CBTX, Inc. (NASDAQ:CBTX) Q2 2022 Earnings Conference Call July 29, 2022 9:00 AM ET
Corporate Participants
Justin Long – General Counsel
Robert Franklin – Chairman, President and Chief Executive Officer
Ted Pigott – Chief Financial Officer
Joe West – Chief Credit Officer
Conference Call Participants
Brady Gailey – KBW
Brad Milsaps – Piper Sandler
Matt Olney – Stephens Inc.
Operator
Ladies and gentlemen, thank you for standing by and welcome to the CBTX 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. [Operator Instructions].
I would now like to turn the call over to your host, Justin Long, General Counsel. You may begin.
Justin Long
Thank you. Good morning. I’m Justin Long, the General Counsel of CBTX and our management team would 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’d like to remind you that during this presentation, we may make forward-looking statements regarding future events, or financial performance or 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-10Q, 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. 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, Ted Pigott, our Chief Financial Officer; Joe West, our Chief Credit Officer; and Joseph McMullen, our Controller. At the end of the remarks, we will open the call to questions.
With that, I’ll turn it over to our Chairman, President and CEO, Bob Franklin.
Robert Franklin
Thank you, Justin and welcome to the earnings call for CBTX Inc. 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’ve also seen some of the benefits of our low-priced deposit base provides us even while beginning to experience some 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 CBTX approved 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 to 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 and the world.
We think that our timing of bringing to well positioned Texas banks together is a good one. We continue to work to be more efficient as one organization with 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 adjust to inflation, and higher interest rates, we are very optimistic on the long-term future of our bank.
Now, I will turn the meeting over to Ted Pigott, our Chief Financial Officer.
Ted Pigott
Thank you, Bob. Certain financial information for the quarter ended June 30, 2022 and our periods begins on Slide six of our investor presentation. The company has reported net income of 11.7 million or $0.48 per diluted share for second quarter of 2022. Compared to net income of 10.6 million or $0.43 per diluted share, the first quarter 2022 and net income of 11.7 million or $0.48 per diluted share for second quarter 2021.
Net interest income for second quarter of 2022 was 34.9 million and increased 2.2 million with 1.3 million attributable to rate variance primarily related to interest bearing deposit in other financial institutions in first quarter 2022. Net interest margin adjusted on a tax equivalent basis increased 27 basis points to 3.49%. from first quarter this year. Yield on interest earning assets was 3.56% for second quarter compared to 3.41% for second quarter 2021.
The cost of interest-bearing liabilities was 0.25% for second quarter 2022 and 0.32% for second quarter of 2021. The provision for credit losses was 126,000 for second quarter 2022 compared to provision in the first quarter of this year of $435,000 and a recapture of 5.1 million for second quarter 2021, which primarily resulted from the improvements in the local economy during that period.
Non-interest income decreased 1.8 million for second quarter 2022 as compared to first quarter. Non-interest 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 other non-interest income and a gain of 1.2 million for sales of asset underlying a portion of the company’s equity investments partially offset by 1.2 million loss, including net gain on sale of assets for the disposal of the building and improvements to the land lease that was terminated earlier.
Non-interest expense was 23.8 million for second quarter, compared to 24.7 million for first quarter 2022 and 25.2 million for the second quarter 2021. The decrease in non-interest expense of $894,000 for second quarter, compared to the first quarter 2022 was primarily due to a $556,000 decrease in salaries and employee benefits, primarily due to higher insurance in the first quarter and a decrease of $305,000 in data processing and software expense. The decrease in non-interest income of 1.4 million for second quarter 2022 compared to second quarter 2021 was primarily due to $1.3 million decrease in professional and director fees primarily related to BSA/AML compliance matters and legal fees partially offset by 1 million costs related to the pending merger with Allegiance Bancshares. Our efficiency ratio for the second quarter 2022 was down to 61.84%.
