Q2 2022 CBTX Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Ladies and gentlemen, thank you for standing by and welcome to the C. P. P X Q2, 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer saying well that's the.
A question during the special need to press Star one on your telephone.
I would now like to turn the call over to your host Justin Long General Counsel you may begin.
Thank you good morning, I'm, Justin long of General Counsel, CTX, and our management team I'd like to welcome you to our earnings call for the second quarter of 2022. 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 that we will refer to during this.
Presentation.
Before we begin I would like to remind you that during this presentation. We may make forward looking statements regarding future events or financial performance of our business prospects.
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, our quarterly reports on Form 10-Q, and our other filings with the SEC, which can all be accessed on our Investor Relations website.
IR Dot CVT X I N C dot com and.
Any forward looking statements are made only as of the date of this call and we assume no obligation to update any such statements.
We should also be aware that during this call we will reference certain non-GAAP financial information a reconciliation of these financial measures to the most directly comparable GAAP financial measures is included in our earnings release and Investor presentation.
I'm joined this morning by Bob Franklin, Our Chairman President and CEO .
Target, our Chief Financial Officer, 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.
Thank you Jonathan and welcome to the earnings call for <unk>.
We are pleased to present, our second quarter results for 2022.
During the second quarter, we have continued to see a fairly strong economy.
And consequently, a nice growth in our loan portfolio.
We are also seeing some of the benefits of our low price deposit base.
<unk>.
<unk> provides us even while beginning to experience.
Pressure to the upside on pricing.
During the quarter, we did see some net interest margin expansion and we expect that trend to continue as the federal reserve pursues higher interest rates.
We are very proud of our team that continues to produce while we work hard towards our merger with allegiance bank.
Mergers can be distracting, but our team has continued to serve our customers. While also doing the hard work. It takes to make sure that we have a successful merger.
During the second quarter shareholders of allegiance and CBT acts approve the agreement.
For the merger and we received approval of both the FDIC and the Texas Department of banking.
While we wait patiently for the approval of the Federal Reserve, we continue to work diligently with our counterparts at allegiance to provide for a smooth transition for our customers employees shareholders and communities, which we serve.
Despite these positives we must remain vigilant for the changes to the economy.
The fed has told us that it intends to slow the economy through a series of interest rate hikes to try and get a handle on inflation.
We know that higher interest rates can lead the strains on the economy and certain asset repricing.
However, we must continue to adjust our underwriting to accommodate a slowing economy.
We do benefit from operating in the state of Texas, where we continue to see both job and population growth, but we are not immune to what is happening in the rest of the nation in the world.
We can we think that our timing of bringing two well positioned Texas banks together is a good one we continue to work could be more efficient as one organization.
A strong low cost deposit base, and a granular well priced loan portfolio.
Although we are cautious about the next several months as the economy adjusts to inflation and higher interest rates. We are very optimistic on the long term future of our bank.
Now I'll turn the meeting over to Ted <unk>, our Chief Financial Officer.
Thank you Bob.
Certain financial information for the quarter ended June 30.
Two two in prior periods again on slide six of our Investor presentation.
The company has reported net income of $11 7 million.
Our 48 cents per diluted share for our second quarter 2022.
<unk> to net income of $10 6 million or <unk>.
43.
<unk> per diluted share for first quarter 2022.
And.
Net income of $11 7 million at one.
<unk> 48 per diluted share for second quarter 2021.
Net interest income for second quarter of 22, 2022 was $34 9 million.
And it and increased $2 2 million.
With $1 3 million attributable to rate variance.
Primarily related to interest bearing deposits.
In other financial institutions.
First quarter two.
22.
And that is net interest margin adjusted on a tax equivalent basis increased 27 basis points to 349%.
From first quarter of this year.
Yield on interest, earning assets was three 6% for second quarter compared to 341% for second quarter 2021.
The cost of interest bearing liabilities was.
25.
Pursuant for second quarter 2022.
And.
32% for second quarter of two <unk>.
'twenty one.
The provision for credit losses was 126000.
Our second quarter 2022, compared to a provision in the first quarter of this year.
$435000.
