Q2 2021 Allegiance Bancshares Inc Earnings Call
Good day and thank you for standing by welcome to the allegiance Bancshares, Inc. Second quarter 2021 earnings conference call at this time all.
All participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need of press star 1 on your telephone. Please be advised today's conference may be recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to 1 of your speakers today Courtney.
Cereal. Please go ahead.
Yeah.
Thank you operator, and thank you to all who have joined our call. Today. This morning's earnings call will be led by Steve Retzloff CEO of the company.
Ray Vitulli President of the company and CEO of allegiance Bank, Paul AG Executive Vice President and CFO, and Executive Vice President and Chief Risk Officer of the company and President of allegiance Bank and Shana cut the executive Vice President and General Counsel.
Before we begin I need to remind everyone.
Some of the remarks made today constitute forward looking statements as defined in the private Securities Litigation Reform Act of 1995 as amended.
We intend all such statements to be covered by the Safe Harbor provisions for forward looking statements contained in the act.
Also note that if we give guidance about future results that guidance.
The only a reflection of management's beliefs at the time of the statement is made and such beliefs are subject to change we disclaim any obligation to publicly update any forward looking statements, except as may be required by law.
Please see the last page of the text in this morning's earnings release, which is available on our website at allegiance Bank Dot com.
Additional information about the risk factors associated with forward looking statements.
We also have provided an investor presentation on our website, although it is not being used as a guide for today's comments. It is available for review of at this time.
At the conclusion of our remarks, we will open the line and a lot of time for questions and now I'll turn the call over to art.
CEO Steve Retzloff.
Thank you Gordon welcome everyone to our conference call and we really appreciate your attendance.
As was highlighted in our press release. This morning, the second quarter resulted in another record or net income for the company of $22.9 million or of $1.12 per diluted share which.
Is due in part 2 of our outsized PPP success and continued recognition of the fees associated as we proceed with the PPP for given its process.
Also as we continue to closely monitor our core loan relationships and assess economic factors that drive our allowance model of the quarter's earnings also benefited from a release from the allowance.
1 losses.
We feel great about our tangible book value of having increased by 12, 7% over the past year, notwithstanding <unk> 44 per share of dividends and with some share repurchases or.
Our service model has proven itself through a high level of customer acquisitions, both due to and separate from the PPP effort. It has also been.
Been recognized through our recently completed customer survey that Ray will describe the results place of allegiance at an absolute top tier level of customer satisfaction.
Over the past 12 months.
The positive grown significantly by 15, 6% with the mix of noninterest bearing deposits ending the second quarter at 30.
<unk> 36, 3%. In addition through the second quarter, we are continuing to reflect the steady decline in our cost of funds due to our disciplined approach in the current rate environment.
Our relationship officers remains focused on growing the bank through competitive loan pricing in terms of extraordinary Treasury management services and are experiencing loan pipelines.
Prerequisite to continued high volumes of production, we believe our capital liquidity asset quality steady growing brand loyalty and strong culture provide an excellent profit share from which allegiance customers and shareholders will continue to build value.
As it must with much of the broad broader economy, we are glad to see.
See that the Houston Beaumont region is rebounding well recently with a few notables such as higher oil prices and excellent housing market and a purchaser's men purchasing managers index now well into positive territory.
While we are clearly pleased to be the largest community bank focus on this region of Texas, We do however recognize that.
And that our mix of geographies may present favorable market opportunities for our community bank like ours that possesses a proven ability to effectively serve the independent business owner.
Finally allegiance serves all of our stakeholders, which includes active support of many local community initiatives, including financial support and volunteerism at the Houston Foodbank of the formation.
The other 2 fundraising effort for the new banking program of Texas, Southern University advocacy for and assistance to disadvantaged youth and affordable housing options for low income families. These and other initiatives provide compelling evidence of the interval value that our community minded model is able to deliver.
With that I'll turn it over to Ray.
