Q1 2022 CBTX Inc Earnings Call
Speaker 1: We F? I.
Speaker 2: Ladies and gentlemen, Thank you for standing by and welcome to the cbx first quarter 2022 earnings conference call. At this time, all participants are in listen only mode. After the speaker presentation, there will be a question and answer session.
Speaker 2: To ask a question during this time, you will need to press our one on your telephone keybad.
Speaker 2: If we require any further assistance, please press star zero.
Speaker 2: I would now like to hand a conference over the year. Speaker today: MR Justin long, general Counsel of community bank of Texas. Thank you, Please go ahead.
Speaker 3: Thank you. Good morning. I'm just a long general Counsel of CBTX, and our management team would like to welcome you to the cbx and earnings call for the first quarter of 2022. We appreciate you joining us. Yesterday, we issued our earnings press release, a copy of which is available on our website, along with the slide presentation that we will refer to during this presentation.
Speaker 3: Before we begin, I'd like to remind you that during this presentation, we may make forward-looking statements regarding future events, our financial performance, our business prospects.
Speaker 3: Forward-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 or quarterly reports on Form 10 -q and our other filings with the SEC, which can all be accessed on our Investor Relations website at IR cbx IMC, 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.
Speaker 3: You should also be aware that during this call, we will reference certain non-GAAP financial information. A reconciliation of these financial measures to most directly comparable GAAP financial measures is included in our earnings release and investor presentation.
Speaker 3: I'm joined this morning by Robert AR, Franklin junir, our Chairman, President in CEO , Ted piget, our Chief Financial Officer, joill West, our Chief Credit Officer, and Joseph mcmlland, our controlled.
Speaker 3: At the end of their remarks, we'll open the call to questions. With that, I'll turn it over to our Chairman, President and CEO , Bob Franklin.
Speaker 4: Thank Justin.
Speaker 4: Welcome to the earnings call for CBT Xing for the first quarter of 2020 -two.
Speaker 4: We are pleased to present our first quarter results for 2022. the first quarter continued the positive momentum generated in the fourth quarter of 21, as we left our regulatory overhang behind.
Speaker 4: Our core loan growth continued at a lower rate than the fourth quarter and a return to our more normalized mid- to high single-digit growth.
Speaker 4: Our deposits remained strong in a quarter that has historically seen some runoff after year-end. As we approach the tax season.
Speaker 4: Our local economy continues to gain strength and our pipeline is continuing to build.
Speaker 4: We are in a rising interest rate environment and with an asset-sensitive balance sheet. We believe this provides us with opportunity.
Speaker 4: However a rising interest rate environment also signals the need to be cautious and maintained disciplinine.
Speaker 4: We will continue to monitor the Federal Reserve and its impact on interest rates. Rising interest rates will also mean pressure on cash flows and real estate valuations.
Speaker 4: But our markets are strong and look to be able to withstand the pressures of rising rates as well as other demands of the moment. COVID-19, geopolitical pressures, inflation and supply chain issues.
Speaker 4: We feel fully prepared to navigate these challenges as we look forward to our new partnership with the great folks at Allegiance bank.
Speaker 4: We've been working closely with the Allegiance's bank, preparing to integrate our teams while we press forward to gain approval from our regulators and shareholders.
Speaker 4: Our shareholders meeting. The vote is set for may twenty-fourth.
Speaker 4: And we have been encouraged by the shareholder feedback as we move towards our boat.
Speaker 4: We believe that this merger is one that will build shareholder value for years to come.
Speaker 4: We are excited as we look to the remainder of 2022. We feel that we are prepared for the economic challenges that may lay ahead and are determined in our efforts for the successful merger of equals with Allegiance bank.
Speaker 4: Now I'll turn the meeting over to de POC at our Chief Financial Officer. Thank you, Bob.
Speaker 5: Certain financial information for first quarter 2022 PRI periods. begbetween some Slide 6, our investor presentation. The company reported net income of ten point six million dollars and diluted per share earnings of 43 cents for first quarter.
Speaker 5: For the fourth quarter 20- 21, the company pectated a dead loss of 500 ory $5 thousand a two cents per ly this year.
