Q1 2022 Allegiance Bancshares Inc Earnings Call
Good day and thank you for standing by welcome to the Q1 2022 allegiance Bancshares, Inc. Earnings Conference 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 be.
Press Star one on your telephone please be advised that today's conference is being recorded.
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I would now like to hand, the conference over to your speaker today, Courtney Terrio, EVP and Chief Accounting Officer of allegiance Bank. Please go ahead.
Thank you operator, and thank you to all who have joined our call today in this morning's earnings call will be led by Steve Retzloff CEO of the company raised that Julie President of the company and CEO of allegiance Bank Paul E X.
Second a vice president and CFO .
Akin executive Vice President and Chief Risk Officer of the company and President of allegiance Bank, and Shannon Campbell Executive Vice President and General Counsel.
Before we begin I need to remind everyone that some of the remarks made today constitute forward looking statements as defined in the private Securities Litigation Reform Act of 1095 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 is only a reflection of management's beliefs at the time. The statement is made and such beliefs are subject to change.
Disclaim any obligation to publicly update any forward looking statement, 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 or 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 at this time.
At the conclusion of our remarks, we will open the line and allow time for questions I'll now turn the call over to our CEO Steve Retzloff.
Thank you Courtney and good morning, everyone, who is participating with us on today's call. We thank you for your time and interest.
Hallmark for allegiance Bank has always been our ability to develop and maintain extraordinary customer relationships, most particularly as we serve the business owners in our region. It has been integrated into our organizational DNA since our inception.
Quality granular organic growth consistency over an extended timeframe.
The level of new loan originations in the first quarter of 2020 to set a new record for our team and also resulted in a record level of core loan growth of $130 million. After excluding the impact of our PPP loans, which are declining due to the forgiveness process.
The 12, 8% annualized core loan growth rate was accompanied by continued organic deposit growth of $115 million during the quarter.
Overall, we continue to feel very good about our core banking activities and are very appreciative of the unwavering great effort being delivered by our entire team the affirmation from customer and employee engagement surveys provide added confirmation of a broad appreciation for our culture and sense of purpose as we serve both our direct customers, but our alt.
Increasingly active in the local community.
In addition earnings were strong we're very pleased with the Manageability of our asset quality and our capital and liquidity positions should provide a solid foundation to support continued organic growth.
And Paul will provide added color on the details for the quarter I will add that it was great to see the positive economic activity and growing demand for our services all the while we were breaking production records, we have been making excellent progress as we prepare for our merger with community Bank of Texas multitude of decisions and collaborative evaluations has led to a.
Step by step, but steadily increasing coming together of the two very talented banking teams technology organizational staffing and design operational consolidations process changes the alignment of policies controls risk management and governance are all being created for the coming combined company. Most importantly, the alignment then.
Coming together as one team is gaining powerful momentum every working day given evidence such as the recent high level of population growth into the Houston MSA, having gained 69000 in the past year, which is second in the nation, we're more excited than ever about the prospects for our merged entities with that I'll turn it over to ray for them.
Our detailed review of our operational results, followed by Paul who will cover our financial results.
Thanks, Steve.
The momentum that was generated in the back half of 2021 continued into 2022 as our lending teams set all time records in both core loan originations and core loan growth.
I have mentioned team effort many times before but when you set these type records and see both the attraction of new customers to the bank and expansion of existing customer relationships team effort takes on a deeper meaning.
For example, these results are executed on our new loan origination system, which required a team to implement drive enhancements and trainer lending and loan operations staff to ensure technology adoption.
In addition, we continue to integrate our new lenders and producers over the past five quarters, we have hired 13, new lenders, including nine who were homegrown from within.
It takes a team to coach and mentor, our lenders so that they can integrate and begin to build their customer base.
I can't say team enough and want to acknowledge all of our bankers for their contributions to the success.
Moving now to our quarterly operating results, our staff and lending team booked a record $469 million of new core loans that funded to a level of 307 million by March 31, compared to the fourth quarter 2021, when $450 million of new core loans were generated which funded to a level of 327.
Yes.
The weighted average interest rate charged on the new first quarter core loans was 435% compared to the weighted average rate charged on our new fourth quarter loans of four 4%.