For a more detailed review of our operational results followed by Paul who will cover our financial results.
Thanks, Steve.
From time to time, we've shared feedback from our customers describing the extraordinary service and our bankers provide.
These stories, whether about the friendliness of our bankers are going the extra miles of track down of wire.
<unk> and <unk>, the PPP loans to keep employees working while facing uncertainties with the pandemic I'll speak to our culture of service and contributions.
As Steve mentioned in an effort to be proactive and soliciting feedback on customer experience. We recently launched our first ever net promoter score or NPS survey.
This score.
Where can range from negative 100 deposits of 100, and we're extremely extremely pleased to report an NPS that is been exceeding 80 since the April launch, placing us in the 100 percentile and the broader banking industry.
Customer experience drives our ability to retain and attract clients and has certainly contributed to.
Of the healthy pipeline that our bankers reported heading into the second quarter that produced a record level of loan originations totaling $379 million.
We continue to take advantage of the market share opportunity that was presented with our outsized PPP success.
And are now starting to see core loan originations from our new customers.
Sure can hand, our onboarding of new Treasury management clients has remained steady further reflecting the growth potential coming from those customers that are new to the bank.
We had nice momentum in the back half of the quarter in terms of core loan growth and are as well positioned as ever for originations to remain strong which is our leading indicator for net loan growth.
Moving now to our quarterly operating results total core loans, which excludes PPP loans ended the second quarter at $3.96 billion, an increase of $38 million during the quarter.
Our staff and lending team booked the previously mentioned $379 million of new core loans debt funded to a level of 200.
Hundred 51 million by June 30.
Impaired to the first quarter when $325 million of new core loans were generated which funded to a level of $203 million by March 31.
The weighted average interest rate charged on the new second quarter core loans was 448% compared to the weighted average rate charged on the.
The first quarter core loans of $4.6 1%.
And for 64% in the fourth quarter of 2020.
Paid off core loans were $238 million in the second quarter compared to $180 million in the first quarter the.
The $238 million of paid off core loans during the quarter had a weighted average rate of.
5 of 6%.
Carried core loans experienced advances of $129 million at a weighted average rate of 477% and paydowns of $114 million, which were at a weighted average rate of 5 point out of 7%.
All in the overall period end weighted average rate charge.
<unk> on our funded core loans decreased 7 basis points, ending the quarter at $4, 95% compared to 5.2% as of March 31.2021.
Over the past few quarters, we have provided information on several loan categories that could have heightened risk due to energy prices and the COVID-19 pandemic.
Those being our oil and gas portfolio, our hotel portfolio, and our restaurant and bar portfolio.
While we continue to keep a close eye on these categories. We feel it will take more time to see a return to free Covid performance in the hotel portfolio.
At June 30, our hotel portfolio totaled $129 million or 2.
Per cent of our funded loans.
The weighted average LTV of 72, 4% on the $126 million that's categorized the CRE.
A 30% stress test on the LTV, plus 6% and marketing expenses would result in a $5 million shortfall in the portfolio.
We are seeing.
8 improvement in occupancy and ADR, which is welcome news.
In aggregate our asset quality at quarter end remained in a manageable position.
Nonperforming assets, including both non accrual loans and Owari ended the second quarter up from 55% to 58 basis points of total assets.
Non accrual loans.
The increase of net of $1.5 million during the quarter from $35.1 million.
To $36.6 million, primarily due to $7.3 million of additions, partially offset by $2.9 million of payoffs $1.8 million of payments 8.
821000 moved to other real estate 1.
<unk> hundred 76000 in charge offs and 64000 upgrades placed back on accrual.
The $7.3 million in additions was comprised of of $4.3 million of hospitality property with the additional $3 million increase coming from 6 relationships.
1 of which totaled $1.2 million and the remaining $1.8 million.
5 smaller relationships.
Oh, sorry increased to $1.4 million during the quarter compared to 576000 for the first quarter, primarily due to the addition of an $821000 retail.
