Q3 2021 Spirit of Texas Bancshares Inc Earnings Call
Greetings and welcome to the Spirit of Texas, Bancshares 2021 third quarter 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 <unk>.
The phone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host 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 third 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 the opening remarks, we will provide a high level review and commentary on the financial details for the third quarter before opening the call up for Q&A.
And now I'd 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 B dot com.
It will also be a telephonic replay available until November four 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 October 28, 2021, and therefore, you are advised that time sensitive information may no 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 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 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 Dean.
Thank you Jerry and good morning, everyone welcome.
I'm extremely pleased to announce a strong performance for Q3.
Our goal has always been to serve as the vibrant markets in which we operate.
The engine that drives community banking is the demand for quality loan.
Our strategy has always been to retain talented bankers and high growth markets and capitalize on opportunities as they arise.
While the past 18 months have been extremely challenging for the banking industry.
We are now experiencing the loan demand that will drive organic loan growth and profitability higher in the coming quarters.
During the third quarter loans grew an impressive 12% annualized.
When excluding the impact of PPP loans.
We anticipate these trends to continue and expect to have an exceptional fourth quarter with respect to loan growth.
In addition to strong loan growth during the quarter. We earned net income of $10 $5 million, representing fully diluted EPS of <unk> 59 cents and a return on average assets of 1.33% annualized.
We also increased our quarterly dividend from nine cents per share to <unk> 12 cents per share and have maintained our net interest margin near 4% despite market pressures with respect to rates.
I continue to be extremely impressed with the resilience and commitment of our talented bankers, who drive successful results quarter after quarter.
We are well positioned to meet the needs of our community with respect to loan demand and are truly excited to see successful projects that our borrowers will bring to the community in the coming quarters.
Now I'll turn the call over to David to discuss the loan portfolio and asset quality David.
Thank you Dean.
As Dean mentioned, we are extremely pleased to return to low double digit annualized loan growth.
The deals currently being funded are high quality projects at competitive rates.
Many of these deals carry opportunities to earn swap fees as our new for borrowers are more concerned with future interest rate swings.
We anticipate the fourth quarter to also be a strong quarter with respect to loan growth despite increasing competition in many of our markets.
We are working diligently to assist remaining PPP borrowers through the forgiveness process and hope that by the end of the fourth quarter. The remaining balance of PPP loans will be negligible.
Asset quality continues to improve with loans migrating into lower risk ratings during the quarter due to improved financial performance.
Nonperforming loans declined $1 3 million or 16, 7% from the second quarter of 2021.
Nonperforming loans to outstanding loans decreased to 28 basis points from 33 basis points during the quarter as more borrowers began to show signs of strength coming out of the COVID-19 pandemic.
The yield on loans in the third quarter of 2021 was five point O, 9%, which increased 22 basis points from Q2, 2020 and decreased 21 basis points from Q2 2021.
The yield on loans continues to be impacted by increased PPP forgiveness and accretion.
Purchased loan discount, which is earned as the acquired portfolios mature.
While loan demand has returned to near pre pandemic levels competitive pressure has also return that may require us to record loans at a lower rate to remain competitive.
Wherever possible when competing on a rate we also offer customers swap offerings that lock in the lower right for the customer while generating new noninterest income.
The loan pipeline continues to build each month and we are currently experiencing higher close rates as more deals pull through to funding.
The provision for loan losses for the third quarter was $306000.
The lower provision for the quarter was due to risk rate migration within the organic portfolio.
At quarter end the coverage ratio on the organic portfolio was 82 basis points, excluding PPP loans.
Annualized net charge offs were 10 basis points for the third 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 deposits continued to show strong growth as Q3 ended with total deposits of $2 7 billion.
An increase of $98 4 million or 15, 3% annualized from Q2, 2021, and an increase of $383 $1 million or 16, 8% over Q3 2020.
Noninterest bearing deposits decreased $4 6 million or 0.59% from Q2 with.
With the reduction due to PPP related deposits as borrowers to put the proceeds to use.
Noninterest bearing deposits currently make up 28, 7% and total deposits.
Interest bearing demand deposits increased $35 3 million or six 7% from Q2 <unk>.
Primarily due to balances associated with new accounts opened by customers generated from the Paycheck protection program and the main street lending program.
Savings and money market accounts increased $91 2 million or 14% from Q2 also due to success retaining and growing the relationships associated with COVID-19 related assistance programs.
Time deposits decreased by $23 4 million or three 8% from Q2 2021.
Due to aggressive repricing the cost of time deposits decreased 11 basis points from Q2, 2021 to one 6% to 8%.