Paid off core loans were $214 million in the first quarter compared to $223 million in the fourth quarter of 2021.
$214 million of paid off core loans during the quarter had a weighted average rate of 489%.
Carried core loans experienced advances of $142 million at a weighted average rate of $4 700%.
And paydowns of $104 million, which had a weighted average rate of 489%.
All in the overall period end weighted average rate charge on our funded core loans decreased three basis points ending the first quarter at four 8% compared to $4, 83% as of December 31.
With record core loan growth of $130 million for the quarter. We were pleased to report for funded loans of just over $4 2 billion setting another record for the bank.
Turning to asset quality nonperforming loans ended the first quarter at 37 basis points of total assets up slightly from 34 basis points in the fourth quarter 2021.
Non accrual loans increased a net $2 $2 million during the quarter from $24 1 million for the fourth quarter 2021 to $26 3 million, primarily due to $7 5 million in additions, which was partially offset by $2 $2 million in upgrades placed back on accrual of $1 2 million in pay.
$1 2 million in payments and 654000 and charged off balances.
Charge offs for the first quarter totaled three basis points annualized.
In terms of our broader watch list our classified loans as a percentage of total loans decreased to three 8% of total loans as of March 31, compared to 386% as of December 31.
Criticized loans decreased to five 1% at March 31 from 536% at December 31.
And specific reserves for individually evaluated loans ended the first quarter at 16, 4% of total reserves compared to 15, 5% at December 31.
In aggregate our asset quality at quarter end remained in a manageable position with low single digit charge offs for the quarter.
On the deposit front total deposits increased $115 million in the first quarter compared to the fourth quarter and were up $788 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 as the result of higher balances in our carried accounts.
With that our noninterest bearing deposits to total deposit ratio was 38, 2% for March 31, compared to 37, 1% for December 31.
And 35, 6% for the year ago quarter.
In closing Steve mentioned, the solid population growth for the eastern region, but job growth remains equally as strong in February the region created 46000 jobs, which nearly closes the gap on recovering the 300000 jobs lost due to the pandemic.
The resilience of the business owners in the eastern region to create jobs along with the continued population growth has us as excited as ever about the upcoming MLP with community Bank of Texas, creating the business bank for the region.
I'll now turn it over to our CFO Paul <unk>.
Right.
<unk> to report a great start to 2022 with meaningful loan growth and solid earnings.
Net income for the first quarter was $18 7 million or <unk> 91 per diluted share as compared to $21 $6 million or $1 <unk>.
Per diluted share in the fourth quarter and $18 million or <unk> 89 per diluted share in the first quarter of 2021.
Compared to the fourth quarter of 2021, our first quarter results were driven in part by lower PPP related revenue and provision variance, partially offset by lower funding costs and M&A related expenses among other things.
Our pre tax pre provision income for the first quarter was $24 7 million as compared to $23 8 million in the fourth quarter and $22 5 million for the year ago quarter.
We recorded net interest income of $55 2 million for the first quarter down from $58 1 million in the fourth quarter, primarily due to a change in the mix of interest, earning assets and a $3 $4 million decrease in net PPP fee revenue recognized into interest income.
Net interest income was down just slightly from $55 7 million for the first quarter of 2021, primarily due to lower revenue recognized on PPP loans offset by lower interest expense and increased interest income from securities.
Total net fee revenue related to PPP loans recognized into net interest income during the first quarter was $2 5 million.
Compared to $5 9 million in the fourth quarter and $6 9 million for the first quarter of 2021.
Interest expense decreased by $396000 in the first quarter compared to the fourth quarter and by $2 million compared to the first quarter of 2021.
Before moving on I should note that as of March 31, we had approximately $2 $3 million of net deferred fees remaining related to PPP loans.
Yield on loans was five 2% in the first quarter compared to $5 three 2% for the fourth quarter and 515% for the year ago quarter.
Excluding PPP loans and related revenue yield on loans would have been $4, 87% for the first quarter for 95% in the fourth quarter and 515% in the year ago quarter.
Total yield on interest, earning assets was 356% for the first quarter down from 386% for the fourth quarter and $4, 67% for the year ago quarter.
