Q1 2021 Spirit of Texas Bancshares Inc Earnings Call
Greetings and welcome to the Spirit of Texas, Bancshares first quarter 'twenty 'twenty One earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your.
Telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. Jerry Goldman Chief Operating officer. Thank you Sir 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 2021 first 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 first quarter before opening the call for Q&A.
I'd now like to cover a few housekeeping items.
There will be a replay of today's call and it will be available by webcast on our website at www Dot S. OTB dot com.
There will also be a telephonic replay available until April 29, 2021, and more information on how to access. These replay features was included in yesterday's release.
Please note that the information reported on this call speaks only as of today April 20, <unk> 2021, and therefore, you are 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 and could cause actual results performance or achievements to differ materially from those expressed and 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 2020.
To understand certain of those risks uncertainties and contingencies.
The comments today will also include certain non-GAAP financial measures additional details and reconciliations of 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.
Thank you Jerry and good morning, everyone and welcome.
We are pleased to announce another solid quarter performance.
Texas is open for business and the economy is picking up steam during.
During the quarter, we have seen a significant number of Texans received of vaccine.
And into the mandatory mast requirement and businesses across the state of allowed to operate at full capacity.
As a result, we have seen an increase and economic activity across the state.
And we anticipate a quicker recovery and many parts of the country.
During the quarter, we reported strong net income of over $10 million with fully diluted EPS of <unk> 58 cents and a return on average assets of 1.32% annualized our provision expense has returned to pre pandemic levels consistent.
With the improvement and all economic indicators within Texas.
The current allowance balance appears adequate based on our insight experience and assessment model.
Credit quality has improved and loans and active deferral periods are not significant and either number or balance.
The net interest margin has been adjusted in response to the global pandemic.
And then stabilize with our measures taken to deploy excess liquidity and remove inefficient leverage.
We are pleased to now turn our gaze to of future growth, both organically and through strategic partnerships.
The first quarter has always been a slower quarter with respect to loan growth.
And as we review our pipeline and funding projections for the remainder of the year, we're confident and our quarterly and annual loan growth projections.
We'll never chase loan growth at the expense of our underwriting guidelines, but we are excited about the opportunities that are currently expected to materialize and the next few quarters.
And as always we are diligently looking for strategic partners, who can assist us with growing the bank with meaningful impact.
Now I'll turn the call over to David to discuss our loan portfolio and asset quality David.
Thank you Dan.
I would like to add some more detail around our results debt I know the entire spirit team is proud to have achieved.
The unpaid principal balance of loans and active deferment period has declined from $91 3 million at December 31st 2022 of 11 6 million and March 31 and 2021.
97% of loans requesting of deferment during 2020 have resumed scheduled payments and when the last loan exits deferment and the middle of May and we expect that more than 99% of loans for question deferment or regime scheduled payments on.
These statistics would not be possible without our lending team and credit administration team, who have worked tirelessly the past year understanding borrower needs and providing guidance as well as assistance.
While we did experience some loan growth during the quarter when excluding PPP loans.
We sold approximately $45 2 million of participation from the commercial real estate portfolio and an effort to improve concentrations and assist our loan mix with respect of policy limits and.
As Dean mentioned, the first quarter has historically been a period of for slower loan growth and demand typically increasing late in the second quarter through the end of the year as.
As we look at our current pipeline, we are still projecting year over year loan growth, excluding PPP loans and the high single digits.
The yield on loans and the fourth quarter of 2020 was five 9%, which decreased 33 basis points from Q4, 2020.
The decrease and yield was expected given newly originated PPP loans, which yield of 1% and a slower pace of PPP forgiveness, and we experienced in the fourth quarter of 2020 <unk>.
Excluding the impact of PPP loans, the loan yield was 529% compared to five 3% at December 31, 2020 of the yield on loans. Excluding P. P. P has stabilized.