This improved shift in deposit mix resulted in a two 8% cost of deposits a decrease of four basis points from Q2 2021.
The bank has no broker deposits.
The reported loan to deposit ratio at the end of Q3 was 84, 4% excluding PPP activities the loan to deposit ratio was 84%.
Borrowings decreased by $39 8 million during the third quarter to $79 3 million due to the payoff of PPP Lf borrowings.
Borrowings totaled two 5% of assets at the end of Q3.
The company has significant sources available liquidity.
<unk> $50 million in the holding company line of credit fed funds lines totaling $118 million in federal home loan bank availability of $804 8 million.
I would now like to turn the call over to Alison to provide a financial overview of the third quarter Allison.
Thanks, Gerry and good morning, everyone.
We provided detailed financial tables in yesterday's earnings release.
Consolidated net income for the three months ended September 32021 was $10 5 million with fully diluted EPS of <unk> 59, compared to earnings of $7 1 million and fully diluted EPS of <unk> 44 cents in the third quarter of 2020.
Net income and earnings per share were primarily driven by the recognition of $2 2 million net accretion of origination fees on PPP loans.
We anticipate the majority of the remaining $2 5 million of net origination fees on PPP loans to be recognized during Q4 2021.
Noninterest income was $3 3 million for the third quarter of 2021 compared to $3 9 million for the second quarter of 2021.
Decrease of 573000 linked quarter.
The decrease from Q2 was primarily due to lower swap related fees.
Demand for swap products began to increase during the second half of the third quarter and we expect noninterest income to increase in the coming quarters due to demand for swap products.
Loans held for sale grew $3 million as SBA loan production has begun to increase from our SBA Department restructuring.
This will translate into loan sales in the coming quarters and a return to the gain on sale of SBA loans contributing to the overall noninterest income.
Noninterest expense totaled $18 million in the third quarter of 2021, an increase of $1 2 million from the $16 8 million reported in the second quarter of 2021 the.
The increase was primarily due to an increase in salaries and benefits expense of $1 4 million, resulting from higher medical expenses due to nonrecurring large claims during the quarter and an additional pay period.
With respect to net interest margin the tax equivalent margin in the third quarter 2021 was 4% compared to second quarter 2021 tax equivalent margin of 414%, representing a 14 basis point decrease sequentially.
While the overall cost of funds continues to decline competitive pressures on loan production is negatively impacting the yield on loans.
However, using excess liquidity to fund strong loan growth will assist the overall margin in the coming quarters.
The provision for loan losses for the third quarter was 306000, which increased the allowance to $16 3 million or 72 basis points of our total loans outstanding or 75 basis points, excluding the hundred percent government guaranteed PPP loans.
The provision expense for the quarter related primarily to the provisioning of new loans.
The coverage ratio on the organic portfolio was 82 basis points on the $1 8 billion in organic loans outstanding excluding PPP loans at quarter end.
Additionally, we have $2 1 million unamortized discount on the acquired loan portfolio at September 32021, 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 September 32021 capital ratios remained strong and book value per share and tangible book value per share has increased to $22 49, and $17 67, respectively.
I'd now like to turn the call back over to Dean for closing remarks.
Thank you Allison.
It makes my job very easy when we report solid earnings.
Improved credit quality and strong loan demand.
All that is left to say is thank you to our team who made these results possible.
Our bankers have expertly navigated us through very challenging times.
And I am excited to see what is in store for spirit of Texas in the coming quarters.
Expectations are high.
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 he would like to ask a question. Please press star one on your telephone keypad.
Tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Brad Millsaps with Piper Sandler. Please proceed with your question.
Okay.
Hey, good morning, guys.
Oh man.
Yeah.
Just wanted to maybe touch on loan growth for a moment.
I know you guys expressed confidence in hitting your 8% to 12%.
Our goal for the year.
I think that would.
<unk>.
Lead lead me to believe there'd be a pretty big step up in the fourth quarter are you expecting kind of.
The outsized kind of catch up in the fourth quarter debt to to get to that goal and kind of how do you think about <unk>.
Heading into 2022.
Yeah Brad.
Excuse me, where we are continuing to believe that we're going to be in that.
8% to 12% growth for the year over year at the end of the fourth quarter.
We're not quite ready to.
Our guide for the first or second quarter of 2022, yet, but the pipeline in place today supports continued growth in the low double digits at this point.
Okay. Thank you and then Alison I was I was writing quickly.
Senses, maybe came in a touch higher than that I was looking for can.
