Earnings Call Transcript - STEL Q4 2021

Operator, Operator

Good day, and thank you for standing by. Welcome to the Community Bank of Texas, Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during the session, please follow the instructions provided. Please be advised that today's conference may be recorded. If you require any further assistance, please follow the instructions provided. I would now like to hand the conference over to your host today, Justin Long, General Counsel. Please go ahead.

Justin Long, General Counsel

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 fourth 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. 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 reports on Form 10-Q, 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. The 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 Chief Financial Officer, 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, Rob Franklin.

Robert R. Franklin, Jr., Chairman, President and CEO

Thank you, Justin. Welcome to the earnings call for CBTX, Inc. for the fourth quarter of 2021. We are pleased to present our fourth-quarter results of an eventful 2021. The first half of the year was marked by caution. But as we move to the second half of the year, we saw increasing optimism as the country appeared to be better able to deal with the impact of the pandemic, which allowed us to better assess the continuing effects on our team and our customers. As the year progressed, the economic environment transitioned from a heavily COVID-impacted economy to a more stable and recovering economy. Our Texas economy provided opportunities and showed its resilience even with the emergence of the Omicron variant during the fourth quarter. Over the second half of the year, the economic environment transitioned, showing signs of recovery. Given the opportunity to have more face-to-face interactions with our customers and our prospects, our team began to rebuild our pipeline and show loan growth. The calling efforts of the third quarter produced good loans that were booked in the fourth quarter, resulting in solid relationship-driven deposits. This team effort provides us good momentum as we move into 2022. During the fourth quarter, we were proud to announce that we had found an excellent partner in Allegiance Bank and that we would combine in a merger of equals transaction, slated to close in the first half of 2022. We have filed the regulatory applications, and our teams are working together to identify ways to build a better bank together. As we work toward closing, we continue to be very excited about the opportunities that our combined organization will have in the future. Additionally, we settled and ended the investigation by the financial institution FinCEN and the order that we had with the OCC during the fourth quarter. We are pleased to have concluded this chapter, and we believe the BSA program stands ready to be a leader for our merger partner and be ready for our increase in size and scale. Our fourth-quarter financial results reflect several one-time charges, reflecting the settlements with the regulatory agencies and the costs associated with the actions we have taken in connection with the pending merger. Ted will speak more specifically to our financial results. Overall, we are excited about 2022 and the opportunities it will provide. We have liquidity, we have capital, we have an asset-sensitive balance sheet that will surely allow us to succeed in our Texas markets, which continue to do well. Now I'll turn this over to Ted Pigott, our Chief Financial Officer.

Ted Pigott, Chief Financial Officer

Thank you, Bob. Certain financial information for the fourth quarter and prior periods begins on Slide 5 of the investor presentation. For the fourth quarter of 2021, the Company reported a net loss of $545,000 or $0.02 per diluted share. Its earnings were impacted by the costs of the settlement with regulatory agencies and the costs associated with the pending merger. Net income for the year ended December 31, 2021, was $35.6 million or $1.45 per diluted share compared to $26 million or $1.06 per diluted share for the year ended December 31, 2020. Now we'll move on to the fourth quarter results. Net interest income for the fourth quarter of 2021 decreased to $30.8 million from the third quarter of 2021. The interest margin on a tax-equivalent basis decreased by 15 basis points to 3.7% from the third quarter of 2021. The loan yield decreased by 13 basis points to 4.39% from the third quarter. The cost of interest-bearing liabilities scaled to 24 basis points for the fourth quarter of 2021. The provision for credit losses was a recapture of $1.2 million for the fourth quarter of 2021, primarily due to qualitative factor adjustments associated with continued improvements in the local economy. Non-interest income for the fourth quarter decreased to $4.1 million from the third quarter, primarily due to a decrease in earnings on bank-owned life insurance due to related gains of $1.9 million realized in the third quarter. Net gains on sales of assets increased by $550,000. Non-interest expense for the fourth quarter increased by $10.5 million from the third quarter, primarily due to regulatory fees increasing by $7.9 million, largely due to an imposition of civil money penalties totaling $8 million in settlement of BSA AML compliance matters. Other expenses increased by $2 million to $3.3 million, primarily due to $1.3 million in expenses associated with the pending merger with Allegiance Bancshares, Inc. Salaries and employee benefits increased by $1.6 million primarily due to an increase of $894,000 in officer bonuses and $545,000 in officer salaries. Income expense was $1.8 million for the fourth quarter, and the effective tax rate was 142% for the fourth quarter because the payments made in conjunction with the resolution of the BSA/ACL compliance matters are not tax-deductible. As for the balance sheet, total assets at December 31, 2021, increased by $276.9 million compared to September 30, 2021. This was driven by growth in loans of $259 million, and growth in securities of $65.5 million. Loans, excluding loans held for sale at December 31, 2021, increased by $307.1 million from the third quarter. Loans, which exclude PPP loans, increased by 12.2% in the fourth quarter. Deposits at December 31, 2021, increased by $299.6 million compared to September 30, 2021. Compared to December 31, 2020, deposits were up 16%. The total cost of top deposits was 13 basis points for the fourth quarter. The company maintains strong capital ratios with the total risk capital ratio at 16.42%, the CET capital ratio at 15.31%, and the Tier 1 leverage ratio at 11.22% at December 31, 2021. Non-performing assets totaled 50 basis points of total assets at December 31, 2021. The allowance for credit losses for loans was $31.3 million or 1.09% of total loans at December 31, 2021. The ACL decreased during the fourth quarter primarily due to the recapture of $901,000 in the ACL for loans and a recapture of $306,000 for unfunded commitments due to the qualitative factor adjustments associated with continued improvements in the local economy. Net recoveries were $38,000 for the fourth quarter, compared to $82,000 for the third quarter. Now, I'll turn it over to Joe West.