The residential property.
Our <unk> is now comprised of 2 residential properties.
Was from charge offs for the quarter were minimal at an annualized rate of 1 basis point.
In terms of our broader watch list our classified loans as a percentage of total loans increased to $4..1 8% of total loans as of June 30, compared to $3, 91% as of March 31.
Criticized loans increased to 6.
<unk>, 5% at June 30 from $5.9 8% in March 31.
Specific reserves for individually evaluated loans ended the quarter at 17, 2% of total reserves compared to 14% at March 31.
On the deposit front, we saw an increase in total deposits in the second quarter by 59 million.
<unk> from the first quarter and up $733 million over the year ago quarter.
We continue to see solid growth in noninterest bearing deposits that contributed to the quarter to date increase primarily the result of new accounts associated with Pvp customers.
As well as higher balances in our carried accounts.
With that are non interest bearing deposits to total deposit ratio was 36, 3% for June 30.
Compared to 35, 6% from March 31, and 37, 3% for the year ago quarter.
Adding 48600 jobs in the first 6 months of the year the Houston.
Area has now recovered 59% of the jobs lost at the onset of the pandemic.
The housing market remains strong with record lows in terms of months of supply for single family homes, while multifamily occupancy has now hit 90%.
Our bankers are out meeting with customers and prospects and we were encouraged by our healthy loan.
Non pipeline and look forward to carrying the momentum from the second quarter 2 of the remainder of the year.
I'll now turn it over to our CFO Paul.
Thanks Ray.
We are proud to report another record quarter of earnings with net income of $22.9 million.
A $1.12 per diluted share.
As compared to $18 million or 89 per diluted share in the first quarter and $9.9 million or <unk> 48 per diluted share in the second quarter of 2020.
While these record results were driven in part by a negative provision for credit losses.
We are pleased to note that the quarter would still represent a record for us.
Without that negative provision driven by lower funding costs PPP related revenue and improved noninterest income and expense line.
Accordingly pretax pre provision income for the second quarter represented a record at $25.3 million as compared to $22.5 million in the first quarter.
And $22.6 million for the year ago quarter.
Recall that in the first quarter, we had about $1.5 million in nonrecurring asset write down expenses due to our branch closure.
The improved net interest income again with the key driver to our pretax pre provision earnings power during the quarter, where we saw an increase.
Of $898000 or 1.6% to $56.6 million from $55.7 million from the first quarter, primarily due to lower interest expense in the quarter, partially offset by slightly lower revenue recognized from PPP loans.
Interest expense decreased by $894000.
During the second quarter compared to the prior quarter.
Total net fee revenue related to PPP loans, recognizing the interest income during the second quarter with $6.4 million of decrease from the $6.9 million in the first quarter.
Before moving on I should note that as of quarter end, we had approximately.
The only $18 million of net deferred fee income remaining relating to PPP loans at the recognizing that $6.4 million of net pp P. D income into yields during the second quarter and a total of $13.3 million.
Year to date.
Total yield on loans in the first.
With 5 point of 9% as compared to $5.1 5 per cent for the first quarter and $5.1 3 per cent for the year ago quarter.
Excluding PPP loans and related revenue yield on loans would have been 5 point of 7% for the second quarter 5 point of 6% in the first quarter and 544 per cent.
First quarter year ago quarter.
Total yield on interest, earning assets was 441% for the second quarter.
Down from $4.6 7% for the first quarter and 487% for the year ago quarter.
Reflecting our growing earning asset mix that includes a higher proportion of cash and securities as well as significant PPP.
<unk> loan balances within total loans.
With respect to interest expense our cost of interest bearing liabilities continue to track downwards in the second quarter to 67 basis points from 80 basis points for the first quarter and of 119 basis points for the year ago quarter, driven principally by CD repricing.
And the overall cost of funds of the second quarter was 44 basis points versus 54 basis points in the first quarter.