Can you maybe maybe speak to any additional color there maybe on the expense run rate I know you guys have been working hard to continue to find synergies, but you know you're a small growth company as well. So I know you have to reinvest just kind of want to get a sense of the expense rate run rate going forward.
Sure. So this quarter, we kind of had an anomaly come through in our medical expenses. So that was about $400000 higher than we had expected him with that being said, though we do have an additional pay period in December so I'm going to keep that expense run rate for Q4, and $18 million conservatively with potentially a little bit lower than that but I'm going to give me.
A little later room at that $18 million.
Okay, Great and then maybe just last two housekeeping items for me.
The average balance of PPP loans, and then I think I may have missed it.
Loan discount accretion did you recognize in the third quarter.
Yeah, Great question, so as far as accretion accretion came in lighter this quarter than normally normally we collect about 825000 a quarter. This quarter. It was only 300000.
We've got $2 $1 million remaining on that mark out of that portfolio and as far as average balances of PPP loans that was roughly $100 million.
For Q3.
Okay, Great I'll hop back in queue. Thank you very much hey, Brian one more is there still on let me just mention to you I think it was important that.
The 12% is a strong number and then by anyone's measurement on the loan growth, but at the same time of course income is generated by how soon it gets into the into the quarter right and so as we start trying to fund. These sometimes it's later in the quarter, which was the case this time so it didn't.
Generate as much revenue as we would have wished early on but but of course, that's a catch up in 2014, So youll see that continue to help us along the way.
Great. Thanks, Steve.
Thank you. Our next question comes from the line of Brady Gailey with <unk>. Please proceed with your question.
Hey, Thanks, good morning, guys.
Great.
Well youre talking about.
Or at a higher level of fee income going forward you know you specifically mentioned.
Slop fees doing well and it sounds like you'll have some some added fee income from the restructuring of your S. P. A.
Maybe just talk about the upside you think you could see from those two initiatives and where you think fee income could get to on a quarterly run rate by next year.
Yeah, so unexpected swap fees to come in we're budgeting around $1 million in quarter, and then with our SBA production, we will see a pickup in Q4, but really in 2022 is where we expect that group to really shine through.
So for my run rate on noninterest income for Q4, I'm anticipating between three and a half and $4 million and that's just continued to grow and to enter 2020 tail because a lot of SBA department restructuring.
Okay.
Alright.
And then when you look at the net interest margin you all know there's a lot of moving parts here.
How do you think net interest margin or either NII what trend from here.
So I think this quarter was kind of a low point I expect it to go up from here.
As Dean alluded to the majority of our loan growth occurred in the end towards the end of September So youll see that pick up in NII in Q4 as well as you know with David pipeline, we fully expect our asset mix to improve as we deploy some of that excess liquidity into loans.
Alright.
Finally for me.
Anything on the M&A crowd, you all continue to do well.
Look for downstream targets, our conversations active whats the latest thought in Manhattan.
They had a very active things are.
Yeah.
From my seat I see more discussions going on than in the past there was a lot more interest by a lot more different sized banks.
Yeah.
Okay.
Alright, thanks, guys.
Thank you. Our next question comes from the line of Matt Olney with Stephens. Please proceed with your question.
Thanks for taking my question guys I wanted to circle back on loan growth.
Historically much of the banks are a lot of the banks borrowers have seasonal borrowing needs that results in <unk>.
Fourth quarter being the strongest quarterly growth for the bank and in most years.
How much of the the outlook in the fourth quarter, some from seasonal tailwind versus how much of it is it more of a inflection in borrowing needs that we could see carry into 2022.
Well Matt.
Seasonal versus.
We see I'd say it's.
The fourth quarter has traditionally been very strong for us historically, it's been that way every year. So I hate to attaching thing to any seasonality other than that's just the way it works, but the last last couple of years have been extremely strong.
In 2020, so our expectation is that will continue.
This quarter based on the pipeline I have in place that we're almost 40% of the loans that are in the pipeline are approved and have a good chance of being closed and funded in this quarter and then there'll be some run over into the first quarter just like there was.
Earlier this year so.
The borrower the needs of the borrowers seemed to be normalized now and the.
The activity that we're seeing is.
It's just normal.
In all respects to us and we're just trying to get it done and get it in as quickly as possible, we see an opportunity here too.
<unk> continued to grow our market share in each of our major metros.
Which with the teams what we have in place we have the capacity to do so and then as I've said before we are continuing to look for those.
<unk> bankers in market that will give us additional capacity to continue to grow our pipeline. So that in 2022, we can maybe guide to the high teens growth for 2022.
