Investment Thesis
One of my favorite banks located deep in the heart of Texas is Independent Bank (NASDAQ:IBTX). In fact, I have written about it before (here and here) and when looking back, I think my original thesis can be concisely boiled down to just a few sentences:
From a fundamental perspective, I continue to like IBTX given the franchise in both Texas and Colorado (both strong population growth areas), above average credit culture, management’s efficiency focus, and prospects for stronger organic growth than many peers.
While I still generally agree with this thesis, I believe today it warrants a slight tweaking to account for the recent bank outperformance and pending capital actions. Overall, I continue to like IBTX for the franchise located in both Texas and Colorado, its efficiency focus, solid credit culture, clear line of sight for growth, and now a well-disciplined acquisition strategy. This last bit stems from its ability to walk away from the Texas Capital (TCBI) deal.
In my opinion, IBTX’s outlook for profitability is better than most of the industry heading into the second half of 2021 and going into 2022. When I look back six- to twelve-months from now, I think IBTX will be one of the names in Texas trading for a premium valuation and have a better than average share price performance.
Recent Results and Growth Expectations
When looking back at second quarter earnings, the bottom line is that core results continue to be driven by lower revenue than what I had originally been modeling. From there, it trickles down the income statement and produces a little bit softer bottom line results. While the top line revenue number has been hit with a sluggish net interest margin (NIM), I think the NIM is close to its cycle floor.
Outside of the margin, loan growth trends continue to provide hope that excess liquidity will be moved into higher yielding loans soon. If this happens faster than industry peers, I will venture to guess that my future estimates are too conservative and core profitability metrics will significantly outpace peers.
Beside the loan and deposit portion of the bank, noninterest income was a little softer than expected. This relative weakness is not an IBTX “problem” but more so just a slower mortgage market relative to the first quarter. Expenses were a little higher than consensus expectations, but overall I think management continues to thread the needle of both outsized growth and supporting bottom line results.
When looking to the future, I have a level of excitement that keeps me bullish on the name. On the second quarter call, there was a hint of additional lenders being added to the payroll that could help drive additional growth. IBTX has a very pure culture, in my opinion, and this culture of being a growth institution will bode well for a return to higher commercial loan balances over the next year.
Maybe I am being too optimistic on the Texas market, or Denver for that matter, but I continue to believe that mid-to-high single-digit loan growth is realistic for 2022. While the final number will likely be predicated on minimal loan paydowns, I have a very strong degree of confidence that IBTX will outpace peers in terms of final loan growth results.
From this rather high level explanation of the recent results, I am now assuming the return on assets (ROA) metric works a little lower (due to slower mortgage). I think the near-term ROA is likely to be in the 1.1% to 1.2% range, which is pretty solid for most banks in this poor interest rate environment. I also think loan loss provisioning will remain fairly minimal. Bottom line, top line revenue growth should be evident in 3Q due to a larger balance sheet and the margin finding its footing.
Another swing factor to the investment thesis is IBTX’s acquisition strategy. On the second quarter earnings call, it sounded like IBTX wanted to increase assets from ~$18 billion to around $30 billion – which would imply a sizable transaction is likely. Recall, its last completed acquisition was well-timed, but they paid a high price (to get into Denver). With hindsight at 20/20, it was very much worth the price, but at the time it seemed expensive (and the shares lagged peers). It's hard to gauge what deal might be pending, but my faith in management as solid acquirers gives me a great deal of confidence it will work out well.
Concluding Thoughts
While I am still very optimistic on the bank, the entire thesis is based on stronger loan trends and top line net interest income growth. While core trends make this seem likely (in the next three to six months), the outcome of any merger announcement will likely be the top reason people invest (or choose to sell). The long story short is that not much has changed in my investment thesis and IBTX continues to be a bank most portfolios should own.
This management team continues to gear the bank for growth, plain and simple. However, I should note that credit soundness is a priority. If management can't make healthy loans, they would rather shrink the balance sheet than make bad loans. In my opinion, this little caveat to credit is what positions IBTX to be well suited for the next decade of growth.
