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Independent Bank Group, Inc (IBTX)

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Independent Bank Group (IBTX)

Q3 2018 Earnings Conference Call

October 23, 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 Chief Risk Officer

Analysts

Michael Belmes - KBW

Michael Rose - Raymond James

Matt Olney - Stephens

Presentation

Operator

Good day ladies and gentlemen and welcome to the Independent Bank Group’s Third 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]

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

Mark Haynie

Good morning and welcome you to the Independent Bank Group third 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 the actual and expected results to differ. We intend such statements to be covered by Safe Harbor provisions for forward-looking statements. Please see page four 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 the loan portfolio. I'll be back at the end with some closing remarks and to open it up for questions.

Positive profitability trends continued through the third quarter with adjusted net income of $36.6 million, which is a 13.5% increase from second quarter 2018 and a 47.4% increase from third quarter 2017. Adjusted return on assets at 1.45% and adjusted return on tangible equity at 18.47% are again record levels for the company.

As we had indicated last quarter, loan growth moderated this quarter to 4% annualized, given our strong growth in Q1 and Q2 annualized growth is 12.6% year-to-date through nine months, which is consistent with our outlook for full year 2018. Asset quality metrics continue to be at historically strong levels with non-performing assets at 16 basis points and our conservative underwriting standards remain intact. We did recognize a partial charge-off on energy loan that has been a problem asset since the energy downturn. The expected loss had been fully reserved and did not impact third quarter earnings.

We successfully completed the operation conversion for the Integrity acquisition in August and integration of their branches and employees has gone well. We're happy to have them join the Independent Bank team.

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

Michelle Hickox

Thank you, David good morning everyone. Please note that slide five of the presentation include selected financial datas for the quarter. Our third quarter adjusted net income was $36.6 million or $1.20 per diluted share compared to $24.8 million or $0.89 per diluted share for the third quarter of last year and $32.2 million or $1.11 for the linked quarter.

As you can see on slide seven, net interest income increased to $86.3 million in the third quarter from $72.9 million in the third quarter of 2017 and from $78.9 million for second quarter 2018. The net interest margin declined to 3.94% for the quarter down 3 basis points from the previous quarter at 3.97%. The adjusted margin net of acquired loan accretion was 3.89% compared to 3.93% in the second quarter.

Average loan yield for the quarter net of accretion income was 5.28% and benefited from increases in the bank’s target loan rates as well as increases in variable loan rates following the Federal Reserve rate increases.

Total non-interest income increased to $12.7 million compared to $12.1 million in the third quarter of last year and from $10.1 million in the previous quarter. Third quarter mortgage banking revenue and other non-interest income includes the fair value adjustment to the mortgage portfolio and interest rate hedge of approximately $1.6 million due to the implementation of a mortgage hedging program. We do not anticipate this income to recur in future quarters at these levels. The increase from prior quarter is also related to various loans with a $309,000 difference in gain on sale of premises and equipment, as well as a larger earnings credit on a correspondent account.

Read the rest of this transcript on seekingalpha.com