Matt I might add something to what David has seen in the past.
As a strong finish for the year.
Except for Covid when Covid hit now that brings to bear what we've seen over the last six to nine months I would say a post COVID-19 is is a buildup in and excitement that we haven't seen in.
In our lifetimes, so to speak people trying to come alive, so to speak get their lives back at the same time some fear on taxes, we have seen in the last 12 months, where people would be selling their properties and trying to reduce their debts in some areas and you see some payoffs. Some early payoffs on some properties that they might would have turned a cap for earning producing.
They might have.
Gone ahead and added that fear what <unk> seen is that sort of settled down a little bit so the pay down pay off from the large side and you see now we're actively building on the future. So you see a lot more excitement in that way and I think that contributes to that these metro market communities that are now looking for the opportunities for the future.
And so I think thats build in Davids pipeline.
Right at the right time for us.
Okay. Thanks for that and then I guess, what about on the competitive side as far as loan growth I think we saw them move down on the core loan yield front.
Lots of banks talking about increased competitive pressures what are you guys seen an on core loan yields more in the newer production and how much how much pressure should we be anticipating on the core loan yields from here.
As you start to book some increased production the next few quarters. Thanks.
Our targets have changed just because of competition, we have a lot of liquidity like a lot of banks in our markets.
It's down to pricing and a lot of respects.
The competition that we're seeing is mainly around pricing and not necessarily around credit, which I like actually so it gives us an honest chance if it's a good deal we're going to we're going to play ball. If it's a deal. This marginal it's got to pay the rate.
We're not interested marginal not from a credit perspective, but.
In the in our rates are falling and the prime plus one range.
And if it's a fixed rate deals going to be.
Mid fours to closer to five depending on the term.
And we're still able to compete at those levels a lot. We are seeing some stuff that we don't like.
<unk>.
We're seeing sub 3% fixed rate 10 year.
Fixed deals that's not who we are and we would rather bring them as a customer and give them a good deal on swap that fixes them for seven to 10 years, we pick up a nice fee on that and then we've got a we've got a floating rate.
Hello.
So right now we're in really good shape, 62% of our loans are floating.
Are those if we got a rate bump are going to be immediately impacted positively for us in our our net interest income Scott appreciably increase.
Got it okay perfect.
And then on the deposit side Allison we saw some really good improvement on.
The funding costs coming down just any color on.
How much more room, you have to bring down deposit costs, there and I think there was a comment on prepared remarks had mentioned that you expect most of the fourth quarter loan growth to be funded by liquidity just any clarification there.
Well from a.
Or.
Cost of deposit standpoint.
There is a little room for it to come down a little bit further.
What we saw in Q3 as each each month of the quarter it ticked down a little bit more so about half of our CD portfolio re prices in the next six months.
So that'll provide us some additional.
Additional benefit there. We also have some some pretty sizable public fund contracts that repriced in September. So we will see the full quarter impact on that where those reprice to much more favorable terms, so again, a little bit of room, maybe another.
Three or four basis points in Q4.
What I'm looking for.
Yeah, and we saw quite a bit of deposit growth during the quarter I don't know if you want to touch on where that came from Jerry.
Yeah.
We keep expecting that deposit growth to moderate.
It's just not happening again, another 15% annualized in Q3.
<unk>.
A lot of that came from new customers that we picked up through the PPP process or the main street lending process.
<unk>.
Those have.
We ended up being very good deposit customers, but those are businesses that are they're smart businesses theyre looking to put that money to use at some point in time, but right now.
They are very liquid as well and that cash is sitting on their balance sheet and in our bank.
But we are.
Again, they're going to have future borrowing needs outside of main street or PPP that we're going to be able to step up and meet.
Understood.
And just lastly on the.
Stock repurchase plan, just remind me of the authorization and any commentary on the the appetite to focusing on buyback and buy back more near term.
Yeah. So we still have our stock repurchase plan in place with an authorization of $10 million to repurchase there.
Again, we've got that plan under <unk> five one and if it's activated then it will go ahead and start repurchasing shares we have seen some improvement in our in our tangible book so.
And our excuse me our multiple our trading multiple.
Again, I think we're seeing some improvement there to allow us to to use our capital in other ways, but.
But we're constantly monitoring that.
Okay guys. Thanks for your help.
Thank you, Matt and thanks, Matt.
Thank you there are no further questions at this time I'd like to turn the floor over to Dean bass for closing comments.
Thank you for attending our Q3 2021 earnings announcement I. Appreciate your continued support 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 day.