Q4 2020 Spirit of Texas Bancshares Inc Earnings Call

[music].

Greetings and welcome to Spirit of Texas, Q4, 'twenty 'twenty earnings Conference call. At this time, all participants are in a listen only mode.

And the answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This call is being recorded.

I will now turn the conference over to management to begin the presentation.

Thank you operator, and good morning, everyone. We appreciate you joining us for the spirit of Texas Bancshares' Conference call and webcast.

To review 2024th quarter results.

With me today is Mr Dean bass, Chairman and Chief Executive Officer.

Mr. David Mcguire, President and Chief lending Officer, and MS. Allison Johnson, Chief Financial Officer.

Following my opening remarks, we will provide a high level review and commentary on the financial details of the fourth quarter before opening the call for Q&A.

And now I'd like to cover a few housekeeping items, there will be a replay of today's call and it will be available by webcast on.

On our website at Www Dot <unk> TB dotcom.

There will also be a telephonic replay available until February 2nd.

2021.

And more information on how to access. These replay features was included on Yesterdays release.

Please note that the information reported on this call speaks only as of today January 26 2021.

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.

However, 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 SEC for the year ended December 31 2019.

To understand certain of those risks uncertainties and contingencies.

The comments today will also include certain non-GAAP financial measures 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 of Texas website.

Now I'd like to turn the call over to our chairman and CEO, Mr. Dean Bass, Inc.

Jerry and good morning, everyone.

The key to victory in any contest depends upon having a solid strategy positioning yourself for success with respect to both of offense and defense.

And executing on that strategy.

When we first raised public capital on 2018.

We knew we had a winning strategy.

Over the next two and a half years, we would partner with three bank groups some of the best and brightest bankers in Texas.

And most recently the Simmons team that we welcomed to the branch acquisition earlier in 2020, which also allowed us to expand our footprint into the San Antonio and Austin markets.

We also rolled our loan production office into a de Novo branch in Corpus Christi in Q4 and deployed branch optimization efforts.

One branch sale and consolidating three locations in existing markets.

We have continually look for ways to grow and expand while playing defense in response to a global pandemic.

It is tempting after reporting such an outstanding quarter to spend my time with all of you. This morning discussing in detail our record financial and operational results and.

An increase in our quarterly cash dividend.

And our strong position with respect of both capital and asset quality.

However, I believe our results and strength speak for themselves for the fourth quarter.

Instead, I would like to use my time to highlight the importance of execution and thank all of those who made Q4 results possible.

This executive management team like any team in any bank in the country that strategic priorities and initiatives intended to improve customer experience and satisfaction and drive strong financial and operational results for our investors and other stakeholders.

The difference here at spirit of Texas lives of our talented bankers and seasoned support staff, who are able to execute flawlessly on those priorities and initiatives and exceed expectations every single day.

Our quarterly results reflect the outstanding efforts of our entire bank on.

Our strong lending staff was able to work through paycheck protection program loan forgiveness applications, while achieving tremendous success boarding and funding loans associated with the main street lending program.

It is extremely difficult to implement these government programs with often changing and shifting rules and regulations. However, our team has done so impressively.

Additionally, our support staff have shown tremendous resilience and the ability to execute while sometimes having to work from remote locations far too often while dealing with the impact of the global pandemic hitting close to home.

This dedication with some of my call devotion to excellence has not gone unnoticed.

Finally during the quarter, we named Allison Johnson, our Chief Financial Officer.

It was of demonstrating months of ability to navigate and execute in a tough financial environment that this decision was very easily made.

She will continue to perform with excellence for this organization.

I'd like to conclude my prepared remarks this morning by discussing.

The year to come.

With an election behind us of vaccine currently being distributed in the sentiment of uncertainty of declining capital markets.

Now time to turn of our gaze toward growth opportunities.

Throughout 2021, we will continue to look for growth opportunities in non interest income, which has a large part of our success in 2020.

We will continue to vigorously serve our communities funding needs through government programs and traditional lending and we will look for opportunities presented by strategic partnerships, which had been a huge part of our growth story since inception.

We have been able to emerge from this pandemic stronger than ever due to the strategy and our professional team of bankers now I'd like to turn the call over to Mr. David Mcguire, Our president Chief lending officer to discuss the loan portfolio and asset quality David.

Thank you Dean.

I would like to echo and expanding sentiment.

I am also tremendously proud of our dedicated staff, who have achieved something that is nothing short of amazing.

I would also like to expand the sediment to our borrowers who have operated their businesses and projects this year under an enormous weight.

We knew that Texas of are tough, but the level of resilience and fortitude shown by our borrowers is truly inspiring.

