Q3 2020 CBTX Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the CBT exit Q3, Twentytwenty earnings Conference call. At this time, all participants lines are in listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you wouldn't need to press star one on your telephone.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your speaker today, Justin longer General Counsel. Thank you. Please go ahead Sir.
Thank you and good morning, I'm, Justin long the general account.
And our management team would like to welcome you to the CV, TX <unk> earnings call for the third quarter of 2020, we appreciate you joining us.
We issued our earnings press release yesterday afternoon copies of which is available on our website.
With the summary, slide presentation that we will refer to during this presentation. We all.
Also filed our quarterly report on form 10-Q for the third 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 or financial performance, where our business prospects.
Were 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 factor 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 FCC, which can also be accessed on our Investor Relations website.
IR Dot CBC axion Si dot 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.
[noise] release and Investor presentation.
I'm joined this morning by Robert Franklin, Our Chairman, President and CEO, Ted probably get our CFO, Joe West, Our Chief Credit Officer, and Joseph Mcmullan, Our controller at the end of the remarks, we will open the call to questions with that I turn it over to our chairman President and CEO Bob Franklin.
Thank you Justin and welcome to our earnings call for C. B T acts for the third quarter of 2020.
During the third quarter, we continued our work to identify the stresses in our loan portfolio and the effect.
The continued pandemic may cause.
Our markets want to open and it appears that most of our customers have found ways to work around the obstacles that covert continues to Iraq.
We believe that the credit risk that appeared to be forming during the shutdown of our country earlier. This year has mitigated in a substantial way.
We can see this in our customers decreased the Pearl request and the continued improvement in cash flows across our portfolio.
We realize that covered now and will be with us for some time to come and must prepare to cope with it so facts as a bank and and and working with our customers.
We have a great team of experienced bankers that will help guide our bank and our customers through these trying times. Our staff has worked tirelessly to maintain a superior service level that we insist on providing to our customers and I thank them for their dedication.
During the third quarter, we continued our dividend program and reinstituted, our stock buyback program.
These actions are what we believe to be an acknowledgement of the strong capital position that C. B T. X maintains this strong capital position allows us to appropriately manage our capital while maintaining a strong and adequate reserve.
We acknowledge the headwinds facing us as we enter the fourth quarter and and continue into 2021.
But 19 pressure on the oil and gas industry low interest rate environment. Our continued spend on completing our obligations to our regulators and the contentious political environment.
Our efforts around the pandemic will continue until there is clarity and we feel the major impact this past week.
We feel confident in our efforts on this front.
No. We have traditionally had limited exposure to the oil and gas industry. We will continue to monitor the effects on our customers directly and indirectly.
The low interest rate environment will continue to put pressure on our net interest margin, but we think much of that compression is behind us.
We will can we will be also be mindful of our expenses and look for ways to generate some additional fee income over the coming months.
As Ive asked for our regulators, we feel confident in our work towards meeting their expectations and that the expense around this effort will begin to Medicaid as we finish the first quarter of 2021.
C. B T X remains the strong relationship driven by our customers and investors have come to know.
We're optimistic about our markets, our customer base and our opportunities, but we will be cautious in our prospecting and our underwriting as we navigate these unchartered waters.
Now I'll turn this over to Tad pocket, our Chief Financial Officer.
Thank you Bob.
We reported net income of $6.4 million in diluted earnings per share of 26 cents per share for the third quarter.
2020 compared to.
Net income of 13.1 million and diluted earnings per share of 52 cents per share for the third quarter of 2019.
Net income for the nine months ended September.
30, 20, Tony was $16.1 million or 65 cents per diluted share.
Compared to 37.9 million.
The dollar 51 cents per diluted share for the nine months ended September Thirtyth 2019.
Net income in the third quarter, 2020 decreased $2.9 million or 8.3% to $31.7 million compared to 34.6 million for the third quarter of 2019.
And decreased $450000 or 1.4 cents.
32.2 million into the second in the second quarter of 2020.
The yield on interest, earning assets was 3.75 for the third quarter of 2020 compare.
Compared to 4.98 for the third quarter.
My team.
The cost of interest bearing liabilities was 46.
Basis points for the third quarter 2014 versus.
1.12% for third quarter 2019.
The net interest margin would tax cool tax equivalent basis decreased to 3.55% for third quarter 2020.
Down 13 basis points from 3.68 for the second quarter 2020.
The decrease of 88 basis points from 4.43 for the third quarter 2019.
Net interest income for the third quarter 2020 was four point.
Zero million dollars, an increase of 1.1 million or 38.3% compared to 2.9 million for the second quarter of 2020.
And a decrease of $92000 or 2.2% compared to.
4.1 million for the third quarter 2019.
During the third quarter of 2020, the bank receive tax nontaxable death benefit.