We expect to see continued improvement in our funding costs going forward driven by CD repricing and continued optimization.
So with the help of lower interest expense in Q2 and PPP.
The net fee income recognition offsetting a significant shift in the composition of our earning assets are taxable equivalent net interest margin was 4.2% for the quarter as compared to $4.1 9% in the first quarter and $4.1% in the year ago quarter.
Excluding PPP loan balances and related revenue net.
<unk> margin would have been 388% for the second quarter from 395% in the first quarter.
Going forward, we continue to feel well positioned to maintain a relatively strong core net interest margin through optimizing our funding mix and maintaining discipline on loan pricing.
But we do see excess liquidity and.
Net interesting changes to our earning asset composition as the potential drag on NIM expectation.
Noninterest income was up quarter over quarter, increasing of $2.3 million for the second quarter from $1.7 million for the first quarter, primarily due to a few small non recurring items to the positive and.
The resulting net loss on the sale of other real estate as compared to the $176000 loss on the <unk> taken in the first quarter.
Total noninterest expense decreased in the second quarter to $33.6 million compared to $34.9 million in the first quarter. The difference is primarily.
And the to the $1.5 million of nonrecurring asset write downs, we took in the first quarter.
Thanks in part to an improved expense line, we saw our efficiency ratio for the second quarter decreased to 57, 7% compared to the 68, 5% from the first quarter.
And a small increase.
Do the $56, 90% for the prior year quarter.
I'll note that the first quarter efficiency ratio would've been $58.2 9%. If you were if you were to exclude the aforementioned asset write downs during the quarter.
Moving on to credit we recorded a negative provision for credit losses of $2.7 million.
During the quarter reflective of improving expectations for credit in our allowance model.
Our allowance for credit losses ended the quarter at $49.6 million, representing 111 basis points on total loans and 145 basis points on core or.
Our non PPP loans.
The bottom line, our second quarter, RIAA, and our ATC metrics came to 142% and 17, 2% respectively.
Both again, representing all time highs.
Quarter end tangible book value per share was $27.17.
Which as Steve mentioned.
<unk> makes for an increase of approximately 12, 7% since a year ago quarter.
Notwithstanding dividends and share repurchases over the last year.
Entering the second half of 2021, we feel very well positioned to continue to drive franchise and shareholder value.
It never gets old to be able to.
To say that we are bigger and better than ever at over $6.5 billion of assets with profitability capital and liquidity levels at or near all time highs.
We look forward to building on the momentum from our tremendous Pvp success to continue adding market share of Houston's largest community bank.
I will now turn.
Turn the call back over to Steve.
Thank you Paul with that I will now turn the call over to the operator to open the lines of questions.
Thank you as a reminder, if you have a question at this time. Please press Star then 1 on your Touchtone telephone to withdraw your question. Please press the pound key.
First question comes from the line of Brady.
Brady Gailey with <unk>. Your line is open. Please go ahead.
Hey, Thanks, good morning, guys.
The.
So we saw kind of of continued buildup in cash in the quarter when do you start.
Thinking about more aggressively putting that to use.
And the bond portfolio out of the bond book.
It grew this quarter, but does that continue for the next couple of quarters of excess cash continues to grow.
We think about it all the time, but we really don't want to take interest rate meaningful interest rate risk.
In the bond portfolio.
We had been growing the bond portfolio, but.
We have been staying pretty short.
Short duration and variable rate, which.
It.
It doesn't really drive meaningful.
Our net interest of our interest income.
But it really reflects the extent to which we do want to get more incrementally more invested but.
Effectively were against the taking a meaningful amount of interest rate risk through that securities portfolio.
Alright that makes sense.
There doesn't appear to be any.
The share buybacks in the quarter.
Look at how the stock has traded you know used to be over 40 of itself.
Back into the mid Thirty's I think thats at a level, where you guys have purchased stock before you know should we think about you guys re engaging in the share repurchase plan at this point.
