Stellar Bancorp Inc (STEL) 2021 Q2 法說會逐字稿

Welcome to the CBTX Q2 2021 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Justin Long. 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, Inc., Earnings Call for the Second 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 Form 10-Q for the second 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 second 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 these 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...

Ladies and gentlemen, please stand by. The call will resume momentarily.

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Thank you. Well, we got cut off. So I'm not sure where I was in my brilliance, but let me...

Our PPP loans.

We'll start back. Our PPP portfolio continues to decline as the pace of borrower forgiveness up picked up during the second quarter. Our officers are increasing their pace of in-person meetings, and we are seeing our pipeline build as we continue into the third quarter. Our expectations are that we will continue to see new loan activity coming from existing relationships and newly acquired customers as our calling efforts continue to increase into the third and fourth quarters.

We have been provided significant liquidity by our customer base. Our job is to stay focused and disciplined on our credit culture as we put these funds to work. We face stiff competition and the rate environment is challenging. But these are issues that we have dealt with since the beginning as community bankers. The challenge is to not make mistakes as we are not being paid a great risk premium in this interest rate environment.

I also want to thank our entire team that has worked very hard on our Bank Secrecy Act program to meet regulatory expectations, including the formal agreement with the OCC. It has been a bank-wide effort, and we continued our efforts during the second quarter, including the work with some consultants and outside counsel. We have continued to communicate with the OCC regarding our program and the formal agreement. We believe that we have taken the necessary actions to comply with each of the articles of the formal agreement with the OCC.

Based on discussions with the OCC, we expect to hear from them regarding the status of the formal agreement in the coming weeks. We do not anticipate our spend on consultants to continue into the third and fourth quarters. We are pleased to be in a more robust economy and expect to capitalize on that growth to continue to build CBTX for the future.

We remain focused on creating shareholder value, we have a great team, excellent customers, and operate in growing markets. We have a strong balance sheet, exhibiting a strong capital position. Our relationship model provides us with low-cost deposits and strong, sticky customer relationships. Our focus will remain on driving long-term value for our shareholders.

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

Thank you, Bob. Certain financial information for the second quarter and prior periods begins on Slide 4 of our investor presentation. The company reported net income of $11.7 million or $0.48 per diluted share for the quarter ended June 30, 2021, compared to $10 million or $0.41 per diluted share for the quarter ended March 31, 2021. And finally, 2000 -- $2.2 million or $0.09 per diluted share for the quarter ended June 30, 2020.

Our net interest income for the second quarter 2021 was $31 million, a decrease of $2.1 million from the first quarter. The second -- the net interest margin on a tax-equivalent basis was 3.29% for the second quarter, a decrease of 42 basis points from the first quarter 2021. The loan yield increased 28 basis points to 4.36% for the second quarter 2021 compared to first quarter 2021. The cost of interest-bearing liabilities was 0.32% for the second quarter compared to 0.34% for the first quarter 2021.

Our provision for credit losses was a recapture of $5.1 million for second quarter 2021 compared to a provision for credit losses of $412,000, which was primarily due to continued improvements in the national economy, economic forecast, loan quality, and the size of the loan portfolio. Noninterest income for the second quarter increased $380,000 in the first quarter to $3.5 million, primarily due to increases in gains on sales of assets and also card interchange fees.

Noninterest expense for the second quarter 2021 was $25.2 million, an increase of $1.9 million, the first quarter. The increase from first quarter 2021 primarily resulted from increases in professional and director fees of $738,000, salaries and employment benefits of $546,000, and advertising, marketing, and business development of 2,000 -- $225,000 from the first quarter.

Total assets at June 30, '21, increased $37.9 million to a total of $4.1 billion compared to March 31, 2021. This growth was driven by net deposit inflows of $32 million. Loans, excluding loans held for sale at June 30, decreased $162 million to a total of 7 -- $2.7 billion compared to March 31, 2021. PPP loans, net of deferred fees, and unearned discounts were $179 million at June 30, '21, and compared to $268.8 million at the end of March 31, 2021. Compared to June 30, 2020, our loans, excluding PPP loans, decreased 2.8% on an annualized basis. Deposits at June 30, 2021, increased $32 million to $3.4 billion compared to March 31. Compared to June 30, 2020, deposits increased 5% on an annualized basis.