Our assets are 4.32 billion at June 30, 2020, decrease of 123 million from March 31, 2022. Securities increased 2.1 million from March 31, 2022, and it increased 240.9 million compared to second quarter of 2021. Loans excluding loans held for sale were 3.03 billion at June 30, 2022, an increase of 153 million or 5.3% from March 31, 22 an increase of [4.34] [ph] million or 11.1% from June 30, 2021.
Loans excluding loans held for sale and PPP loans increased 473.6 million or 18.6% to 3.2 billion from June 30, 2021. Our average return on assets for the second quarter was 1.08%. 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 as the total risk-based capital ratio was 15.53%, CET1 capital ratio was 14.49% and the tier one leverage ratio was 11.48% at June 30, 2022.
Non-performing assets totaled 28.3 million or 6.65% of total assets at June 30, 2022, compared to 22.1 million or 0.5% for total assets at March 31. The allowance for loan losses as a percentage of total loans was 1.06 percent at June 30, 2022. It was 1.09% at March 31, 2022, and 1.36% at June 30, 2021.
I will now turn it over to Joe West.
Joe West
Thank you, Ted. I’ll speak a bit to our loan portfolio beginning with Slide 9 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 22, an increase of approximately 153 million. We funded approximately 178 million in new loans during Q2 and had 126 million in pay downs or payoffs, excluding PPP loans. For the quarter C&I, including the effects of the PPP payoffs declined by approximately 19.5 million or 3.3% compared to Q1 and C&I decreased 10.7 million, excluding PPP payoffs. CRE was up 39 million or 3.4%, quarter-over-quarter, C&D was 87.6 million or 18.5% compared to the first quarter, one of four family was stable quarter-over-quarter, and multifamily increased 21.5 million or 7.7%.
Slide 10 sets forth the components of our commercial loans and our total commercial loans were up slightly in the second quarter to 2.6 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 flows for the second quarter decreased to 183 million compared to 186 million at the end of 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 received 8.8 million 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 will take half of PPP loans.
Slide 13 sets forth information about our allowance for credit losses. As Ted noted, our allowance for credit losses to loans was 1.06% at June 30, 2022.
Turning to Slide 14, our non-performing assets remain low during the second quarter, and our credit quality remains strong. Slide 14 also shows information regarding our non-performing assets to our total assets, which was 0.65% as of June 30, 2022, compared to 0.50 at March 31, 2022. As with the first quarter, our recovery during the first quarter exceeded our charge offs, resulting in a net recovery of 166,000.
With that, I’ll turn it back over to Bob Franklin.
Robert Franklin
Thank you, Joe. With that, we’ll open it up to questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Brady Gailey with KBW. Your line is open.
Brady Gailey
Hey, thanks. Good morning, guys. I just wanted to start with the lack of set approval for the merger. I mean, we’re coming up on nine months since the transaction was announced. Is there anything that they’re focused on? Or do you guys have any sense as far as what the holdup could be on the Fed side?
Robert Franklin
I’ll give you a little. There’s not a lot of clarity I can give because I don’t have much. But I will tell you that from a timing standpoint, we announced in November and really got fully papered with the Fed in January. So if you start to take her from January, we’re, I guess, still within a relatively what their timeframe has been here for a while, but the Fed doesn’t and I think as we talked to other folks that have gone through this process, that doesn’t communicate with you much. And I don’t — 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 of that’s holding this thing up.
So we don’t have any specifics to give you I wish I could. But we 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 that. So it’s very frustrating to us, very frustrating to our employees and folks from trying to get this deal done, because we’re poised ready to hit the button but we are waiting on the Fed.
Brady Gailey
And you guys on a standalone basis have excess capital, even the pro forma bank will have excess capital, are buybacks a possibility, as we wait for the Fed? Or is that something that you think you just need to wait and get this deal closed? And then think about buybacks after the fact?
