Q4 2020 CBTX Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the C. B T X fourth quarter 'twenty 'twenty earnings Conference call.
At this time all participant lines are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question to one day session you would need to press Star then one on your telephone please be advised on today's conference maybe recorded.
Any further assistance. Please press Star then zero I would now like to hand, the conference over to your host the day, Justin Long General Counsel. Please go ahead.
Thank you.
I'm Justin loans, the general counsel of CTX, and our management team would like to welcome news.
To the <unk> earnings call for the fourth quarter of 2020, we appreciate you joining us.
Our earnings press release yesterday afternoon copy of which is available on our website along with the slide presentation that we will refer to during this presentation.
Before I begin I'd like to remind you that during this presentation. We may make forward looking statements regarding future events on our financial performance or our business prospects forward looking statements are subject to subject to risks and uncertainties that could cause actual results could 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 quarter quarterly report on form 10-Q for the third quarter.
In our other filings with the SEC all of which can be accessed on our investor Relations website at IR Dot CVT X I N C 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 release and Investor presentation.
I'm joined this morning by Bob Franklin, Our Chairman, President and CEO, Ted Pigott, Our Chief Financial Officer, Joe West, Our Chief Credit Officer, and Joseph Mcmullan, Our controller.
At the end of the remarks, we'll open the call to questions with that I am going to turn it over to our chairman President and CEO Bob Franklin.
Thank you Justin.
Welcome to the earnings call for <unk>, Inc. For the fourth quarter of 2020.
We entered the fourth quarter of 2020 with caution.
As we experienced an ever increasing contentious political climates, and an acceleration in COVID-19 cases in our markets as well as across the country.
These conditions remain as we enter 2021 we.
We are watchful for the economic impact of the policies of the New administration, while we continue to be encouraged by the distribution of various vaccines, allowing communities to move more freely again.
Our customers remain resilient, even though our markets are not fully open.
We continue to see a drop in our current deferrals and request for new deferrals loan activity is beginning to pick up and we expect that new loan relationships will steadily increase throughout the year slower in Q1, and two but picking up in the last half of the year.
The year 2020 was impacted.
By markets negatively affected by the pandemic.
Larger than normal loan loss provisions low.
Our interest rates and a large spend related to our BSA program.
We believe we have identified our major risks in the portfolio and adequately reserved for that.
We have lowered our cost of funding to meet our lowering our lower lending rates and we are hopeful for the new vaccines and the complete reopening of our markets.
As for our regulators on the formal agreement.
Gives me with the OCC.
We continue to put significant work in energy into our BSA program.
We are confident in our work.
To meet the regulatory expectations and further expect that our expense around these efforts will be significantly mitigated in 2021.
We are again cautious as we entered the year, but we are but are also optimistic about the opportunities that we since 2021 will bring.
Continued to maintain a strong balance sheet and capital position, which allows us the maximum flexibility in meeting our goals for 2021.
With this I will now turn the turn the program over to Ted <unk>, Our Chief Financial Officer.
Good morning, and thank you Bob.
We'll move into the fourth quarter of 2020 results company reported net income of $10 2 million or <unk> 41 per share for.
For the quarter ended.
At December 31, 2020, compared to $6 4 million or <unk> 26.
<unk> per diluted share for the quarter ended.
September 30th 2020.
Net income from the year ended December 31, 2020, with $26 $4 million per dollar point.
Six diluted.
Per diluted share compared to $55 million or 2.0 too.
<unk> per diluted share.
For December 31.
2019.
For the fourth quarter 2020, net interest income increased three 6% compared to third quarter 2020.
Yield on interest earning assets increased.
379% for fourth quarter 2020.
Compared to $3 75.
Percent for third quarter 2020 cost on interest bearing liabilities.
Well.
Three 9% for fourth quarter 2020, compared to 46 basis points for the third quarter 2020.
The net interest net interest margin on a tax equivalent basis increased seven basis points to 363% per fourth quarter.