The company maintained strong capital ratios as the total risk-based capital ratio increased to 17.72%. The common equity Tier 1 capital ratio increased to 16.46%, and the Tier 1 leverage ratio was 11.63% at June 30, 2021. Nonperforming assets totaled $21 million or 0.52% of total assets at June 30, 2021, compared to $23.6 million or 0.59% of total assets at March 31, 2021. The allowance for credit losses for loans was $37.2 million or 1.36% of total loans at June 30, 2021, compared to $40.9 million or 1.41% of total loans at March 31, 2021.

The ACL decreased during the second quarter, primarily due to recapture of $4.2 million and $893,000 in the ACL for loans and unfunded commitments. This is due to improvements in the national economy and economic forecast, the reduction in loan portfolio, and an improvement in loan quality. Net recoveries were $499,000 for the second quarter compared to net charge-offs of $49,000 for the first quarter 2021.

Now I will turn it over to Joe West.

Thank you, Ted. I'll speak a bit for our loan portfolio, beginning with Slide 7 from the investor presentation. For the second quarter, our net loans were down slightly at $2.69 billion versus $2.85 billion at the end of first quarter of '21, a decrease of approximately $160 million due primarily to paydowns during the second quarter of 2021 of approximately $64 million on commercial loans. We also had a decrease of approximately $90 million in our PPP loans.

Our loan deferrals relating to COVID continue to decrease, and we had 9 loans with principal totaling $20.5 million on deferral at the end of the second quarter. For the quarter, C&I was down by approximately $98 million or 12.9%, again, with $90 million in PPP payoffs compared with Q1. CRE was down 1.5% quarter-over-quarter. Construction and development was down 8.2% compared with the first quarter. 1-4 family was down 6% and multifamily was down 2.4%.

Slide 8 sets for the components of our commercial loans, and our gross commercial loans were down slightly for the second quarter from $2.56 billion versus $2.41 billion at the end of the second quarter. As you turn to Slide 9, you'll see our construction and development loan components, and our construction and development loans were down approximately $38.1 million when compared to March 31, 2021, due to payoffs as well as some existing C&D loans, reaching completion and moving to permanent loan classification.

Slide 9 sets forth our oil and gas exposure, including how we quantify our direct and indirect exposure. Our direct and indirect oil and gas loans for the second quarter increased slightly to $171.6 million compared with the end of the first quarter. Slide 10 sets forth information about our PPP loans. During the second quarter, we saw the pace of approved forgiveness applications increase and our net PPP loans decreased $89.6 million from the end of the first quarter. During the second quarter, we originated $20.3 million of new PPP loans, and we received payments totaling $110.4 million related to forgiveness or payments from customers. We continue to work with our borrowers on forgives applications.

The table at the bottom of Slide 10 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 the PPP loans. Slide 11 sets forth information about our allowance for credit losses. As Ted noted, our allowance for credit losses was 1.36% at June 30, 2021.

Turning to Slide 12. Our nonperforming assets decreased again slightly during the first quarter, and our credit quality remains strong. Slide 12 shows information regarding our nonperforming assets to our total assets, which was 0.52% as of June 30, 2021, compared to 0.59% as of March 30, 2021. Our recoveries during the second quarter exceeded our charge offs, resulting in a net recovery of $299,000.

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

Thanks, Joe. With that, we'll open it up for questions.

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

So I just kind of wanted to start off on the pay down front. I know it's tough to gauge, but given what you guys are seeing in the market today, do you think it'll accelerate or decelerate in the back of the year? And then also, how does that impact what you expect on the loan growth front, excluding PPP loans?

Yes, Graham, we somewhat expected to see the second quarter have somewhat of a dip as we started to push into more face-to-face meetings. We did get some unexpected paydowns in the form of several projects that were sold. The pricing on some of this stuff is -- and it kind of surprised us a little bit on where it came from, for retail centers, which we thought were fairly stressed over the COVID period but recovered quickly. And there's a lot of capital chasing these projects. So a little unexpected to see and I think Joe has those numbers for us, if you want to talk about them, Joe, why don't you.