Proceeds of $2 million under two bank owned life insurance policies and recorded a gain of $760000 over the carried carried Dave.
Compared to the third quarter 2019 deposit account service charges.
$505000 lower.
Due to lower transactional fee income.
For the nine months ended September Thirtyth 2020.
Net interest income for the nine months ended September 32020 decreased 6.1 million.
6% to $96.1 million from one.
102.2 million for the nine months ended September Thirtyth 2019.
The yield on interest earning assets.
It was 4.5% for the nine months ended 20 September.
Thirtyth 2020, compared to 5.2% for the nine months ended.
September Thirtyth 2019.
The cost of interest bearing liabilities was 64 basis points for the nine months ended.
Morning.
Two reported at 20% to 21.6% for the nine months ended September Thirtyth 2018.
The net interest margin the tax equivalent basis decreased 75 basis points to 3.76% for the nine months ended.
September Thirtyth 2020.
From.
4.51 for the nine months ended September.
For 2019.
Now I'd ask you to non interest income for the nine months ended.
Tempur 30 of 2020 was.
$7.3 million, a decrease of $3.7 million or 24.5% compared to 14.9 million for the nine months ended September Thirtyth 2019.
Earnings on Bank owned life insurance for the first nine months of 2020 and 2019 includes 17.
719000.
And 3.3 million, respectively, Tac non taxable gains on debt.
From bank on life insurance claims.
Additionally, our deposit our deposit service charges decreased 1.2 million again due to lower transactional fee activity.
Non interest expense for the nine months ended September 30.
2020 decreased $409000 or <unk>, 0.6% to 68.4 million.
Compared to 68 million.
Nine months ended September Thirtyth 2019.
Total assets at September Thirtyth between Ustwenty decreased 87 point.
$1 million or 8.9% to 3.81 billion compared to 3.90 billion at June Thirtyth two.
[noise] decreased $383 million or 11.2% compared to 3.43 billion at September Thirtyth 2019.
Primarily due to the origination of PPP alone.
Loans, excluding loans held for sale at September Thirtyth, 2020 increased $29.6 million or 4% annualized.
The $2.96 billion compared to 2.93 billion at June Thirtyth, 2020, and increased $287.7 million or 10.7% compared to.
2.68 billion at September Thirtyth 2019.
I rarely due to the origination of pp loans and other organic loan growth.
The process of September decreased $83.5 million or 10.2% annualized to $3.17 billion compared to 3.25 billion at June Thirtyth 2020.
An increased 426.3 million or 15.5%.
Compared to 2.74 billion at September Thirtyth 2019.
We maintain our strong capital ratios as the company.
Companys total risk based capital ratio increased to 16.67%.
Siti.
One capital ratio was 15.41% and the tier one leverage ratio was 11.9% at September Thirtyth 2020 compared to 16.56.
15.3, young and 11.9 cents, respectively at June Thirtyth 2020.
Nonperforming assets totaled 15.6 million.
Our portfolio, 1% of total assets at September Thirtyth, 2020, compared to $11.2 million.
Or 2.29% of total assets at June Thirtyth 2020.
And 1.1 billion or <unk>, 0.03% of total of total assets is 'cause it for you.
22019.
The provision for loan losses for third quarter 2020.
Was $4.6 million or <unk>, 0.67% annualized of average loans compared to 8.5 million or 1.18% annualized.
Average loans for the second quarter 2000 2020.
And 579000 or <unk>, 0.09% annualized of average loans for the third quarter of 2019.
The uncertainties associated with the COVID-19 pandemic sustained and stability in the oil and gas industry, resulting economic conditions and into.
The impact on the Companys loan portfolio led the company to adjust certain factor utilized to determine.
The steel.
In addition, there been there's been an increase to the company's adversely graded loans.
Which increased the Companys hcl and provision for credit losses, especially in three months ended September Thirtyth 2020.
As a result of these factors the company increased the Hcl.
And the related provision for credit losses, which has negatively impacted the company's net income during.
2020.
As for credit losses was 1.49% of total loans at September Thirtyth 2020.
And 1.35% of total loans at June Thirtyth 2020.
And finally, 0.96% of total loans at September Thirtyth 2019, or.
Our allowance for credit losses, less the PPP loans was 1.67 as of September Thirtyth 2020.
Now, we'll turn it over to Joe asked.
Thank you Ted let me speak a bit to our loan portfolio beginning with slide eight from the Investor presentation.
The third quarter, our loans were $2.92 billion versus $2.9 billion at the end of the second quarter of this year, an increase of approximately $25.2 million.
Our portfolio yield was down from the three months ended Q3, 2020, with a yield of 4.37% versus 4.54%.