Joe West, Chief Credit Officer

Thanks, Ted. I'd like to speak a bit to our loan portfolio, beginning on Slide 9 from the investor presentation. For the fourth quarter, our loans excluding loans held for sale were up at $2.84 billion versus $2.58 billion at the end of the third quarter of 2021, an increase of approximately $260 million. Our loan growth was due in part to our organic growth, and much of the growth came in the second half of the fourth quarter, with our booking of $141 million of loans in December of 2021. We also purchased approximately $81.4 million of one- to four-family mortgage loans in the fourth quarter. Our loan deferrals related to COVID stayed relatively constant as we had seven loans with a principal totaling $18.5 million on deferral at the end of the fourth quarter. For the quarter, C&I, including the effect of PPP payoffs, was up by approximately $38.1 million or 6.4% compared to Q3. C&I increased $87.6 million net of PPP payoffs. CRE was up $62.8 million, a 6.1% quarter-over-quarter. Construction and development was up $67.2 million or 17% compared to the third quarter. One-to-four family was up $73.1 million or 35.8%. And multi-family was up $500,000. Slide 10 sets forth the components of our commercial loans, and our total commercial loans were up in the fourth quarter to $2.47 billion versus $2.31 billion at the end of the third quarter, including our PPP loans. Slide 11 also 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 third quarter increased to $204.9 million compared with the end of the third quarter. Slide 12 sets forth information about our PPP loans. During the third quarter, our net PPP loans decreased to $52.8 million, and we received $49.5 million related to forgiveness or payments from customers. The table at the bottom of Slide 9 sets forth our average yield on our portfolio. Our average yield on our PPP loans, and the average yield on our loan portfolio when excluding the PPP loans. Slide 13 sets forth information about our allowance for credit losses. As Ted noted, our allowance for credit losses to loans was 1.09% at December 31, 2021. Turning to Slide 14, our non-performing assets remained low during the fourth quarter, and our credit quality remained strong. Slide 14 also shows information regarding our non-performing assets for our total assets, which was 0.50% as of December 31, 2021 compared to 0.49% as of September 30, 2021. As with the second quarter, our recoveries during the quarter exceeded our charge-offs, resulting in a net recovery of $48,000. With that, I'll turn it back over to Bob Franklin.

Robert R. Franklin, Jr., Chairman, President and CEO

Thanks, Joe. With that, we're ready to open it up for questions.

Operator, Operator

Thank you. If you have a question at this time, please follow the instructions provided. Our first question comes from the line of Charles West, with Piper Sandler. Your line is open. Please go ahead.

Charles West, Analyst

Good morning, everyone.

Robert R. Franklin, Jr., Chairman, President and CEO

Morning.

Charles West, Analyst

I just want to start on the loan growth. It is great to see the positive momentum there. Can you speak more on what drove that line utilization or something else? And then how is the production compared to recent quarters?

Robert R. Franklin, Jr., Chairman, President and CEO

What was the last part of that?

Charles West, Analyst

And then how is the production compared to recent quarters?