Speaker 5: As earnings were impacted by the cost of settlement with regulatory agencies and costs Associating with the pending merger.
Speaker 5: Net interest income for first quarter decreased $46 thousand to $32.6 million. From first quarter to one.
Speaker 5: And an increased one point eight million or 6% from fourth quarter.
Speaker 5: 2021 the interest margin on a tax equivalent basis increased 15 basis points to three point to 2% from three zhundredero seven for the fourth quarter.
Speaker 5: The yield and earning assets was 3%, the first quarter.
Speaker 5: Compared to 4% for first quarter 2021.
Speaker 5: The cost of interest-bearing liabilities was 27 basis points for the first quarter.
Speaker 5: And 34 basis points for first quarter 2021.
Speaker 5: Yields and learning assets decreased in cost.
Speaker 5: Of interest-bearing liabilities remain about the same level, which continued compression.
Speaker 5: Of net interest margin on a tax equivalent basis to three point to 2% for first quarter. 2020 -two.
Speaker 5: The provision for credit losses was $435 thousand for first quarter, compared to 412 thousand for first quarter 2021.
Speaker 5: The provision for credit losses for first quarter was comprised of a 400 to $15 thousand provision for credit losscredit losses related to curren funded commitmentsand a $2 thousand provision for credit losses for loans.
Speaker 6: Noninterest income for first quarter was five point three million, an increase of two point two million or 71% compared to three point one million of first quarter 2021.
Speaker 5: And increased one point two million or 30%, compared to four point one million for first fourth quarter of 2021.
Speaker 6: The interest in noninterest income and first quarter compared to the first quarter.
Speaker 5: 2021 was primarily due to payments.
Speaker 5: totalally $1.5 million recognized for early termination of anales.
Speaker 5: Included another and nonest income. Also a gain of one point two million for sales of assets underlying a portion of the company's equity investments.
Speaker 5: Partially offset by a loss of one point two million included in net gain, own assets for disposals of business buildings and write-offs.
Speaker 5: Concerning lowan leasehold improvements for well land lease that was terminated earlier.
Speaker 5: Noninterest income for first quarter increased $1.4 million of 6%.
Speaker 5: To $24.7 million compared to first quarter of 2021.
Speaker 5: Noninterest income for first quarter 2022 decreased 10.2 million from the fourth quarter.
Speaker 5: 2021 primarily due to.
Speaker 5: Regulatory fees, which decreased $7.8 million due to pentalle'es totaling eight million in the settlement of the BSA AML compliance matters paid in the fourth quarter of 2021.
Speaker 5: Other expenses decreased $864 thousand to two point six million, primarily due to the decrease.
Speaker 5: Of 515, 13 thousand in expenses associated with the pendvoing merger with late police bike bank shares.
Speaker 5: Income tax expense was two point three million for the first quarter and the effective tax rate was 18% compared to 20% for this quarter 2021.
Speaker 5: The last assets as of March thirty-first 2022, increased four hundred and seventeen.
Speaker 6: Million dollars, of 10% to four point four five billion, compared to.
Speaker 5: four point three villion four March 31 2021.
Speaker 5: And their decreased $4 million of 1% compared to the four or ninev total at December thirty-first 2021.
Speaker 5: Annual growth. In total assets included 258.9 million securities and 163.3 billion million in cash and cash equivalents.
Speaker 5: Loans, excluding for sale.
Speaker 6: Those held for sale decreased at eleven point billion or 0%, down to two point eight eight billion is compared to two point eight nine billion at March 31 2021.
Speaker 6: Primarily due to PP loan paydowns, excluding the PP loans.
Speaker 6: The loan portfolio increased $241 million, or B on 2%.
Speaker 6: To $2.86 billion over the 12 months.
Speaker 6: Total deposits at March 31 to 2: 22 increase to increased by 436.5 million.
Speaker 6: Or about 13% to three point eight two billion, compared to.
Speaker 6: three point three point 3: eight 3, eight billion at marks 31 2021, and a decreased 10.1 billion or point 3%.
Speaker 6: Compared to three will make three billion at December 2021.
Speaker 6: The cost of total deposits was 12 basis points for the first quarter.
