Stellar Bancorp Inc (STEL) 2021 Q1 法說會逐字稿

Good morning, everyone, and welcome to the CBTX Q1 2021 Earnings Call. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Justin Long. Please go ahead, sir.

Thank you. Good morning. I'm Justin Long, the General Counsel of CBTX, Inc. and our management team would like to welcome you to our Earnings Call for the First Quarter of 2021. 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 10-Q for the first 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 first 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 Robert R. Franklin, Jr., 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'll open the call to questions. With that, I'll turn it over to our Chairman, President and CEO, Bob Franklin.

Thank you, Justin. Welcome to the Earnings Call for CBTX for the First Quarter of 2021. We entered the first quarter with cautious optimism as the economy continued to rebound in response to stabilizing conditions related to the pandemic, including the accelerated distribution of vaccines.

Over the course of the first quarter, our markets in Texas continued to improve as companies worked toward returning to pre-pandemic operations. We have seen businesses in the communities begin to regain their footing after the difficulties of 2020, and as of March 31, 2021, the Governor of the state of Texas removed restrictions, initially, set in place allowing businesses to reopen at full capacity.

During the first quarter, we also noted a build in liquidity in the system and continue to increase our deposits. We anticipate that our customers in the bank will be able to put that liquidity to work during 2021, particularly as conditions in our markets continue to rebound.

Our asset quality remains strong. During the quarter, we have seen a decline in the number of loans subject to deferral arrangements for businesses impacted by COVID-19 pandemic, which allows us to focus on those businesses hardest hit by the pandemic. New loan activity continues to slowly pick up as markets reopen, and we expect that we will maintain this upward trend, especially during the second half of the year.

Through the first quarter, we have minimally adjusted our economic qualitative factors associated with our ACL. That would be more aligned with an improving economy. However, our expectation is that in coming quarters with the continued economic improvement, we will be adjusting for the economy, bringing our ACL back in line with more traditional levels.

Our capital remains strong, which allows us to increase our dividend to our shareholders. We will continue to evaluate our dividend policy along with the share buybacks to make sure we maintain a strong capital base that allows us to take advantage of acquisition opportunities. Our focus is to create shareholder value and enhance shareholder return when opportunities are available.

We continue to work with the OCC with respect to compliance regarding the formal agreement and a focused time and resources on our Bank Secrecy Act program to meet the regulatory expectations. We will continue to do so until the release of the formal agreement. The OCC just recently completed its examination, and we await its final conclusions.

We are optimistic about the remainder of 2021, particularly in the second half of the year as our great team, our customers and our communities can shift their focus from the difficulties associated with the pandemic to more opportunistic aspirations and growth. We maintain our strong balance sheet and capital position to allow us maximum flexibility of meeting our goals for the company and our shareholders in 2021.

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

Thank you, Bob. Our references to certain financial information for the first quarter and prior periods begins on Slide 4 of our investor presentation if you want to follow along. The company reported net income of $10 million or $0.41 per diluted share for the quarter ended March 31, 2021 compared to $2.2 million or $0.41 per diluted share for the quarter ended December 31, 2020.

Net interest income for the first quarter '21 was $33.1 million, an increase of $570,000 from the fourth quarter 2020. The net interest income on a tax-equivalent basis was $3.71 for the first quarter '21, which is an increase of 9 basis points from the fourth quarter of 2020. The loan yield increased 22 basis points to $4.64 for the first quarter compared to the fourth quarter of 2020. It was assisted by accretive net origination fees of $3.2 million and $2.1 million, respectively, from the Paycheck Protection Program loans.

The cost of the interest-bearing liabilities was 34 basis points for the first quarter compared to 39 for the fourth quarter of 2020. The provision for credit losses was $412,000 for the first quarter of '21. It was primarily due to increases of $237,000 and $126,000 in the ACL for loans and unfunded commitments, respectively, in addition to $49,000 in net loan charge-offs.

Noninterest income for the first quarter was $3.1 million, a decrease of $411,000 from the fourth quarter. The decrease from the fourth quarter, primarily resulted from decreases in gains on sales of assets and deposit accounting service changes with 187,000 and 77,000, respectively. The decrease in noninterest income for the first quarter 2020 resulted from decreases in swap fees in the deposit service of account fees of $964,000 and $292,000, respectively.

Noninterest income for the first quarter '21 was $23.3 million, a decrease of $373,000 from the fourth quarter. First quarter '21, professional and director fees decreased $1.7 million from the fourth quarter 2020. And consulting related fees associated with BSA/AML compliance matters, salaries and employee benefits increased by $1.3 million to $14.2 million.

