Stellar Bancorp Inc (STEL) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the CBTX Q3 2020 Earnings Conference Call.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Justin Long, General Counsel. Thank you. Please go ahead, sir.

Thank you, and good morning. I'm Justin Long, the General Counsel of CBTX, and our management team would like to welcome you to the CBTX earnings call for the third quarter of 2020. We appreciate you joining us.

We issued our earnings press release yesterday afternoon, a copy of which is available on our website, along with the slide presentation that we will refer to during this presentation. We also filed our quarterly report on Form 10-Q for the third quarter yesterday afternoon.

Before we begin, I'd like to remind you that during this presentation, we may make forward-looking statements regarding future events, our financial performance or our business prospects.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Additional information concerning factors that could cause actual results to differ is available in our earnings release and in the Risk Factors section of our annual report on Form 10-K, our quarterly report on Form 10-Q for the third quarter and our other filings with the SEC, which can all be accessed on our Investor Relations website at ir.cbtxinc.com. Any forward-looking statements are made only as of the date of this call, and we assume no obligation to update any such statements.

You should also be aware that during this call, we will reference certain non-GAAP financial information. A reconciliation of these financial measures to the most directly comparable GAAP financial measures is included in our earnings release and investor presentation.

I'm joined this morning by Robert Franklin, our Chairman, President and CEO; Ted Pigott, our CFO; Joe West, our Chief Credit Officer; and Joseph McMullen, our Controller. At the end of their remarks, we will open the call to questions.

With that, I turn it over to our Chairman, President and CEO, Bob Franklin.

Thank you, Justin, and welcome to our earnings call for CBTX for the third quarter of 2020. During the third quarter, we continued our work to identify distresses in our loan portfolio and the effects that the continued pandemic may cause. Our markets want to open, and it appears that most of our customers have found ways to work around the obstacles that COVID continues to erect.

We believe that the credit risk that appeared to be forming during the shutdown of our country earlier this year has mitigated in a substantial way. We can see this in our customers decreased deferral requests and the continued improvement in cash flows across our portfolio. We realize that COVID-19 will be with us for some time to come and must prepare to cope with its effects as a bank and in working with our customers.

We have a great team of experienced bankers that will help guide our bank and our customers through these trying times. Our staff has worked tirelessly to maintain the superior service level that we insist on providing to our customers, and I thank them for their dedication.

During the third quarter, we continued our dividend program and reinstituted our stock buyback program. These actions are, what we believe to be an acknowledgment of the strong capital position that CBTX maintains. This strong capital position allows us to freely manage our capital while maintaining a strong and adequate reserve.

We acknowledge the headwinds facing us as we enter the fourth quarter and continue into 2021, COVID-19, pressure on the oil and gas industry, low interest rate environment, our continued spend on completing our obligations to our regulators and the contentious political environment.

Our efforts around the pandemic will continue until there is clarity. And we feel the major impact has passed. We feel confident in our efforts on this front.

Though we have traditionally had limited exposure to the oil and gas industry, we will continue to monitor the effects on our customers, directly and indirectly. The low interest rate environment will continue to put pressure on our net interest margin, but we think much of that compression is behind us. We will be -- also be mindful of our expenses and look for ways to generate some additional fee income over the coming months.

As for our regulators, we feel confident in our work towards meeting their expectations, and that the expense around this effort will begin to mitigate as we finish the first quarter of 2021.

CBTX remains the strong relationship-driven bank our customers and investors have come to know. We are optimistic about our markets, our customer base and our opportunities, but we will be cautious in our prospecting and our underwriting as we navigate these uncharted waters.

Now I'll turn this over to Ted Pigott, our Chief Financial Officer.

Thank you, Bob. We reported net income of $6.4 million and diluted earnings per share of $0.26 per share for the third quarter of 2020 compared to net income of $13.1 million and diluted earnings per share of $0.52 per share for the third quarter of 2019.

Net income for the 9 months ended September 30, 2020, was $16.1 million or $0.65 per diluted share compared to $37.9 million or $1.51 per diluted share for the 9 months ended September 30, 2019. Net income in the third quarter of 2020 decreased $2.9 million or 8.3% to $31.7 million compared to $34.6 million for the third quarter of 2019, and decreased $450,000 or $0.014 from $32.2 million in the second quarter of 2020.

The yield on interest-earning assets was 3.75% for the third quarter of 2020, compared to 4.98% for the third quarter of 2019. The cost of interest-bearing liabilities was 46 basis points for the third quarter of 2020 versus 1.12% for the third quarter of 2019.

The net interest margin on a tax equivalent basis decreased to 3.55% for the third quarter 2020, down 13 basis points from 3.68% for the second quarter of 2020 and a decrease of 88 basis points from 4.43% for the third quarter of 2019.