Speaker 6: The capital maintains still strong capital's capital ratios as the total risk, but cris-based capital ratio over sixteen point ER 6%.
Speaker 6: The common equity Tier one capital ratio was 15 and the Tier one leverage ratio was 11%, all at March 31 2020 -two.
Speaker 6: Nonperforming assets total: 22.1 vw.
Speaker 6: Our zero point five 50 basis points own total assets at March thirty-first 2022 compared to.
Speaker 6: 23.6 million or pointer five 9%.
Speaker 6: In total assets at March thirty-firstth, twoy thousand and twenty-one.
Speaker 6: And compared to 22.6 million or pointer 5% of total assets at December 31 2021. it allowance for credit losses on loans as a percentage of.
Speaker 6: Loans was a 1%. nine at March 31 2021. one at March 31 2021.
Speaker 6: And finally one P nine at December 31 2021.
Speaker 6: Now I'll turn over the presentation to Joe Wes.
Speaker 7: Thank you, Ted. I'll speak a bit to our loan portfolio, beginning with Slide nine from the investor presentation.
Speaker 7: For the first quarter, our net loans were up at two point eight five billion versus two point eight four billion and, in of first quarter 2022, increase ofapproximately 12 millionwe funded approxately 178 milliona new loans during Q1 and had one hundred and twenty-five million and look. Loans pay off, excluding PPP payoffs.
Speaker 7: For this quarter CI, including the effect of PP payoffs, declined by approximately 33 million, or five 3% compared to Q4 and CI increased three million could excludde the PPP payoff. C was up tofifty-one million.
Speaker 7: 4% quarter over quarters, construction and develop was up 13 million, or 3%, compared to the fourth quarter of 21 and 1: four amily declined 14 million, or approximately 5%, and multifamily declined seven million.
Speaker 7: Slide 10 sets forth the components of our commercial loans. Our total commercial loans were up slightly from the first quarter to the two point five billion, versus two eben at the of the fourth quarter, including our PPP loans.
Speaker 7: Slide 11 also sets forth our oil and gas exposure, including how we quantify.
Speaker 7: Our direct andindirect exposure. Our direct exposure, our direct andindirect oil and gas lows for the third quarter decreased to 186 mmay compared to the end of the fourth quarter.
Speaker 7: Fourth quarter of 21 fly twellls set. Fourth, information about our PPP loans are continue to wind down. During the first quarter, our net PPP loans decreased to 18 million and we received 36 million related to forgiveness or payments for customers.
Speaker 7: The table of the bottom of Slide 12 sets fourth, our average yield of our loan portfolio, our average ield of ourppp loans and the average yield of our loan portfolio when taking out the PP loans.
Speaker 7: Slide 13 sets forth information about our allowance for credit losses. As Ted noted, our allowance for credit losses to loans was 1% at March 31 2020 -two.
Speaker 7: Turning to Slide 14. our nonperforming assets remained low uring the first quarter and our credit quality remained strong.
Speaker 7: Slide 14 also shows information regarding our nonperforming assets to total assets.
Speaker 7: Which was zero- 0% as of March 31, unchanged when compared with the fourth quarter of 2021.
Speaker 7: As with the fourth quarter, our recoveries during the quarter exceed our charge-off, resulting in a net recovery of $77 thousand.
Speaker 7: With that, I'll turn it back over to B rightcker.
Speaker 4: Thank you. Y with that operator will open up for question understood at this time. I would like to remind everyone, in order to ask a question.
Speaker 2: Breast Star and the number one on your telephone. keepyad again that Star one on your telephone. keepyad plss, for just a moment to compile the Q? ity rster.
Speaker 1: Your first question comes from the line of will Jones, from KBW, your line silkenhe. Great good morning guys, more well.
Speaker 8: So just wanted to start. You know an update with the merger you I notice you got, or I saw you guys set D the shareholder vote. Just curious where you guys stand regarding approval from the regulators. You know, are you getting any push back there? You still feel like you're on track to that late, later second quarter close and then could you just remind us who all you're required to get approval from?
Speaker 4: Well the approvals are the state the fbi see and then the Fed and as in everybody's case. I think we're all waiting on the pet but.
Speaker 7: We have no indication that we won't meet. Our expectation was that we would close this transaction somewhere around June thirtieth and I think we have no indication that.
