Stellar Bancorp Inc (STEL) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the CBTX Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

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

Thank you. 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 fourth 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.

Before I 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, all of which can 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 Bob Franklin, our Chairman, President and CEO; Ted Pigott, our Chief Financial Officer; Joe West, our Chief Credit Officer; and Joseph McMullen, our Controller. At the end of the remarks, we'll open the call to questions.

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

Thank you, Justin. Welcome to the earnings call for CBTX, Inc., for the fourth quarter of 2020. We entered the fourth quarter of 2020 with caution as we experienced an ever-increasing contentious political climate and an acceleration in COVID cases in our markets as well as across the country. These conditions remain as we enter 2021. We are watchful for the economic impact of the policies of the new administration while we continue to be encouraged by the distribution of various vaccines, allowing communities to move more freely again.

Our customers remain resilient even though our markets are not fully open. We continue to see a drop in our current deferrals and request for new deferrals. Loan activity is beginning to pick up, and we expect that new loan relationships will steadily increase throughout the year, slower in Q1 and Q2, but picking up in the last half of the year.

The year 2020 was impacted by markets negatively affected by the pandemic, larger-than-normal loan loss provisions, lower interest rates and a large spin-related to our BSA program. We believe we have identified our major risks in the portfolio and adequately reserved for them. We have lowered our cost of funding to meet our lowering -- our lower lending rates, and we are hopeful for the new vaccines and the complete reopening of our markets.

As for our regulators and the formal agreement with the OCC, we continue to put significant work and energy into our BSA program. We are confident in our work to meet the regulatory expectations and further expect that our expense around these efforts will be significantly mitigated in 2021.

We are again cautious as we enter the year but we are -- but are also optimistic about the opportunities that we sense 2021 will bring, continue to maintain a strong balance sheet and capital position which allows us the maximum flexibility in meeting our goals for 2021.

With this, I will now turn the program over to Ted Pigott, our Chief Financial Officer.

Good morning. Thank you, Bob. We'll move into the fourth quarter 2020 results. Company reported net income of $10.2 million or $0.41 per share for the quarter ended December 31, 2020, compared to $6.4 million or $0.26 per diluted share for the quarter ended September 30, 2020.

Net income for the year ended December 31, 2020, was $26.4 million or $1.06 diluted -- per diluted share compared to $50.5 million or $2.02 per diluted share for December 31, 2019.

For the fourth quarter 2020, net interest income increased 2.6% compared to third quarter 2020. The yield on interest-earning assets increased to 3.79% for fourth quarter 2020 compared to 3.75% for third quarter 2020. The cost on interest-bearing liabilities was 0.39% for fourth quarter 2020 compared to 46 basis points for third quarter 2020. The net interest margin on a tax equivalent basis increased 7 basis points to 3.62% for fourth quarter compared to the third quarter. Net interest income for the fourth quarter of 2020 decreased $501,000 compared to the third quarter.

During the third quarter of 2020, the bank received nontaxable death benefits or proceeds of $2 million under 2 bank-owned insurance policies and we recorded a gain of $769,000 over the carrying value during the third quarter.

Noninterest expense for the fourth quarter of 2020 was $23.7 million, a decrease of $200,000 compared to third quarter 2020, primarily due to a decrease in salaries and employee benefits of $1.5 million, partially offset by a $663,000 (sic) [$763,000] increase in professional and directors fees, mainly consulting fees related to Bank Secrecy Act/Anti-Money Laundering compliance matters.

Net interest income for the year ended December 31, 2020, decreased 23.6% from 2019. The yield on earning assets was 3.98% for the year compared to 4.95% for the year 2019. The cost of our interest-bearing liabilities was 0.57% for 2020 and 1.07% for 2019. The net interest margin on a tax equivalent basis decreased 69 basis points to 3.73% for the year 2020.

Net interest income for 2020 was $14.8 million. Earnings on bank-owned life insurance for the years 2020 and 2019 included $769,000 and $3.3 million, respectively of nontaxable gains on death benefits on bank-owned life insurance claims. Additionally, deposit account service charges decreased $1.5 million in 2020 due to lower transactional fee activity.

Noninterest expense for 2020 increased $2.0 million or 2.2% from the year 2019. Professional and director fees include $3.9 million in consulting fees regarding the company's BSA/AML compliance efforts.

