Q3 2021 CBTX Inc Earnings Call

October 28, 2021

Excuse me, ladies and gentlemen, today's call is scheduled to begin momentarily until that time your lines will remain on hold until the conference begins. Thank you for your patience.

[music].

Yeah.

Ladies and gentlemen, thank you for standing by and welcome to City Phoebe T X Q3, 2021 earnings call. At this time 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 to press.

One on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today just along thank you. Please go ahead.

Thank you and good morning, I'm, Justin long the General Counsel CVT X.

Our management team would like to welcome you to the Cta.

T X.

Earnings call for the third quarter of 2021, we.

We appreciate you joining us.

We issued our earnings press release yesterday afternoon, a copy of which is available on our website.

Along with the slide presentation, we will refer to during this presentation.

We also filed our quarterly report on Form 10-Q for the third quarter yesterday afternoon.

Before we begin I'd like to remind you that during this presentation. We may make forward looking statements regarding future events or financial performance or our business prospects.

We're looking statements are subject to risks and uncertainties that could cause actual results to 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 quarterly report on Form 10-Q for the third quarter and our other filings with the SEC, which can all be accessed on our investor relations.

Web site at IR Dot C D T 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 used.

To the most directly comparable GAAP financial measures is included in our earnings release and Investor presentation.

I'm joined this morning by Robert Franklin, Our Chairman, President and CEO, Ted Pigott, our CFO, Joe West, our Chief Credit Officer, and Joseph Mcmullan, Our controller at the end of their remarks, we will open the call to questions with that I'll turn it over to our chairman President and CEO Bob Franklin.

Justin well.

Welcome to the earnings call for <unk>, Inc. For the third quarter of 2021.

We are proud to present, our third quarter results, which continue to be indicative of the transition from the COVID-19 impacted economy through most of the first half of the year through an improved economic environment nationally and in our markets.

As we enter the fourth quarter, our credit quality has stabilized and deposits continue to grow.

Our customers are starting on new projects and continuing to grow their businesses as confidence.

Gross in the local economic environment.

During most of 2023.

Through early this year, we curtailed our Kurt our commercial real estate lending.

Due to uncertainty in this sector largely due to uncertain effects of the pandemic.

Additionally, we began in the second and third quarter, a return to a natural flow payoffs.

But also have experienced some acceleration due to the pent up demand for the products, we traditionally finance.

Thus the combination of not selling continuing to fill that pipeline over the preceding quarters and the accelerated payoffs have slowed our portfolio growth.

That said our lenders have done a good job during the third quarter and rebuilding our loan pipeline.

And we continue to see those efforts into the fourth quarter.

We continue to remain disciplined in our credit decisions and believe that our portfolio will stabilize during the fourth quarter, allowing us to return to our traditional growth rate over the next couple of quarters.

With the continued low interest rate environment, and our liquidity building.

Our liquidity build during Covid, we have increased our bond purchases during the third quarter and will continue additional bond purchases at a measured pace.

However, we know that our best efforts should remain towards building our loan portfolio, although we monitor our cost structure regularly as we set our budget for 2022, we will be evaluating our expense base to look for ways to improve our efficiency.

Lastly, we have made significant progress on the regulatory front the OCC terminated the formal agreement relating to our bank Secrecy Act and then I'm binary laundering program on September 7th.

As I have said previously the work on the Bank Secrecy Act program was a bank wide effort and the agreement was lifted in approximately 14 months. We believe this timing is a testament to our people our program and our work with the OCC.

We believe that our BSA program today complies and is quite capable of taking on additional scale.

In addition, as we set forth in our 10-Q, we have entered a confidential settlement discussions with pinch them.

Relating to a potential resolution of its investigation into our BSA program.

Although I'm unable to speak to specifics of the settlement discussions we are working diligently to resolve any outstanding matters relating to past workings of our BSA program.

We believe that we are well positioned entering the fourth quarter.

We have an experienced lending staff and significant capital that gives us flexibility in supporting our future growth and expansion decisions.

We have strong liquidity and maintain a lawyer loyal low cost relationship driven deposit base that provides significant shareholder value. Our focus will remain on driving long term value for our shareholders.

Now I will turn it over to Ted <unk>, our Chief Financial Officer.

Thank you Bob.

Certain financial information third quarter periods begins on slide four of our Investor presentation.

The company reported net income of $14 4 million.

<unk> 59 per diluted share for the quarter ended September 30.

2021 compared to.

11, 7 million or <unk> 48 per share for the quarter ended June 30, 'twenty one.

And $6 4 million.

26 cents per diluted share for the quarter ended December 30 September 30th.

And in 'twenty.

Third quarter results.

Our net income net interest income for the third quarter 'twenty, one was $31 2 million an increase of $231000 from second quarter 'twenty one.

The net interest margin on tax equivalent basis was three 2% for third quarter.

21, a decrease of seven basis points from second quarter 2021.

<unk> yield increased 16 basis points to 452% third quarter.

Compared to second quarter.

2021.

The cost of interest bearing liabilities was 30.

30 basis points for second quarter.

Compared to 32 basis points for first quarter.

