain in place.

Funding sources and pricing of deposits have become more challenging as the Fed continues to increase short-term rates. We've been successful increasing our loan in investment yields, but not at the same pace as the funding cost.

We continue to actively manage liability side of the balance sheet to minimize these costs. But if the deposit betas continue to accelerate, this will be a challenge for the balance of the year.

Now, I'll turn it over to Michelle to provide more details on the operating results for the quarter. Michelle?

Michelle Hickox

Thank you, David. Good morning everyone. Please note that slide five of the presentation includes selected financial data for the quarter. Our second quarter adjusted net income was $32.2 million or a $1.11 per diluted share compared to $22.7 million or $0.82 per diluted share for the second quarter of last year and $29.2 million or $1.03 per diluted share for the linked quarter.

As you can see on slide seven, net interest income increased to $78.9 million in the second quarter from $69.5 million in the second quarter 2017 and from $74 million for the first quarter 2018.

The net interest margin declined to 3.97% for the quarter, down three basis points from the previous quarter at 4%. The adjusted margin net of acquired loan accretion was 3.93% compared to 3.96% in the first quarter, a decrease of three basis points.

Average loan yields for the quarter net of accretion income was 5.19% and benefited from increases in the target loan rates as well as increases in variable loan rates following the Federal Reserve rate increases. Earning asset yields also benefited from a 32 basis point increase in yield on taxable securities compared to the linked quarter.

Total non-interest income decreased to $10.1 million compared to $11 million in the second quarter last year, an increase from $9.5 million in the previous quarter. The decrease from last year is primarily due to decreased service charge and mortgage income. The $678,000 increase from prior quarter is related to seasonal mortgage activity and a larger earnings credit on our correspondent account.

Read the rest of this transcript on seekingalpha.com