Turning to the balance sheet. Total assets in March 31 increased by $79.4 million, $2.4 billion compared to $3.9 billion at December 31, 2020. The growth was driven by net deposit inflows of $83 million during the period. Loans, excluding loans held for sale at March 31, 2021, decreased $32.5 million to $2.9 million compared to December 31, 2020. PPP loans, net of deferred fees and unearned discounts were $268.8 million on March 31, 2021, and $271.9 million -- [$271.10 million] excuse me at December 31, 2020.

Deposits at March 31, 2020 increased $83 million to $3.4 billion compared to $3.2 billion at December 31, 2020. The company maintains strong capital ratios as a total risk capital ratio increased to 17%. The CET1 capital ratio increased to 15.75 and the Tier 1 leverage ratio was 11.90 at March 31.

Nonperforming assets totaled $23.6 million, 0.59% of total assets at March 31, 2021 compared to $24 million or 0.61% of total assets in December 31, 2020. The allowance for credit losses for loans was $40.9 million or 1.41% of total loans at March 31, 2021 compared to $40.6 million or 1.39% of total loans at December 31, 2020.

The ACL increased in the first quarter of 2021, primarily due to increases for 237,000 and 126,000 in the ACL loans and unfunded commitments, respectively, in addition to $49,000 in net loan charge-offs.

Now we'll turn it over to Joe West.

Thank you, Ted. I'll speak a bit to our loan portfolio, beginning with Slide 7 from the investor presentation.

For the first quarter, our net loans were down slightly at $2.85 billion versus $2.88 billion at the end of 2020, a decrease of approximately 37 -- excuse me, $32.7 million, primarily due to paydowns during the first quarter of 2021. Our average loan yield for Q1 was up from the 4.42% for Q4 2020 to 4.64%. Our average yield on loans for Q1 when excluding the PPP loans was 4.49%.

For the quarter, C&I loans were up by approximately $13.8 million or 1.9% compared to Q4. CRE was up 2.9% quarter-over-quarter. C&D was down 11.2% compared to the fourth quarter. 1-4 family was down 6.3% and multifamily was up 5.2%

Slide 8 sets forth the components of our commercial loans and our gross commercial loans stayed relatively flat for the first quarter at $2.56 billion versus $2.56 billion at the end of 2020.

As you turn to Slide 9, you will see our construction and development loan components and our construction and development loans. We're down approximately $58.6 million when compared to December 31, 2020. Due to existing C&D loans reaching completion and moving to permanent loan classification as well as some payoffs.

Slide 10 sets forth our loan -- or excuse me, sets forth our oil and gas exposure, including how we quantify the direct and indirect exposure. Our exposure for the first quarter remained relatively flat compared to the exposure at the end of 2020.

Slide 11 sets forth information about our PPP loans. During the first quarter, our team worked with customers on the latest round of PPP financing and originated 834 new PPP loans with principal balances totaling $122.3 million.

Our team also continued to work with our borrowers on forgiveness applications. And at March 31, we had received payments totaling $123.4 million compared to $60.8 million of payments received during the fourth quarter. During the second quarter, our primary focus in this area will be on forgiveness applications as we stop accepting PPP loan applications beginning April 25.

The table at the bottom of Slide 11 sets forth our average yield on our loan portfolio. Our average yield our PPP loans and the average yield on our portfolio we're taking out the PPP loans.

Slide 12 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 16 at March 31 and the principal balance of both worlds remaining on deferral as of March, was $34.3 million. A large category of remaining deferred loans in our commercial real estate portfolio, was 7 loans, principal of approximately $22.7 million.

The bottom of Slide 12, sets out a breakout of what we think are the elements of our portfolio that are most sensitive to the COVID-19 virus. Retail centers, oil and gas, convenience stores, gas stations, hotels and restaurants in the comparison across Q1 and Q4 2020. Those elements are comprised of approximately 25.3% of our total loans at March 31 and December 31.

Slide 13 sets forth information about our allowance for credit losses during 2021. As Ted noted, our allowance for credit losses through loans was 1.41% at March 31, '21.

Turning to Slide 14. Our nonperforming assets decreased slightly during the first quarter, and our credit quality remains strong.

Slide 16 shows information regarding our nonperforming assets to our total assets, which was 0.59% as of March 31, '21 compared to 0.61% as of December 31, 2020. Our net charge-offs remained low at 0.01% of average loans on an annualized basis. With that, I'll turn it back over to Bob Franklin.

Thank you, Joe. Andy, I think we're ready for questions.