Asset quality remained strong during the first quarter, we have seen improvement and past due and loans and overall risk ratings nonperforming loans increased to $9 9 million at March 31, and 2021 from $8 6 million at December 31 2020.
Nonperforming loans to outstanding loans increased to 41 basis points from 36 basis points during the quarter, primarily related to working through remaining pandemic related credit accounts.
We did not expect overall of the nonperforming assets to increase meaningfully during 2021.
The provision for loan losses for the first quarter was $1 1 million, which was consistent with the first quarter of 2020 and.
At quarter and the coverage ratio on the organic portfolio was 92 basis points, excluding PPP loans.
Annualized net charge offs were 14 basis points for the first quarter of 2021.
With that I'll turn the call back over to Jerry to provide a review of the funding side of the company Jerry.
Thank you David.
Total deposits at the end of Q1 were $2 6 billion and increase of $138 million or five 6% from Q4, 2020.
And an increase of $520 million or 25% over Q1 and 2020.
Of the $138 million sequential increase from Q4 2020.
$59 million with related to newly originated and PPP loans and $45 million was due to the seasonality and of public funds.
Noninterest bearing deposits increased $72 7 million or 10% from Q4 again with deposits related to PPP loans, representing the bulk of the increase.
Non interest bearing deposits now make up 38% of total deposits up from 23, 4% at the end of Q1, 2020.
This improved shift and deposit mix, along with aggressive repricing of deposits.
<unk> and a three 8% cost of deposits a decrease of eight basis points from Q4, 2020.
Bank has no broker deposits.
The reported loan to deposit ratio at the end of Q1 was 93, 6% excluding.
Excluding PPP activities the loan to deposit ratio drops to 79, 7% down from 85, 9% at the end of Q4.
Due to the previously mentioned loan participations, so during the quarter.
Borrowings decreased by $61 million during the first quarter to $191 7 million.
Due to payoff of PPP Lf borrowing.
After obtaining PPP forgiveness on the loans pledged against it as well as the maturity of <unk> short term borrowings.
Borrowings totaled 6% of assets at the end of Q1.
The company has significant sources of available liquidity, including $50 million and a holding company line of credit bad funds loans totaling $118 million and the federal home loan bank availability of $668.8 million.
I would now like to turn the call over to Alison to provide a financial overview of the first quarter Allison.
Jerry and good morning, everyone. We provided detailed financial tables in yesterday's earnings release.
Consolidated net income for the three months ended March 31, 2021 was $10 1 million with fully diluted EPS of <unk> 58, and.
Compared to earnings of $4 1 million and fully diluted EPS of <unk> 22 cents and the first quarter of 2020.
Net income and earnings per share were primarily driven by the recognition of $1 8 million of net PPP origination fees and $2 2 million of deferred costs associated with the origination of the latest round of PPP.
We anticipate the remaining $1 9 million of net origination fees on PPP loans generated during 2020 to be recognized during Q2 2021.
And the latest round of PPP, we funded $144 3 million and loans with net P. P. P origination fees of $4 7 million.
Which we should recognize over the lifetime.
Non interest income with $2 6 million for the first quarter of 2020, one compared to $8 8 million and the fourth quarter of 2020, a decrease of $6 2 million linked quarter.
The decline from Q4, 2020 was primarily driven by the one time fee recognition from the gain on the sale of main street lending program loans of $3 7 million and a reduction and swap product income of $1 9 million.
We expect noninterest income to increase in the coming quarters as Treasury management offerings and swap products remain a strategic initiative for 2020 one.
Noninterest expense, which totaled $16 6 million for the first quarter of 2021 compared to $18 4 million and the fourth quarter of 2020 decreased due to due to the deferral of $2 2 million and costs associated with the origination of the latest round of PPP loans.
Given our ongoing efforts to diligently reduce expenses branch optimization will continue to be of focus in 2020 one.