Moving to financial conditions. Total assets at December 31, 2020, increased 3.5% from September 30, 2020, and increased 13.5% compared to December 31, 2019. This was spurred by the originations of PPP loans and deposit inflows. Loans, excluding loans held for sale at December 31, 2020, decreased 1.4% compared to September 30, 2020. And they increased 10.8% compared to December 31, 2019, primarily due to the origination of PPP loans.

While deposits at December 31, 2020, increased 4.1%. This is consistent with seasonal trends and compared to September 30, 2020. And deposits also increased 15.5% compared to December 31, 2019.

We've maintained our strong capital ratios as the company's total risk-based capital ratio increased to 16.71%. Our CET1 capital ratios were 15.45%, and the Tier 1 leverage ratio was 12%, all as of December 31, 2020.

The allowance for credit losses for our loans was $40.6 million or 1.39% of total loans at December 31, 2020. This compares to $41.1 million (sic) [$44.1 million] or 1.49% of total loans at December 31 -- September 31 -- September 30, 2020. The allowance decreased during the fourth quarter 2020, primarily due to a $3.5 million loan charge-off.

The allowance increased $15.4 million at December 31 compared to December 31, 2019. The allowance increased probably due to uncertainties associated with the COVID-19 pandemic, sustained instability in the oil and gas industry, resultant economic conditions and the impact on the company's loan portfolio that led the company to adjust certain factors utilized to determine the ACL.

Now I'll turn it over to Joe West.

Thanks, Ted. Let me speak a bit to our loan portfolio, starting with Slide 8 from the investor presentation. For the fourth quarter, our loans were down slightly at $2.92 billion versus $2.96 billion at the end of the third quarter of this year, a decrease of approximately $40.4 million. In part as a result of a forgiveness and payoffs of our PPP loans, which were down to $275.4 million on a gross basis at the end of the year.

Our average yield was up from Q3 2020 with a yield of 4.37% to 4.42% for the 3 months ended December 31. Our average yield on loans for Q4 when excluding the PPP loans was 4.51%.

For the quarter, C&I loans were down by approximately $87.7 million or 10.8% compared to Q3. That's a $56 million paydown in the PPP loans, and a $31 million paydown in the non-PPP portfolio.

CRE was up 9.7% quarter-over-quarter. C&D was up 3.2%. 1-4 Family was up 5.5% and multifamily was down 13.5%.

As you turn to Slide 10, you will see our construction and development loan components and our construction and development loans were up approximately $16.5 million when compared to September 30, 2020, due to additional construction funding in the community development portfolio and some land development lending.

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 a downward trend from Q1 of 2020 to Q4 this year with a total falling from September 30 by approximately $3.5 million, largely because of loan payoffs and paydowns.

Slide 12 sets forth our information about our PPP loans. During the fourth quarter, we continued to work with our borrowers on forgiveness applications and at the end of 2020, we had received payments totaling $60.8 million and had submitted forgiveness application for another 256 million loans (sic - see slide 12, "256 loans") with total principal balances of $86.4 million.

With the release of the simpler forgiveness application by SBA earlier this month, we also began to work with our borrowers of loans of less than $150,000 on forgiveness application. Our team is doing great work with our borrowers on the forgiveness apps and has turned back to assisting customers with a second round of PPP financing, which we began on January 19th.

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 portfolio when taking out the PPP loans.

Slide 13 sets forth information regarding deferral arrangements that we entered with our customers as a result of the COVID-19 pandemic. The total number of our deferred loans was down to 21 at December 31 and the principal balance of those loans remaining on deferral at the end of December was $38.4 million. The largest category of our remaining deferred loan is in our commercial real estate portfolio with 9 loans with principal of approximately $19.4 million.

If you turn to Slide 14, you'll see a breakout of what we think are the elements of our portfolio that are most sensitive to the COVID-19 virus; retail, CRE, oil and gas, convenience stores, hotels and restaurants in a comparison across Q4, Q3 and Q2. Those elements comprise approximately 25.3% of our total loans at December 31, slightly up from 24.7% at the end of September, slight increases resulting from construction loans in the group continuing to fund.

