Q2 2020 Spirit of Texas Bancshares Inc Earnings Call
[music].
Greetings and welcome to the theory practicing <unk> record second quarter earnings Conference call.
Hi, all parts of it then Arnie listen only mode. It brief question and answer session well all the formal presentation.
He wants you to acquire radar systems during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce your host Mr., Gary Coleman Executive Vice President and Chief operating officer thinking that the old then you may begin.
Thank you operator, and good morning, everyone.
We appreciate you joining us for the spirit of Texas Bancshares Conference call and webcast to review, our 2022nd quarter results.
With me today, as Mr., Dane bass, Chairman and Chief Executive Officer.
Mr., David Mcguire, President and Chief lending Officer.
As Allison Johnson interim Chief Financial Officer.
Following my opening remarks will provide a high level review and commentary on the financial details for the second quarter before opening the call for Q1 night.
I'd now like to cover a few housekeeping items there'll be a replay of todays call and it will be available by webcast on our website.
Your WWF dot so to be dot com.
We'll also be a telephonic replay available until June July 28, 2020.
More information on how to access these requite preachers was included in yesterday's release.
Please note that the information reported on this call speaks only as of today July 21, 2020, and therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.
In addition, the comments made by management during the conference call may contain certain forward looking statements within the meaning of the United States Federal Securities laws.
These forward looking statements reflect the current views of management.
Ever various risks uncertainties and contingencies could cause actual results performance or achievements to differ materially from those expressed in the statements made by management.
The listener or reader is encouraged to read the company's annual report form 10-K filed with the FCC for the year ended December 31 2019.
Do I understand certain of those risks uncertainties and contingencies.
The comments today will also include certain non-GAAP financial measures <unk>.
Additional details and reconciliations to the most directly comparable GAAP financial measures are included in yesterday's earnings release, which can be found on the spirit, Texas aside.
Now I'd like to turn the call over to our chairman and CEO Mr. being bass Green.
Thank you Gerry and good morning, everyone.
David and I started the company more than a decade ago excited at the opportunity to serve various communities throughout Texas, well also earning a solid return on investment for those who believed in our vision.
Over the next 10 years, we've focused on growth by adding quality asset.
Managing risk and partnering with the Beth and the brightest bankers in Texas.
Being a banker, though involves not only growing in the good time.
But making tough decisions.
In the economic downturn.
Every downturn is different and present, both unique challenges and opportunities for the future.
During the cycle of stress, we are focused on the solution for recovery.
Our bank wholeheartedly supported the government programs intended to save our community.
We're very fortunate that our commitment to the communities, we serve and deploying our talented staff.
Has provided a strong return on investment and led to our best quarter since inception.
We're pleased to announce net income of $7.7 million for the second quarter.
And dilutive earnings per share of 44 cents.
Our second quarter performance was bolstered by the payroll protection program.
We were able to successfully leveraged years of experience, but small business lending to help those in need by quickly and effectively the point our entire bank staff to meet the demand of our small businesses across Texas.
Our lenders as many of our support staff worked tirelessly throughout the process.
As a result during the second quarter of 2020, we were able to help small businesses obtain $428 million in funding.
While generating $15.3 million of origination fees.
Which will be earned over the life of these loans.
While the fight against global pandemic, it's far from over.
We're very pleased that the majority of Texas is now open for business.
In Texas consumers are doing a great job of supporting local business.
We remain committed to our employees customers and they have implemented enhanced safety protocols throughout the organization.
Now I'd like to turn the call over to Mr., David Maguire, our president and Chief lending officer to discuss the loan portfolio and asset quality David.
Thank you Jane.
We are truly an unprecedented times like many businesses throughout Texas the past three months for us as it has been an exercise in assessing damage.
Planning for on certain future and ensuring that all decisions, we make or in the best interest of our shareholders.
We are extremely fortunate that we entered this environment was superior credit quality, a strong capital position and most talented lending and credit administration staff in Texas.
It is now time to leverage these expert resources and to capitalize on current macro economic opportunities.
Throughout most of the second quarter many of our borrowers businesses were close in approximately 25% had requested some former <unk> really.
We granted a period of relief for 90 days to those in need and are extremely pleased that the vast majority of those struggling businesses have regained some level of trading as Texas reopened welcome back consumers.