For three months ended June 30, largely the result of a declining interest rate environment in 2020, and it was impacted by our PTP loans, which I will discuss a little bit lighter.
Our average yield on loans for Q3, when excluding the PPP loans was 4.65 per cent.
For quarter.
Second our loans were down slightly by approximately 5 million.
4.01% CRT was up.
0.4%.
CMV, what was down 9.2% one to four family was down 7.2% and multifamily was down 14.5%.
As you turn to slide 10, you will see our construction and development loan components in our construction and development loans were down approximately 47 million when compared to the June 32020, due to the completion of projects and fewer loans entering the category.
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 continue to downward trend from Q1 2014 to Q3 this year.
Total falling from June 30, approximately 7.6 million largely because of loan payoffs and pay downs.
Slide 12 sets forth our success with information about our PPP levels. During the third quarter, we began to work with our bar worsening forgiveness applications with our initial focus being on loans greater than $2 billion.
At 10 20.
2020, we have submitted forgiveness applications will 10 loans with total principal balances of $34.4 million and as of the end of last week. We are still awaiting word back from the S.P.J. I.
I believe is as of this morning, we have submitted forget us applications.
For 16 loans were total principal balances of 43.7 million.
And also we got word yesterday that we had one loan for 82000 was approved.
We have not the money is not coming after the SP I notified us that one of these application was approved.
With the release of a separate forget us application Bobby SBK earlier. This month, we have also begun to work with our borrowers with loans less than 50000, all forgiveness applications.
969 of RPP loans falling under 50000 principal amount.
Our team has done a great work with our.
Our work on the forgiveness applications and we expect to continue profit the rest with them during the fourth quarter of this year.
The table at the bottom of slide 12 sets forth, our average yield for our loan portfolio, our average yield on our PPP loans with an average yield on our loan portfolio were taking off a PPP loans.
13 sets forth information regarding referral arrangements that we have entered into with our customers as a result of the COVID-19 pandemic.
The total number of our deferred loans was down to 41.
September 30, compared with 689 at June 30, and the principal balance of our loans remaining on the thermal at the end of September was $82.4 million the.
The largest category of our deferred loan is.
As in our commercial real estate portfolio.
25 loans with a principal of approximately $49.3 million.
We're relatively pleased with the performance of the loans that are coming off referral at September 30 of the 41 loans on deferrals 16 with a principal balance of 29 million were scheduled to return to payments. This morning.
If you turn to slide 14, you will see a breakout of what we think are the elements of our portfolio that are most sensitive to over $19 retail CRD oil and gas convenience stores hotels and restaurants and the comparison between.
Q3, and Q2 those.
Those elements comprise approximately 24.7% of our total loans.
At September 30, slightly up from the 24.4% at the end of June this.
This group the deferred loan totals were at the end of the second quarter retail CRD $18.6 million.
Oil and gas 4.9 million convenience stores $5.9 million hotel.
Hotels 17 million restaurants reporting on that.
Turning to slide 16, our nonperforming assets increased slightly over the third quarter, but our credit quality remained strong as Bob mentioned, we believe we are working our process early detection and identification of problem loans conservatively.
That process led to an increase.
And adversely graded loans as we are identifying past due loans associated with business was impacted by the pandemic.
As well as businesses that may be negatively impacted generally slow.
Slide 16 shows information regarding our nonperforming assets to our total assets.
Which was 0.41% as of September 30 compared to.
The real 0.29% as of June 30.
Net charge offs remained low at <unk>, 0.02% of average loans.
Fast food and classified credits for.
We discuss now past dues were 27.2 million at Q3.
This is 5.4 million in Q2.
Classified credits right as substandard or worse inquiries, but remained low compared to the total portfolio moving to 89 day that Q3 20 versus 70 million at Q2 20.
This is 51 million at Q1 20.
The increase of 19 million from Q2 to Q3 was due primarily to cover the related issues TDR as increased to 46.5 million in Q3.
Imperative $34.8 million at Q2, and 15.9 million in Q2, and 20 excuse me Q.
Q1 2000.
You may recall the that the increase in TDR from Q1 to Q2 was largely the result of five credits that moved from substandard and receive referrals inquiries or TDR as at the end of Q2 over Q1 included 32 loans totaling 26.3 million. It has potential credit issues not related to co wouldn't that entered into deferral arrangement calls.
Charles with these loans pre Detica. We went ahead and consider these tdrs in connection with the deferral arrangement.
The large increase in the third quarter largely as a result of one covert damaged credit which receive additional payment before.
With that I'll turn it back over to Bob.
Thank you Joe with that we'll open it up to questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again that was star then the number one.
Your first question comes from the line of Graham date with Piper Sandler.
Hey, good morning.
Mark.
All right. So I just wanted to I wanted to start on expenses you. All noted an increase in consulting fees related to the.