'twenty one.

The provision for credit losses was a recapture of $4 9 million for the third quarter.

As compared to a recapture of $5 1 million for second quarter.

Primarily due to continued improvements in the national economy economic forecast.

Loan quality and the size of our loan portfolio.

Noninterest income for the third quarter.

One increased from $1 5 million from second quarter.

256 million.

Primarily due to an increase in earnings on bank owned life insurance.

Which.

We realized $9 million.

Gays.

Gain on other sales of assets for 246000.

Noninterest expense for third quarter.

Decreased $825000.

Second quarter to 24.

$4 million increase in third quarter resulted from a decrease in <unk>.

Professional and directors' fees of $874000.

Financial condition.

The total assets.

September 30.

<unk> increased $142 6 million to $4 2 billion compared to.

Jude.

'twenty one.

Growth was driven by net deposit inflows.

<unk>.

$114 $8 million.

Loans, excluding loans held for sale at September 30.

<unk> decreased 121.

$1 million to $2 6 billion.

Compared to two.

June 30.

We won.

PPP loans net of deferred fees and uninsured.

Discounts.

Were 108 million at September 32021.

And $179 1 million at June 31, 30.

2021.

Compared to September 32020 loans.

Excluding PPP loans.

Decreased 5% on an annualized basis.

Deposits at September 30, 21 increased $114 8 million to $3 5 billion.

Compared to June 30, 'twenty one.

Compared to September 30.

September 30th.

2020 deposits increased 11, 4% on an annualized basis.

The company maintains strong ratios capital ratios as the total risk based.

<unk> capital ratio increased to 18, 12% <unk> capital ratio increased to $16, 87%.

In the tier one leverage ratio increased.

11, six 9%.

At the end of September 32000.

'twenty one.

Asset asset quality.

Nonperforming assets totaled $20 6 billion for 9% of total assets at September 30 to 21.

Compared to $21 million.

Five 2% of total assets at.

At June 30, 'twenty one.

The allowance for credit losses for loans was $32 2 million or one 3% of total loans at September 30.

'twenty, one compared to 32 point.

Two 2 million or $1, 36% at total loans on June 30, 'twenty one.

The ACL decreased during the quarter third quarter 21, primarily due to a recapture of $5 1 million.

And the ACO PCL for loans and a provision of $893000 for unfunded commitments due to improvements in the national economy.

Economic forecast.

The reduction of loan portfolio.

And the improvement in loan quality.

Net qualities were $82000 for the third quarter compared to net recoveries of 499000.

For the second quarter of 2021.

Now I will turn it over to Wes.

Thank you Ted I'll speak a bit to our loan portfolio, beginning with slide seven from the Investor presentation.

For the third quarter, our net loans were down at 258 billion versus $2 69 billion at the end of the second quarter of 2021, a decrease of approximately $116 million, primarily due to pay downs pay offs of Seo businesses projects and some refinancings.

During the third quarter of 2021 of approximately $38 million of future.

Our net PPP loans decreased approximately $78 million during the quarter through the third quarter.

Our loan deferrals related to Covid decrease that we had several loans with principal totaling $18 8 million on deferral at the end of the third quarter.

For the quarter.

<unk> was down approximately $62 5 million or two 5% compared to Q2.

Yeah.

However, net of PPP payoffs.

<unk> increased $19 million in full quarter CRE was down five eight.

8% quarter over quarter and down one 2% compared to the end of 2020.

<unk> was down 19, 4% compared to the second quarter, one to four family was down three 4% and.

Multifamily was up seven 8%.

Slide eight sets forth the components of our commercial loans and our growth commercial loans were down slightly for the third quarter at $2 3 billion versus $2 four $1 billion.

Third quarter, putting our PPP loans.

As you turn to slide nine you will see our construction and development loan components, our construction and development loans were down approximately $32 5 million when compared to June 32021, due to pay off as well as some existing C&I loans, reaching completion and move into permanent loan classification.

Slide nine sets forth, our oil and gas exposure, including how we quantify our direct and indirect exposure.

Our direct and indirect oil and gas loans for the third quarter increased slightly to $85 4 million compared to the end of the second quarter.

10 sets forth information about our PPP loans during the third quarter, our net PPP loans decreased to $107 million, and we received $78 million related to forgiveness or payments from customers.

The table at the bottom of slide 10 sets forth our average yield on our loan portfolio, our average yield on our PPP loans and the average yield on our loan portfolio when taking out the PPP loans.

Slide 11 sets forth information about our allowance for credit losses.

Noted our allowance for credit losses to loans was 123% at September 32021.

Turning to slide 12, our nonperforming assets decreased again slightly during the third quarter and our credit quality remains strong.

12 shows you information regarding our nonperforming assets to total assets, which was 0.49% as of September 32021, compared to zero point.

2%.

As of June 32021, as well as the second quarter, our recoveries during the third quarter exceeded our charge offs, resulting in a net recovery of 82000.

I will turn it back over to Bob.

Excuse me. Thank you Joe with that we'll open it up to questions.

