KBRA Affirms Ratings for Independent Bank Group, Inc. and Revises Outlook to Negative

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for McKinney, Texas-based Independent Bank Group, Inc. (NASDAQ: IBTX) ("Independent" or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the bank subsidiary, Independent Bank ("the bank"). The Outlook for all long-term ratings is revised to Negative from Stable.

Key Credit Considerations

The revision to a Negative Outlook reflects the weakened earnings profile primarily due to NIM headwinds related to funding pressures in the high rate environment as the company significantly grew loans in 2022-2023 without similar deposit growth. IBTX has also maintained lower capital levels than peers which had been supported by a strong credit track record; however, the $100 million legal settlement in 1Q23 further depressed capital ratios (~30 bps) with reduced ability to rebuild capital from weakened earnings. The company also maintains a concentrated loan portfolio with 57% investor CRE which at over 400% of total risk based capital is well above regulatory guidance of 300%. IBTX benefits from a branch-based deposit gathering system throughout its footprint in Texas and the Front Range, CO. However, the market is highly competitive and the leveraged balance sheet with a 1Q24 loan-to-deposit ratio of 93% has required the company to defend its deposit base, driving total cost of deposits well above peer averages at 3.14% in 1Q24. Management expects NIM to trough in 2Q24 with expansion in 2H24 as deposit costs and flows show signs of stabilization. The company has experienced deposit migration from NIB to IB similar to the banking industry although NIB remains a meaningful component of total deposits at 21%. Estimated uninsured and uncollateralized deposit balances at 1Q24 were $5.0 billion (32% of total deposits); however, the company maintains strong on-balance sheet liquidity of ~40% of total assets. KBRA considers IBTX’s credit quality to be above peer average driven by its conservative credit underwriting as loss experience has been well contained peaking at 7 bps in the last five years despite its heavy investor CRE and C&D concentrations, reflective of the benign credit environment (pre-COVID) and strong underlying markets, combined with the depth of management’s systems and processes.

Rating Sensitivities

A revision to a Stable Outlook would require an improvement of earnings performance and a capital build to levels more consistent with the rated peer group without any material credit challenges. Growth in core deposits more consistent with levels that would match loan balances would also be viewed favorably. A downgrade could occur if the company fails to rebuild capital levels to be more consistent with rated peers and if earnings performance further deteriorates, negatively impacted by credit quality challenges.

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