Net interest income for the third quarter of 2020 was $4.0 million, an increase of $1.1 million or 38.3% compared to $2.9 million for the second quarter of 2020. And a decrease of $92,000 or 2.2% compared to $4.1 million for the third quarter of 2019.

During the third quarter of 2020, the bank received nontaxable debt benefit proceeds of $2 million under 2 bank-owned life insurance policies and recorded a gain of $760,000 over the carrying value. Compared to the third quarter of 2019, deposit account service charges were $505,000 lower due to lower transactional fee income for the 9 months ended September 30, 2020.

Net interest income for the 9 months ended September 30, 2020, decreased $6.1 million or 6% to $96.1 million from $102.2 million for the 9 months ended September 30, 2019. The yield on interest-earning assets was 4.05% for the 9 months ended September 30, 2020, compared to 5.02% for the 9 months ended September 30, 2019.

The cost of interest-bearing liabilities was 64 basis points for the 9 months ended September 30, 2020, and 1.06% for the 9 months ended September 30, 2019. The net interest margin on a tax equivalent basis decreased 75 basis points to 3.76% for the 9 months ended September 30, 2020, from 4.51% for the 9 months ended September 30, 2019.

Net interest -- noninterest income for the 9 months ended September 30, 2020, was of $11.3 million, a decrease of $3.7 million or 24.5% compared to $14.9 million for the 9 months ended September 30, 2019. Earnings on bank-owned life insurance for the first 9 months of 2020 and 2019 includes $719,000 and $3.3 million, respectively, of nontaxable gains on debts from bank-owned life insurance claims.

Additionally, our deposit service charges decreased $1.2 million, again due to lower transactional fee activity. Noninterest expense for the 9 months ended September 30, 2020, increased $409,000 or 0.6% to $68.4 million compared to $68 million for the 9 months ended September 30, 2019.

Total assets as of September 30, 2020, decreased $87.1 million or 8.9% to $3.81 billion compared to $3.90 billion at June 30, 2020, and it increased $383 million or 11.2% compared to $3.43 billion at September 30, 2019, primarily due to the origination of PPP loans.

Loans, excluding loans held for sale at September 30, 2020, increased $29.6 million or 4% annualized to $2.96 billion compared to $2.93 billion at June 30, 2020, and increased of $287.7 million or 10.7% compared to $2.68 billion at September 30, 2019, primarily due to the origination of PPP loans and other organic loan growth.

Deposits at September decreased $83.5 million or 10.2% annualized to $3.17 billion compared to $3.25 billion at June 30, 2020, and increased $426.3 million or 15.5% compared to $2.74 billion at September 30, 2019.

We maintain our strong capital ratios as the company's total risk-based capital ratio increased to 16.67% at CTE1 capital ratio was 15.41% and the Tier 1 leverage ratio was 11.9% at September 30, 2020, compared to 16.56%, $15.30% and 11.96%, respectively, at June 30, 2020.

Nonperforming assets totaled $15.6 million or 0.41% of total assets at September 30, 2020, compared to $11.2 million or 0.29% of total assets at June 30, 2020, and $1.1 million or 0.03% of total assets at September 30, 2019. The provision for loan losses for third quarter of 2020 was $4.6 million or 0.67% annualized of average loans compared to the $8.5 million or 1.18% annualized of average loans for the second quarter of 2020 and $579,000 or 0.09% annualized of average loans for the third quarter of 2019.

The uncertainties associated with the COVID-19 pandemic sustained instability in the oil and gas industry, resulting economic conditions and the impact on the company's loan portfolio led the company to adjust certain factors utilized to determine the ACL. In addition, there have been -- there has been an increase in the company's adversely graded loans, which increased the company's ACL and provision for credit losses, especially in the 3 months ended September 30, 2020.

As a result of these factors, the company increased the ACL and the related provision for credit losses, which has negatively impacted the company's net income during 2020. The allowance for credit losses was 1.49% of total loans at September 30, 2020, and 1.35% of total loans at June 30, 2020, and finally, 0.96% of total loans at September 30, 2019. Our allowance for credit losses, less the PPP loans, was 1.67% as of September 30, 2020.

Now I'll turn it over to Joe West.

Thank you, Ted. Let me speak a bit to our loan portfolio, beginning with Slide 8 from the investor presentation.

For the third quarter, our loans were $2.92 billion versus $2.9 billion at the end of the second quarter of this year, an increase of approximately $25.2 million. Our portfolio yield was down from the 3 months ended Q3 2020, with a yield of 4.37% versus 4.54% from 3 months ended June 30, largely the result of the declining interest rate environment in 2020, and it was impacted by our PPP loans, which I'll discuss a little bit later.