Speaker 7: We shouldn't be meeting that target at this point.
Speaker 8: Got you, but then just from the state and fyes, those are still outstanding as well.
Speaker 4: They are, but I think typically you'll see them wait until a pet comes out to do that, but sometimes they get in front, but typically it's they.
Speaker 9: They left of the adly Jo catch a H I mean.
Speaker 8: Helpful there and in atturning on the loan growth. You know you guys really, really maintain some nice momentum all to that unprecedented fourth quarter, but more back to that, you know.
Speaker 8: Mid- upper single-digit range that you've alluded to and is it does still feel like a good proxy for what you expect the rest of the year.
Speaker 7: I think it is well. I think we're looking at sort of a little bit more normalized as it.
Speaker 7: There's a lot of interesting pressures out there in the market, but there's still a lot of good loans. Our markets are strong. I think there's some good opportunities for us to continue the momentum that we have.
Speaker 7: But I think we're being a little more cautious around what's happening. We're not sure exactly where interest rates are going to go. There's all kind of.
Speaker 4: Sort of projections out there, but we know directionly they're going up, I think. From an earnings standpoint that should be good for us.
Speaker 4: With our asset-sensitive balance sheet and but I think Re we're going to be cautious around the lending side and the risks that we take. But there's the market in Dallas Houston, Beaumont.
Speaker 4: As all are they're all pretty strong and still seeing job growth population growth. We're seeing people eager to move to Texas and I think we'll be able to capitalize us on that as we go forward. But I think some of the cautionary signs around.
Speaker 4: Simply rising interest rates and also supply chain issues that continue, I think, to get a little tougher, for folks are out there and we just have to make sure we're aware of that, as we're making no decision.
Speaker 10: Okay great appreciate the commentary there, and I noticed that it excluding PPP, your loan yields were up a smidge linked quarter. Just curious. What was that? A function of some better pricing you're seeing on these new loans?
Speaker 7: No. I don't think right now and this this happens every time you've got. The interest rates start to move one way or the other. So same thing happens when they move down or.
Speaker 4: There's all kinds of pricing disintermediation. Some people are still pricing at old rates. Some people are starting to get more aggressive about it so the market right now is not stable in that regard So.
Speaker 4: As nonmarket centers. We're still sort of.
Speaker 4: Out there with the market on pricing and the pricing hasn't moved significantly upward, at least on the first bed moves, although I think I think we'll start to see that as time goes on. We're certainly being more sensitive around trying to get variable rate pricing and most of the deals that we're doing, even if we have to set floors and ceiling zones, So we're mindful of rising interest rates as we put new deals.
Speaker 10: Okay again pretay, helpful there and if I could just sspeak one last one to here: know we haven't kedabout the buyback a lot AST few quarters, but just just wanted to get your thoughts there. I'm not sure what you guys have authorized today, or buyback, even makes sense for you guys right now with the pending deal, but but you know the stocks pull back along with you know the broader bank group and it's kind of more in line before you've historically bought back. Just wanted to get your thoughts there.
Speaker 4: Yes it's given where we are in our regulatory approvals and all of the the things, along with our combination with the legions, it's difficult for us to really be active right now, but we certainly see that, as we come out of this, as a tool that we will certainly use when it's available to us. It's something that we feel strongly about. We don't think the market's pricing our stock where we'd like to see it, and so when we're given the green light to do it, I think you'll see us be active in that part of the market.
Speaker 8: Understood Thank CA. Thank youyour next question comes from the line of Brad meltsaps. From pipersandler, your line is open.
Speaker 11: Good morningy, Bob. Just wanted to talk a little bit more about loan repricing. Can you remind us kind of your mix in terms of variable and fixed rate loans and kind of what would you expect a reprice with each move from the Fed, maybe inclusive kind of any floors that you have to maybe eat through on the way up?
Speaker 4: Yes Brad, we're basically 50: 50 variable to fixed and we've got about a billion La just under a billion long. That's index to prime.
Speaker 12: And the other roughly 38 million of variable is using other indexes, whether as suofur LOB, bor or 11 K 11, eleventh district cost funds for mortgages.
