Stellar Bancorp, Inc. (STEL) Q4 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Community Bank of Texas, Fourth Quarter 2021 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, [Operator Instructions]. Please be advised that today's conference may be recorded. If you require any further assistance, [Operator Instructions]. I would now like to hand the conference over to your host today Justin Long, General Counsel. Please go ahead.

Thank you. Good morning. I'm Justin Long, the General Counsel of CBTX, and our management team would like to welcome you to the CBTX, Inc. Earnings call for the fourth quarter of 2021. We appreciate you joining us. We issued our earnings press release yesterday afternoon, a copy which is available on our website along with the slide presentation that we will refer to during this presentation. 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, or 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 at ir.cbtxinc.com. Any forward-looking statements are made only as of the date of this call, and we assume no obligation to update any such statements. You should also be aware that during this call we will reference certain non-GAAP financial information. The 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 Robert R. Franklin, Jr., our Chairman, President and CEO, Ted Pigott, our Chief Financial Officer, Joe West, our Chief Credit Officer, and Joseph McMullen, our Controller. 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, Rob Franklin.

Thank you, Justin. Welcome to the earnings call for CBTX, Inc. for the fourth quarter of 2021. We are pleased to present our fourth quarter results of an eventful 2021. The first half of the year was marked by caution. But as we move to the second half of the year, we saw increasing optimism as the country appeared to be better able to deal with the impact of the pandemic, which allowed us to better assess the continuing effects on our team and our customers. As the year progressed, the economic environment transition from a heavily COVID impacted economy to a more stable and recovering economy. Our Texas economy provided opportunities and showed its resilience even in the -- with the emergence of the Omicron variant during the fourth quarter. Over the second half of the year the economic environment transitioned showing signs of recovery. Given the opportunity to have more face-to-face interaction with our customers and our prospects, our team began to build back our pipeline and show loan growth. The calling efforts of the third quarter produced good loans that were booked into the fourth quarter, and solid relationship-driven deposits. This team efforts provides us good momentum as we move into 2022. During the fourth quarter, we were proud to announce, that we had found an excellent partner in Allegiance Bank. And that we would combine and merger of equals transaction, slated to close in the first half of 2022. We have filed the regulatory applications, and our teams are working together identifying ways to build a better bank together. As we work together towards closing, we continue to be very excited about the opportunities that our combined organization will have in the future. Additionally, we settled and ended the investigation by the financial institutional FinCEN and the order that we had with the OCC during the fourth quarter. We are pleased to have concluded this chapter and we believe the BSA program stands ready to be a leader for our merger partner, and ready for our increase in size and scale. Our fourth-quarter financial results reflect several one-time charges, reflecting the settlements with the regulatory agencies and the costs and some of the costs associated with the actions we have taken in connection with the pending merger. Ted will speak more specifically to our financial results. Overall, we are excited about 2022 and the opportunities they will provide. We have liquidity, we have capital, we have an asset sensitive balance sheet that will -- surely allow us to succeed in our Texas markets, which continue to do well. Now I'll turn this over to Ted Pigott, our Chief Financial Officer.

Thank you, Bob. Certain financial information for the fourth quarter and prior periods begins on Slide 5 of the investor presentation. For the fourth quarter of 2021, the Company reported a net loss of $545,000 or $0.02 per diluted share. Its earnings were impacted by the costs of the settlement with the regulatory agencies and the costs associated with the pending merger. Net income for the year ended December 31, 2021 was $35.6 million or $1.45 per diluted share compared to $26 million or 1. -- 1 -- 1, excuse me, $1.06 per diluted share for the year ended December 31, 2020. Now we'll move to the fourth quarter results. Net income -- net interest income for the fourth quarter of 2021 decreased to $30.8 million from the third quarter 2021. And then interest margin on tax -- tax equivalent basis decreased 15 basis points to 3.7% from third quarter 2021. The loan yield decreased 13 basis points to 4.39% from the third quarter. The cost of interest-bearing liability scaled to 24 basis points for the fourth quarter 2021. The provision for credit losses was a recapture of 1.2 million for fourth quarter 2021, primarily due to qualitative factor adjustments, associated with continued improvements in the local economy. Non-interest income for fourth quarter decreased to $4.1 million from third quarter, primarily due to a decrease in earnings on bank-owned life insurance due to related gains of $1.9 million realized in the third quarter. Net gains on sales of assets increased $550,000.00. Non-interest expense for the fourth quarter increased $10.5 million from third quarter primarily to regulatory fees increasing $7.9 million, primarily due to an imposition of civil money penalties totaling $8 million in settlement of BSA AML, compliance matters. Other expenses increased $2 million to $3.3 million, primarily due to $1.3 million in expenses associated with the pending merger with alliance -- Allegiance Bancshares, Inc. Salaries and employee benefits increased $1.6 million primarily due to an increase of $894,000 in officer bonuses and $545,000 in officer salaries. Income expense was $1.8 million for the fourth quarter and the effective tax rate was a 142% for fourth quarter, because the payments made in conjunction with the resolution of the BSA / ACL compliance matters are not tax deductible. The recent balance sheet, total assets at December 31, 2021 increased $276.9 million compared to September 30th, 2021. It was driven by growth in loans of $259 million, and growth in securities of $65.5 million. Loans, excluding loans held for sale at December 31, 2020 increased $301 million -- $307.1 million, from the third quarter compared to September 21. Loans which exclude PPP loans, increased 12.2% in the fourth quarter. Deposits at December 31, '21 increased $299.6 million compared to September 30th, 2021. Compared to December 31, 2020 deposits were up 16%. The total cost of top deposits was 13 basis points for the fourth quarter. The company maintains strong capital ratios as the total risk capital ratio was 16.42, the CET capital ratio was 15.31, and the Tier 1 leverage ratio was 11.22% at December 31, 2021. Non-performing assets totaled 50 basis points on total assets at December 31, 2021. The allowance for credit losses for loans was $31.3 million or 1.09% of total loans at December 31, 2021. The ACL decreased during the fourth quarter primarily due to the recapture of a $901,000 in the ACL for loans and recapture of $306,000.00 for unfunded commitments due to the qualitative factor adjustments associated with continued improvements in the local economy. Net recoveries were $38,000 for fourth quarter, compared to $82,000 for the third quarter. Now, I'll turn it over to Joe West.

Thanks, Ted. I'd like to speak a bit to our loan portfolio beginning on Slide 9 from the investor presentation. For the fourth quarter, our loans excluding loans held for sale were up at 2.84 billion versus 2.58 billion, at the end of the third quarter of 2021, an increase of approximately 260 million. Our loan growth was due in part to our organic growth, and much of the growth came in the second half of the fourth quarter, with our booking of a $141 million of loans in December of 2021. We also purchased approximately 81.4 million of one to four family mortgage loan in the fourth quarter. Our loan deferrals related to COVID stayed relatively constant as we had seven loans with a principal totaling $18.5 million on deferral at the end of the fourth quarter. For the quarter, C&I including the effect of PPP payoffs, was up by approximately $38.1 million or 6.1, excuse me, 6.4% compared to Q3. And C&I increased $87.6 million net of PPP payoffs. CRE was up $62.8 million, 6.1 percent quarter-over-quarter. Construction and development was up $67.2 million or 17% compared to the third quarter. One-to-four family was up $73.1 million or 35.8%. And multi-family was up $500,000. Slide 10 sets forth the components of our commercial loans and our total commercial loans were up in the fourth quarter to $2.47 billion versus $2.31 billion at the end of the third 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 loans for the third quarter increased to $204.9 million compared with the end of the third quarter. Slide, 12 sets forth information about our PPP loans. During the third quarter, our net PPP loans decreased to $52.8 million and we received $49.5 million related to forgiveness or payments from customers. The table at the bottom of Side 9 sets forth our average yield on our portfolio. Our average yield on our PPP loans, and the average yield on our loan portfolio will taking out the PPP loans. Slide 13 sets forth information about our allowance for credit losses. As Ted noted, our allowance for credit losses to loans was 1.09% at December 31, 2021. Turning to Slide 14. Our non-performing assets remained low during the fourth quarter, and our credit quality remained strong. Slide 14 also shows information regarding our non-performing assets for our total assets, which was 0.50% as of December 31, 2021 compared to 0.49% as of September 30, 2021. As with the second quarter, our recoveries during the quarter exceeded our charge-offs, resulting in a net recovery of $48,000. With that, I'll turn it back over to Bob Franklin.

Thanks, Joe. With that we're ready to open it up for questions.

Thank you. If you have a question at this time, [Operator Instructions]. Our first question comes from the line of Charles West, with Piper Sandler. Your line is open. Please go ahead.

Good morning, everyone.

Morning.

I just want to start on the loan growth. It is great to see the positive momentum there. You speak more on what drove that line utilization or something else. And then how is the production compared to recent quarters?

What was the last part of that?

And then how is the production compared to recent quarters?

Well, certainly it was better than what we had seen for the first three quarters of the year. But it was across the board on various things that really wasn't attributed to line usage. It was more new production. We saw some good CRE opportunities and we've taken advantage of and some good C&I opportunities. So kind of across the board, really.

Yes, I would say that we were looking at new loans in our committees and in our -- and discussing them with our lenders. Really starting in the second half of the year, it was -- getting the deals approved and closed was slower than we would have liked. So we knew we would feel -- Q3 was pretty flat, but we saw a lot of activity in the fourth quarter, especially accelerated towards the end of the year. And as Bob, said it was -- there's across-the-board we saw the majority of it was in commercial real estate, but we also saw some good C&I growth as well.

We saw our approved pipeline building through the third quarter and we could see where, as these things got closed, that the fourth quarter was going to be good and I think we feel good about where we're heading into the first quarter because we've got a good pipeline behind us and it's continuing to build. So we feel good about where loan growth is.

Okay, great. That makes sense. And then a follow-up to that on the loan purchases. Both the yield on this compared to non-purchase, and is this something you plan to do more in the future?

The weighted average yield that's also the purchase is 2.78, but now as -- it's -- we will look at these things in the future. I don't know if we'll do a whole lot of it, it just kind of depends. We kind of -- it was offset a little bit as the PPP runoff, but we had the opportunity to buy a package at a decent yield and we went ahead and get there. I don't think it's something that we normally got to do.

Okay, great. That's all for me. Thank you.

Thank you.

Thank you. [Operator Instructions] And our next question comes from the line of Thomas Wendler with Stephens Inc. Your line is open. Please go ahead.

Hey. Good morning, everyone.

Morning.

Just looking at expenses, we saw that tick up in salaries. Can you guys give us a little bit of an outlay between the increase in salaries and the bonuses? Can you give us an idea of a good run rate for expenses for 2022?

Yes, I think if you use somewhere around $25 million, it's going to be probably something that would work. It's going to be a little bumpy as we get towards our -- the combination with Allegiance, I think we're -- this business associated with that would be all around that number, but from a run rate standpoint, on a normalized basis, given where we are today, that's about kind of works.

That's great. Thank you. And then with the MOE with ABTX, that's set to close in the second quarter. Can you give us any updates on the MOE and the conversion timeline?

Well, I don't think it's in our -- I don't think we get to decide. So as soon as we get regulatory approval, we'll move too close and we've done what we can do as far as filing our documents. In the meantime, we're having great meetings with our partner, having good integration sessions, and finding the right way to run this bank in the future as a combined organization. So we feel really good about what's going on in that regard. But from a timing standpoint it's taken out of our rail, and we have to rely on the regulators on when they get this thing approved.

Sounds right. And then one final one for me. Can you give us any color around the percent of the loan portfolio that's variable? And then how many of those variable rate loans are currently on their floor?

Yeah, we've got only the variable rate size it's a -- we've got -- hold on, I'm looking at the similarity. We have about 50% really, about a billion 440 is variable. And we think as the good bid as sitting at the floor. We think we will have something around 500 and -- excuse me, $750 million that includes prime adjustable loans as well as any lab work pricing or software pricing we have that can move with the fast rate move. I mean, the lab work has already started to move up a little bit, but it's spinning away. On the same we decided to do is first rate high. We had about 570 that we could move in the prime portfolio.

Alright, that's great guys. Thanks for answering my questions.

Thank you very much.

Thank you. And I'm showing no further questions and I would like to turn the conference back over to Bob Franklin for any further remarks.

Well, thank you very much. I think we're very excited about 2022. I think Texas economy is good and we see good opportunities out there. Our guys are doing a great job of building pipeline and we're very excited about the prospects that we have with our new merger partner, Allegiance Bank. With that, thank you for your attention today and we appreciate you attending the call.

That concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.