Q2 2021 Spirit of Texas Bancshares Inc Earnings Call
Greetings and welcome to the Spirit of Texas, Bancshares' second quarter earnings Conference call.
At this time all participants are in a listen only mode.
A brief question 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 Jerry Coleman 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 second 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 second 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 O T. The dot com.
The will also be a telephonic replay available until July 29.2021.
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 July 22nd 2021, and therefore, you are advised the 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 FCC from 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 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.
Thank you Jerry and good morning, everyone welcome.
During the second quarter, we celebrated our third anniversary as a publicly traded company over those 3 years, we have grown assets science by over 200 per cent.
Maintaining the asset quality through challenging times and increase shareholder value.
Through core earnings.
Share repurchases and quarterly dividends.
This quarter's results represent another strong performance and then the established history of.
Our profitability and operational excellence.
For the second quarter were net income of $12.4 million, representing fully diluted EPS of <unk> 70 cents and the return on average assets of 1.57% of annualized.
Credit quality continues to improve with nonperforming assets declining $2.4 million or 23, 9% during the quarter.
Additionally, we have been able to maintain the net interest margin above 4% consistent with our goals.
While we are pleased to report another quarter of solid results of large aspect of ensuring superior performance and the future is understanding the overall economic trends in positioning ourselves appropriately.
With the National in Texas economy is booming.
We have now shifted our internal discussions from bar of health and credit quality, the federal reserve policy, and overall macroeconomic trends, which impacts the yield curve and our ability to enhance profitability in the future.
Texas like other parts of the country is experiencing staffing pressures supply shortages and other inflationary forces.
While we have not experienced significant labor shortages within our network of bankers, we must understand the impact. The these challenges are having on our bar.
And the overall capital markets.
Overall, we have exceeded expectations this quarter as well as over the past 3 years since becoming a public company.
We continue to live in truly unprecedented times and many of the traditional models of peanut of community banking.
Our being challenge, but we are confident that we are well positioned to increase core profitability and continue to increase shareholder value.
Now I'll turn the call over to David to discuss the loan portfolio and asset quality David.
Thank you Dan <unk>.
Excluding the impact of PPP forgiveness and origination of the most recent round of PPP loans.
Total loans grew $17.4 million for the quarter or 3.4% annualized.
Historically, the first 2 quarters of always been a period of slower loan growth with the majority of the annual growth coming the last 2 quarters of the year.
Currently we expect this trend to continue and anticipate high single digit growth overall for 2021, excluding the impact of PPP loans.
Currently we have $188.3 million remaining of PPP loans with net deferred fees remaining to be recognized $4.8 million.
We anticipate working through significantly all forgiveness applications by the end of the year and anticipate earning materially all of the net deferred fees over the next few quarters.
The yield on loans in the second quarter of 2021 was 5.3%, which increased 16 basis points from Q2, 2020, and 21 basis points from Q1.2021.
The increase in yield related primarily to increased PPP forgiveness and accretion of purchase loan discount which has earned us the acquired portfolios mature.
Excluding the impact of PPP loans and acquired discount the loan yield was 496% compared to 5.4% at March 31.2021.
During the quarter, we have started to experience competitive pressure on loan rates, which are impacting the entire market.
Such we will focus on quality deals and ensure that our borrowers understand the value, we provide which justifies the higher rate than those offered by other institutions.
While we do not expect these competitive pressures to compressed alone yield and overall net interest margin in the near term we.
We are working diligently to mitigate the impact wherever possible.
Overall, our loan pipeline continues to build each month and we expect the closure rates to return to pre pandemic levels in the next 2 quarters.
Additionally, deploying the excess liquidity into higher yielding loans will significantly assist net interest income in the coming quarters.
During the second quarter asset quality improved significantly with nonperforming loans declining to $4 million or 23, 9%.
For the first quarter of 2021.