We fully expect at more than 90% of these borrowers will resume scheduled payments as many already have and the request for additional relief has been that minimal.
We continue to monitor segment significantly impacted by Cobot 19, and have worked diligently over the quarter to reduce risk in these segments, which include retail strip centers hospitality restaurants, and direct and indirect auto exposure.
Retail strip centers at June Thirtyth 2020 consisted of 120.4 million were 5% at the loan portfolio.
These retail strip centers, 75% or non owner occupied Lorraine remaining 25% or owner occupied.
Hospitality exposure at June Thirtyth, 2020 consisted of 91.4 million or 3.8% of the loan portfolio.
Oh, these hospitality loans, 84% or term lines and the remaining 16% our construction loans.
At June 30 to 2020, the loan portfolio consisted of 30.5 million of restaurant exposure or 1.3%.
Of these restaurant loans approximately half a quick service restaurants, and the other half a full service restaurants.
Total old exposure in the loan portfolio at the end the quarter was 74.7 million or 3.1% of total loans outstanding.
Direct energy exposure was 1.8% and total loans outstanding and 1.2% was and direct energy exposure.
Loan growth during the second quarter was primary due to US successfully funding 428 million a ppt loan originations.
Excluding P.T. loans organic loans increased 43.1 million or 14.4% annualized which included 13.3 million participations purchased.
We saw a lack of young man during the second quarter, which is expected given the current environment. However, we're pleased that many of the quality relationships. We had in the pipeline at December 31st 29 team have simply delay plans as opposed to canceling them outright.
We fully expect that by the ended the year with a presidential election behind us and hopefully a vaccine near demand for loans will return as borrowers embraced a more certain economic environment.
The yield on loans in the second quarter, a 2020 was 5.14% which decreased 80 basis points from Q1 2020.
The reduction in yield was expected since a large portion of our variable rate loans reprice quarterly and reprice on April one 2020 at levels indicated by recent declines in index rates.
As of June Thirtyth 2020, the majority of our variable rate loans had reached the floors and we do not expect further deterioration in lung deal going forward.
We're pleased to report no significant weaknesses in asset quality quarter over quarter was nonperforming loans Jal standing loans declining to 31 basis points at the end of Q2 2020 compared to 38 basis points at the end of Q1 2020.
The provision for loan losses for the second quarter was 2.8 million, which increased the amounts to 9.9 million or 41 basis point of our loans outstanding.
At quarter end the coverage ratio on an organic portfolio was 77 basis points, excluding PPP lines annualized net charge offs were 10 basis points for the second quarter of 2020.
As the full picture of the Lincoln severity of this pandemic comes into view over the next few quarters, we believe we're well positioned well staffed and fully committed to ensuring a full and robust recovery.
With that I'll turn the call back over to Jerry Gold meant to provide a review of the funding side of the company Jerry.
Thank you David.
Total deposits at the end of Q2 were $2.4 billion, an increase of $338 million or 16.3% from tier 120 20.
And an increase of 53.8% over Q2 2019.
Oh, the $338 million sequential increase from Q1.
Approximately 108 million, where PPP related deposits.
Non interest bearing deposits increased 258 point sixmillion.
Or 53.1% from Q1.
Again with PPP deposits County for 108 million increase.
Significantly exclusive PPP related deposits.
Interest bearing deposits now make up 27.7% of total deposits.
Up from 23.4% at the end of Q1 2020.
This improved shifting deposit mix, along with aggressive repricing of deposits.
Resulted in 8.67% cost of deposits a decrease of 26 basis points from Q1 2020.
The bank has no broker deposits.
The reported loan to deposit ratio at the end of Q2 is 100.5%.
Excluding PPP activities.
The loan to deposit ratio dropped to 86.6%.
Borrowings increased by $79.8 million during the second quarter of two 193.1 million.
Due to our utilization of the pads PPP liquidity facility.
Partial funding of the PPP lungs.
Borrowings totaled 6.5% of assets at the end of Q2.
The company has significant sources of available liquidity.
Including $40 million, a holding company line of credit.
Since lines totaling $108 million and federal home loan bank availability of $519.5 million.