And a recapture of $5 1 million for second quarter, 2021, which primarily resulted from the improvements.
In the local economy during that period.
Noninterest income decreased $1 8 million for second quarter 2022, as compared to first quarter.
Noninterest income for second quarter was down compared to the first quarter this year.
It include payments totaling $1 5 million recognized in.
Connection with the early termination the land lease and included in other noninterest income.
And a gain of $1 2 million for sales of assets underlying of course with the country's equity investments, partially offset by $1 2 million loss.
Net gain on sale of asset for the disposal of the building and improvements.
The land is land lease that was terminated earlier.
Noninterest expense was $23 8 million for second quarter.
<unk> to $24 7 million for first quarter 2022.
And $25 2 million for the second quarter.
2021, the decrease in interest expense.
$894000 for second quarter.
Compared to the first quarter of 2022 was primarily due to.
$556000 decrease in salaries and employee benefits, probably due primarily due to higher insurance.
Insurance in the first quarter.
The decrease of three $305000 in data processing and software expense.
The decrease in noninterest income of $1 4 million for second quarter.
2020 to compare to.
Second quarter 2021 was primarily due to.
A $1 $3 million decrease in professional and directors' fees, primarily related to BSA AML compliance matters and legal fees, partially offset by $1 million COO.
Costs related.
To the pending merger with allegiance Bancshares.
Our efficiency ratio for the second quarter.
2022 was down to 61, 84%.
Yes.
Our asset or.
432 billion at June 32022.
The decrease of 123 million from March 31.
2022.
Securities increased $2 1 million from March 31.
<unk> 2022 increased 249 million compared to second quarter of 2021.
Loans, excluding loans held for sale were three 3 billion at June 30.
2022 and.
And an increase of 153.
Or.
Five 3% from March 31, 'twenty two.
And increased $303 four.
Or 11, 1% from June 30.
2021.
Yes.
Loans.
Excluding loans held for sale and PPP loans increased 473.
6 million or 18, 6%.
232.
Billion from June 'twenty to 'twenty 2021.
Average return on assets for the second quarter was one 8%.
Total deposits at June 30.
2022 decreased $64 6 million to $3 76 billion compared to March 31 2022.
The cost of total deposits was 12 basis points for the second quarter 2022.
The company maintains strong capital ratios is the total risk based capital ratio was 15 five 3%.
The CET one capital ratio was $14 four 9% in the tier one leverage ratio was 11 four 8% at June 30.
2022.
Nonperforming assets totaled $28 3 million or six.
65% of total assets at June 30.
2022.
Compared to $22 1 million or <unk>.
Clint.
5%.
Four.
Total assets at March 31.
The allowance for loan losses as a percentage of total loans was one 6% at June 32000.
2022.
It was one 9% at March 31 232.
136% at June 32.
2021.
Right.
I'll now turn it over to Joe <unk>.
Thank you Ted I will speak a bit to our loan portfolio beginning with slide nine from the Investor presentation.
For the second quarter, our net loans were up at 3 billion versus $2 9 billion at the end of the first quarter of <unk> 42, an increase of approximately $153 million, we funded approximately $178 million in new loans during Q2 and had $126 million in paydowns or payoffs, excluding PPP loans for.
The quarter C&I, including the effects of the PPP payoffs declined by approximately $19 5 million or three 3% compared to Q1, and C&I decreased $10 7 million, excluding PPP payoffs.
CRE was up $39 million or three 4% quarter over quarter.
<unk> was $87 6 million or 18, 5% compared to the first quarter, one to four family will stable quarter over quarter, and multifamily increased 21 5 million or seven 7%.
Slide 10 sets forth the components of our commercial loans and our total commercial loans were up slightly the second quarter.
226 billion versus $2 5 billion at the end of the first quarter, including our PPP loans.
Slide 11 also sets forth, our oil and gas exposure, including how we quantify.
Our direct and indirect exposure, our direct and indirect oil and gas wells for the second quarter decreased to $183 million compared to $186 million through the first quarter.
Slide 12 sets forth information about our PPP loans that continue to wind down during the second quarter, our net PPP loans decreased $8 9 million and we were we received $8 8 million is related to forgiveness for payments from customers.