Slide 15 sets forth info about our allowance for credit losses during 2020. As Ted noted, our allowance for credit losses to loans was 1.39% at December 31, 2020.

Turning to Slide 16. Our nonperforming assets increased slightly during the fourth quarter, but our credit quality remains strong. As Bob mentioned, we believe that we are working with our process for early detection and identification of problem loans conservatively. Our process led to an increase in adversely graded loans during 2020, including during the fourth quarter 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 0.61% as of December 31, 2020, compared to 0.41% as of September 30, 2020. Our net charge-offs increased during the fourth quarter to 0.49% of average loans on an annualized basis. Nonperforming assets increased $8.4 million during the fourth quarter of 2020, primarily due to 2 relationships previously classified as substandard accruing that we moved to nonaccrual status, partially offset by 1 loan of $3.5 million charged-off during the fourth quarter.

During the year ended December 31, 2020, we restructured 36 loans as TDRs with pre-modification outstanding recorded investments totaling $43.7 million, all of which remained outstanding at year-end. 34 of the 36 loans restructured as TDRs were subject to COVID-related deferral arrangements during 2020.

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

Thank you, Joe. And with that, we'll go ahead and open it up for questions. Operator?

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

Can you just go into a little more detail about the loans that moved to nonperforming this quarter? Just kind of like what industries they might have been focused in? And then on the CRE loan, like kind of where it might be sitting on a loan-to-value basis? Just really any additional color here, I think, would be great.

Yes, I'm going to make 1 comment, and then I'm going to let Joe give you more detail. We have chosen -- and I don't know how everybody else would do it, but from our standpoint, we've chosen to treat problem credits the same way we always have. We don't use the CARES Act to determine whether something is a TDR or not. If it's a TDR, we feel like it's -- then we treat it as such COVID-related or not. So in that light, you can understand some of the detail that Joe will give you. But Joe, go ahead.

Yes. The 2 long -- there are 2 relationships that make up the bulk of that -- of the dollars that we moved into nonaccrual in Q4. One relationship was in the automotive repair industry and business was down significantly due to COVID. So we had granted them a deferral, but then granted additional deferrals. And when we did the additional deferral in the Q3, we downgraded it substandard but did not place it on nonaccrual at that time. And then as operating results continue to suffer in Q4, we went ahead and put it on nonaccrual.

The other one is an industrial metal fabricator. A lot of their business is in the marine industry. And that's not a COVID issue, that had been substandard for really a couple of years, and really just kind of been limping along. And as business has deteriorated, we moved it -- in Q4, we moved that to nonaccrual. There's no real estate associated with that.

There is some commercial real estate associated with the automotive company that I mentioned a while ago that is their primary -- is commercial real estate at their primary location. And our loan-to-value on that particular loan is 80%.

Okay. Great. That's great color. And then also, I guess, what are you seeing in terms of migration into criticized and classifieds compared to where you're at in the third quarter? And then what are you kind of expecting in 2021? Have you already factored in some more migration into your reserve? And do you think where it sits right now is pretty good considering what you're expecting?

Yes. We think we've -- as I wanted to emphasize in -- for this increase in NPAs that we had in Q4, these were problems that we identified in Q3 or earlier. And so if you look at our total levels of classified, it has remained fairly constant over the last 4, 5 months. And elevated, obviously, as compared to a year ago. But over the last 4 or 5 months, that total number has remained constant.

And we're not seeing new things migrate that way to any major extent. We think that we've got a handle on the problems, and we're continuing to work with people because we probably think, in most cases, that's the best way to get repaid, is probably give them a little additional work -- time to work the issue out. But -- so we don't see -- as we look forward into 2021, we're not seeing a deterioration in the credit quality of the portfolio. We think we've got our problems identified at this time, and we're not -- don't see -- anticipate too much new problems hitting the books in 2021.

Okay. And then I guess just 1 last question here. Switching to expenses. Excluding that $2.4 million BSA/AML consulting expense, it looks like you guys did a pretty good job managing the expense base this quarter, mainly on lower salaries. Is there anything specific that happened here in the fourth quarter? And can you give me a sense of where you think the quarterly run rate might settle out in early 2021?