Compared to the third quarter.
Net interest income for the fourth quarter of 2020 decreased $501000 compared to the third quarter.
During the third quarter 2020, the bankruptcies non tax will death benefit to proceed.
Of two $2 million under our two bank on life insurance policies, and we recorded a gain of $769000 over the carrying value during the third quarter.
Non interest expense for the fourth quarter of 2020.
Was $23 $7 million, a decrease of $200000 compared to third quarter 2020.
Primarily due to a decrease in salaries and employee benefits of $1 5 billion.
Partially offset by a $663000 increase in professional and directors' fees, namely consult increase related to bank secrecy Act anti money laundering compliance matters.
Net interest income for the for the year ended December 31, 2020 decreased <unk>.
Three 6% from 2019.
The yield on earning assets was 398% per the year.
Per to 495% per year 2019.
The cost of our interest bearing liabilities was.
Five 7%.
<unk> thousand 20.
And one point <unk>, 7% for 2019.
The net interest margin on tax equivalent basis decreased 69 basis points to 373% for the year 2020.
Yeah.
Net interest income for 2020 was $14 $8 million.
Earnings on bank life insurance per year to year.
<unk> 2020, and 2019 included 769000.
And $3 $3 million, respectively of non taxable gains on debt benefits on bank owned life insurance claims.
Additionally, deposit account service charges decreased one.
One $5 million in 2020 due to lower transactional fee activity.
Non interest expense for 2020 increased two point.
Zero million or two 2%.
From the year 2019.
Professional and director fees include $3 $9 million in consulting fees.
Regarding the company's BSA AML compliance efforts.
Moving to financial condition.
Total assets.
At December 31, 2020 increased three 5% from September 30th 2020.
And an increased 13, 5% compared to 2000.
On the 31st 2019.
This was spurred by the original used for PPP loans and deposits inflows.
Loans, excluding loans held for sale at December 31, 2020 decreased one 4% compared to September 32020.
And they increased 10, 8% compared to December 31, 2019, primarily due to the reason the origination of PPP loans.
Well this deposits at December 31, 2020 increased four 1% this is consistent with seasonal trends and compare.
Hey.
September 32020.
Deposits.
Also increased 15, 5% compared to December 31, 2019.
We've maintained our strong capital ratios as of the company's total risk based capital.
Capital ratio increased to $16, 71%.
Our CET one capital ratios were $15 four 5% in the tier one leverage ratio was 12% all as of December 31 2020.
Yeah.
The allowance for credit losses for loans was $46 million or one 9% of total loans on December 31.
2020.
This compares to 41 per $1 million or 141% of total loans at December 31 September 30 per September 30th.
2020.
The allowance decreased during the fourth quarter 2020, primarily due to a $3 $5 million loan charge offs.
The allowance increased $15 4 million.
At December 31, compared to December 31, 2019.
The allowance.
Increased probably due to uncertainties on.
Certain fees associated with the COVID-19 pandemic.
State is stability in the oil and gas industry result on economic conditions and the impact on the company's loan portfolio the Atlantic on to adjust certain factors realized determined you feel.
Now I will turn it on with the West.
Thanks Ted.
I speak a bit to our loan portfolio, starting with slide eight from the investor presentation.
For the fourth quarter, our loans were down slightly at two point non 2 billion versus $2 6 billion at the end of the third quarter of this year a decrease of approximately $44 million in part as a result of a forgiveness on payoffs of our PPP loans, which were down to $275 4 million on the gross price.
So at the end of the year on.
Average yield was up from Q3 2020 with a yield of 437%.
244, 2% from the three months ended.
December 31.
Our average yield on loans for Q4, when excluding the PPP loans was 445, 1%.
For the quarter.
C&I loans were down by approximately $87 7 million or 10, 8% compared to Q3.
That's a 56 million pay down to the PPP loans.
31 million pay down on the non PPP portfolio CRE was up nine 7% quarter over quarter.