Nonperforming loans to outstanding loans decreased to 33 basis points from 41 basis points during the quarter as we have worked through the remaining deferments and credits negatively impacted by the ongoing pandemic.
The provision for loan losses for the first quarter was $1.3 million, which was consistent with the first quarter of 2021.
At quarter end the coverage ratio on the organic portfolio was 88 basis points, excluding PPP loans.
Annualized net charge offs were 20 basis points for the second quarter of 2021.
Charge offs for the quarter related to pre pandemic impaired loans that were fully resolved during the quarter.
Overall.
Charge off activity for the remainder of 2021 is expected to remain closer to our annual historical charge off activity.
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 Q2 were $2.6 billion, a decrease of $25.4 million.
Or 1% from Q1.2021.
And an increase of $157.2 million or 6.5% over Q1.2020.
The decrease from Q1.2021 is due to a reduction of $51.3 million in PPP related deposits.
As borrowers put the proceeds to use.
Exclusive of the reduction in these deposits.
Total deposits grew $25.9 million from Q1, 2021 or 4% annualized.
Noninterest bearing deposits decreased $28.2 million or 3 and a half the shift from Q1 again with the reduction in deposits related to PPP loans accounted for the day decrease.
Noninterest bearing deposits currently make up 38% of total deposits.
Time deposits decreased by $39.5 million or $6.1 per cent from Q1.2021.
Due to aggressive repricing the cost of time deposits decreased 16 basis points.
From Q1.2020, 120.79%.
This improved shift in deposit mix resulted in a 3.2% cost of deposits a decrease of 5 basis points from Q1.2021.
The bank has no broker deposits.
The reported loan to deposit ratio at the end of Q2 was 88, 3%.
Excluding PPP activities the loan to deposit ratio is 81%.
Up from 79, 6% at the end of Q1.
Due to the previously mentioned loan growth of 3.4% annualized for the quarter.
Borrowings decreased by $72.6 million during the second quarter to $119.1 million due to the payoff of PPP Lf borrowings.
After obtaining PPP forgiveness on the loans pledged against it.
Borrowings totaled 3.9% of assets at the end of Q2.
The company has significant sources of available liquidity, including $50 million at the holding company line of credit.
Fed funds lines totaling $118 million in federal home loan bank availability of $778.2 million.
I would now like to turn the call over to Alison to provide a financial overview for the second quarter Allison.
Thank you Jerry and good morning, everyone. We provided detailed financial tables in yesterday's earnings release.
Consolidated net income for the 3 months ended June 30 of 2021 was $12.4 million with fully diluted EPS of <unk> 70 cents compared to earnings of $7.7 million and fully diluted EPS of <unk> 44 cents in the second quarter of 2020.
Net income and earnings per share were primarily driven by the recognition of $2.4 million net accretion of origination fees on PPP loans.
We anticipate the majority of the remaining $4.8 million of net origination fees on PPP loans to be recognized during Q3 and Q4.2021.
Noninterest income of $3.9 million for the second quarter of 2021 compared to $2.6 million for the first quarter of 2021, an increase of $1.2 million linked quarter the.
The increase from Q1 was primarily driven by an increase of $1.3 million of swap fees.
We expect noninterest income to continue to increase in the coming quarters as swap products remain a strategic initiative for 2021 as well as we should begin to reap the rewards of our investment and restructuring of our SBA Department.
Additionally, during the second quarter, we purchased $15 million in bank of life insurance products, which has the tax equivalent yield of approximately $3.8 9% and runs through noninterest income.
Noninterest expense totaled $16.8 million in the second quarter of 2021, which was relatively flat compared to $16.6 million reported in the first quarter of 2021.
The first and second quarters of 2021 were free of expenses associated with various projects and initiatives, which have historically distorted of noninterest expense in previous quarters.
These additional expenses included merger related expenses branch optimization of expenses strategic hiring and restructuring expenses and expenses associated with balance sheet management priorities.
The approximately $17 million of noninterest expense represents a much clearer picture of our core run rate currently.