Robert R. Franklin, Jr., Chairman, President and CEO

Well, certainly it was better than what we had seen for the first three quarters of the year. But it was across the board on various things that really wasn't attributed to line usage. It was more new production. We saw some good CRE opportunities we've taken advantage of and some good C&I opportunities. So kind of across the board, really.

Joe West, Chief Credit Officer

Yes, we were reviewing new loans in our committees and discussing them with our lenders. Starting in the second half of the year, the approval and closing of deals was slower than we hoped. We anticipated that Q3 would be fairly flat, but we observed a lot of activity in the fourth quarter, especially towards the end of the year. As Bob mentioned, most of this activity was in commercial real estate, but we also experienced solid growth in C&I.

Robert R. Franklin, Jr., Chairman, President and CEO

We saw our approved pipeline building through the third quarter and we could see where, as these things got closed, that the fourth quarter was going to be good. I think we feel good about where we're heading into the first quarter because we've got a good pipeline behind us and it's continuing to build. So we feel good about where loan growth is.

Charles West, Analyst

Okay, great. That makes sense. And then a follow-up to that on the loan purchases. Both the yield on this compared to non-purchase, and is this something you plan to do more in the future?

Joe West, Chief Credit Officer

The weighted average yield from the purchase is 2.78, but we will evaluate this in the future. I'm not sure if we will engage in this extensively; it depends on various factors. It was somewhat balanced out by the PPP runoff, but we seized the chance to acquire a package at a good yield, and we proceeded with that. I don't believe this will be a regular practice for us.

Charles West, Analyst

Okay, great. That's all for me. Thank you.

Robert R. Franklin, Jr., Chairman, President and CEO

Thank you.

Operator, Operator

Thank you. If you have a question, please follow the instructions provided. And our next question comes from the line of Thomas Wendler with Stephens Inc. Your line is open. Please go ahead.

Thomas Wendler, Analyst

Hey. Good morning, everyone.

Robert R. Franklin, Jr., Chairman, President and CEO

Morning.

Thomas Wendler, Analyst

Just looking at expenses, we saw that tick up in salaries. Can you guys give us a little bit of an outlay between the increase in salaries and the bonuses? Can you give us an idea of a good run rate for expenses for 2022?

Robert R. Franklin, Jr., Chairman, President and CEO

Yes, I think if you use somewhere around $25 million, it's going to be probably something that would work. It's going to be a little bumpy as we get towards our combination with Allegiance. I think this business associated with that would be all around that number, but from a run rate standpoint, on a normalized basis, given where we are today, that number works.

Thomas Wendler, Analyst

That's great. Thank you. And then with the MOE with ABTX, that's set to close in the second quarter. Can you give us any updates on the MOE and the conversion timeline?

Robert R. Franklin, Jr., Chairman, President and CEO

I don't think we have the ability to decide on the timing. As soon as we receive regulatory approval, we will proceed to close, and we have completed our document filings. In the meantime, we are having productive meetings with our partner, engaging in integration sessions, and determining the best way to operate this bank as a merged entity. We are optimistic about the progress in that area. However, the timeline is beyond our control, and we must depend on the regulators to approve the transaction.

Thomas Wendler, Analyst

Sounds right. And then one final one for me. Can you give us any color around the percent of the loan portfolio that's variable? And then how many of those variable rate loans are currently on their floor?

Joe West, Chief Credit Officer

We currently have around 50%, approximately $1.440 billion, in variable rate loans. We estimate that about $750 million, which includes prime adjustable loans as well as any LIBOR pricing, is positioned at the floor. The LIBOR has already begun to increase slightly, but it's not moving significantly. Additionally, we decided to prioritize first-rate high, and we have about $570 million that we can adjust in the prime portfolio.

Thomas Wendler, Analyst

Alright, that's great guys. Thanks for answering my questions.

Robert R. Franklin, Jr., Chairman, President and CEO

Thank you very much.

Operator, Operator

Thank you. I'm showing no further questions, and I would like to turn the conference back over to Bob Franklin for any further remarks.

Robert R. Franklin, Jr., Chairman, President and CEO

Well, thank you very much. I think we're very excited about 2022. I think the Texas economy is good and we see good opportunities out there. Our teams are doing a great job of building the pipeline and we're very excited about the prospects that we have with our new merger partner, Allegiance Bank. With that, thank you for your attention today, and we appreciate you attending the call.

Operator, Operator

That concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.