These trends are primarily reflective of changes in interest rates and the mix shift and our growing earning asset base towards a higher proportion of lower yielding securities and cash.
With respect to interest expense our cost of interest bearing liabilities continues to track downwards in the first quarter to 51 basis points from 56 basis points in the fourth quarter and 80 basis points in the year ago quarter. This was driven principally by deposit repricing and lower borrowings.
The overall cost of funds for the first quarter was down to 32 basis points versus 36 basis points in the fourth quarter, thanks to a higher proportion of noninterest bearing deposit balances.
We are working hard to preserve our optimized deposit positioning as we manage expected changes in interest rates throughout 2022 and beyond.
As we look at our tax equivalent net interest margin lower PPP net fee income recognition along with lower interest expense in the first quarter and a significant shift in the composition of our earning assets resulted in a margin of three 3% for the first quarter as compared to 357% in the fourth quarter and $4 one nine.
<unk> percent in the year ago quarter.
Excluding PPP loan balances and related revenue net interest margin would have been $3 one 4% for the first quarter from $3 two 8% in the fourth quarter.
Notwithstanding structural decreases in our go forward net interest margin profile due to significant shifts in our average earning asset mix. We are really pleased to see core net interest income excluding PPP fee income growing nonetheless, thanks, largely to the larger balance sheet.
From here, we see upside in our NIM and net interest income profile and more so after completing our merger with <unk>.
Noninterest income increased to $4 million for the first quarter from $2 $5 million in the fourth quarter, primarily due to a mix of factors, including $1 3 million in income from Spi investments.
We've been really pleased to see significant year over year increases in our interchange income as well as this line item increased to $819000 in the first quarter compared to $623000 in the year ago quarter.
Total noninterest expense decreased in the first quarter to $34 5 million compared to $36 $7 million in the fourth quarter. This was largely due to a decrease in professional fees and acquisition and merger related expenses, partially offset by increased regulatory assessments.
Aside from these items, which we consider to be one off we are very pleased to be holding the line on expenses.
Accordingly, our efficiency ratio for the first quarter decreased to 50, 832% compared to 66, 8% from the fourth quarter of 2021.
Moving on to credit we recorded a provision for loan losses of $1 $8 million during the quarter, which is primarily reflective of the record core loan growth during the period.
Our allowance for credit losses on loans ended the year at $49 2 million.
Representing a 115 basis points of total loans and 117 basis points on core or non PPP loan.
Bottom line, our first quarter, <unk> and <unk> metrics came to one 4% and $13 three 5%, respectively, representing what we feel are solid results.
Quarter end tangible book value per share was $25 24.
Which represents a meaningful decrease since year end reflective of the OCI impact of the significant shift in interest rates on the value of our available for sale securities portfolio.
We went from an $18 $2 million gain position in OCI at year end to $63 $6 million loss position at March 31.
That said, we continue to feel very well positioned on capital the company declared a dividend of <unk> 14 per share common stock.
And authorized the repurchase of up to 1 million shares of common stock since our existing share repurchase authorization was set to expire at the end of April .
In closing 2022 is off to a great start and we are extremely excited to close our pending merger with <unk> as soon as practicable.
I'll now turn the call back to Steve. Thank you Paul with that I'll now turn the call over to the operator to open the line for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Brad Milsap from Piper Sandler Your line is now open.
Hey, good morning.
Good morning, Brad.
I know there are a lot of moving parts kind of ahead of the.
Hopefully the close date around June 30, but just kind of wanted to ask about how youre thinking about.
Managing the balance sheet kind of ahead of that ahead of the close and then as the companies come together both companies still have.
Quite a bit of cash.
Thinking about how you know what your plans are for deployment and then maybe secondly, obviously, a great loan growth quarter this quarter.
<unk> was solid as well can you just talk about kind of your thoughts around growing loans the balance of the year and into 2023.
Certainly I'll start.
Holistically with respect to the balance sheet and I'll, let ray pipeline as it relates to expectations on loan growth.
Really what we want to do in positioning the pro forma company is.
Positioning it to support means.
Meaningful loan growth.
Our potential for loan growth.
Without while.
While still preserving a.