Moving on to the net interest margin.
The tax equivalent margin in the second quarter of 2020, 1 was 414%.
Impaired the first quarter 2021 tax equivalent margin of 398%, representing a 16 basis point increase sequentially.
Excluding the impact of PPP loans, our tax equivalent net interest margin for the second quarter of 2021 was $4.1 zero per cent compared to 4 point out of 2% for the first quarter of 2021.
As PPP loans are forgiven and excess liquidity is introduced we will continue balancing our liquidity needs to fund future loan growth and investment in higher yielding products.
However, during the second quarter of 2021, we are beginning to see competitive pressure on loan rates in our markets, which will produce headwinds with respect to maintaining our net interest margin above our target of 4%.
The provision for loan losses for the second quarter was $1.3 million, which increased the allowance to $16.5 million or 73 basis points of our total loans outstanding are 79 basis points, excluding the 100% government guarantee of PPP loans the.
Provision expense for the quarter related primarily to the provisioning of loans moving from the acquired portfolios. So they are 2 of the organic portfolio of every new law.
The coverage ratio on the organic portfolio was 88 basis points on the 161 billion in organic loans outstanding excluding PPP loans at quarter end.
Additionally, we of $2.3 million of unamortized discount on the acquired portfolio at June 30 of 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 June 30 of 2021, we continue to enjoy strong capital ratios with the tier 1 leverage ratio at the bank of 10.47% and 10 point out of the 6% at the company on a consolidated basis.
Our strong capital position provides us the strategic flexibility to assess opportunities going forward.
I'd now like to turn the call back over to Dean for closing remarks.
Thank you Allison I'd like to close by thanking our dedicated management team and talent in the network of bankers for another quarter of exceptional performance.
Obviously, we wouldn't be here without are supportive of investors that share our vision.
And of course, thank you to our customer base.
Which has tripled in size over the last 3 years.
We have maintained the culture of excellence at Spirit of Texas Bank that speaks for itself each and every time, we report quarterly results.
I'm confident in the abilities of our team to tackle any upcoming challenges.
While always looking for the Golden opportunities that are hidden within.
Our results reflect that we are well positioned for continued growth and profitability.
This concludes our prepared remarks I'd like to ask the operator to open up the line for any questions operator.
Yeah.
Ladies and gentlemen, we will now have a question and answer session.
If you would like to ask a question. Please press star 1 on your telephone keypad.
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1 moment, please what we now poll for questions.
Hum.
The first question comes from Brad Millsaps of Piper Sandler. Please proceed with your question.
Hey, good morning.
Good morning, good morning, Brad.
Maybe Alison I wanted to start.
Start with expenses I think I heard you say that $17 million would be a pretty good run rate.
The last quarter, you talked about you know the run rate maybe being closer debt.
<unk> 18 of half million, just kind of curious you know kind of what you know what's kind of brought those numbers down I know <unk> benefited from some of that 91, but it seems like you're doing really well on the revenue side and just kind of curious I said some projects you put off or you.
You just kind of found some more expense savings to kind of bring your thoughts around that run rate down.
Yeah, So really our run rate going forward. If you add back Q1, and Q2, if you add back of the million dollars in origination fees deferred costs associated with the origination fees or origination of PPP loans really gets us to that core run rate of 17 of half so what what occurred in Q2.
We just we were able to squeeze out a little bit more cost.
Cost savings out of our mergers from the past.
So we really expect that 17 of half to continue going forward.
With that being said, we are projecting an increase of about 3.5% annually.
For salaries.
For raises and bonuses going forward and we also of our are.
Our open to hiring additional producers to help facilitate the increased loan demand we're anticipating from the back half of the year. So you may see that increase a little debt going forward.
Okay, great and the Dave I think last quarter, you talked about maybe getting the.
The high high single digit type growth for the year I apologize if I missed this in your prepared remarks, but do you still feel good about that number and I know you, obviously expect it to be more back half weighted but just kind of curious kind of what your thoughts are there.