We feel like share repurchases are.
Really valuable tool for capital management.
Our highest index.
Now of plateau of.
Of course, it's going to be putting forth.
Loan growth and supporting that loan growth with capital and then secondarily, we want to maintain a meaningful amount of flexibility.
For M&A possibilities and things along those lines. So yes share repurchases are definitely.
As of kind of in the Arsenal, but at the same time.
We.
Preferred usage of cash, it's kind of they're going to be through either organic growth or inorganic opportunities that we want to have maintained the high level of flexibility.
And then finally from me I mean, if you look at the last couple of.
You guys have been growing core loans kind of X.
<unk> they are in the low single digit level of your a lot of banks are talking about growth kind of accelerating in the back half of this year and as we get into 2022.
Should we think about it.
The loan growth for you guys going forward.
Quarter low so we did see some nice growth in the back half of the second quarter, but we think the momentum will carry.
Into the the the the next 2 quarters of the year the originations were strong.
Those were on a pipeline that was strong and we and the pipeline looks.
Similar going into the to this quarter so.
You know I think as we get.
What we saw in the back half of the second quarter Brady we can.
We can tick up into that what youre talking about into that.
The higher single digit than what we've done what we showed in the first 2 quarters.
We're really pleased with the pipeline.
The start of the production.
From the staff I have from PPP, they basically the.
No longer distracted by that so we're seeing the thing, they're making those calls and the longer distracted by the PPP and feel very good about our team out there.
You know shaking the bushes.
Okay, great. Thanks, guys.
Thank you and our next question comes from the line of Matt Olney with Stephens. Your line is open. Please go ahead.
Thanks, Good morning, guys good.
Morning, Matt.
Want to start on the fee side and the fees are a little bit higher than the recent run rate. Paul I think you mentioned in prepared remarks that there were a few items and then we should.
And the photo of anything you can detail for us on that.
Really really nothing meaningful at.
Hey.
There were so small that they didn't.
Didn't merit delineation.
What we're really happy with on the fee income line and probably a new addition.
Taking the with respect to of breakout is the.
The great trend, we've got going on the interchange or debit card and ATM card income as it's listed on our.
On our financials, we broke that out here for the first time this quarter really.
Gone from a low base, but we're extremely proud of.
Being able to grow that number of 50% year over year and.
A track record.
Building there.
So all in all we like that the trend that's manifesting itself on the non interest income side, albeit.
We still.
<unk> got room to go to make it more meaningful mix of our revenue profile.
Okay great.
And on the interest bearing deposit costs, the container move quite a bit lower in <unk>.
Any color on how much more room is remaining within that.
There is more room.
And ultimately you're going to see most of it manifests itself on the CD line, but we've been measured and gradual in working down the non maturity rates are but it is a.
Largely going a function of the.
From a higher rate Cds rolling off and really in this environment, especially with the level of the community liquidity, we have being.
Highly more disciplined as it relates to how we approach.
Everything that comes on the balance sheet and walking down.
And the exception rates that have been out there and the overall heat rates that we've got so we've got some room to go still but we're.
Still want to be measured about it.
So it's not.
Upset the applecart as it relates to the nature of our.
Deposit base.
Sure.
<unk>.
And then a.
Last question on operating expenses, Paul I think we came in around 3.3 and a half million kind of a core number I think that was pretty much in line with your your guidance from last quarter, 1 of the thoughts from here on operating expenses.
We're working to hold the line.
Okay.
That prior guidance.
End of still.
Still sits there there's definitely some variability.
That has the potential to drive ticket ever so slightly upwards.
But we feel pretty decent about that that guy.
So ultimately what we're focused on maintaining the growth posture and.
In doing so.
The goal is to hold the line, but there's we're going to be opportunistic about what we can do to position the bank for growth.
We're pleased that at least.
Yes.
With.
Some of what's driven that.