Yes, during the first half of the year, we've seen a decrease in our outstanding retail CRE of about $48 million. If you might recall from earlier presentations when we were discussing the effects of COVID, and one of the things we highlighted was our exposure to commercial real estate in the retail space that was just under $300 million. And so that's down now to just under $250 million. So -- and what was interesting about that, as Bob said, is both of these were not -- this reduction was not rated to refinancing out to another lender, but the sale of the center to another investor. And to the extent that we could, we tracked the sales prices on those and compared them with the appraisals, and they were selling it above the appraised values of what we could determine. So felt pretty good about that as giving some -- as an indicator, some strength in that market.

So -- and we also had some contraction in our outstanding loans in c-stores, more of those, I think, were refinances than sales. That was about -- probably about $20 million in the first half. And a little bit of a contraction in our 1-4 family perm portfolio, I think just homeowners taking advantage of lower rates with other lenders. And so I think that was -- that declined a little bit but the big hit really was the retail and the c-stores. In some ways, that derisk the balance sheet a little bit. So -- but we're happy to see that the prices were -- for those properties were holding up.

But what we have seen on the other side of that, Graham, is our pipeline is significantly better than it was at the beginning of the first quarter -- of the second -- first part of the second quarter. And so we're starting to get new opportunities and starting to book those loans. As we begin the third quarter, and we think that will do nothing but increase throughout the rest of the year. So we feel good about where we are from a trajectory standpoint and it didn't surprise us necessarily that we took a slight step back in the second quarter as we can -- as we started to do our face-to-face meeting. So I think payoffs will continue but I think they're more at a similar pace to what we would normally see in a cycle, but we'll just have to see where that takes us. But I think most people are going to start to see the same kind of thing, but it's -- but the bright side of that is that the pipeline is good, and we feel good about where we're going there.

Okay. Great. Thanks. And then on liquidity, looks like the average for liquidity balances in the quarter was about $670 million. I just kind of wanted to get a sense of what your plan is on deploying that cash into higher-yielding assets. So do you think you'll buy more bonds maybe at a similar magnitude to what we saw this quarter or are you thinking that you might just reserve the majority of it for loan growth, assuming a lot of it runs out of the bank? That may have been temporary or stimulus-driven, I guess, that came in over the last couple of months.

Yes. I mean it's all of the above, I think you just described, Graham. I mean we're -- we typically deploy our money into loans. That's where we like to go and that's where we take our risk. And we have increased our bond portfolio some. It's not a great environment, we don't feel to significantly increase that bond portfolio. We're aware that you can make a lot of mistakes at a low-interest-rate environment and pay for those in later years. And so we're very cognizant of trying to stay as flexible as possible. At the rapid rate that this liquidity came to us, it's difficult for us to employ it in the same rapid rate. And so we have to be diligent about the way we do it. That's how we're going to step along and do this over time, and we can't do it tomorrow.

So we think we'll continue on a good growth rate through the end of the year. And if the economy stays good, as good as it is now through next year, we think 2022 will be a very good place to kind of catch-up on this liquidity position. But it's an unusual place for us. We haven't had this kind of liquidity gap for a long time, and it's going to take us a while to work through it and understand because I do think some of this is temporary. I don't believe that people are going to sit there forever in this low-interest-rate environment and hold cash balances the way they have. So we expect some of that will go away. It's hard for us to understand what that may be, but we do expect some of that to push off and get employed into something better than certainly what we're paying them, which is very little. Our cost of funds is still extremely low and we just continue to look for opportunities to employ that.

Your next question is from the line of Will Jones with KBW.

So great news that you guys won the BSA. It sounds like you guys have seen a lot more visibility on that front. Bob, just wanted to ask you, do you think it's fair to say that 2Q is really the last big slug of BSA expense. I know it can be really hard to look forward and kind of map that out but just curious if you think 2Q may be kind of peak BSA expense from here? And then maybe thinking more on core expense base, stripping out the BSA impact. Expenses are up a little bit quarter-over-quarter, closer to that $24 million mark. Some of this was comp-related, was there anything onetime in that comp line and/or is that really just a reflection of some of the hiring efforts you guys put forth, and then is $24 million a good core run rate on the expense base moving forward? Thanks.