Yes. The biggest adjustment, and I'll let Ted speak to the run rate for 2021, but the biggest adjustment in the fourth quarter was some adjustment to some bonus accruals that we had had based on a better year. So it's -- we had some adjustments in the fourth quarter with the salary expense around that. As far as run rate going forward, I'll let Ted address that one.

Well, I think we normalized the fourth quarter for you. So given that as our run rate going forward, I think the only thing you'll see in the first quarter is we generally do our salary adjustments first quarter, which I don't think will not be on the same run rate that you've seen in prior years. We've already looked at that and tightened that down. Other than that, I don't really know of any major things that are going to affect us going forward like that.

(Operator Instructions) Our next question comes from the line of Bill Jones with KBW.

I just wanted to -- switching back to credit a little bit. I just wanted to touch on those COVID deferrals that were moved to TDR this quarter. Just maybe get a little more clarity around the decision to move those loans. And does anything really change regarding the mechanics of those loans or how they'll be treated moving forward?

I didn't quite -- the part of the question, I didn't quite understand. Can you repeat it?

Yes. Just a little more clarity around the COVID deferrals that were moved to TDR this quarter. Does anything really change about how those will be treated moving forward?

I would say, no, they may -- we're going to continue to work with them. They -- there could be additional deferral given -- depending on how we gauge their prospects for business in 2021. The -- one of them -- the problem is that the one that had been classified for a longer period of time is really not a COVID issue. It's -- they had revenue problems prior to the pandemic.

So we'll continue to work. We might grant some additional forbearance there if we could see our way to a better collection process this year. So both of those are sort of at a point where we're evaluating their -- the plans they've given us for the near and medium-term and trying to decide what's in the best interest of the bank regarding the additional restructure of the loans.

Got it. That's helpful. And then maybe just moving on to growth. You guys sound pretty optimistic about 2021. And I think CBTX is one of the few banks that outside of PPP was actually able to get a little bit of organic growth this year. Does the mid-single-digit growth range feel like a fair number next year?

Yes. Well, I think our expectation is that we get back to our normalized growth, which is 5% to 8% a year is our typical target. Now I can't give that guidance really and with any kind of specifics just because I just don't understand what first and second quarter are going to give us and really clouds the rest of the year because I think it's going to be difficult to understand exactly. Most of our business comes from shoe leather marketing. So when we can't get out and visit with our customers and our prospects, that makes it difficult for us.

So a lot of our loan generation is coming from existing customers, which is great, and that happens on a regular basis year in, year out, COVID or not. And so that business will continue at a much better pace than what our -- maybe new prospects and new business is.

And so it's too difficult at this point to really know that we will be back on that track. Our expectation and feeling is that we possibly could get there. But I can't, with any certainty, tell you that we're going to be able to. But that's our goal anyway.

Understood. Great. Yes, definitely a tough environment to look ahead in and forecast a little bit. Just last 1 for me on the buyback. You guys were a little active this quarter, 150,000 shares, which is great to see. Surprised it wasn't a little more than that just given your stock has been trading so cheaply, especially at the time that you guys reinstated. Just wanted to hear your thoughts on your buyback appetite moving forward and how you guys think you'll deploy some of your excess capital?

Well, we're -- we always look at everything. We look at buybacks, look at possibly increasing the dividend and still are hungry for some M&A. And I think M&A is something that's top of mind right now, I think, as people have a lot of conversations. We continue to have a lot of conversations with people. But as far as the buyback goes, I mean, the limitations around the programs that are available to us, make it a little bit difficult, the flow of the stock makes it a little difficult. But it's -- we're buying what we can every day. So we're -- we continue to be in the market to buy our stock back. We still think it's cheap relative to what other uses we might have for that capital.

So it's a -- we feel like it's still a good buy for us. But we're also looking to employ that capital in a very different way. And we think that maybe this COVID debacle has -- will provide some opportunities. I think people are reassessing where they are and what their opportunities are. And we are encouraged by the conversations that we're having out there that more and more people are considering transactions.

So we'll see what happens over the next 12 months, but we're looking at several different ways to try to employ some of that excess capital that we have. We don't -- we're hoping it's not in a negative way.

There are no further questions at this time. I would now turn the call back over to Bob Franklin for closing remarks.

Well, very good. We appreciate everyone joining us on the call today. Thank you for your interest in CBTX. And with that, we're adjourned. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.