I'd now like to turn the call over to our interim Chief Financial Officer, Allison Johnston to provide a financial overview of the second quarter Allison.
Thanks, Jerry and good morning, everyone.
We provided detailed financial tables in yesterday's earnings release.
On a consolidated basis net income for the three months ended June 30 in 20 27.7 million what fully diluted EPS of 44 cents compared to earnings of 5.8 million and fully diluted EPS of 41 cents in the second quarter 2020.
Well this is a great quarter, given our success of the payroll protection program. We've used the past three months to review our capital plan liquidity position and core expense run rate.
The current environment demands that we remain prepared to resume robust operation if the economic recovery is reshaped well, having sound contingency plans if the recent spike in Cobot 19 cases flows the pace of the recovery.
We are committed to acting in the best interest of all shareholders by not reacting to drastically but quickly enough to capitalize on future opportunities that may arise.
Our tax equivalent margin in the second quarter, 2020 was 4% compared to first quarter 20, Twain tax equivalent margin of 4.4%, representing a 40 basis point decrease.
The decline from the first quarter of 2020 is primarily due to rate resets on interest, earning assets as a result of the decreases and the interest rate set by the federal open market Committee during the first quarter 22 money and the addition of PDP loans would shield, 1% honest stated basis and 3.4%.
Accounting for the effect of deferred costs and fees on an effective yield basis.
Excluding the impact of P.P. loans tax equivalent net interest margin was 4.21 for Scott.
As of June Thirtyth 2020, our loan yield declined 80 basis points to 5.14% from Q1 2020.
Excluding the impact of P.P. loans as of June Thirtyth 2020, our yield on loans was 5.54% a decrease of 40 basis points from Q1 2020.
The impact for the first quarter index rate declines was fully phased in to our loan yield during the quarter as the majority of our variable rate loans reset on April 1st 2020.
We do not anticipate further deterioration I'm o'neil despite market rates given that the majority of our loans are currently other floors.
The provision for loan losses for the second quarter was 2.8 million, which increased the allowance to 9.9 million or 41 basis points of our loans outstanding.
50 basis points, excluding the 100% government guaranteed PPP loans.
The majority of the provision expense for the quarter related to increasing qualitative reserves in response to the current economic environment as opposed to a deterioration in credit quality or an increase in impaired loan balances.
The coverage ratio on the organic portfolio was 77 basis points on a 1.3 billion inorganic loans outstanding excluding TV p. loans at quarter end.
Additionally, we have 6.7 million unamortized discount on the acquired loan portfolio at June Thirtyth 2020.
As an emerging growth company, we have delayed the adoption Cecil until 2023.
Under our current incurred loss model our reserves are based upon an estimate of loss events, which have occurred as opposed to forecasting future loss events.
Over the next quarter as periods of deferment expire and we receive updated financials from bars, which will include the period. The businesses were not an operation, we anticipate risk rate movement, and the third and fourth quarters elevated impaired loan balances and an elevated provision expense and corresponding increase in coverage ratios.
We are committed to working for problem loans quickly and mitigating losses wherever possible.
At June Thirtyth 2020, we believe we were adequately reserved at 9.9 million based upon the knowledge, we haven't the current economic environment and our burst financial condition.
Noninterest income totaled 2.6 million for the second quarter 2020, compared to 2.7, no answer the first quarter of 2020.
U.S. small been <unk> business administration loan servicing fees increased 246000 quarter over quarter as a result of favorable servicing asset valuation.
As many of the valuation assumptions are currently other floors on ceilings, we do not anticipate much volatility in the servicing assets for the next two quarters.
Additionally, during the second quarter 2020 mortgage referral fees increased 155000 as mortgage activity increased as a result of lower interest rates during the quarter.
We would expect based on strong housing starts and permits data for this trend to continue as first time homebuyers take advantage of historically low rate and current homeowners take this opportunity to refinance.
Gain on sale loans in interest rate swap income declined 138000, and 369000, respectively. In response to general declines in lending activity during the quarter.
Noninterest expense totaled 16.1 million in the second quarter 2020, a decrease of 23.2% from 21 million and the first quarter of 2020.
The primary reason for the decline in noninterest expense was the deferral of 4.9 million of salary expense recorded in conjunction with the P.P. loan originations.