Sure.
An asset sensitive balance sheet.
Traditionally <unk> has been very asset sensitive and we've been very neutral.
But in particular, given the direction of rates and and the flexibility we want from a balance sheet standpoint, since we want to be able to.
Support loan growth without taking meaningful interest rate risk, we are going to do everything to kind of maintain that flexibility.
For that reason adopting.
The a more asset sensitive and more asset sensitive stance.
Similar to what our partner has traditionally had is it's going to be I think very important to support our loan growth.
And without changing.
That aspiration is to asset sensitive right, Okay, Hey, Brad.
Yeah. So the pipeline started building.
Kind of mid 'twenty, one and we saw.
Originations start to pick up and that just carried into the first quarter and so as we look at the pipeline for the second quarter. It looks similar to the first quarter. So.
Whether it's whether it's going to be another record not we don't know, but as far as what we're seeing in the market and what our lenders are saying, we're reporting solid pipelines going into the to get us through the first half of the year and.
The rate environment is challenging, but we're winning business.
That's great and maybe Ray just as my follow up.
Encouraged to see I think the new new funded yield is up linked quarter.
You just mentioned competitive pricing can you talk about that a little bit and then just remind us kind of your mix of loans that would be fixed versus maybe tied to prime and kind of how you see things repricing as.
If the fed in fact continues to raise short term rates sure I'll talk a little bit about just what happened in the quarter then Paul can maybe touch on the whole portfolio with fixed and floating but yes, we picked up 15 basis points on the loan and rich that the loans were originated in the first quarter compared to the fourth quarter.
So we're very pleased about that and.
Just on the pricing.
We're just looking at an end.
You see some things out there from some other banks and we're just kind of plowing through it and.
As the highest service provider, where we feel good about where we are but we just got to watch that.
To where we we don't chase it down into the twos or something which is we've seen a little bit of that which is kind of.
Kind of crazy, but on the loans originated for the quarter.
It was nice to see that just for that quarter that record fixed was 54%.
Floating 46, and if you look at the year ago quarter. It was more like 70 30. So we've had we've seen a nice shift from fixed to floating.
And I think that will help us obviously as we.
Whatever we get in May with a rating if we get a rate increase.
Yes, following up on the portfolio at the end of the quarter.
We have about technically speaking 32, 3% of our loan portfolio is variable rate loans, but the majority more than the Super majority of that is in variable rate loans that are at above or.
At above or no floors. So.
Really 25% of our loan portfolio is <unk>.
Clearly variable and then the remaining 7%.
Below floors.
Thank you guys I'll hop back in queue.
Okay.
Thank you. Our next question comes from the line of Matt Olney from Stephens.
Your line is now open.
Hey, Thanks, good morning, guys.
Good morning, Matt.
Just piggybacking on that last discussion as far as rate sensitivity and loan repricing.
So if 25% of the loans are our variable can you confirm that that.
25% or call it about.
$1 billion did those get the benefits of that.
Pricing.
From from mid March and do we see that I guess reset at the beginning of April just I'm just trying to figure out there is some kind of a timing reset mismatch or if indeed, all 25% of those variable rate loans did get that benefit over the last few weeks all did not.
So that is.
Putting you statistics as of $3 31.
There would be some of that very few I should say.
Since it went from low 20% to 25%.
As it relates.
Pre rate change to poach straight change.
So there is a small portion of that would have been.
But about four maybe at that for now so to speak so really.
When I speak to this it's more prospectively rate hikes from here are going to be.
Reflected 25% and actually if the rate hike ends up being higher than expectations of my blow a couple through Florida.
Got it okay. Thanks for that.
And then I guess shifting a little bit overall towards the securities portfolio. I think we saw the yields on that come down a little bit this quarter.
Any color on that coming down was that just a result of the purchases from late last year getting a full quarter impact and then kind of as you look forward and think about some of the.
Recent purchases just any color on kind of the yields on the securities book.
Certainly.
It's exact you answered your own question as it relates to the nature of our book.
Securities.
The go forward yields.
They are most certainly higher and really.
We're pressing pause as it relates to putting meaningful money to work in anticipation of the merger closing as soon as practicable.