Thank you at this time, if you would like to ask a question you may do so by pressing Star then the number one on your telephone keypad.

Your first question comes from the line of will Jones with CBW.

Yes.

Hey, Good morning, guys. This is Lewis K B W.

Good morning, well, where one or two CBW.

I don't know who has either okay anyway.

Just wanted to start on loan growth.

Loans were down again, you guys had some optimism coming off of <unk>.

But Bob you started a little bit of pressure from a lag in your CRE pipeline. Just curious if this was a trend you guys saw in the second quarter as well or if this is kind of new and unique to the third quarter.

It started to begin well I began sort of late.

We werent sure whether it will continue as a trend but it is hard to began in late in the second quarter I guess.

The payoffs accelerated or better than we were.

We are a little bit surprised that people were coming back to purchase.

These.

Strip centers.

Tend to be the ones that were paying off initially.

You also saw the opening up of permanent markets like that again and then so people did we refinanced some of them out to permanent loans, but.

We were surprised at that.

That there.

There was capital ready to go out and buy sort of an anchor centers.

That.

Typically had had.

Had some issues surround tenants et cetera.

As they were starting to firm back up I thought well.

This would take a while for this to happen, but it didnt.

And actually I think.

The Testament to our customers they did get their tenants backup and paying ransom.

And attractive for people to buy so.

I think we're going to we're going to start to get back to a more normalized repayment.

Repayment of these loans and pay offs.

We're starting to catch up with that our pipeline is built up again.

So we start <unk>.

Catching up to the payoffs that we have to catch up to so we're making lives. Its just trying to get it get beyond <unk>.

What's paying off so it's getting there I'm pretty happy with.

With where our guys are from a pipeline standpoint.

Thanks.

I think this fourth quarter will be good.

And sort of set us up as we go into 2022.

Yes.

That makes sense.

Do you think it's fair to say loans may.

Still feel a little pressure next quarter as you kind of restart this growth engine.

And it really will be early 2022 that we see that returning to that 5% to 8% growth that you guys have.

So good at generating.

Yes.

I think by the time, we make it to the first quarter.

Trying to live quarter to quarter is not a great idea of it.

Thanks.

We feel like we're starting to get back into our normal terms.

That could change a bit depending on payoffs, but.

The pipeline that we see in front of us.

The payoffs that we think are going to happen.

We should start to get back to a more normalized growth as we enter.

2022 so.

We get into the first and second quarters, I think we're kind of be back to where we've been traditionally.

Okay, Great and then I just wanted to move on to expenses really great to see you guys get the BSA behind.

I know you guys have spent a lot of time and money on that over the past year, but just thinking in terms of expenses.

BSA costs were down really nicely linked quarter.

Just trying to get a sense of a good run rate for that professional fee lines moving forward now BSA.

If you back out.

200000, or so you spent this quarter.

Those fees are kind of in the $300.

I'm, sorry, a one three to $1 $4 million range is that a good way to think about that few longer that expense line moving forward.

Yes, I think.

We need to think about it in two ways well and one is.

The go forward expense.

Attorneys fees consultants that kind of thing that's on the downturn.

But I will caution we still we still have our negotiating is as I talked about in my opening remarks with FEMSA. So.

There are still some pain to be had.

For defense and as.

From a penalty standpoint.

So as we negotiate that out.

That that's still in front of us but.

Again, we're talking about the past so there's some pain to be paid for.

For the past.

But as we look to the future.

Those expenses are basically going to go away as soon as we get this get this settled out and where we're currently as we've talked about earlier and negotiations with them.

And it's our hope that.

This gets concluded by them by the end of this quarter.

Okay, great. Thanks for taking my questions.

You bet.

Your next question comes from the line of Charles <unk> with Piper Sandler.

Hey, good morning, guys.

Minor.

Let's start on the liquidity front, so I see that averages balances are up around it's around $854 million can you just talk about some of your plan to deploy the excess capital.

Especially just like how aggressive you'll be given current yields in or do you feel more comfortable being patient as long ago at the time.

Well.

It's.

Yes.

As we went through Covid.

We tried to SaaS what was happening to us.

<unk> was a bit of surprise that all of that money seamless check as well as it has.

Over time.

I don't think people will be patient with.

Having their money Orange zero so.

We're a bit cautious around what liquidity.

We will do over time, but we're going to continue to increase our bond purchases a bit.

We don't think it's rational to just jump into the bond market.

Full floor. So I think we should we're going to measure ourselves into that we're going to continue to look to ways to deploy more of that money into loans.

Which is the primary thing.

Things that we wanted to.

But we're going to do it on a measured basis and that's that's kind of how we see the world.

How we've lived for a number of years so that's.

That's how we'll do it.

Okay, great. Thanks, and then shifting over to the reserve you had another substantial negative release, bringing it down to around 123 beds do you see do you think we're starting to get to a more normalized level youre, giving some of the growth expectations coming into the end of the year and into 'twenty two.

We're getting close I think.

Depending on what where loans go on I think we will start building back.

It could call we're so.

I'll now with seasonal is just soft driven by formula.

As we add portfolio.

Well, we will tend to add.

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