Yes, just exactly that Brad we're looking really good right now and in fact.
This month the next month look extremely good.
So it sets us on that pace to true.
To reach by the end of the year of what I've guided to a very very very excited about what we're seeing showing up in our pipelines it's almost.
Like it's returned to pre pandemic levels, and we're seeing a broad spectrum of different type of deals that we like to do and the borrowers are putting their money up to to get deals done now they've really taken their fingers off of the pause button and and now of putting their money where the mouth is to get good things done.
Yeah.
That's great and maybe just kind of a final bigger picture question Dean.
You guys had another great quarter easily beat expectations, you've got lots of capital yet the stock is you know sort of trading.
130 of tangible book value or so.
It's gotta be tough maybe the go to look at acquisitions in that range. Just how do you feel about the buyback given you've got so much capital could we see you get more aggressive there, particularly with the strong results you posted.
Well from the M&A side, it's never been easy for US, it's always been hard, but we've always executed in a I don't know of anyone else has come out of the.
The become on the public company and the executed like we have but so we've been we use the plane small ball and so that's that's kind of where we are there in the M&A side, although the Allison the address the buybacks we.
We look we don't want to look for those opportunities in that.
Well you would rather that are that the price the run on up where are where its more competitive and so we're certainly of bargain go ahead Alex.
Yeah. So during the quarter, we also renewed our stock buyback plan for another year, but we do have the plan available to deploy but ultimately you know we're we're looking at the valuations of where our stock prices trading and we're going to deploy our capital, which makes the most sense for our shareholders and give them the greatest rate of return.
Yeah.
Great. Thank you I'll hop back in queue.
Thank you.
Our next question comes from Matt Olney with Stephens, Inc. Please proceed with your question.
Thank you good morning wanted to ask about loan yields.
It sounds like there's incremental pressure.
That was mentioned in prepared remarks on the loan yields would love to hear it.
Any any numbers you can put behind that and what are spreads look like today versus a few months ago.
Matt This is David good morning.
We're seeing.
You know from a put a number 2 at the mid to high fours right now on any term debt of 3 to 5 years, which is down about a quarter to 35 basis points from what it was in the first quarter.
I think that's kind of where the floor is from our perspective, we are dedicating ourselves of maintaining our margin at all costs of about 4% and to do that.
We need to be in the force most of the time doesn't mean that we won't fight for good business that meets our needs on the quality side.
You know for.
For us to grow we will need those loans, so there's a little bit of pressure, but it's not as much as you might think I think that the.
Our marketplace and where we play.
Typically as borrowers with 500 to maybe $2 million to $3 million of knees and loans and we're just able to price in that range much more easily than we can on bigger loans and so as long as we stay to our knitting that that customer base has awaken and so they are.
Requesting loans.
At a pace that we haven't seen in over a year that if.
If we maintain our pricing will maintain our margins.
Yeah.
Okay. That's helpful. David and then last quarter, we talked about our loan participations that were sold but it could be potentially a call back later in the year.
Did we see any of that in <unk> or is that something that we could see in <unk>.
Yes, ma'am, we bought back about $40 million before the.
2014.14, sorry.
The state of that $14 million before the end of the quarter.
Okay perfect.
Hi, Thank you maybe you sold something.
The north of $40 million from the first quarter. So there's the potential for incremental purchases later in the year.
Yes.
And then on the PPP, obviously, the bank was the big winner.
The market share growth of new customer wins, I think you've highlighted before bringing over some of those customers on the deposit side.
Have you seen any movement yet on the the loan side from some of those newer customers and and if not kind of what's the expectation of when you'll see some of those tailwind.
Yeah actually we are just now starting to see that.
We are like I said, our customer base is awakening so to speak.
And that includes our PPP customers. So we're finalizing bringing over all of their deposits and their loans and they are looking for new loans. So just this past week we approved.