Yes, and no issue just wondering if you could share how much those were this quarter and also how you think that might impact the run rate for expenses going forward do.
Do you expect somebody to come out of the expense base in the coming quarters and maybe for.
The core expense base to come back closer to 20 to 23 million going forward.
Yeah.
Well the.
Yes, a failing on costs for the third quarter was $1.3 million.
Graham to the spend on the on the BS I sort of.
A bunch of things together with some of the summer ARPU improvements too.
Well the process itself some are.
Redoing old old things that have to be brought current.
There's a number of things that go into the consulting fees for this and that and the spend is kind of lumpy.
So depending on our staff the things that they do.
But it kind of moves up and down but thats going to be a heavy spend at least for the next.
Few months.
As we get towards.
Our examination, which is usually in the in the first.
Actually the first week in February so.
We expect to be spending.
I don't think it would be more than what were spending this quarter.
But it could be about the same at least through the fourth quarter.
All right great. That's really helpful. It sounds pretty onetime in nature.
And then I guess turning to loan growth looks like it went modestly positive this quarter.
Can you talk about I guess, the drivers behind that and how that might have affected your outlook going into 2021, especially if the economy and borrow demand continue to improve a little bit from here.
Yeah, we're seeing some bright spots as far as demand goes.
We've been very cautious about we kind of kicked up some underwriting standards around certain things were acquiring more equity and certain deals and.
Just trying to be a little cautious around what we what we see out there.
Looking at our own portfolio. There are just so many things that.
We feel our sort of disconnected right now we want to get past the election and try to figure out.
Now what.
What people are going to do around whatever we see that happens.
After November 3rd so.
That's that's pressure I think what is going to be around for a while but it does feel like people are understanding how to get around.
And navigate the covert issue.
So we're seeing less and less stress on the portfolio I think we're having better visibility into the things that we think we can do in Canada.
But we're also seeing some other stresses as.
At our at our and our markets oil and gas shale plays.
Even though we don't have direct exposure there is some pressure around oil and gas the.
And really the petrochemical business is starting to feel it in them.
Where are you would you might think the rest of the world given what's been happening. This is would be using more and more in the way of plastics.
It appears there are using less but.
That will ride itself also so.
We actually feel good about.
Really beginning in the 2021, I think the fourth quarter EPS, Toby kind of lumpy items.
I can't tell you that we're going to.
Pedal to the metal about new.
New deals and the fourth quarter until we kind of have a better feel for what's going to happen.
But if that gives you some idea I mean, we're we're doing our best to we will feel good aquari. If we end the year somewhere close to year over year, basically flat, probably going to be down a little bit from that but.
That's what we're shooting for.
Great that's very helpful.
I guess, just one more I was.
Wondering if you could give a little color around those the two loans that went to nonperforming this quarter.
Maybe like way industry, there and if you guys have any specific reserve on them right now.
Yes, we do a specific reserves on them and.
They were.
Juan was low for.
Yes, so to cover related issue.
And.
Auto repair.
Industry and.
The other is a loan to an individual.
In the.
Yes.
We've got that reserve so that's what I was really good.
So two there.
All right Awesome. That's it from me guys. Thank you.
Thank you.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of Matt Olney Stephens, Inc.
Good morning, guys, Tom Windler on for Matt only I said, a few quick questions for you.
Can you give me an idea of how loan yields on new production comparing to what you see you saw in Threeq.
Loan yields are starting to I think flatten out a little bit you know there's been a lot of competition and people.
As rates start to move down you see people in various ways trying to figure out what rates need to be but we're trying to bring most of our loans at around 4%.
Depending on relationships that will move one way or the other.
But thats, where a lot of the new things that we're putting on are are coming and in some cases for getting a higher range. Some places a little lower rank.
But we continue to see a lot of competition around.
Certainly the deals that ever buy things they can do that today.
Okay. That's great. Thank you and then can you maybe give your appetite for the repurchase program.
Our appetite is strong the ability for us to get as much as we want is difficult. So.
As you guys well know the rules around how we buy the stuff under this program.
Is limited and so were bought as much as we can.
But we are limited as to as to how that plays out. So our program has out there. We're in there every day and.
Well by as much as we can.
All right great. Thank you and then one last one for me.
The Hcl build it looks like it was driven by the other category can you give me an idea of what this consist of.
Oh, primarily as to one and it was around one individual high net worth individual.
That we made a loan to and we're still negotiating on how we get paid around that but.
It was that was that was the bill and the hub.
All right that's great. Thank you all my questions.
Thank you.
And at this time there are no further questions I would like to turn the call back over to Mr. Franklin.
Very good we appreciate everyone's interest today and thank you.
Ladies and gentlemen that does conclude today's conference call. We thank you for participating you may now disconnect.
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