The table at the bottom of slide 12 sets forth our average yield on our loan portfolio, our average yield on our PPP loans and the average yield on our portfolio when you take out the PPP loans.
Slide 13 sets forth information about our allowance for credit losses, as Ted noted our allowance for credit losses to levels was 1.06% at June 32022.
Turning to slide 14, our nonperforming assets remained low during the second quarter and our credit quality remains strong slide 14 Slide 14 also shows information regarding our nonperforming.
Assets to total assets, which was 0.65% as of June 32022, compared to 0.0 at March 31 2022.
As with the first quarter, our recoveries during the first quarter exceeded our charge offs, resulting in a net recovery of one.
166000.
With that I'll turn it back over to Bob Franklin.
Thank you Joe.
With that we'll open it up to questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your Touchtone telephone.
We'll pause for a moment, while we compile the Q&A roster.
Okay.
Our first question comes from Brady Gailey with <unk>. Your line is open.
Hey, Thanks, good morning, guys.
Good morning, Brian .
I just wanted to start with the lack of fed approval for the merger I mean, we're coming up on nine months since the transaction was announced and is there anything.
They're focused on or do you guys have any sense as far as what the holdup could be on the fed side.
Well I'll give you a little.
Theres not a lot of clarity I can give you a I don't have much Brad I will tell you that.
From a timing standpoint.
We announced in November and got really got fully papered and with the Fad in January .
If you start to take off from January .
I guess still within a relatively.
What their timeframe, it's been here for a while but.
But that doesn't I think as we as we've talked to other folks that have gone through this process.
That does not communicate with you much and.
We don't know of any reason why this deal wouldn't get approved.
Our two primary regulators have approved the deal.
Our shareholders have approved it there's nothing that we know that's holding this thing up.
So we don't have any specifics to give you I wish I could.
But.
We've been our understanding is that we are in line. We just don't know where we are in line.
And there are some 20% to 25 deals pending right now before Pat so.
It's very frustrating to us very frustrating to all of our employees and products will try to get this deal done because we're we're poised ready to hit the button.
But.
We are we are waiting on the patents.
Doug.
Do you guys on a standalone basis have excess capital even the pro forma.
Bank, we will have excess capital our buybacks a possibility as we wait for the fat or is that something that you think.
You just need a way to get this deal closed and then think about buybacks. After the fact.
Well, it's been very difficult for us.
On the buyback process with all the analysis around blackout.
We did.
By a little bit of stock back about 93 little over 93000 shares since last quarter.
So we have been in the market a bit.
And we would intend once we can clear all those sort of.
Have the ability to get back into the market I think.
Both banks are interested in probably during some some share repurchases, but I won't speak for them today, but.
But as far as we're concerned yes, I mean I think.
Especially if this continues to go on.
We do feel like that's a good place for us to go.
Okay, and then finally for me I know.
You guys have talked about kind of 5% to 8% growth rate.
Clearly a lot more than that this quarter.
What's the update on how youre thinking about.
Kind of core organic loan growth going forward.
I.
I still think over the long term if you average SaaS that's kind of.
Where were we would be on a consistent basis, but there are times. When we can we feel like there's opportunities for us because Texas economy is sure we've heard on other calls.
It still appears to be fairly strong, although we're starting to see some weakening we have to be prepared for that.
But we're taking opportunities we're tightening our underwriting a bet.
We're able to get a lot more in the way of sort.
Part of equity on the front end, we're making sure that we have people that have the liquidity and ability to service the debt.
If they have to hold it for a little longer than what they thought they might be able to hold it.
Might have to hold it so.
It's still a good economy for us I think.
Yes.
I think you will see loan growth start to wane, a bit just because thats seems to be what.
And everybody wants wants to happen but.
We're going to continue to take our opportunities, where we where we can.
So.
I don't I don't think we're going to do necessarily this type of loan growth for the next several quarters, but.
How do you think it will come off a bit.
Okay, great. Thanks for the color Bob.
Thank you.
One moment for our next question.
Our next question comes from Brad Milsap with Piper Sandler Your line is open.
Hey, good morning, guys.