Because really we want to think in concert with respect to the pro forma.
As it relates to the interest rate positioning. So we both have really meaningful levels of cash to put to work in both companies have high preference for that to be put to work in loans rather than securities, but we're really pleased that the securities markets has made.
<unk>.
The investment an investment of excess liquidity incrementally more worthwhile to our bottomline.
Yes.
Okay perfect.
And then I guess last from me I think you said PPP fees remaining around $2 4 million.
Do you expect to recognize all of those into <unk> into <unk> or could that leak into the back half of the year, it's going to leak into the back half of the year generally speaking.
We're kind of at the tail and it's slowing down.
Hard to predict I mean, we could have a wave.
But as it.
Behaved year to date it was heavier in January and February and it's it's we're petering off.
It will.
Very likely leak into the third quarter.
But the impact expect the impact.
Likely to be half again as much in the second quarter as it was in the first quarter not dissimilar to the first quarter being about half as much as the fourth quarter.
Yes.
Okay, guys. Thanks, taking my questions.
Thanks.
As a reminder to ask a question you will need to press star one on your telephone.
Our next question comes from the line of Brad <unk> from Piper Sandler Your line is now open.
Hey, Thanks for thanks for taking my follow up question.
Paul just curious around expenses.
I know you are pleased to kind of hold it in that 34% to $35 million range, but just kind of thinking about as the companies come together I mean do you think <unk>.
It represents a good run rate.
Or do you think maybe that's a little light just because maybe you aren't spending some money on some things that you otherwise might be as you kind of wait things out.
Both companies kind of this quarter were.
Lower than expected expenses.
I'm, just trying to get a sense of.
It might be too aggressive sort of assuming this rate kind of going forward.
You know, we are getting a little bit of a pull forward so to speak.
Peak of.
I don't want to say pull forward of cost savings, but we've both been holding the line and been very thoughtful about incremental spend.
From announcement to close a trend that we have spend relating to the deal but then.
As we think about our staffing plans and things along those lines. We are really putting our heads together. So we're really pleased to be holding the line here and we actually are.
C.
The current level of spend.
When you take out the noise.
To be pretty representative of expectations going forward.
Once again thats not counting Nana.
Nonrecurring M&A related expenses.
But the driver of that is.
Partially us putting our heads together with respect to staffing plans and the pro forma.
And positioning ourselves.
Best for putting these two companies together.
Got it so maybe so maybe the some of the $36 million of original cost savings that you expected, we're starting to maybe see a little bit of that now not obviously not the lion's share of it but.
Maybe maybe some of it is currently in the run rate.
There is definitely some.
And it's.
It's a function of.
Disciplined and it's a function of really.
Thinking together with our partners about how we want the expense story to shape out.
Got it and in your mind, no real change to that $2 65 target that you guys kind of laid out back in November maybe if anything it could be.
A little bit better given the growth that both companies have seen and then maybe actually some more assurance that we're actually going to see sort of the rate hikes that you guys put in the pro forma is initially.
265.
'twenty three expectations.
Your EPS expectations Youre, saying.
Yes.
The pro forma company.
I don't think we presented numbers for the pro forma company, we actually gave the numbers for each separate company, but we actually do feel good actually when you look at both companies' respective levels of earnings in the first quarter.
Even when you take out anything that can be deemed to be onetime in nature, we feel really good about.
Those inputs Standalone inputs, we feel like both companies are.
Outpacing.
The expectations that we set when we announced the merger in November there's a lot of variables out there as you know in terms of the economy and interest rates and so on and so forth, but we have not revisited that to the extent that we would alter any of those future expectation.
I'll say that we felt good about just brought the how the market setup has been like for all banks credit.
Experience in the economy plays into so much this year, but we very we feel very good about the interest rate backdrop, and other kind of market setup supporting our respective earnings profile and that were greater than pro forma.
Mine, our core assumptions remain intact.
Perfect. Thank you thanks Paul.
Okay.
Thank you at this time Im showing no further questions I would like to turn the call back over to Steve Retzloff for closing remarks.
Well just once again, we appreciate all of your time and interest in allegiance and we look forward to speaking to you again in the future. So thank you all very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
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