The tax equivalent margin and the first quarter of 2021 was $3 nine 8% compared to fourth quarter 2020 tax equivalent margin of four for 4%, representing a 46 basis point decrease sequentially.
Excluding the impact of PPP loans, our tax equivalent net interest margin for the first quarter of 2021 was for pointed out of 2% compared to $4 two 1% for the fourth quarter of 2020.
During the quarter, we moved approximately $200 million of cash into higher yielding securities, which should help to improve the margin and the second quarter and ensure that our tax equivalent net interest margin remains above our target of 4%.
The provision for loan losses for the fourth quarter was $1 1 million, which increased the allowance to $16 3 million or 67 basis points of our total loans outstanding were 79 basis points, excluding the 100% government guaranteed PPP loans.
The provision expense for the quarter related primarily to the increase and specific reserves on impaired loans.
The coverage ratio on the organic portfolio was 92 basis points on the 151 billion and organic loans outstanding excluding PPP loans at quarter end.
Additionally, we of $4 1 million of unamortized discount on the acquired loan portfolio at March 31 2021.
We would not expect elevated provision expense for the remainder of 2021 beyond those amounts needed to fund net charge offs and loan growth.
As of March 31, 2021, we continue to enjoy strong capital ratios with a tier one leverage ratio at the bank of 10.38% and 998% at the company on a consolidated basis.
Maintaining a strong capital position as the current priority. So that we can focus on organic growth and strategic partnerships that may arise from the coming quarters on.
And now like to turn the call back over to Dean for closing remarks and thank.
Thank you Allison I am very pleased with our first quarter results and truly excited for what is in store for spirit of Texas Bad.
We can now return on our focus to the growth trajectory, we're on and at the beginning of 2020.
With some level of visibility of returning to the capital markets. We are seeing merger activity increase as banks seek to combined strength and mitigate weaknesses exiting the pandemic.
Spirit of Texas has a strong capital position.
And and experienced management team with expertise and finding the right strategic partners.
Without a doubt the future of our bank will be a story of growth stability and quality.
As it has since inception.
This concludes our prepared remarks I'd like to ask the operator to open up the line for any questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and called for.
Formation Cuomo of indicate your line is and the question queue. You May press starts really if he would like Joe all of your questions on the queue for participants using speaker equipment and may be lots of folks need of pickup your handset before pressing of Starkey one moment, while we poll for questions.
Our first question comes from the line of Mark all of them.
What you.
You May proceed with your question.
Yeah.
Good morning, Thank you.
Good morning, Matt format.
And I want to start on the P. P P side and it sounds like the forgiveness process with slower than expected and <unk> and and that's definitely been of sediment from some of your peers as well, but you are expecting I think the remaining fees from the first round of PPP to be recognized and two Q I believe does that.
And you're already seeing the process of forgiveness start to improve in recent weeks.
We went ahead of actually.
Sorry, David I'll I'll take this one of the first and you can intervene.
We did and the second and the second half of March and that actually picked up and forgiveness and we actually ended up recognizing another million dollars of additional fee income remaining off of the first two rounds of PPP loans fees. We have one 9 million yet to be recognized which we expect of recognized in the second quarter of this year.
Yeah.
Yeah, and Mac, just a little color there too to add is as we saw acceleration right before the end of the quarter and the SBA of forgiving of loans and that's continued on for up through today as a matter of fact, we're plowing through those first two rounds and.
Think that those will be satisfied here pretty quickly this quarter and as Alison said and and then well weighted out to around three and and start processing those for loans for forgiveness of later in the year of late third quarter early fourth.
Got it okay perfect.
And just on on fees.
And the first quarter and little bit slower I think than you expected with respect to both swaps and SBA gains.
<unk> love to hear more about what you saw on the first quarter and and your expectations on these overall, but those two in particular are from here.
Sure so well last quarter, we implemented this new smart products and we scrubbed the existing loan portfolio and any eligible loans that we thought we should take advantage of that product. We went ahead and implemented that swap product for those customers, so that and increased fee income and kind of about one nine.