Good morning, Brad.
Maybe Bob I wanted to see.
Start with maybe the net interest margin I think in the deck you disclosed about half the loans are variable rate, but about three quarters have floors I.
I Wonder if after this week are we pretty much through the floors, just wanted to kind of get a sense of how.
How you guys are thinking about.
Further margin expansion from here you know pre Covid you were.
You were much higher in the balance sheet, a little bit different but.
What would you view as kind of your opportunity to improve that improve the NIM from here.
Yes, we think this is Joe we think worked through these floors. The first couple of moves there was that a march 17th quarter quarter point up and the.
May 5th.
Passport Mark those pretty much caught up to the floors and this last June .
June bump was.
In the second half of the month, so we really didn't.
We get the benefit of that too much in Q2 so.
We think we're growing.
The benefit of this last move this lag.
Two moves.
Pretty well in the portfolio. So yeah, we've caught up to the floor for.
For the most part.
We should that should have helped us expand the margin will do.
Okay, great. Thank you and then maybe switching gears to expenses.
You guys are kind of excluding some of the noise kind of flat year over year.
It looked like head Count's down about 40 people.
Just kind of curious I know you outlined 15%.
Expense saves when you announced the deal.
There are some of those savings maybe already in the run rate just kind of curious how to think about kind of the expense save opportunity have you identified more any any change in regard to that.
Well.
I think I think the answer to your questions yes.
Around all of those things.
The thing for US is as we are moving towards getting these two banks put together.
And.
As you think about people in.
As we identified certain folks that will go forward certain ones are ones that are going to stay for a certain dates.
So this is all taking place right now so.
Some of this stuff is.
<unk> worth.
With what we're doing in the combination.
I think thats a good thing.
To some extent it does put pressure on some of our folks to because it makes us ride a little light in certain areas, but.
For the most part.
We are ready to go and I think.
If we can if we can get.
Approval from the Federal Reserve I think Paul will be off and running.
Both banks have been planning for quite a while.
Around that.
We have a pretty good game plan on what we're going to do when we get to the other side. So.
We're just.
We've got one more hurdle to get over and we're not sure where they place the hurdle.
Okay. Thanks, Bob and maybe just final one for me do you think you guys will provide sort of an update on.
Maybe at closing kind of where youre thinking about the marks.
What has changed since November .
Elevated rates.
But just kind of curious if you guys had any plans to speak maybe to kind of level set expectations. There in terms of kind of how we should think about the two companies coming together given given all the things that have happened.
Yes, I think there'll be some opportunities to do that I don't think we're really.
Prepare to do that today, but.
I think we can.
We'll be looking at kind of.
As we get closer and tried to understand when the timing of those shows.
Give people a better understanding of what that might look like so.
I would say stay tuned on that front.
Got it if it's still still feel comfortable with sort of I mean, given what's happened sort of the net numbers that you guys put out there.
Back in November in terms of kind of what you thought the companies could earn it would seem to me that that would have only improves.
Given given kind of where rates have moved.
Yes.
Yes.
<unk>.
I would worry to build but about generalizations, but for the most part I can't imagine that we're not better.
On pretty much all of the things that we have.
And we had out there from a projection standpoint they.
Our production has been better.
Pricing has been better I think for thanks.
What affect the go forward operating piece of this is better than what we projected but.
I'm sure if somebody looked real hard de pops up and that wasn't I hate to generalize like that but for the most part outside.
We look like we've improved.
Over what we had projected.
Great. Thanks, Bob.
Thank you.
And one moment for our next call.
Our next question comes from Matt only only with Stephens. Your line is open.
Hey, good morning, everybody.
Going back to Brad's question around cost savings and the timeline.
I'm curious since you're still waiting on final deal approvals did you have to push back the original systems conversion date or is that still in the future.
We could still hit this if we get an approval soon.
Well, it's a good question Matt.
We're getting really close we've got a couple of days identify.
So we don't.
<unk> got a little bit on the first one I think.
Second one isn't far behind that.
So I.
I mean, it's.
We're still in this year.
If it goes to longer.
Too much longer I think we may have to push that conversion into next year, but.