These long costs will amortize on a straight line basis over the life go up.
At June Thirtyth 2020, approximately 500000, the these deferred costs it already amortized into the loan yield along with one and a half million of deferred fee revenue.
Yesterday morning, there was a press release announcing the sale of one of our branch locations.
This is one of the many initiatives we've strategically put in place to prove our commitment to diligently managing expenses this year.
Additionally, we will begin realizing some of the cost savings from the citizens acquisition at the end of July after conversion.
We currently enjoy a strong capital position at both the bank and the company on a consolidated basis.
It is vital that we preserve capital over the next few quarters. So that we are well positioned to work through any troubled assets, while maintaining the ability to look for deals and continue our growth trajectory.
As of June Thirtyth 2020, the bank had a tier one leverage ratio of 9.6% and the company on a consolidated basis has a tier one leverage ratio of 9.49%.
The majority of P.P. loans were funded through deposit and partially through P to P. Olin liquidity facility, which is neutral to capital.
During the quarter with the encouragement from our board of directors, we amended and extended our stock buyback plan.
With our current stock still trading below tangible book value per share. This quarter. We felt this was an opportunity to repurchased 603000 shares of undervalued stock we remain committed to repurchasing undervalued stock as long as the internal rate of return from the purchase shares exceeds the return earned on other investment offered.
Unity and the capital is not needed elsewhere.
I'd now like to turn the call back over to Mr. Bath wrap up Deane.
Thank you Alison.
More than a decade ago, we chose the name spirit of Texas Bank.
Because of the spirit of this great state is not intangible.
It is something that our customers and our employees.
Feel every day.
Well, we joined the rest of the country that isn't recovery.
I know that the Texas economy.
Will rebound faster stronger and better because of the spirit.
And I'm proud that our bank has committed to forging a path to a strong profitable and lasting recovery.
Our motto has always been Texans, helping Texan.
And our employees are committed to those words.
And then so doing we believe we will emerge from this period stronger and with the ability to significantly enhance shareholder value.
This concludes our prepared remarks.
I'd like to ask the operator to open up the line for any questions operator [laughter].
Thank you will now be conducting a question and answer session.
Yes. The question. Please press star one on your telephone keypad confirmation towable indicate your line isn't a question Q.
Hi starts to if you'd like you have your questions from the Q for participants using speaker equipment, maybe necessary to pick up your hands that before passing the starkey.
Our first question comes from the line, Brad Milsaps with Piper.
Please proceed with your question.
Hey, good morning.
Good morning.
Let's see Allison maybe I wanted to start with just just a little more color out P. P. P for the quarter do you happen to have yeah average balance of up PPP loans for the second quarter.
The average balances about 325000.
Yeah, and 25 million.
325 million.
Okay, and if I understand the accounting correctly.
You guys generated gross fee the.
15.3 million looks like in the release, you said you recognized about a million of those in the quarter plus the.
The point Ninemillion related to Fas 91, so that means what would that mean, you've got about 9.4 million.
Left to recognize in the bottom line is that is that the direct way to think about it.
No we've got about 12 million remaining.
After the okay.
Okay.
Got it.
Right.
Okay.
And just just around your comments around the reserve.
It sounds like you know you guys are gonna plans to build that in the back half the you're obviously that's dependent upon you know kind of what happens with you know classified criticized assets. It as you know some deferrals come off can you can you talk about you know maybe at this point kind of what you think in terms of you know we're going to Matt order of magnitude is are you.
Weights to kind of what you feel like you can build reserve to the back half.
Sure, let me elaborate on that and provide some color.
So as you know are under the incurred loss model. So our reserve levels are calculated to adhere to accounting guidance, we don't set target coverage ratios and then vendor modeled to support those levels I.
I know the expectation on the preference would be that we set aside some of this P.P. income and increase our provision, but you know the accounting just doesn't support that at this time and as David can elaborate on.
We've always prioritize quality over chasing loan growth.
This puts us in a stronger position to deal with the current environment.
We believe based on the facts, we have today that reserve levels are appropriate.
With that being said, there's still a great deal of uncertainty in the economy right now so we've budgeted between two and 3 million per quarter and estimated provision expense over the next two quarters and we feel like that's conservative insufficient given what we know right now.