Of that line has been a function of the strong bottom line performance that plays into certain things like profit sharing and bonuses like that so there's definitely things in there that are pushing it up while we're trying to be a good about how we manage it overall.
Okay. Thanks, guys.
Thank you.
Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then 1 and our next question comes from the line of Graham <expletive> with Piper Sandler. Your line is open. Please go ahead.
Hey, guys. Good morning, it's 1 of granted.
So obviously.
Obviously, there's been some disruption in M&A current and in Texas recently caused by M&A.
And this is probably only of accelerated I guess as deals start picking up in the region, but I'm just wondering I'm just trying to get a sense of how effective you guys had been in attracting a quality lenders over the past quarter and maybe how many you're.
To add each quarter from here as they become available.
Sure So the last.
The last quarter, we actually as far as external hires for lenders, we did not last quarter first quarter, we hired 1 of.
The last quarter, we did have 2 promotions internally from our lender development program, which is we're really proud.
All of that and expect some more of that but.
This quarter is actually already started off with a couple of hires.
Onboarding of new lender of this month and we expect 1 next month, so you know it.
At 1 time, we were talking about.
1 producer.
The Monotype.
The run rate, it's probably not that and I think.
Translation of both the external hires as you mentioned from maybe some disruption in the market, but also some of our and.
Internal promotions from our lender development program and the <unk>.
The homegrown category.
Okay, Great. That's helpful and then I guess more broadly on the M&A.
It'll be obviously seeing a pull back in bank stocks recently, but I'm just wondering how conversations are going for you guys and basically if you think.
He might be going against some of the line over the next 12 to 16 months just depending on some of your expectations I guess.
We're always out there talking and meeting with the.
Folks locally.
We have an interest in looking even a little bit beyond the territory. If the if opportunities arise. So we're active we've got the capital.
Accomplish it and.
Yeah, obviously, the like you say the market has kind of pulled back a little bit but.
Think of our focus has always been and will be.
The need to be with the sellers are on their day 365 values.
And we think we provide a great opportunity for them to the game value overtime.
Joining us so I think we've got the flexibility.
And certainly are interested in that are you know right.
Right right company right size.
But we're.
Interactive, we haven't shut that door of let's put it that way.
Alright, Great and then just the last thing from me is I guess a quick 1 here do you guys have the number for what average PPP loans were in the quarter.
I guess, we can get a better idea of what the balance sheet look like.
Sure thing and the $604 million.
Sure.
Yeah.
Alright, great. Thanks, guys.
Thank you.
Thank you and our next question is a follow up question from Matt Olney with Stephens. Your line is open. Please go ahead.
Thanks, guys just wanted to circle back on the the M&A question and it seems like the allegiance footprint you know between.
Houston and Beaumont count at South Texas.
I'm curious how much appetite there is to extend the footprint beyond the south Texas markets.
Hard to gauge the.
Agree or level of appetite.
There's interest.
The second half.
The largest player in the market and you have to look it up.
I'm, an old the manufacturing Guy and I looked at the there's an inventory issue there there's an inventory of available.
Available candidates are in this region and then there's an inventory outside of this region. So I think your options are are obviously better.
If you expand the shelves that you're looking at and so it's just the simple matter of that we want to be consistent and prudent and very careful about any conversation that we have but you know I think we're well we're certainly getting there quickly in terms of the scale needed to consider other regions are or maybe just a nibble.
Nibbling at a little bit of way, but you know it's it's it's a.
It's a process the spread that way, it's just the process for and I think there's a growing interest and certainly looking at other deals of good advantage of the bank.
Okay.
That's all from me Thanks, guys Great Matt.
Thank you and I'm showing no further questions at this time I would like to turn the conference back over to Steve Retzloff for any further remarks.
Well.
Once again I really appreciate everybody's interest in the bank, we feel great about where we are we've got a commitment to perform.
Create value so thank.
Thank you and we'll speak to you again next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Okay.
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