Speaker 12: So we had roughly 38 million in prime loans fromme index loans. That adjusted with the March, the last move that was made, and we think that, as it hits 4% than four per 5% - I'm talking about prime here- that will be.
Speaker 12: Up to captured meeting and capturing our floors and probably over 80%, just over 80% and repriced on problem loans there. So we're really in far Re pricing on. I think are in a pretty good spot as rates move up on our prime index loans.
Speaker 13: That's very helpful. And then I know, Re in some degree a little bit of a holding pattern until you to put the two balanceies together but and you made some dent in the liquidity this quarter. But how should we think about that as the two companies come together?
Speaker 13: Should should that be more earmarked for accelerated loan growth, or do you think you'll be more aggressive in building out a larger bond portfolio now that rates are higher? Just kind of wanted to get your thoughts around liquidity. I know Allegiance is holding quite a bit as well. Just kind of curious how you're thinking about that.
Speaker 14: Yes I think, because we have discussions around putting the two banks together. We want to make sure we have liquidity to do the kind of things we want to do. But yes, I think to be more aggressive around deploying that in loans is certainly what we're after. We did do some additional deployment into the bond portfolio. I think we'll continue to look at that as rates are coming up.
Speaker 9: And try to to use some of that liquidity there. But we want to be mindful of our partners and make sure that we're doing the right thing So that we have, as we come together, we're not crossing each other.
Speaker 9: And whatever we're doing so a lot of discussions around that I think as we come together. We'll still probably have some significant liquidity. But I think we're going to have.
Speaker 9: An idea of what we want to do with that and, but primarily, what we do is make LO, So that's that's where we want to put most of.
Speaker 11: Got it and involved. Just just final kind of bigger picture question for me: when you announced the mergeri think you were targeting kind of 265 and EPS in 2- 23 with a steeper curve and a higher Fed fund rate. At the time I think people sort ofpush back on that and you turned out to be right. The curve, the expectations for higher rates have probably gotten even higher since then but we also have more maybe in FL ary pressure kind of how do you think about that 265 number as you said there today, terms of kind of how things have changed since November and just kind of curious out maybe any of your assumptions might have gotten better or even in some cases maybe worse. Just just kind of curious how you thinking about that hundred and 65 number.
Speaker 14: Yes I mean, projections are cough sometimes. I think, from from our standpoint, we feel feel pretty good about what we think we can do, andi.
Speaker 7: There's a lot of pressures moving against us and a lot of pressures that are sort of back, that are sort of tailwinds, So it's hard to gauge that exactly right now. I feel uncomfortable in that.
Speaker 9: I'm not sure whether we're going to push supply up to meet demand or whetherthey're going to move demand down to meet supply and I think those questions are still out there right now on a lot of that will will kind of show and what our ability to deploy. Some of this liquidity is but.
Speaker 9: And then the question mark around: are we going to be in recession in 23? The lers out there for me So. So I don't know. I mean, I think we still feel good about the projections that we put out thereso I don't think I would come off of that.
Speaker 15: Great Thank you guys. Appreciate you taking my questionsthank.
Speaker 2: Your next question comes from the line of mth, only from stphenzinkc. Your line is open.
Speaker 16: He thanks. Good morning everybodyorameric Bo, as you mentioned earlier, the combined company is going to have lots of liquidity in. Based off your commentary, it sounds like the the big priority is going to be prettiness into loans over time and C B X has had that come a longstanding longan growth goal of that- five 8%.
Speaker 7: But I guess across the Street allesions they have been going loans for a while in that mid upperoutteens And since then it's kind of slow down. But I guess I'm curious, as you put these companies together, if you think you're still going to maintain that mid to high single digit long growth over time and not looking for any kind of near-term guidance on 23. I'm thinking about a longer term speed limit for the combined company with respect to longan growth.
Speaker 4: Yeah I think that's A. it's a good question. I think really, as you combine the companies together, both trajectory trajecries will kind of emmerge into each other. But a lot of this depends. I mean, we sort of feel like we average that five day percent over time. So we've we've been, we've had times where economy was so good that we were' able to do better than that, and I'm not sure where we are exactly in the cycle. That's why there's So there'ares, so many pressures, what in different direions. Right now it's harder to for me to make those trajections, but I think we're, I think Allegiance appears to be on their track. I think we're on our track. I actually feel like we may do a little better than that over the over the coming year. If the market holds away- it looks like it is right now. So I actually think we might be at the upper end of our range.