It is a key part of our core values to ensure that our loan officers stay close with their borrowers to ensure that needs are met timeline.

However, during the current year, we asked for loan officers to go above and beyond to work with our borrowers to help all viable businesses and projects survive.

The result was us hopefully of bond between lender and borrower that will be a strong and lasting as we emerge from the pandemic.

The strength and resilience of our borrowers is best exemplified by the status of loans, which were on deferred net periods at the start of the fourth quarter.

During 2020 $546 million on loans had requested some form of relief from regularly scheduled payments and.

At December 31, 2020, only 15, 9% of these loans remained on the permit with the overwhelming majority of these expected to resume payments during the first quarter of 2021. Additionally.

Additionally, we have completed a thorough review of the portfolio and downgraded any loans associated with industry is expected to have a slower recovery.

Hospitality and entertainment centers continued to be negatively impacted and are expected to continue to recover at a slower pace in the coming quarters.

These two segments represent $106 million or for 2% and $3 2 million or one 3% of the total portfolio respectively.

At this time, we believe that the general and qualitative reserve associated with these loans are adequate and any loans of demonstrating an inability to pay are quickly moved to specifically impaired and evaluated.

Additionally, we continue to see improvement in restaurants retail centers in loans associated with oil and gas exposure.

Thanks for the main street lending program in demand for traditional lending starting to show signs of life, we were able to achieve loan growth of $88 7 million for the quarter.

This was offset by $158 million of pp loans forgiven during the quarter.

We continuously update of our loan pipeline with new opportunities and are excited to see many borrowers revisiting plans and updating project timelines.

The yield on loans in the fourth quarter of 2020 was 542%, which increased 55 basis points from Q3 2020.

The increase in yield was expected as PPP loans begin to pay off in the entire net origination fees recognized.

Excluding the impact of PPP the yield on loans for the fourth quarter was five 3% compared to five 4% for the third quarter of 2020.

We remain committed to effectively balancing market rates for new loans, and the strategic priority of reducing compression within the net interest margin.

We are exceptionally pleased with the stability of the asset quality during the fourth quarter as loans exit deferment period and updated borrow information is received and digested.

Nonperforming loans to outstanding loans decreased to 30 basis points at the end of Q4 2020 compared to 36 basis points at the end of Q3 2020.

The provision for loan losses for the fourth quarter was for $4 million, which increased the allowance to $16 million or 67 basis points of our loans outstanding.

At quarter end of the coverage ratio on the organic portfolio was 104 basis points, excluding PPP loans.

Annualized net charge offs were nine basis points for the fourth quarter of 2020.

With that I'll turn the call back over to Jerry Goldman to provide a review of the funding side of the company Jerry.

Thank you David.

Total deposits at the end of Q4 were $2 5 billion, an increase of $172 million or seven 5% from Q3 2020.

And an increase of $531 million or 27, 5% over Q4 2019.

Of the $172 million sequential increase from Q3 of 2020.

Approximately $126 million was related to the main street lending program.

Noninterest bearing deposits increased $60 3 million or 9% from Q3 again with main street deposits, representing the bulk of the inquiries.

Noninterest bearing deposits now make up 29, 6% of total deposits up from 23, 1% at the end of Q4 2019.

This improved shift in deposit mix, along with aggressive repricing of deposits resulted in a zero point for 6% cost of deposits of <unk>.

Decrease of 12 basis points from Q3 2020.

Bank has no broker deposits.

The reported loan to deposit ratio at the end of Q4 was 97, 2%.

Excluding PPP activities of the loan to deposit ratio dropped to 85, 9% down slightly from 88, 8% at the end of Q3.

Borrowings decreased about 25 million during the fourth quarter to $252 7 million.

Due to pay off of P. P. P O L borrowing.

Borrowing.

After obtaining PPP forgiveness on the loans pledged against it.

Borrowings totaled eight 2% of assets at the end of Q4.

The company of significant resources of available liquidity, including $50 million and a holding company line of credit.

Fed funds loans totaling $118 million in federal home loan bank availability of $654 9 million.

I would now like to turn the call over to our Chief Financial Officer, Allison Johnson to provide a financial overview of the fourth quarter Allison.

Thanks, Gerry and good morning, everyone I would like to start this morning by thanking you for those kind words and vote of confidence I think I can speak for the majority here at spirit of Texas, but none of these results would be possible without your vision on execution.

We provided detailed financial tables in yesterday's earnings release.

Consolidated net income for the three months ended December 31, 2020 was $12 5 million with fully diluted EPS of <unk> 72 cents.