Our average yield on loans for Q3, when excluding the PPP loans, was 4.65%. For the quarter, C&I loans were down slightly by approximately $5 million or 0.01%, CRE was up 0.4%, C&D was down 9.2% 1-4 Family was down 7.2%, and multifamily was down 14.5%.

As you turn to Slide 10, you will see our construction and development loan components, and our construction and development loans were down approximately $47 million when compared to the June 30, 2020, due to the completion of projects and fewer loans entering the category.

Slide 11 sets forth our oil and gas exposure, including how we quantify our direct and indirect exposure. Outstanding balances of oil and gas loans continued the downward trend from Q1 2020 to Q3 this year, while the total falling from June 30 were approximately $7.6 million, largely because of loan payoffs and pay downs.

Slide 12 sets forth the information about our PPP loans. During the third quarter, we began to work with our borrowers on forgiveness applications, with our initial focus being on loans greater than $2 million. At 10/20/2020, we had submitted forgiveness applications on 10 loans, with total principal balances of $34.4 million. And as of the end of last week, we're still awaiting word back from the SBA.

I believe as of this morning, we had submitted forgives applications for 16 loans, with total principal balances of $43.7 million. And also, we got word yesterday that we -- 1 loan for $82,000 was approved. We have not -- the money is not coming yet, but the SBA notified us that one of these applications was approved.

With the release of the simpler forgiveness application by the SBA earlier this month, we have also begun to work with our borrowers with loans less than $50,000 on forgiveness applications, with 969 of our PPP loans falling under $50,000 in principal amount.

Our team is doing a great work with our borrowers on the forgiveness applications, and we expect to continue progress with them during the fourth quarter of this year.

The table at the bottom of Slide 12 sets forth our average yield on our loan portfolio, our average yield on our PPP loans, and the average yield on our loan portfolio when taking out our PPP loans.

Slide 13 sets forth information regarding deferral arrangements that we have entered into with our customers as a result of the COVID-19 pandemic. The total number of our deferred loans was down to 41 at September 30, compared with 689 at June 30. And the principal balance of our loans remaining on deferral at the end of September was $82.4 million.

The largest category of our deferred loan is in our commercial real estate portfolio, with 25 loans with a principal of approximately $49.3 million. We are relatively pleased with the performance of the loans that are coming off of deferral. At September 30, of the 41 loans on deferral, 16 with a principal balance of $29 million were scheduled to return to payments this month.

If you turn to Slide 14, you will see a breakout of what we think are the elements of our portfolio that are most sensitive to COVID-19 virus. Retail CRE, oil and gas, convenience stores, hotels and restaurants, and the comparison between Q3 and Q2. Those elements comprise approximately 24.7% of our total loans at September 30, slightly up from the 24.4% at the end of June.

For this group, the deferred loan totals were, at the end of the second quarter; Retail CRE, $18.6 million; oil and gas, $4.9 million; convenience stores, $5.9 million; hotels, $17 million; and restaurants, $3.9 million.

Turning to Slide 16. Our nonperforming assets increased slightly over the third quarter, but our credit quality remains strong. As Bob mentioned, we believe we are working our process early detection and identification of problem loans conservatively. That process led to an increase in adversely graded loans as we are identifying past due loans associated with businesses impacted by the pandemic as well as businesses that may be negatively impacted generally.

Slide 16 shows information regarding our nonperforming assets to our total assets, which was 0.41% as of September 30 compared to 0.29% as of June 30. Our net charge-offs remained low at 0.02% of average loans.

Past dues and classified credits would be discussed now. Past dues were $27.2 million at Q3 versus $5.4 million at Q2. Classified credits rated substandard or worst increased, but remained low compared to the total portfolio, moving to $89 million at Q3 '20 versus $70 million in Q2 '20 versus $51 million at Q1 '20. The increase of $19 million from Q2 to Q3 was due primarily to COVID-related issues.

TDRs increased to $46.5 million compared to $34.8 million at Q2 and $15.9 million at Q2 '20 -- excuse me, Q1 '20. You may recall that the increase in TDR from Q1 to Q2 was largely the result of 5 credits that moved from substandard and received deferrals. The increase in TDRs at the end of Q2 over Q1 included 32 loans. Totaling $26.3 million, and had potential credit issues not related to COVID and that entered into deferral arrangements.

Because problems with these loans predated COVID, we wouldn't had to consider these TDRs in connection with the deferral arrangement. TDRs increased in the third quarter, largely as a result of 1 COVID damage creditor, which received additional payment deferral.

With that, I'll turn it back over to Bob.