And which was kind of an anomaly for Q4 and.
On the seasonality of that though I would think you know.
And with Q1, typically being slower loan growth quarter.
We expect that debt swap fee income to pick up in future quarters, two and we're estimating about probably about a million dollars of quarter I'm here going forward and Additionally, I'll, let David talk about the seasonality associated with the SBA portfolio and the gain on sale generated from that.
The.
And the SBA as you know last year was a very difficult year for <unk>.
Generating and new SBA loans due to the pandemic, but.
And but if you look at it today, we're starting to see activity that we had pre pandemic and the SBA department. So the expectation and this is Ed will probably because of the timeline on closing and fully funding and SBA loans and we expect to see a much better second half of the year and the SBA World and.
We will probably be more reliant upon swap and other product income fee and.
During the second and third quarters on on through the end of the year.
Okay got it and that's helpful.
And then on the of.
Loans side loan growth side, I think you mentioned still some participations around $45 million just love to hear more about.
The strategy behind this I think you've mentioned and reducing concentrations and I'm curious were there any fees associated with selling these.
Two other institutions and and would you look to continue to do this and the future. Thanks.
Well if you remember of man we did this last year at this exact same time as we're going into the.
Acquisition of the Simmons branch is trying to balance out of where our internal policies were.
Vs regulatory.
Regulatory targets.
Again this year, we did the same as we as we build up our CRE portfolios and where we're able to.
And there are high quality loans, we're able to find partners that want to take on a piece of the loans that we can rebalance and we now have the capacity to refill those buckets going into the rest of the year. So.
And there is not we are when we do sell those loans, we take a 25 basis point servicing fee on those loans no fee no other fees <expletive>ociated with that and our.
Our expectation is is that as we move along and looking at our growth projections for the rest of the year. We may bring some of those back like we did last year and.
And just remember of like last year, we did the same thing.
To lessen the to bring about more liquidity and less and less and some pressure points are.
And then this year is for a different reason, but we have the same capacity to bring those back in.
Okay. That's helpful. Thank you all back on the Q.
As a reminder of if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Brad Millsaps with Piper Sandler You May proceed with your question.
Hey, good morning.
Good morning, Brad and Brad.
Wanted to maybe follow up on on the margin and and kind of loan yield discussion of it I was impressed that you were able to hold that kind of of core loan yield.
Flat on a linked quarter basis essentially.
Just kind of curious you know do you do you expect any additional pressure there what do you do any of those servicing fees from the.
Commercial real estate participation does that run through interest income opposed to fee income that might be supporting that just kind of wanted to get a sense of.
How much more stability you think you know is there kind of given kind of where that rate is versus maybe what we're seeing from other other of your peers and the market.
Yeah. So it's Brad again, I think I think low nielsen's hit.
<unk> lives for us going forward and the way the the way those participation works is that would run through the yield there, but I really don't think that bad in a material impact on the loan yield on the cost of fund side. We're continuing to think we are continuing to see cost of funds decreased we are we expect that trend to continue and the following quarters. We've got.
22% of our CD portfolio is going to reprice next quarter, and 78% is going to reprice over the next 12 months and well see some relief there we did move some money around from cash and deploy that into our securities portfolio. During the quarter. So we expect to see some pick up there.
And Q2, as well, but I think like most banks weird just we have an influx of deposits right now and you know that's mainly driven by the quantitative easing and what's going on and we don't necessarily see that that path of turning off anytime and that in the short term.
So with that you know, we're constantly monitoring our liquidity position and our <expletive>et mix of our earning <expletive>et mix and seeing how we can deploy that cash versus what we can keep and cash to use for future loan growth.
And just just on the funding side of things and I think you had about $190 million of borrowings and long term debt at the end of the quarter I think roughly $37 million of that of bad as the remainder of essentially.