The earnings of $6 2 million and fully diluted EPS of <unk> 35 from the fourth quarter of 2019.

Record net income and earnings per share were achieved primarily due to a $3 $7 million gain on sale of main street loans.

Net PPP origination fees of $4 5 million and swap fees of $2 4 million.

Well kind of $3 3 million of net origination fees on PPP loans remain which should be recognized over the next two quarters. The main street lending program is not currently expected to continue and the elevated level of swap fees should return to a more normalized level on the next two quarters.

Noninterest income was $8 8 million for the fourth quarter of 2020 compared to $4 8 million on the third quarter of 2020.

As previously mentioned, we do not currently expect noninterest income to remain at these levels in the coming quarters. However, the expansion of noninterest income through Treasury management offerings and swap products remains a strategic initiative for 2021.

The temporary elevation.

And non interest income has provided the time necessary to maintain superior superior profitability, while performing a detailed review of non interest expenses.

Noninterest expense, which totaled $18 4 million during the fourth quarter of 2020 compared to $19 3 million in the third quarter of 2020 reflect our continued focus on reducing the core expense run rate.

The citizens conversion, which occurred in late July of 2020 has allowed us to begin realizing cost savings from the transaction, which were delayed due to COVID-19. The COVID-19 pandemic.

Additionally branch optimization will continue to be of focus in 2021, as we look at the impact of the pandemic on our branch structure and any lasting effects that may warrant accident.

Net interest margin on both of realized on tax equivalent basis were also assisted by PPP loan forgiveness, given that origination fees net of costs of recognized through the margin.

The tax equivalent margin in the fourth quarter of 2020 with for four 4% compared to third quarter 2020 tax equivalent margin of 397%, representing a 24 basis point increase.

Excluding the impact of PPP loans are for tax net net equivalent net interest margin for the fourth quarter of 2020 was for two 1% compared to $4 two 8% for the third quarter of 2020.

While we continue to see compression within the net interest margin from traditional lending the extent of the compression has slowed to a manageable level.

The provision for loan losses for the fourth quarter was for 4 million, which increased the allowance for $16 million or 67 basis points of our total loans outstanding are 76 basis points, excluding the 100% government guaranteed PPP loans.

The elevated provision expense for the quarter related primarily to downgrades of loans requesting additional deferment period, and the increase of specific reserves on impaired loans.

Average ratio on the organic portfolio was 104 basis points on a 149 billion in organic loans outstanding excluding PPP loans at quarter end.

Additionally, we have $5 4 million of unamortized discount on the acquired loan portfolio at December 31 2020.

We would not expect elevated provision expense for at least for the next two quarters as many of the significant qualitative factors have reached their maximum and credit quality is currently stable.

As of December 31, 2020, we continue to enjoy strong capital ratios with the tier one leverage ratio at the bank of 10 three and.

And $9 nine of the company on a consolidated basis.

Maintaining a strong capital position of the current priority. So that we can capitalize on any growth opportunities that arise in the coming quarters.

On January eight 2021, and we completed the previously announced sale of our tax for a branch location to first state bank of Graham.

Under the terms of the transaction the bank's total loans of approximately $3 5 million.

Deposits of approximately $5 7 million.

And the real property on which the branch was located.

I'd now like to turn the call back over to Mr. Bass for closing remarks.

Thank you Allison.

While it is too early to declare a victory in the fight against the global pandemic I can say with absolute confidence that our quarterly and physical year results.

Proves that we have a team in place that can rise to the challenge and thrive on even the toughest of times.

I am incredibly proud of the team we have in place at all levels and look forward to watching them all execute our vision of reaching even higher heights in 2021.

We are well positioned to seize opportunities with increased scale and improved efficiencies strong credit metrics.

And enhanced earnings power to continue our focus on creating shareholder value.

This concludes our prepared remarks I'd like to ask the operator to open up the line for any questions operator.

Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question you May Press star two if he would like to remove the question from the queue and.

For participants using speaker equipment that may be necessary to pick up your handset before pressing the star of he is.

Our first question is from Brad <unk> with Piper Sandler. Please proceed.

Hey, good morning.

Kornberg for Oren Bryan.

Maybe just.

I just wanted to start with the loan growth.

It looks like you guys had some some positive growth for the quarter, which is encouraging.

I think last quarter, you talked about the pipeline of adults.

For the pre pandemic, if not higher levels.

Kind of how should we thinking about loan growth.

In 'twenty, one kind of based on what you guys are seeing out there.

Brad This is David.

We're currently budgeting.

On a mid to high single digits right now and based on the kind of the pipeline that we have in place that we believe is readily attainable at this point.