<unk> was up three 2% one to four family was up five 5% and multifamily was down 13, 5%.
As you turn to slide 10 on you will see our construction on development loan components on our construction and development loans were up approximately $16 5 million when compared to September 32020, due to additional construction funding in the community development.
Our portfolio and somewhere on development lending.
Slide 11 sets forth, our oil and gas exposure, including how we quantify.
Our direct and indirect exposure.
Outstanding balance of oil and gas wells continue a downward trend from Q1 of 2020 for Q4. This year with a total falling from September 30 by approximately $3 5 million largely because of low payoffs and paydowns.
Slide 12 sets forth our.
Information about our PPP loans during the fourth quarter, we continued to work with our borrowers on forgiveness applications.
End of 2020, we had received payments.
Totaling $68 million per submitted forgiveness application for another 256 million loans with a total principal balances of $86 4 million.
With the release of the simple forgiveness application by SBA earlier. This month, we have also begun to work with our borrowers with loans of less than 150000 on forgiveness applications.
Our team is doing great work with our borrowers almost forgiveness.
Apps and has turned back to assisting customers with a second round of PPP financing, which we began on January 19.
On the table at the bottom of slide 12 sets forth our average yield on our loan portfolio, our average yield on our PPP loans, where the average yield on our portfolio were taking out the PPP loans.
Slide 13 sets forth information regarding deferral arrangements that we entered with our customers as a result of the COVID-19 pandemic.
The total number of our deferred loans was down to 21 at December 31, and the principal balance of those loans remaining on deferral at the end of December was $38 4 million.
Largest category of our remaining deferred loans is in our commercial real estate portfolio with non loans with principal of approximately $19 4 million.
If you turn to slide 14, you'll see a breakout of what we think are the elements of our portfolio that are most sensitive to the COVID-19 virus retail CRE oil and gas convenience stores hotels and restaurants.
On a comparison across Q4 Q3 and Q2.
Those elements comprised approximately 25, 3% of our total loans at December 31, slightly up from 24, 7% at the end of September five increases, resulting from construction loans and the group continuing to fund.
Slide 15 sets forth in total about our allowance for credit losses during 2020.
Ed noted our allowance for credit losses to loans was 139% at.
At December 31, 2020.
Turning to slide 16, our nonperforming assets increased slightly during the fourth quarter, but our credit quality remained strong as Bob mentioned, we believe that we are working with our <unk>.
Process for early detection and identification of problem loans conservatively.
Process led to an increase in adversely graded loans during 2020.
Including during the fourth quarter as we identify on past due loans associated with business was impacted by the pandemic as well as businesses that might be negatively impacted generally.
Slide 16 shows information regarding our nonperforming assets for our total assets, which was 0.61% as of December 31, 2020, compared to 0.41% as of September 32020 on.
On the net charge offs increased during the fourth quarter to 0.49% of average loans on an annualized basis.
Nonperforming assets increased $8 4 million during the fourth quarter of 2020, primarily due to two relationships previously classified as substandard accruing that we moved to non accrual status, partially offset by one loan of $3 5 million charge off during the fourth quarter.
During the year ended December 31, 2020, we restructured 36 levels as <unk> with.
With pre modification.
Outstanding record investments totaling $43 7 million all of which remained outstanding at year end.
34 of the 36 loans restructured as <unk> were subject to Covid related deferral arrangements during 2020.
With that I'll turn it back over to Bob Franklin.
Thank you Joe and with that we'll go ahead and open it up for questions operator.
Thank you as a reminder to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key.
Our first question comes from the line of Graham Dick with Piper Sandler.
Your line is now open.
Hey, guys good morning.
Good morning.
Can you just go into a little more detail about the loans that moved to nonperforming this quarter.
Just kind of like what industries. They might've been focused in and then on the CRE loans like kind of where it might be sitting on a loan to value basis, just really any additional color here I think it'd be.
Would be great.
Yes, I'm going to make one comment and then I'm going to let Joe give you give you more detail.