3 different new loan relationships that were related to our ability to provide PPP loans to the and they were significant and so.
So very excited about that that's 1800 unique new customers of the bank debt, we got through the.
The PPP process.
Okay, Alright that sounds great I appreciate your help.
Sure. Thanks, Thank you.
Thank you.
Our next question comes from Brady Gailey with K B W. Please proceed with your question.
Hey, Thanks, good morning, guys.
The follow up just on the loan growth question, So high high single digits. This year.
This year as of the mid year, but when you look out the 'twenty 'twenty 2 and beyond as.
I know the percentage growth used to be a lot higher but youre also of larger company now so how do you think about it.
The loan growth outside of this year and the 2022 and 2023.
Well, we're built to grow and so we have our lending staff has got the capacity today and we're adding additional capacity today that we believe that we're going to be able to maintain.
Load of mid <unk>.
The teams.
In the in the foregoing years from here so that's.
That's where we'd like to be we like to see that kind of growth. It's the <unk>.
<unk>.
And we're built for that so you know I would.
If I were looking at it we were guiding to.
The mid to high teens of last year prior to the pandemic and we're still there.
We believe that as the economies functioning properly with our coverage in the state of Texas has been in all of the major metros with our lending teams actively being.
Active in those markets and then adding additional lenders that we're going to be able to maintain that kind of a guidance to the market.
Okay, Alright, and then on the second quarter, you'll have some really nice swap fees, but I know that can be volatile, but you know it was $1.4 million in the second quarter I think it was close to zero in the first quarter, but maybe just talk about the sustainability or what you think the kind of longer term run rate should be.
On the swap fee side.
Yeah.
You are correct. It is volatile, but it kind of goes we have a very large owner occupied CRE commercial.
CRE portfolio right now we're going through.
And and educating the customers on the value of the swap, particularly in the low rate environment, right now and preserving that rate for them into the future.
That's that is a sales job and so we've been very successful.
In the second quarter with that and we have the same expectations in the in the third quarter. It's a little hard to kind of look out past 90 days because those are things, but it's been really accepted very well in our marketplace and we continue we think that you know.
Looking at that of reasonable budget might be about a million bucks of quarter.
And that product in some some quarters will be more and some will be a little bit less but on average I think that's a good number to the play with and then also our new customers that are coming to us, particularly on the fixed rate basis. It allows us really to compete against the larger banks and so are we all get of floating rate, which we.
Like in and they will get of fixed rate is very competitive it might go out you know 7 to 10 years and protect their there.
Their ability to debt service of the debt.
Right.
And then lastly from me I mean, if you look at the reserve.
It was pretty.
A flat linked quarter, it's around 80 basis points of loans ex PPP.
Yeah, I know you guys have some acquisition marks the you don't make debt percentage look higher but could.
Can you just remind us kind of what the reserve is when you put in the there was the acquisition marks and how we should think about that reserve ratio going forward.
Yes.
Got it still $2.3 million of unamortized discount on our acquired portfolio you add that back in and we're in the we're in the 90 days on our on our coverage ratio of.
Realistically you know with oil price was trading where they're out of about $70 a barrel of the GDP, where it's where it's landing and just we're seeing improvements of the product quality quarter over quarter. I mean, that's going to be about where we're going to set going forward I just cant tweak those qualitative so when the economy is doing doing so well and then our asset quality.
It just continues to improve so.
That's kind of that's kind of our thought process going forward.
And so you sort of still coming up for you guys on January of the first of 23 right.
Correct, yes.
Okay, great. That's it from me thanks, guys.
Thanks very much.
Thank you.
This concludes the question and answer portion of the call I would now like to hand, the call back to management for final comments.
Thank you very much for the interest in us today and I appreciate you calling in and very good questions. Thank you very much have a good day.
Ladies and gentlemen. This concludes today's webcast you may now disconnect your lines at this time thank.
Thank you for your participation and have a great day.