The funding for for P. P P loans and that should come down as those loans pay off.
That's correct.
Okay, Great and then on.
On the expense side of things you mentioned, you know kind of ongoing branch rationalization I'm just kind of wanted to get a sense of you know.
Run rate expenses I <expletive>ume that you know you'll see the the $2 2 million of Fas 91 related deferred cost come back and the run rate, but any other offsets. There on you know kind of of branch rationalization and side that debt that could push the run rate lower.
Yeah, and again and we expect to see maybe some branch rationalization and occur and the second half of the year one of the one of the things. We did last year was we turned off again and again, given COVID-19 and there wasn't a lot of loan growth that we shut off the incentive compensation for our lenders.
Given that we're expecting growth this year, we turn that initiative back on so that's that's being factored in.
From a run rate perspective, you know, we expect to maintain that about 18, and a half million per quarter going forward with with the potential of getting some of the branch closures on there in the second half of the core of every year.
Great and and just final question for me for Dean.
I think you guys at the end of the year, we're pushing about 365% CRE to total capital obviously you had.
The loan participation this quarter.
How much of that going to impact your ability to grow I mean is it is kind of 400.
Number as you sort of view of an upper bound or you're trying to push.
Over time.
Below the 300 threshold just kind of curious.
And how to think about that that number and you know what kind of governor of that you know might represent.
Represent towards growth going forward.
And we think we're in a very good position. If you remember back last year of some of your questions last year was low.
And what are you going to do with the CRE and from the Simmons, It's a large dollar amount and it's it puts a little pressure there or whether there was going to pay off with the quality of those and and and now this year, we're and an excellent position and let David explain what what transpired and what positioned us and of great spot right now good question Yeah.
And Brad.
And on internally.
And we've adopted policies, probably about a decade ago now to exceed regulatory targets with.
And going up to 150% of our tier two capital for construction loans and.
And then we went to 350% on total CRE and so when we when we bumped across that number that immediately gets our attention and we want to manage back down to below that we've done that we're in the low 300, Twenty's right now and given that with earnings and and and other measures we're going to be.
Building capacity right now so that we have the availability to.
The service of the needs of our existing customer base and new customers going forward also consider when we did the sub debt last year was to for M&A and organic growth and so keep in mind, we still have additional funds to dropdown and if we thought it was needed and it could could stimulate.
Our progress and income.
Great. Thank you guys I'll hop back in queue.
Thank you Brian.
Our next question comes from the line of Woody lay with K B W. You May proceed with your question.
Hey, good morning, guys.
More and more weighted.
Yes, I was hoping to get a quick update on the hotel portfolio and it was nice to see deferrals of Paul of such a low level, but was just curious how occupancy rates are trending for this point.
Yes.
Where are we.
We predicted by the summer that all of our hotel portfolio would be back on its feet and what we're seeing is actually they're approaching that faster and so then and then just the beginning of the summer.
And.
Right now.
We have the loans that are or continue to be deferred and we have three hotels are things or our revenues are improving revpar and improving occupancies.
Occupancies are improving.
And so we think that those body and <unk>.
Middle to end of this summer and we'll be back and Oh.
And where they need to be and the rest of the hotel portfolio is performing as expected and all payments remain as agreed all contractual payments and and Amortizations are back in place. So overall, we feel very good about that.
And you know, we're not quite ready to entertain.
Doing new hotel loans at this point, but you know.
And as things become.
Better for the industry.
Particularly here in the state of Texas, and that's where we focus on are we think that you know that portfolio will remain healthy and look to grow it probably later in the year or into 2022.
That's great and a year.
Our next question is are you now with the industry for us with excess liquidity at the moment I would imagine that pricing competition on the loan side, it's pretty intense but you sound pretty optimistic with your board loan yields from here and just curious how and how you're seeing and the pricing competition on board and where you're on boarding guy new average loan yields at this.