We have chosen.
I don't know how everybody all suggest that from our standpoint, we've chosen.
To treat.
Problem credits the same way, we always have we don't use the cares Act.
And while their assumptions on <unk> not.
It puts a PDR we feel like it's.
When we treat it as such.
<unk> related or not so.
In that light you can you can understand some of the detail that debt.
Joe will give you, but Joe go ahead of it.
Yeah.
Yes.
The two loans there are two relationships that make up the bulk of that although dollars that we moved into non accrual in Q4.
One relationship.
Was.
In the automotive repair industry.
And our business was down significantly due to COVID-19.
We have granted them on deferral, but.
I've been granted additional gross referrals on where we did the additional before early into Q3.
Three we downgraded to sub standard, but not did not place it on non accrual at that time and then as operating results continued to suffer in Q4.
We went ahead and put it on on non accrual.
The one is <unk>.
Industrial metal fabricator.
There are a lot of their businesses.
Our marine industry.
And that's not a COVID-19.
Issue that had been sub standard for.
We're doing a couple of years and we're just kind of been limping along.
As the business has deteriorated we moved it in Q4, we move that to.
No.
Non accrual.
Real estate associated with that the risks from commercial real estate associated with the automotive company that I mentioned, a while ago debt.
As their primary is commercial real estate is our primary location.
Our loan to value on that particular loan is 80%.
Okay, Great that's great color. Thank you.
And then also I guess what are you seeing in terms of migration into criticized and classifieds compared to where you are at in the third quarter.
And what are you kind of expecting in 2021.
Have you already factored in some more migration into your reserve and do you think where it sits right now.
It's pretty good considering what youre expecting.
We think we've.
As I wanted to emphasize.
This increase in NPA that we had in Q4. These four problems that we identified in Q3 or earlier.
And so if you look at our total levels on classified.
It's remained fairly constant over the last.
Four five months.
And on.
Elevated obviously as compared to a year ago.
But over the last four or five months that total number has remained constant and we're not seeing new things migrate.
That way because of any any major extent, we think that.
So we've got a handle on the problems.
And.
And we're continuing to work on people because we probably think in most cases thats the best way to get repaid.
Probably give them a little additional work on time to work the issue out but.
So we don't see as we look forward to.
Into 2021, we're not seeing.
A deterioration in the credit quality of the portfolio, we predict we've got our problems identified at this time and we're not.
I don't see this.
Way too much.
Problems hitting books from 2021.
Okay.
And then I guess, just one last question here, you're switching to expenses.
Excluding that $2 $4 million of BSA AML consultant expense.
It looks like you guys did a pretty good job managing the expense base. This quarter, mainly on lower salaries is there anything specific that happened here in the fourth quarter.
Can you give me a sense of where you think the quarterly run rate might settle out in early 2021.
Yeah.
The biggest adjustment and I'll, let Chad speak to the run rate for 2021, but the biggest adjustment in the fourth quarter was there some adjustment to some bonus accruals.
Debt, we had had based on.
A better year. So we had some adjustments on the fourth quarter to salary expense around that.
Far as run rate going forward I'll, let Pat address.
The address outlook.
Well I think we normalize the fourth quarter for you soon.
Given that is on a run rate going forward I think the whole on tables, you'll see in the first quarter, we generally do our salary adjustments first quarter.
Which I think will not be on the scene.
Run rate that you've seen in prior years, where we've already looked at debt and tighten that down.
Other than that I don't really know of any.
Major things that are going on.
Affect us going forward like that.
Okay, that's very helpful.
Ill jump back into the queue congrats on the quarter guys.
Thank you.
Thank you as a reminder to ask a question.
Please press Star then one on your telephone.
Our next question comes from the line of will Jones with <unk>. Your line is now open.
Hey, great good morning, guys.
Good morning.
So I was just wondering switching back to credit a little bit just wanted to touch on those COVID-19 deferrals that were moved to PDR this quarter.