I will say that.
It still appears that if we can get it.
Approval within the next few weeks that we still have a conversion date.
We can make.
In 2022.
Okay.
Great that Bob and then.
On the loan growth front.
It looks like a lot of the growth this quarter was driven by construction.
Which led to hear more about this and it looks like it was diversified based on your disclosures from commercial to multifamily the land.
Can you disclose that.
Construction balances are now over 100% guidelines well loved.
I appreciate it this is.
Short term in nature or anything else you can.
Disclose around the construction piece.
Well in a normalized operating environment.
Go back over the years Theres been sort of two larger components of.
The C&I book in one of those as is our normal C&I business, which is fairly diversified.
What it is.
And actually geography, too because where we're doing some things that.
And Dallas, we're doing some things in Austin, we're done.
<unk> parts of the state that are that are really having some some.
Pretty good economies.
The other is our low income housing piece in that depending on where we are project lies with those guys.
That drives that sandy piece up.
And we probably.
It depends on the volume that we do but.
It'll be 6% to 10 projects a year.
And those those tend to be.
Fairly good size in certain circumstances.
It's something that the regulator is really like to see us do for one.
And so when they look at our C&I book.
We're able to separate that out not ignore it.
Because it is a part of.
Construction development, but it has a different.
Credit.
Mix.
We've seen it as we've watched it go through cycles.
It's a very strong.
Piece of credit for Us and I think thats.
And something that the regulators like to see so.
When they look at us and you take that piece out of drops down.
To the mid 80 sites.
And the same thing if you look at CRE.
And where we are in CRE versus the 300 or so.
We get the benefits of that I think the regulators like it so it hasnt and we've been doing that for.
Basically sensibly.
Came together with community bank in 2013 so.
Yes.
If that helps.
Yes, thats great color, Bob I appreciate that.
That's helpful and then I guess shifting over towards deposit cost.
It seems like most banks that we've spoken with didn't really.
Move their deposit pricing higher until we got into that May and June timeframe and then we've moved a few times since then.
Would love to hear more about.
The banks deposit pricing and how it kind of.
Changed during <unk>, if at all and kind of any recent pricing adjustments.
The fed announcement this week.
We've moved a little bit in certain categories.
We've got some banks in our market.
Or a little more aggressive about pricing on the deposit side then.
And some others.
<unk>.
But we.
I think after this last move.
We can expect to move up pretty much across the board.
At least a little bit.
So we will get back a little bit of what we're getting on the other side.
Most of the market has stayed fairly disciplined around around pricing, but we are seeing some some folks that are a little more aggressive.
But we've been able to hold deposit costs down.
Up until this point and I think we will continue to lag behind.
The most important pieces to us is while maintaining that that's.
Strong demand deposit base that we have which we have.
<unk> seen that peace stayed very stable.
And then the second is money market accounts, because we feel like that's really the relationship driven piece of.
That's attached to our demand deposits in summer.
We're very sensitive.
Not just around other banks in town, but more around what schwab or fidelity or some of the other brokerage houses are doing them because most of our customers.
Our are here because of the relationship.
Typically or not.
They'll shop us a bit with other banks, but it's for the most part it's when they get those statements from Schwab R. R.
Whoever they might have their brokerage accounts with them and see that those guys are moving and we're not we really can't let that happen. So.
We're not we're going to be the highest priced.
Deposit in town, but we're going to stay competitive. So we will just we will move with the market.
And right now the market seems to be fairly well behaved.
Okay.
That's all from me thanks, guys congrats on the quarter. Thank you.
And I'm not showing any further questions at this time I'd like to turn the call back over to Bob for any closing remarks.
Well. Thank you very much thanks for everyone. That's participated in the call today.
And I do want to reiterate.
That.
We are very proud of our staff.
People are working very hard to continue to grow our bank.
Take care of our customers and they really do on two jobs and getting ready for.
Our merger that I think will really be beneficial to this organization in the future. So thank you for.
<unk> on our call today.
Ladies and gentlemen, this does conclude today's presentation you may.
Have a wonderful day.
The conference will begin shortly.
Raise your hand during Q&A you can dial one one.
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