Yes. We are at the end repeal of the spend on consultants for BSA. It's -- we feel very good about where we are, we have complied with each of the items that we needed to comply with, and we think we'll hear from the OCC, it's in their court at this point to sort of hopefully put an end to this. As far as elevated expenses around salaries and things, we did -- we have hired some BSA folks. So there is some spend in that regard. And we're also looking to hire additional lenders. So we've had a lot of conversations with people. We're in the process of hiring some additional folks to help us deploy some of this liquidity.

And so it's sort of all of the above. But I think the -- from where we stand, we've been encouraged by the pickup in our pipeline and the opportunities that we see out there to make new loans. We've been sort of disappointed in where some of our competition wants to take interest rate these days but -- so it's a challenging interest-rate environment, makes us all work harder for less. But it is what it is and we can -- because of our cost structure on the deposit side, we're certainly able to deploy money in this kind of interest-rate environment. However, when you don't -- when you get paid a very small risk premium to put that money out, you want to take less risk in the portfolio. So it's always a risk-reward thing and we are cognizant of that, and we are careful around it. But we have seen really good -- some really good opportunities here recently, and we feel good about what's going on in Houston, Texas, and East Texas, where we deploy most of our money.

Yes. No, that's all really good to hear and that's all great color. And just maybe switching gears a little bit, thinking about capital. It doesn't appear that you guys were active on the buyback this quarter. So can you just confirm that, that was the case? And then moving into the back half of the year. I just wanted to get a sense, how you characterize your buyback appetite from here. You've got a really nice capital stack. The stock price has pulled back a little bit. It feels like an opportunity for you guys to be active in a big way here. So just kind of looking to get some thoughts around the buyback.

Well, I think we probably agree with you around the buyback situation. I think we do have some opportunities there, and we continue to want to explore that. We feel a lot better about our M&A discussions, given where we think we are from a regulatory standpoint. So we're going to continue to explore that. We're having several conversations along those lines, and we'll see where that takes us. But we'll also take a look at our dividend and see that whether that's a proper place. So we look at a little bit of everything, but I do think there's some opportunity to purchase our stock, and I think we'll continue that. We were a little less active this last quarter, but I think you'll possibly see us a little more active in the next quarter, kind of depending on where the pricing goes.

No, that's great. And then maybe, Bob, just expanding on the M&A conversation a little bit. Where ideally would you like to see the franchise grow? Would it really be in that East Texas market?

Well, I think primarily Houston or Dallas. So we are looking to expand our presence in Dallas a bit and always would be happy to do something in the Houston market also because that's our primary market. But we want to bolster our efforts in Dallas. We have a very small presence there now. But it's such a great economy up there, and we really feel like we should be a participant there. And we've been looking for some additional people and possibly some M&A activity up there. So there's some possibilities there, and we're going to continue to pursue that. So we're looking on all fronts. And I think that's -- to keep our eyes and ears open, that's the best thing for us along with doing the things that we do every day, which is loans and deposits.

(Operator Instructions) Your next question is from the line of Thomas Wendler with Stephens Inc.

Most of my questions have been asked but I got one more for you. It looks like your deposit costs have stayed pretty flat at -- or interest-bearing deposit costs, I should say, stayed pretty flat at 35 bps. Can you give me an idea of if you guys can move that any lower and where you expect it to kind of shake out?

Well, I think we find it pretty low as it is but -- no, I don't think it's going to go much lower. I mean we've got certain customers that we've had to do some things for but for the most part, we're paying very little if not nothing for deposits. And our overall cost of funds is so low at this point, it's not something we spend a lot of time on anymore. It's more about how we get this money up and that's our real focus.

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

Thank you very much. We appreciate everyone's interest in CBTX and look forward to speaking with you next quarter. Thank you.

Thank you. This concludes today's conference call. We thank you for participating, and ask that you now disconnect.