Point.
We have a target of.
And of maintaining a margin above 4% and so.
Depending on the deal we're going to get it and particularly if it's alone and that's going to be of three to five year maturity and theyre looking for a fixed rate right now, we're being really careful with that and we're pricing that in we want to be north of 5% and on a three to five year fixed rate deal.
If it's of floating rate deals and youre going to see pricing and the and low to mid force and.
And as far as competition.
It really speak to what everybody else is doing other than looking at what their margins are but based on our local peers. They're doing the same for the same things. We are so the expectation is if we were running into competition that the pricing will be pretty much. The same it's just going to be down two of our.
Our are running and running of guidelines versus theirs and also you might add.
Our our pipeline going into the pandemic last year was around a $1 billion and that's what we had on the ready to come through the bank and <unk>.
Following quarters, and so now where we're seeing that pipeline back to those ranges and close to those ranges where they were prepaying.
Pre pandemic, which is very encouraging.
Got it.
And then last for me you know the pipeline does sound and strong at this point and time are there any segments in particular.
And that'll be driving driving the growth or will it sort of be broad based.
As we go forward.
Yes.
One of the benefits of being on basically having a statewide footprint and this is what we see a lot of different opportunities that.
Our lenders are able to take advantage of so if you look at the pipeline and when we do we actually segmented it out where we're not seeing any one segment.
On a growing any faster than the other so we expect that our the granularity that we're trying to go after as a company.
For safety reasons is going to remain there and not looking to add huge loans on to move the needle and we'll do it one by one like we've always done it and and it'll be and in many different segments that you might expect that that.
And a company like ours as a community bank, we're going to be probably more real estate related.
And as collateral, but could be for lots of different purposes, and and David makes a good point, we are of very geography, and our and our team. We have some strong professionals that have been and been doing their job for many many years and different markets and so that gives us a little bit of and advantage.
And just just territory and and where Theyre looking for loans, so that that's a strength and feel like.
Got it that's all for me thanks, guys.
Thanks, Larry.
Our next question comes from the line of Matt Olney with Stephens You May proceed with your question.
Thanks, just a follow up on the of the investment securities purchases and the quarter. I think you mentioned about two and a million dollars loved to hear more details behind that in terms of products and yields and and duration.
Sure. Yeah. So we are we have a really low risk profile in general on the majority of that was put into a cash flowing agency mortgage backs on.
The average yield on that portfolio and it's one five and the duration of a little over five years.
Perfect. Thank you and then.
I guess I'm more for Dean.
Around M&A, we'd love to hear your thoughts about the M&A chatter and and Texas more broadly and and love to hear kind of what types of transactions make the most sense for the bank this year. Thanks.
I'd be disappointed if you didn't ask me of that question. So.
No.
We have always been and that $3 million to $500 million range has been of target, but as we've talked about before there are different.
Bank group's outstanding bank groups at different levels.
And five two of billions and billions of two and are there any other merger of potentials that are out there that makes sense for the company. We've been open to try to figure out whats and the best interest of our company and I agree with you I think it's.
And that there is a a.
From interest now and a lot of different sectors. We had a good run of the first two years and M&A and we had a pretty active board that was going to continue pre COVID-19 and and now that has picked back up where there's.
More and more strong companies good companies on the board right now, whether it's on the fringes or or in the metros, but it's a little harder.
Waiting into the into the Metro markets. So are our friends and and edges hasnt been successful to us and we think that's a good way to continue.
Okay. Thanks for the commentary.
Thank you.
There are no further questions at this time I would like to turn the floor back over to you Mr. Dean b<expletive> for closing comments.
Thank you everyone for being on the call and we appreciate your interest and.
Listen up we think there are a lot of exciting things in the quarters and we are for you.
We are certainly.
<unk> enjoyed being on this call and look forward to talking to you and the future. 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 rest of your day.
Okay.
[music].
Yeah.