Speaker 9: But it just depends on what the economy does for us. I I think allegius appears to be in the same same kind of mode. They had a good quarter themselves and then I think, as they do their call, they they'll explain where they are, but I we feel good about where both banks are.
Speaker 9: The folks said that the bank and the lenders all appear to be excited about our deal. I think both banks bring things to the table that maybe the other bank didn't have, and I think it's. It's a great combination and people are excited about it. We've seen our guys go to work and and keep their heads down, even in light of all the stuff that they have to do to try to make this combination successful. So I feel good about that. The momentum is is good on both sides, and so we'll see where that takes us through the year.
Speaker 7: ok that's helpful, Bo. Thank you for the Co of theirand I guess. Going back to interest rate sensitivity, you guys gave us some good disclosusure just a few minutes ago on the loan side. I'm curious on the deposit side: have you adjusted any kind of deposit rates since that mid-March Fed meeting and I guess with expectations of 50 bit move from the Fed next week? I'm curious just about the near term expectations of kind of managed deposit cost on the first part of the rightate cyclethanks. Well if feel good about it, I mean we're.
Speaker 6: We have 40%, 47% of our our deposits and demand deposits. We do think pressure on interest rates is going to be up. We haven't seen in the marketplace a huge move. We have not moved our rates much.
Speaker 17: Other than maybe some few specific things, but for the most part we have not moved our rates yet.
Speaker 6: But I do think there will be pressure to move those rates as we move through the next couple of quarters have the rate states, if that stays true, to a 50 basis point move.
Speaker 6: Or maybe a couple of. But we know directionally? Pressure is to the upside. I don't think it's going to be to any great degree.
Speaker 6: Typically what we're watching we don't play in a CD market that much. So most of ours is around money market and we tend to really watch not only the locals but.
Speaker 6: That are playing in our market, but also where brokerage first go, because typically our customers, their alternative is it's typically not to another bank but it's to what am I getting in my brokerage account? And so we also are sensitive that to watch to see what they're doing, and we just haven't seen much movement there.
Speaker 7: okvery helpful. And I just lastly, on the energy front- I don't know if this is for bobred or Joe, butwe've seen a bit of volatility and some of your disclosures around energy loan balances and specifically on the energy services line- think it was up in the fourth quarter, now down quite a bit in one que anything worth caught out. There is this normal seasonality of some customers are. Are you losing customers, adding customers? Just anything worth going out there.
Speaker 6: That was sort of a combination of a, the new loan that was booked in Q4 to service company, and then we had 1, two customers. 1- they sold their, their property was a real estate loan in the service business. They sold their property and paid us off in. The another one in Q1 was a, an inventory dependent loan that refinanced out to another lender. We were, and we weren we big Frank about it work there, we dispointed to see it go. So So we're 're at one hundred eighty five. That's kind of where we've been hanging around for last few quarters. If you go back, we were like at one hundred and seventy high, one hundred seven.ty', S. And so we TH it's a pretty straight line which just we had that bumping in Q4 that then it came back down in Q4.
Speaker 16: We're not a significant oil and gas lender map, but we definitely we'll take our opportunities when we see it. We're really sponsor-driven. When we have strong sponsors behind something, that's when we tend to react and it's a newoil and gas business.
Speaker 16: It's a new onand gas business, So I think you can have strong sponsors no matter what industry you're in, and we like people to do it well and that's kind of where we move our money. butwe're don't shy away necessarily from the oil and gas business for any specific reason. It can be volatile and we understand that, but we have strong sponsors in that area and we tend to want to win there.
Speaker 1: Thanks scotthank you.
Speaker 2: Again if you would like to ask a question, you may press star one on your telephone. keabadthere are no more questions at this time. Turning the call back over to Mister Bob Franklin.
Speaker 4: Thank you appreciate the ability to give first quarter earnings and thank you for your interest and being on our call.
Speaker 2: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Speaker 1: Of O.