IBTX - Independent Bank Group: Profits Are Being Squeezed

2023-08-14 08:35:12 ET

Summary

• Independent Bank Group saw a significant drop in share price earlier this year due to the banking crisis but has since partially recovered.
• The company has grown through acquisitions over the years, and it offers a wide range of services, including commercial and retail lending, deposits, and wealth management.
• While loans continue to grow and deposits have resumed growth, the company still faces challenges with its income statement, debt, and exposure to uninsured deposits.
• Most of these are not dealbreakers, but the profit squeeze does sour the prospect to some degree, for sure.

Earlier this year, practically every bank experienced some downside because of the contagion that was working its way through the industry. Most of the companies survived, but some fell apart entirely. Of the enterprises that did pull out of that downward spiral, one of the ones that was impacted the most at the time from a share price perspective was Independent Bank Group ( IBTX ). Because of high amounts of uninsured deposits, the financial institution saw shares drop as much as 51.1% compared to what they were in late February. But since then, the stock has seen a partial recovery. To put this in context, shares are now down only 25.6% compared to where they were before. This does seem to offer some upside potential for investors. But clearly, the easy money has been made.

A bank that might be worth banking on

According to the management team at Independent Bank Group, the firm operates as a bank holding company that is based out of Texas. While the institution has grown organically over the years, it has also been very active in acquiring other firms. In fact, since the middle of 2010, the firm has completed 12 different acquisitions that brought with them a combined $10.12 billion in assets. In addition to having its own, company-owned, headquarters, Independent Bank Group has 93 full-service branches in operation. 72 of these branches are locations that it owns, with the remaining under lease.

Through these branches, the company offers a wide variety of services to its clientele. For instance, the institution offers commercial lending products to various other firms. Examples include loans for commercial real estate, construction loans, SBA (Small Business Administration) loans, term loans, equipment lease financing, lines of credit, and more. It also provides retail lending products to its residential customers, with examples being loans for the purchase of cars, as well as mortgages and installment loans. Naturally, it also accepts deposits and provides all the customary deposit-related services that you would expect from a bank. And finally, the company also provides other services such as a mortgage warehouse program and wealth management.

Over the years, management has seen the value of loans grow pretty consistently. Back in 2020, for instance, it had net loans totaling $12.98 billion. This number grew to $13.76 billion by the end of 2022. And by the end of the second quarter of this year , they had expanded to $13.97 billion. As of the end of the second quarter of the 2023 fiscal year, Independent Bank Group had 76% of its loan portfolio dedicated to real estate. The largest chunk of this, $7.99 billion, or 57.2% of total loans, fell under the commercial category. Outside of real estate, its largest concentration would be commercial loans. These total about $2.22 billion, or 15.9% of total loans.

While the picture for loans is definitely important, what is most important right now would be the deposit picture. After all, deposits were what caused the banking crisis earlier this year. After seeing deposits grow from about $14.40 billion in 2020 to $15.55 billion in 2021, there was a decrease to $15.12 billion by the end of 2022. But then, because of the banking scare, deposits plunged to $14.06 billion by the end of the first quarter of this year. That's a decline of $1.07 billion in the course of only three months.

The good news is that the company posted a reversal to some extent for the second quarter, with deposits expanding to $14.87 billion. Even though this was the case, its exposure to uninsured deposits has continued to decline. At the end of last year, 54.9% of deposits were classified as uninsured. This number fell to 37.4% by the end of the first quarter and to 31.1% by the end of the second quarter. This is a bit higher than I would like to see, but the company is not without resources to cover outflows should that become an issue. Total liquidity as of the end of the most recent quarter was $2.21 billion. So that does provide partial protection if the picture worsens.

Those who are bearish about the company might point out, and justifiably so, that the company has seen an increase in its debt in recent quarters. At the end of 2022, the total debt was $621.5 million. That number has roughly doubled to $1.23 billion by the end of the second quarter. Even though that is the case, the second quarter reading is actually significantly lower than the $2.19 billion in debt that the company had on its books at the end of the first quarter. So management is making progress on that front.

Moving on to the income statement, one positive thing that we can say about the company is that it has grown its net interest income consistently from year to year. This metric expanded from $473.5 million in 2020 to $553.7 million in 2022. Non-interest income has not been so lucky, falling from $85.1 million to $51.5 million over the same window of time. However, net interest income has come in somewhere in the middle. After growing from $201.2 million in 2020 to $224.8 million in 2021, it dipped slightly to $196.3 million last year.

Fast-forward to today, and the picture continues to be mixed. Net interest income actually fell from $270.6 million in the first half of 2022 to $241.2 million the same time in 2023. Non-interest income remained flat year over year at $26.8 million. But overall net income went from $103.1 million to negative $4.4 million. This pain was really driven by a couple of key factors. For instance, interest on advances from the Federal Home Loan Bank jumped from $0.3 million to $23.8 million. This was because the overall amounts outstanding expanded from $300 million to $875 million. In addition to this, fees for deposits skyrocketed from $13.7 million to $140.4 million. This was the unfortunate byproduct of rising interest rates that resulted in the company having to pay out more to its customers to prevent them from taking their deposits elsewhere in search of higher yields. The weighted average interest rate on deposits came in at 2.73% during the first half of the year. This compares to a paltry 0.28% during the same window of 2022.

Takeaway

Clearly, Independent Bank Group is not in tip-top shape at this moment. The good news is that loans continue to grow and deposits have resumed growth. That is a big step toward recovery. However, the income statement does not look all that appealing at this moment, and the firm still has more debt and greater exposure to uninsured deposits than I would like. If we use data from 2022, the company is trading at a price to earnings multiple of only 9.3. I classify this as being toward the high end of the desirable range. But on a forward basis, that multiple is going to increase. I definitely understand why some investors might like the bank. And in the long run, it could do well. But I would also argue that there are better opportunities that can be had at this time. And because of that, I've decided to rate it a 'hold'.

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