Thank you, Joe. With that, we'll open it up to questions.

(Operator Instructions) Your first question comes from the line of Graham Dick with Piper Sandler.

So I just wanted to start on expenses. You all noted an increase in consulting fees related to the BSA/AML issue. Just wondering if you could share how much those were this quarter. And also how you think that might impact the run rate for expenses going forward?

Do you expect some of these to come out of the expense base in the coming quarters? And maybe for the core expense base to come back closer to $22 million or $23 million going forward?

Well, the BSA/AML costs for the third quarter was $1.3 million.

Graham, the spend on the BSA sort of a bunch of things together. Some are improvements to the process itself. Some are redoing old things that have to be brought current. There's a number of things that go into the consulting piece of this. And the spend is kind of lumpy. So depending on hours spent, the things that they do, it kind of moves up and down.

But there's going to be a heavy spend, at least for the next few months, as we get towards our examination, which is usually in the first -- basically the first week in February. So we expect to be spending, I don't think it would be more than what we're spending this quarter, but it could be about the same, at least through the fourth quarter.

All right. Great. That's really helpful. It sounds pretty onetime in nature. And then I guess, turning to loan growth, it looks like it went modestly positive this quarter. Can you talk about, I don't know, I guess, the drivers behind that? And how that might have affected your outlook going into 2021, especially if the economy and borrower demand continue to improve a little bit from here?

Yes, we're seeing some bright spots as far as demand goes. We've been very cautious about -- we kind of kicked up some underwriting standards around certain things in acquiring more equity in certain deals, and just trying to be a little cautious around what we see out there, looking at our own portfolio.

There are just so many things that we feel are sort of disconnected right now. We want to get past the election, try to figure out what people are going to do around whatever we see that happens after November 3, so that's pressure. I think COVID is going to be around for a while, but it does feel like people are understanding how to get around and navigate the COVID issue. So we're seeing less and less stress on the portfolio. I think we're having better visibility into the things that we think we can do and can't do.

But we're also seeing some other stresses as -- in our markets, oil and gas still plays, even though we don't have direct exposure, there is some pressure around oil and gas that -- and really, the petrochemical business is starting to feel as in the -- where you would -- you might think the rest of the world, given what's been happening is -- would be using more in the way of plastics, it appears they're using less. But that will ride itself also.

So we actually feel good about really beginning into 2021. I think the fourth quarter will still be kind of lumpy. And I can't tell you that we're going to be pedal to the metal about new deals in the fourth quarter until we kind of have a better feel for what's going to happen.

But if that gives you some idea, I mean, we're doing our best. We will feel good if we end the year somewhere close to year-over-year, basically flat, probably going to be down a little bit from that, but that's what we're shooting for.

Great. That's very helpful. And I guess just one more. I was wondering if you could give a little color around those -- the 2 loans that went to nonperforming this quarter. Maybe like what industry they're in? And if you guys have any specific reserve on them right now?

Yes, we do have specific reserves on them, and they were -- one was loan for -- it's a COVID-related issue in the auto repair industry. And the other is a loan to an individual. And that's -- we've got that reserve for that, so those were the 2 there.

(Operator Instructions) Our next question comes from the line of Matt Olney with Stephens, Inc.

This is Tom Wendler on for Matt Olney. I just have a few quick questions for you. Can you give me an idea of how loan yields on new production is comparing to what you saw in 3Q?

Loan yields are starting to, I think, flattened out a little bit. There's been a lot of competition. People -- as rates start to move down, you see people in various ways trying to figure out what rates need to be. But we're trying to bring most of our loans in around 4%. Depending on relationships that will move one way or the other.

But that's where a lot of the new things that we're putting on are coming in. In some cases, we're getting a higher rate, in some places, a little lower rate. But I -- we continue to see a lot of competition around certainly the deals that everybody thinks they can do today.

Okay. That's great. And then can you give an idea of your appetite for the repurchase program?

Well, our appetite is strong, the ability for us to get as much as we want is difficult. So as you guys well know, the rules around how we buy this stuff under this program. And is limited.

And so we're buying as much as we can. But we are limited as to how that plays out. So our program is out there. We're in there every day, and we'll buy as much as we can.

All right. Great. And then one last one for me. The ACL build, it looks like it was driven by the other category. Can you give me an idea of what this consists of?

Well, primarily, as to one -- it was around one individual, high-net-worth individual that we made a loan to, and we're still negotiating on how we get paid around that. But it was -- that was the bill and the other.

And at this time, there are no further questions. I would like to turn the call back over to Mr. Franklin.

Very good. We appreciate everyone's interest today, and thank you.

Ladies and gentlemen, that does conclude today's conference call. We thank you for participating. You may now disconnect.