Just maybe get a little more clarity around the decision to move those loans and does anything really change regarding.
Regarding the mechanics of those loans or how that would be triggered moving forward.
I didn't quite quick.
Part of the question I didn't quite understand what you were previously.
Yes, just a little more clarity around the <unk>.
The Covid deferrals that were moved to TD are this quarter does anything really change about how those will be treated moving toward.
I would say not they may.
We're going to continue to work with them.
There could be additional deferral given.
Depending on how we gauge their prospects for.
Business in 2021.
The one of them the problem.
On that had been classified for a longer period of time.
There's really not a COVID-19 issue.
Yes.
They've had revenue problems prior to the pandemic.
So.
We will continue to work we might grab some additional forbearance there if we could see our way too low.
So better collection process.
This year.
So.
As both of those are sort of.
At a point, where we're we're evaluating their plans they have given us for the near and medium term.
Trying to decide what's the best interest of the bank regarding that.
Additional restructure of the loans.
Okay. That's helpful. Thanks, and then maybe just moving on to growth.
It is down.
Optimistic about 2021, and I think <unk> is one of the few banks debt outside of PPP was actually able to get a little bit on.
Gain on growth this year.
Does the mid single digit growth range feel like.
Fair number next year.
Yes.
Well I think.
Our expectation is that we get back to our normalized growth.
Which is 5% a year as is our typical target now.
Now I can't give that guidance really.
With any part of.
Specific.
<unk> just because.
Don't understand what first and second quarter are going to give us.
And really clouds, the rest of the year because.
I think.
It's going to be difficult to understand exactly most of our business comes from shoe leather marketing so when.
When we can't get out and.
Visit with our.
Our customers and our prospects that makes it difficult for us so a lot of our <unk>.
Our loan generation is coming from existing customers, which is great.
And that happens on a regular basis year on year out COVID-19 or not.
And so that business will continue at a much better pace than what RMA, maybe new prospects on new business says so.
It's too difficult at this point to really.
No debt debt will be back on that track, our expectation and feeling is that we possibly could get there.
But I can't.
Any certainty tell you that.
That we're going to be able to but that's that's our goal.
Understood Great, Yes, no debt.
Absolutely a tough environment to look.
Look ahead and forecasting on a little bit.
Last one from me on the buyback you guys were low active this quarter 150000 shares.
Which is great to see.
Supplies it wasn't a little more than that.
Given your stock has been trading so cheaply, especially at the time that you guys reinstated.
Just wanted to hear your thoughts on share buyback appetite moving forward.
How do you guys think you'll deploy some of your excess capital.
Well on.
We always look at net everything we're looking at buybacks looking at possibly increasing the dividend.
<unk>.
Still are are hungry for some M&A and I think M&A is something that's top of mind right now I think as people have a lot of conversations we continue to have a lot of conversations with people.
But.
As far as.
The buyback goes I mean, the limitations around the programs that are available to us.
I get a little bit difficult.
Our stock makes a little difficult.
It's we're buying what we can.
Every day so we're.
We continue to be in the market.
Hum.
To buy our stock back we still think it's cheap relative to what other uses we might have for that capital. So it's a.
We feel like it's still a good buy for us.
But we're also looking to employ that capital in a very different way in and we think that may be this COVID-19.
Tobacco has provide we'll provide some opportunities I think people are reassessing, where they are and what their opportunities are.
And.
We are encouraged by the conversations that we're having out there.
Net.
More and more people are considering transactions so.
We'll see what happens over the next 12 months, but.
We're looking at several different ways to try to.
Employ some of that excess capital that we have.
Yes, we're hoping that is not in a negative volume.
No absolutely not okay. That's it from me guys. Thanks, Paul is color and congrats on the quarter.
Thank you very much.
Thank you there are no further questions at this time I will now turn the call back over to Bob Franklin for closing remarks.
Well very good we appreciate everyone joining us on the call today.
Thank you for your interest in <unk> and with that.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
[music].