(Operator Instructions)

We have our first question from the line of Graham Dick from Piper Sandler.

So loan balances excluding PPP originations were down just a bit this quarter, it sounds, like mainly on pay downs. But then on last quarter's call, I think we had talked about you all getting back to that 5% to 8% growth rate maybe after the first part of the year. You all still feel good about getting this range, going forward, maybe in the back half of the year mainly?

I'm sorry, Graham, I didn't -- I couldn't hear the last part of your question.

Yes. Sorry about that. Just can you hear me a little better now? Is it any better.

Yes.

So yes, basically just wondering how you guys are feeling about getting back to that 5% to 8% growth rate going forward, mainly, I guess, in the back half of the year as things start to pick up in your economies.

Yes. I think we were feeling fairly good that we're able to hold sort of loan balances pretty well flat through the pandemic and into the first quarter and that we were able to keep up with paydowns and at least keep ourselves in a flat -- relatively flat position. But really, I think the growth prospects are starting to come in. The pipeline is starting to build a bit during this quarter, but I think the growth will come primarily in the third and fourth quarter. We're starting to see a lot of good economic activity here. And as we get towards the end of the year, we still feel like it may be at the lower end of that range. It just depends on the economic activity here. But I still think we can get back to that 5% to 8% growth rate.

Okay. Great. That's helpful. And then I guess moving on to the BSA/AML compliance efforts. So I know you guys just had your examination here in February. I'm not sure on what you guys can discuss on the call but I just wanted to get maybe a little color on how encouraged you guys might be by it or what you kind of think, and what it looks like going forward?

Yes. I mean there's not too much I can say here. I think we were encouraged by the examination, and we're -- it'll take them a month or 2. I'm not sure we'll get the examination back until sometime probably late May or early June, but just the way that things work. But we're waiting on those results. And as we get those back, we'll give folks more information.

Okay. And then I guess last for me, You started to see -- I see a bit of a trend just some larger M&A transactions recently. Obviously, you guys are looking for something completely different than those deals. So I just wanted to get your thoughts on how smaller bank M&A conversations have been progressing and then maybe what the main roadblocks might be to getting some of the bid year criteria, I guess, across the line.

Well, as you guys have seen across the board, and it's been reported in the press, I mean, there's a lot of conversations going on, a lot of combinations happening. And I think more and more of that is going to continue to go on. I've thought for a long time that it was going to take a -- take something to get people's realistic expectations around pricing. And I think the pandemic maybe has done some of that. And we've also seen a pretty significant shift in the way people are looking at financials to give people a better currency to use to go out and do deals. So a lot of conversations going on. I think If we can match expectations on price along with what people can afford to pay, we'll see a lot more of this. And it just seems to me that those things are happening right now. We're having a lot of conversations with whether it be bigger, equal to or smaller. I mean I think it's all -- we're having all those conversations and then trying to figure out what the right way to go. It's -- for us, it's nice to have options, and I think that's where we sit today.

(Operator Instructions)

We have our next question from the line of Thomas Wendler from Stephens.

I have a few questions for you. First, when we saw a nice move-up in the security portfolio last quarter, should we expect to see continued deployment of excess liquidity into the security book? And then do you have any internal limits on how large you want to get the security book?

Yes. Thomas, we did start to increase the securities portfolio really over the last half of the year and trying to find opportunities to deploy some of the excess capital -- or some of the excess liquidity that we had. We're very cautious around making mistakes and deploying too much into the things that would cause those problems later on. My contention is after going through a few of these over the years, as you come through -- come out of these things and then you have these -- have a lot of excess liquidity there are a lot of mistakes get made, whether it be in the loan portfolio or the bond portfolio. So I think we'll remain cautious around what we do on both sides of that to make sure we're not chasing yield in one way or the other. But we will probably continue to add a bit to our bond portfolio, making sure that we have cash flows available to reinvest over time. But it's -- we have to be a bit cautious, especially with interest rates as low as they are, to not get ourselves in a situation that we would regret later on. So yes, you did see a trend there, and I think we'll continue to look at that.

That's some good color. And then on the repurchase program, what kind of appetite are you guys having for repurchasing shares at current prices?

Well, we're always looking at it. We've got a program out there right now. We haven't been able to buy as much as we may have liked over time. But we continue to look at that, continue to look at the prices that we would pay and what that effect is to our balance sheet and so right now, we feel like we're okay. I think -- but we will continue to look at share buybacks. We looked at our dividend policy and felt like it was a good idea to increase our dividend. We did buy back about 20% last quarter, and we'll continue to look at that over time. So trying to enhance shareholder return in various ways, along with trying to really find ways to lever the capital and really by utilizing an acquisition, which we think is probably the best way to help us gain some scale and put to work the liquidity that we have along with the excess cap.