Great and that's the that's helpful.
Dan or David how have you guys noticed any any differences in kind of how your legacy book.
Has performed versus you know maybe you always have set some of the lines that you've acquired the over the last couple of years with some of your acquisition.
Actually no and you know when we the first thing we do during due diligence see [laughter] daily basis.
[laughter] it's.
Performing very well in the acquired side and our legacy portfolio right now is.
As good as we've seen it.
Let me tell me a this is Dan let me add something that the banks that did join US. We're a highly regarded rated and had an excellent performance on their own right before they joined US and we've seen nothing but continued from from that point, if you actually look backs up there.
Their past dues, it's even improve because they have initiated some of the procedures, we put in place and so we're very pleased both with the staff the management team and the loans associated plus he gives us a diversity outside of the metro markets. Those those are those banks or or away from the freight because of the.
Ur cobot virus and and gives us great ability to continue a there their legacy in those markets.
Great. Thank you guys.
Thank you. Our next question comes from the line of Matt Olney Stephens. Please proceed with your question.
Oh, God, Adam Groundbirch or not.
I wondered start with <unk> or <unk> didn't bring on the 12 million remaining correct when or what are your expectations on when that'll come then.
We currently have budgeted the 25% of those will get forgiven in Q4, and then the remaining over 2021 and David you get out little bit more color on that if he'd like as far as expectation.
So it's it's still in development is for us.
Legislation out there correct customers hold off on it.
Asking for free.
[laughter] [laughter].
[laughter] forgiveness, and so like Allison said, we'll start seeing some of that forgiveness, probably starting in August but the majority of it most likely will be in and Oh latter half of the latter quarter of the year in fourth quarter ended the first quarter.
Okay. That's helpful.
And then the other government program the main street when incurred on what people do your customers.
[noise] you know we think so actually we were we studied it and decided that it would be good for our customer base right now the it's about half and half between existing customers and potential new customers to the bank.
You know as far as exact numbers I hate to say at this point, but it's looking like a it's going to be a lot of volume for us towards the ended the second quarter and if they extend ran into.
Okay.
Uh huh.
And then out 100 circle back with this kind of words and now in the press release. You noted were 13 million participations purchased got any more color I know last quarter, the Hilton because I suppose.
And then this quarter.
Well, our liquidity improved [laughter].
[laughter].
Participations sold.
Okay any industry or anything like that you can move out on what was purchases or.
I'm, sorry can you repeat that.
Industry or anything you can provide about hurt with because it doesn't this quarter.
They're just a existing relationships that we had their larger loan relationships.
[laughter] Frank Thanks [laughter].
Okay, Yeah and that was all this is Dan it was all on liquidity as David said and those are the same ones that we like before and and remember it was a different world.
Back in the first of March and so we were in preparation to.
Try to determine what battle and when it might be fall and so since then or you know like continues to change each each week each day each week each each month so.
That's we brought back home the same ones we like.
That we sold that where we felt we needed to provide through the quarter in some liquidity them to make sure. We knew what we were facing going Ah up through today. So that's why we are excited by those bad.
That's helpful. Thank you and then my last question for me it looks like restaurant exposure came down 20, or 30 million from one key was there any more detail behind us.
[noise], Yeah, we actually had quite a few payoffs in the restaurant portfolio this quarter as well as we did a scrubber collateral codes on identified one of its correctly identified incorrectly identified in Q1. So we've actually moves out of the population. So those are the two drivers there.
Okay. Thank you guys.
Thank you.
Thank you there no further questions at this time I'd like to turn the call back over to Mr. bass for any closing remarks.
Thank you very much I appreciate it.
From the spare executive team I'd like to thank everyone for joining us today and thank you to everyone that helped us put this together and their contribution the battle of both the co the.
And starting these companies back is is a very difficult a has been a difficult matter continues to be a lot of a lot of a hands on work and covenants to David our team on the on the front lines.
Making that happen the a central part of what we do every day.
It's not a isn't is also dealing with with cobot around us so they've done an excellent job with I mean any themselves working with their family and themselves to to make this a successful.
So thank you to everyone. Thank you for being on the call.
Thank you ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful.