Stellar Bancorp, Inc. (STEL) Q1 2022 Earnings Report, Transcript and Summary

Ladies and ,gentlemen thank you for standing by and welcome to the CBTX First Quarter 2022 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. [Operator Instructions] I would now like to hand the conference over to your speaker today Mr. Justin Long, General Counsel of Community Bank of Texas. Thank you. Please go ahead.

Thank you. Good morning. I'm Justin Long, General Counsel of CBTX and our management team would like to welcome you to the CBTX Inc. 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. 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. 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. 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 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 will open the call to questions. With that, I'll turn it over to our Chairman President and CEO, Bob Franklin.

Thank you Justin. Welcome to the earnings call for CBTX Inc. for the first quarter of 2022. We are pleased to present our first quarter results for 2022. The first quarter continued the positive momentum generated in the fourth quarter of 2021 as we left our regulatory overhang behind. 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. Our deposits remained strong in a quarter that has historically seen some runoff after year-end as we approach the tax season. Our local economy continues to gain strength and our pipeline is continuing to build. We are in a rising interest rate environment and with an asset-sensitive balance sheet, we believe this provides us with opportunity. However, a rising interest rate environment also signals the need to be cautious and maintain discipline. 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. But our markets are strong and look to be able to withstand the pressures of rising rates as well as other demands at the moment. COVID-19, geopolitical pressures, inflation and supply chain issues, we feel fully prepared to navigate these challenges as we look forward to our new partnership with the great folks at Allegiance Bank. We've been working closely with Allegiance Bank preparing to integrate our teams, while we press forward to gain approval from our regulators and shareholders. Our shareholders meeting to vote is set for May 24th and we have been encouraged by the shareholder feedback as we move towards our vote. We believe that this merger is one that will build shareholder value for years to come. 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. Now I'll turn the meeting over to Ted Pigott, our Chief Financial Officer.

Thank you Bob. Certain financial information for first quarter 2022 and prior periods begins on slide 6 of our investor presentation. The company reported net income of $10.6 million and diluted per share earnings of $0.43 for first quarter. For the fourth quarter 2021, the company reported net loss of $545,000 or $0.02 per diluted share as earnings were impacted by cost of settlement with regulatory agencies and costs associated with the pending merger. Net interest income for first quarter decreased $460,000 to $32.6 million from first quarter 2021 and increased $1.8 million or 5.9% from fourth quarter 2021. The interest margin on a tax equivalent basis increased 15 basis points to 3.22% from 3.07% for the fourth quarter. The yield on earning assets was 3.31% for the first quarter, compared to 3.85% for first quarter 2021. The cost of interest-bearing liabilities was 27 basis points for the first quarter and 34 basis points for first quarter 2021. Yields on earning assets decreased and cost of interest-bearing liabilities remained about the same level which continued compression of net interest margin on a tax equivalent basis to 3.22% for first quarter 2022. The provision for credit losses was $435,000 for first quarter compared to $412,000 for first quarter 2021. The provision for credit losses for the first quarter was comprised of a $415,000 provision for credit losses related to unfunded commitments and a $20,000 provision for credit losses for loans. Non-interest income for the first quarter was $5.3 million an increase of $2.2 million or 71.3% compared to $3.1 million for the first quarter 2021. And increased $1.2 million or 30% compared to $4.1 million for fourth quarter of 2021. The interest and non-interest income in first quarter compared to the first quarter 2021 was primarily due to payments totaling $1.5 million recognized for early termination of land lease, included another non-interest income also a gain of $1.2 million for sales of assets underlying a portion of the company's equity investments, partially offset by a loss of $1.2 million included in net gains on assets for disposals of business buildings and write-offs concerning a low leasehold improvements for land lease that was terminated earlier. Non-interest income for first quarter increased $1.4 million or 5.9% to $24.7 million compared to first quarter of 2021. Non-interest income for first quarter 2022 decreased $10.2 million from the fourth quarter 2021, primarily due to regulatory fees which decreased $7.8 million due to penalties totaling $8 million in the settlement of the BSA/AML compliance matters paid in the fourth quarter of 2021. Other expenses decreased $864,000 to $2.6 million primarily due to the decrease of $513,000 in expenses associated with the pending merger of Allegiance Bancshares. Income tax expense was $2.3 million for the first quarter and the effective tax rate was 17.69% compared to 19.8% for first quarter 2021. Total assets as of March 31st 2022 increased $417 million or 10.4% to $4.45 billion, compared to $4.03 billion for March 31 2021 and they decreased $40 million or 0.9% compared to the $4.49 billion total at December 31 2021. Annual growth in total assets included $258.9 million in securities and $163.3 million in cash and cash equivalents. Loans, excluding for sale -- those held for sale decreased $11.8 million or 0.4% down to $2.88 billion as compared to $2.89 billion at March 31 2021, primarily due to PPP loan paydowns. Excluding the PPP loans, the loan portfolio increased $241 million or down 0.2% to $2.86 billion over the 12 months. Total deposits in March 31 2022 increased to -- increased by $436.5 million or about 12.9% to $3.82 billion, compared to $3.38 billion at March 31 2021 and decreased $10.1 million or 0.3% compared to $3.83 billion at December 2021. The cost of total deposits was 12 basis points for the first quarter. The capital maintains still strong capital ratios as the total risk-based capital ratio was 16.06%. The common equity Tier 1 capital ratio was 14.97% and the Tier 1 leverage ratio was 11.08% all at March 31, 2022. Non-performing assets totaled $22.1 million or 0.5 -- 50 basis points on total assets at March 31, 2022, compared to $23.6 million or 0.59% in total assets at March 31, 2021, and compared to $22.6 million or 0.5% of total assets at December 31, 2021. The allowance for credit losses on loans as a percentage of loans was 1.09% at March 31, 2021, and 1.141% at March 31, 2021, and finally 1.09% at December 31, 2021. Now I'll turn over the presentation to Joe West.

Thank you, Ted. I'll speak a bit to our loan portfolio, beginning with slide nine from the investor presentation. For the first quarter, our net loans were up at $2.85 billion versus $2.84 billion and then, first quarter 2022 increase of approximately $12 million. We funded approximately $178 million in new loans during Q1 and had $125 million in loans payoff, excluding PPP payoffs. For this quarter, C&I including the effect of PPP payoffs declined by approximately $33 million or 5.3% compared to Q4 and C&I increased $3 million, excluding the PPP payoffs. CRE was up $51 million, 4.46% quarter-over-quarter. Construction and developable was up $13 million, or 2.7%, compared to the fourth quarter of 2021 and one to four family declined $14 million or approximately 5% and multifamily declined $7 million. Slide 10 sets forth the components of our commercial loans. Our total commercial loans were up slightly for the first quarter to $2.5 billion versus $2.47 billion at the end of the fourth 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 exposure -- our direct indirect oil and gas loans for the third quarter decreased to $186 million compared to the end of the fourth quarter of 2021. Slide 12 sets forth information about our PPP loans that continue to wind down. During the first quarter our net PPP loans decreased to $18 million and we received $36 million related to forgiveness for payments to customers. The table at the bottom of slide 12 sets forth our average yield of our loan portfolio, our average yield on our PPP loans and the average yield on our loan portfolio when 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 March 31, 2022. Turning to slide 14. Our nonperforming assets remained low during the first quarter and our credit quality remains strong. Slide 14 also shows information regarding our nonperforming assets to total assets, which was 0.50% as of March 31, unchanged when compared with the fourth quarter of 2021. As with fourth quarter, our recoveries during the quarter exceeded our charge-offs, resulting in a net recovery of $77,000. With that, I'll turn it back over to Bob Franklin.

Thank you, Joe. With that, operator we'll open up for questions.

Understood. [Operator Instructions] Your first question comes from the line of Will Jones from KBW. Your line is open.

Hey. Great. Good morning, guys.

Good morning, Will.

Hey. So just wanted to start an update with the merger. I noticed you got -- or I saw you guys set date for the shareholder vote. I’m just curious, where you guys stand regarding approval from the regulators. Are you getting any pushback there, or do you still feel like you're on track for that later second quarter close? And then, could you just remind us who all you're required to get approval from?

Well, the approvals are the state and the FDIC and then the Fed. And as in everybody's case, I think we're all waiting on the path. But we have no indication that we won't meet. Our expectation was that we would close this transaction somewhere around June 30. And I think we have no indication that we shouldn't be meeting that target at this point.

Got you. But then just from the state and FDIC, those are still outstanding as well?

They are. But I think, typically you'll see them wait until the Fed comes out to do that, but sometimes they get in front. But typically it's -- they let the Fed lead so --

Got you. That makes -- helpful there. And then, turning on the loan growth, you guys really maintained some nice momentum off of that unprecedented fourth quarter. But more back to that mid to upper single-digit range that you've alluded to, does still feel like a good proxy for what you expect the rest of the year?

I think it is Will. I think we're looking at sort of more -- a little bit more normalized. 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. 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 and there's all kinds of -- sort of projections out there, but we know directionally they're going up. I think from an earnings standpoint that should be good for us with our asset-sensitive balance sheet. And -- but I think we're going to be cautious around the lending side and the risk that we take. But the market in Dallas, Houston, Beaumont is all -- they're all pretty strong and still seeing job growth population growth. So seeing people eager to move to Texas. And I think we'll be able to capitalize on that as we go forward. But I think some of the cautionary signs around 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 those decisions.

Okay. Great. I appreciate the commentary there. And I noticed that excluding PPP, your loan yields were up a smidge linked quarter. Just curious was that a function of some better pricing you're seeing on these new loans?

No. I don't think. Right now -- and this happens every time you got -- interest rates start to move one way or the other, so same thing happens when they move down or up. 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 as non-market centers, we're still sort of out there with the market on pricing. And the pricing hasn't moved significantly upward at least on these first Fed moves, although 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 in most of the deals that we're doing, even if we have to set floors and ceilings in them. So we're mindful of rising interest rates as we put new deals on.

Okay. Again, very helpful there. And if I could just squeak one last one in here. I know we haven't talked about the buybacks a lot in the past few quarters, but just wanted to get your thoughts there. I'm not sure what you guys have authorized today or at the buyback you can make sense for you guys right now with the pending deal. But the stocks pulled back along with the broader bank group and just kind of more in line with what you've historically bought back. Just wanted to get your thoughts there?

Yeah. It's -- given where we are in our regulatory approvals and all of the things along with our combination with Allegiance, it's difficult for us to really be active right now. But we certainly see that as we come out of this and 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 is pricing our stock where we'd like to see it. And so when we're given the green light to do it, I think we'll -- you'll see us be active in that part of the market.

Understood. Thanks guys.

Thank you, Will.

Your next question comes from the line of Brad Milsaps from Piper Sandler. Your line is open.

Hey, good morning.

Hi, Brad.

Hey, 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 to reprice with each move from the Fed may be inclusive of kind of any floors that you have to maybe eat through on the way up?

Go ahead, Joe.

Yeah, Brad. We're basically 50-50 variable to fixed and we've got about $1.1 billion just under $1.1 billion that's indexed to prime. And the other roughly $380 million of variables using other indexes whether it's SOFR LIBOR or 11th District cost of funds for mortgages. So we had roughly $380 million in prime loans -- prime index loans that adjusted with the March the last move that was made. And we think that as it hits 4% than 4.5% I'm talking about prime here that we will be up to capture -- meeting and capturing our floors and probably over 80% -- just over 80% and repriced on prime loans there. So we're really -- as far as repricing loans, I think are in a pretty good spot as rates move up on our prime index loans.

Thank you. That's very helpful. And then, I know you're in some degree a little bit of a holding pattern until you put the two balance sheets together but -- and you made some den in the liquidity this quarter. But how should we think about that as the two companies come together? 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.

Yeah. 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 and try 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 things, so that we have -- as we come together we're not crossing each other in 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 an idea of what we want to do with that and -- but primarily what we do is make loans. So that's where we want to put most of it.

Got it. And Bob, just final kind of bigger-picture question for me, when you announced the merger, I think you were targeting kind of a 2.65 in EPS in 2023 with a steeper curve and a higher Fed funds rate. And at the time, I think people sort of pushed back on that. And you've turned out to be right. The expectations for higher rates have probably gotten even higher since then, but we also have more maybe inflationary pressure. Kind of how do you think about that two 65 number as you sit there today in terms of kind of how things have changed since November? And just kind of curious how maybe any of your assumptions might have gotten better or even in some cases maybe worse? Just kind of curious how you're thinking about that two 65 number.

Yeah. I mean projections are tough sometimes. I think from our standpoint we still feel pretty good about what we think we can do. And there's a lot of pressures moving against us and a lot of pressures that are sort of back that are sort of tailwind. So, it's hard to gauge that exactly right now. I feel uncomfortable in that. I'm not sure whether we're going to push supply up to meet demand or whether we're going to move demand down to meet supply. And I think those questions are still out there right now. And a lot of that will kind of show in what our ability to deploy some of this liquidity is but -- and then, the question mark around are we going to be in recession in 2023 still lingers out there for me. So, I don't know. I mean I think we still feel good about the projections that we put out there. So I don't think I would come off of that.

Great. Thank you, guys. I appreciate you taking my questions.

Thanks Brad.

Your next question comes from the line of Matt Olney from Stephens Inc. Your line is open.

Hey, thanks. Good morning, everybody.

Good morning, Matt.

Bob, as you mentioned earlier, the combined company is going to have lots of liquidity. And based on your commentary, it sounds like the big priority is going to be putting this into loans over time, and CBX has had that kind of a long-standing loan growth goal of about 5% to 8%. But I guess across the street, Allegiance they have been growing loans for a while in that mid to upper-teens and since it's kind of slowed 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 loan growth over time. I'm not looking for any kind of near-term guidance on 2023. I'm just thinking about a longer-term speed limit for the combined company with respect to loan growth. Thanks.

Yeah. I think that's -- it's a good question. I think really as you combine the companies together, both trajectories will kind of merge into each other. But, a lot of this depends -- I mean we sort of feel like we average that 5% to 8% over time. So, we've been -- we've had times where the 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 are so many pressures in different directions right now. It's harder for me to make those projections. 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 coming year if the market holds the way it looks like it is right now. So I actually think we might be in the upper end of our range. But it just depends on what the economy does for us. And I think Allegiance appears to be in the same kind of mode. They had a good quarter themselves. And I think as they do their call, they'll explain where they are. But we feel good about where both banks are. The folks at 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 a great combination and people are excited about it. And we've seen our guys go to work 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 good on both sides and so, we'll see where that takes us through the year.

Okay. That's helpful, Bob. Thank you for the color there. And I guess going back to interest rate sensitivity. You guys gave us some good disclosures 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 expectations of a 50-bp move from the Fed next week? I'm curious just about the near-term expectations of trying to manage deposit costs on the first part of the rate cycle. Thanks.

We feel good about it. I mean, we're -- we have 40% -- 47% of 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, other than maybe some few specific things. But for the most part, we have not moved our rates yet, but I do think there will be pressure to move those rates as we move through the next couple of quarters if the rate stays -- if that stays true to a 50-basis point move 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. Typically, what we're watching, we don't play in the CD market that much. So most of ours is around money market and we tend to really watch, not only the locals but -- that are playing in our market, but also where brokerage firms go because, typically our customers their alternative is typically not to another bank, but it's to what am I getting in my brokerage account. And so we also are sensitive to that to watch to see what they're doing. And we just haven't seen much movement there.

Okay. Very helpful. And just lastly on the energy front, I don't know if this is for Bob or Joe, but we've seen a little bit of volatility in some of your disclosures around energy loan balances and specifically on the energy services line. I think it was up in the fourth quarter now down quite a bit in 1Q. Anything worth calling out there? Is this normal seasonality of some customers, or are you losing customers adding customers? Just anything worth calling out there. Thanks.

That was sort of a combination of a new loan that was booked in Q4 to a service company and then we had one -- two customers. One, they sold their property was a real estate loan and the service business. They sold their property and paid us off and the other one in Q1 was an inventory dependent loan that refinanced out to another lender. We were working -- be frank about it [indiscernible] disappointed to see it go. So we're at 1 85. That's kind of where we've been hanging around for the last few quarters. If you go back, we were like at 1 70, high 1 70s. And so we're -- it's a pretty straight line. We just -- we had that bump in Q4 and it came back down in Q1.

We're not a significant oil and gas lender Matt but we definitely will 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 in the oil and gas business. So I think you could have strong sponsors, no matter what industry you're in. And we like people that do it well and that's kind of where we move our money. But we don't shy away necessarily from the oil and gas business for any specific reason. It can be volatile and we understand that, but when we have strong sponsors in that area than we tend to want to end there.

Thanks, guys.

Thank you.

[Operator Instructions] There are no more questions at this time. Turning the call back over to Mr. Bob Franklin.

Thank you. Appreciate the ability to give first quarter earnings and thank you for your interest in being on our call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.