Our pipeline continues to be refreshed and on a monthly basis, we're seeing good deal flow.

And I'm excited about the prospect of being able to grow on loans organically during the year of 2021.

Uh huh.

Okay.

Okay, Great and then Allison I noticed.

You took some of the liquidity that you had have you built out the securities portfolio of little bit more.

With the loan growth that you have coming due you think do you think you're finished there or might you use.

Some of the additional liquidity to added.

Out of Securities or is there other options that you are looking at at this point.

Yeah. So we're currently modeling of modeling that and saying you know really we got a lot of deposits than at the end of the year from the main street lending program. So we're really trying to evaluate how sticky those deposits are actually going to be but I think after we'll reevaluate the liquidity position once of the effects of the recent election.

And the vaccine distribution of works its way for the economy, and our and see what our borrowing base, how they respond to that.

Okay.

I think I heard you said that you thought the margin would kind of you know maybe modest compression, but it would be.

Sort of manageable interview over the near term.

Yeah, we are sort of core net interest margin for Q4 was for 'twenty, one which declined seven basis points from Q3 again. The majority of that was due to compression on loan yields which decreased 10 basis points linked quarter.

We still expect to see some relief on the cost of fund side of 22% of our higher rate Cds are going to reprice in the next 90 days and then 80% will re price in the next 12 months. So we will get some relief there.

But we know we're going to fade from headwinds on that front, but we're going to maintain committed to maintaining our core net interest margin of about 4%.

Okay, Great I'll hop back in queue.

Our next question is from what do you say with K B W. Please proceed.

Yeah, Hey, good morning, guys.

Hello, everybody.

So I wanted to take a closer look at the loan growth that occurred during the fourth quarter, excluding the P. P. P.

Forgiveness was there any particular portfolio of segments or geographies that really drove the growth. This quarter was it more broad based.

Woody this is David.

I would characterize it as more broad based all of our markets are performing very well and so we're seeing activity.

Throughout the state.

And we're seeing some good opportunities that.

And the new relationships that.

We're kind of muted last year to be honest with you but.

There's no single cat alone type of category that we're focusing on we're just looking for the general opportunities that come our way from our customer base.

Got it that makes sense and then looking at the expense side you mentioned in your opening remarks you were on.

Can it continue looking for branch optimization into 'twenty 'twenty, one, but I'm just trying to figure out do you think expenses could.

Take a ticket.

Take a step down from the <unk> level or is that of pretty good run rate heading into 2021.

So I think I'm expecting our quarterly core noninterest expense to be consistent with what we saw on Q4 or going forward are we made a lot of progress in 2000 Twenty's for branch optimization, and then reducing our redundancies related to our acquisition. So I really think that on.

Allowed us to determine what our core run rate would be going forward.

So I would model that is pretty much consistent for throughout 2021.

Okay. That's helpful and then glass lots for me.

I understand you know the organic growth of the top priority at this point, but just was wondering if you had any thoughts updated thoughts around share repurchases just with the stock trading around.

1112 of tangible book value right now.

Yeah. So we've got we've got an additional $6 million remaining to repurchase shares.

We took advantage during 2020 by actively repurchasing our shares when our stock price was trading at a discount. However, now that we're trading above tangible book, we've taper that off significantly and has not been of as active but again if that stock price takes a dip we of the availability to go back in and aggressively repurchase shares.

Yes.

Okay got it thanks guys.

As a reminder of the star one on your telephone keypad, if he would like to ask a question. Our next question is from Thomas Wendler with Stephens. Please proceed hey.

Good morning, everyone. This is Tom when they're on for Matt only I got on.

A few quick questions of the remaining $3 3 million and the PPP fees can you give me an idea of when those will be recognized.

So on modeling those currently again, that's really dependent upon what the government decides to do but on modeling does evenly throughout Q1 and Q2.

Okay, Yeah that sounds good and then with the main street lending program. It got extended in the January 8th of 2021 are there going to be any more fees recognized through that or is that completely over.

We closed the last main street loan in the nation on January 4th or fifth of feel for it and so that fee income of would come into the first quarter.

Okay.

Thank you just one last one from me actually.

Can you give me an idea of what happened with the classified and watch list of.

December 31st.

The decline.

Yes.

Nothing significant.

Continuing trying to work on that.

Of that list of customers, there was impaired and trying to get them off of books.

Alright sounds good for me thank you.

Thank you grant on life.

This concludes our question and answer session I would like to turn the conference back over to management for final remarks.

Thank you everyone for being a part of this announcement today I. Appreciate your continued support of a good day.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.