Yes. Yes. It sounds pretty consistent. And then one last housekeeping item for me. Can you give me an idea of the forgiveness timeline you're expecting for the remaining PPP loans and fees?

Yes. It's an interesting question. I don't know that we necessarily have a timeline. Our suspicion is that the second round of this or third round, as you might call it, might be quicker in that -- these people, I think, are going to be looking for forgiveness pretty quick after this. The rules are a little bit different. But it's been fairly consistent the way we've gone through on a month-to-month basis, but I know that we'll be concentrating more on trying to get people to go ahead and get this done. But it's hard to tell exactly where people are going to be, but it seems to me the second part of this is going to go faster than the first.

We do have another question from the line of Will Jones from KBW.

So Bob, I just wanted to go back to M&A for just a brief moment. It has been a notable year in M&A, particularly with larger, more transformational type deals. One of those happened to be right in your backyard with the cadence, think it was South deal right there in Houston. I'm sure you know what a transformative deal like this often brings along a bit of market disruption and a bit dislocation. Just curious how CBTX is positioned to capitalize on some of this disruption, whether it be market share takeaway or lender hiring. Where does the company see the most opportunity to capitalize here?

Yes. In that particular transaction, Will, I'm not sure. Cadence really positioned themselves, at least in our -- what we've seen in doing a lot larger transaction and really went about the market in a sort of a larger bank way. A lot of what they were doing doesn't necessarily fit into what we were doing. The other side of that transaction really was still trying to build out market share here. And so there may be a few opportunities there to look at as people try to figure out what their positions are in these new organizations. And we certainly have our feelers out. But in some cases, it may be more along the lines of additional customer opportunities than it is -- offshore opportunities just based on the types of things that they were doing.

Got it. That makes sense. And then maybe just last for me. Just looking back to the buyback. I want to say your stock is not quite as it used to be, I think, trading around 1.7x tangible now. It sounds like the appetite for the buyback is still there even at these higher price levels. Is there a point where the buyback doesn't make as much sense for CBTX from a capital deployment standpoint?

Well, I think that's 2 separate things. The appetite to buy back stock is probably still there. What's being served up to us today, it's a higher price, and we have to look at that in the context of what we feel is a good earn back. And so it's probably not -- it's obviously not nearly as attractive to us today as it was when it was trading a lot lower because it just doesn't make sense for us as a buyer. But I think we feel strongly about the future of the organization and certainly still don't believe that we're necessarily being priced at what we think the organization is worth. But it's certainly -- we certainly feel like the market is starting to recognize the value in our organization, and so we like that. But we'll always gauge what's proper for us as a bank to determine what the right price to buy these shares back is. That's -- I mean, that's what we'll do going forward.

Yes. That makes sense. That makes sense. And just lastly for me, if I could slip one more quick one in here, it's great to hear the commentary around the reserve levels. It feels like the confidence level is certainly picking up as the economic outlook kind of brightens a little bit. Could you just remind us what's your day 1 CECL reserve one back in 1Q '20, if you kind of strip out some of that COVID provisioning? And then, longer term, do you feel like the reserve can steadily trickle back down towards those levels? Is that a fair way to think about it?

Yes, I do. I mean, I think we're -- we typically, I guess, run in the 1 to 1.15 range. I think that is something that we would see over time would be sort of the right place for us to be now. CECL drives us in different ways and maybe that's slightly higher based on CECL today. But we do feel like we've gone through the terror of June of 2020 when we saw a $500 million-plus of deferral requests come in and now we're down to very few. And so I think we also have seen many of our borrowers -- most of our borrowers back on track again, and we understand the ones we have to work with. So -- and even the ones that we thought were the most stressed appear to have some light at the end of the tunnel, and it looks like they've come and starting to come back. So we feel pretty strong about the portfolio. And the reserve as it sits today is really high level for us. I mean that's something that we're not used to and don't feel like it may be necessary as we move through the rest of the year. Now loan growth will impact that also -- it also means that we won't have to add to it, maybe, as we go forward. So it's a balancing act between loan growth and what the reserve needs to be to cover what we have.

(Operator Instructions)

There are no further questions at this time, presenters. I would like to turn back the call to Mr. Bob Franklin. Go ahead, sir.

Well, thank you very much. I appreciate everyone's interest in CBTX, and we look forward to speaking with you next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect, and thank you for participating.