Robert Franklin
Well, it’s been very difficult for us on the buyback front, just with all the ins and outs around blackouts. We did buy a little bit of stock back about 93 — little over 93,000 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 in the market. I think both banks are interested in probably doing some share repurchases, but I won’t speak for them today, but as far as we’re concerned, yes, I mean, I think especially if those continues to go on. We do feel like that’s a good place for us to go.
Brady Gailey
Okay. And then finally for me, I know you guys have talked about kind of 5% to 8% loan growth rate. You clearly did a lot more than that this quarter. What’s the update on how you’re thinking about core organic loan growth going forward?
Robert Franklin
I still think over the long-term. If you average us out that’s kind of where we would be on a consistent basis. But there are times when we can — we feel like there’s opportunities for us. Texas economy, as I’m sure we’ve heard on other calls, still appears to be fairly strong, although we’re starting to see some weakening, and we have to be prepared for that. But we’re taking opportunities, we’re tightening our underwriting a bit, we’re able to get a lot more in the way of sort of equity on the front end. And 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. So I think it will see loan grow, start to wane a bit, just because that’s seems to be what the Fed and everybody wants to happen. But we’re going to continue to take our opportunities where we can and so I don’t think we’re going to do necessarily this type of loan growth for the next several quarters, but I do think it’ll come off a bit.
Brady Gailey
Okay, great. Thanks for the color Bob.
Robert Franklin
Thank you,
Operator
One moment for our next question. Our next question comes from Brad Milsaps with Piper Sandler. Your line is open.
Brad Milsaps
Maybe, Bob, I wanted to 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 wonder if after this week, are we pretty much through the floors, just wanted to kind of get a sense of how you guys are thinking about, further margin expansion from here, pre-COVID, you were much higher and the balance sheet is a little bit different. But what would you be is kind of your opportunity to improve that improve the NIM from here?
Joe West
Yes. We think — this is Joe, we think that we’re through these fours, the first couple of moves, that was the March 17, quarter point up, and the May 5, half point about those pretty much caught up to the floors, in this last month of June — in the second half of the month. So we really didn’t get the benefit of that too much in Q2. So we think we’re going to reap the benefit of this last move — this last two moves pretty well in the portfolio. So yes, we’ve caught up to the floors for the most part. And that should have help us expand the margin a little do.
Brad Milsaps
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 looks like head counts down about 40 people. Just kind of curious, I know, you outline is 15% expense saves when you announced the deal, or some of those savings, maybe already in the run rate, just kind of curious how to think about kind of the expensive opportunity. Have you identified more any change in regard to that?
Robert Franklin
Well, I think the answer your question is, yes, around all those things. The thing for us is, as we are moving towards getting the two banks put together. And as you think about people and as we identify certain folks that will go forward certain ones — ones that are going to stay for certain dates. This is all taking place right now. So some of the stuff is associated with what we’re doing and the combination. And I think it’s a good thing to some extent. It does put pressure on some of our folks to because it makes us run a little light in certain areas. But for the most part, we’re ready to go and I think if we can get approval from the Federal Reserve, I think we’ll be off and running. But both banks have been planning for quite a while around this and 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 placed the hurdle.
Brad Milsaps
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 you’re thinking about the marks, a lot has changed since November, not only the rates, but just kind of curious if you guys had any plans, just to maybe, to kind of level set expectations there in terms of kind of how we should think about, the two companies coming together, given all the things that have happened.
Robert Franklin
Yes, I think there’ll be some opportunities to do that. I don’t think we’re really prepared to do that today. But I think we can, we’ll be looking at kind of, as we get closer and try to understand when the timing of this is, give people a better understanding of what that might look like. So I would say, stay tuned on that front.
Brad Milsaps
Got it, but 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 that companies could earn, it would seem to me that that would have only improved, given kind of where rates have moved?
Robert Franklin
Yes. I don’t — I’ve worried a little bit 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 had out there from a projection standpoint. I think our production has been better, I think pricing has been better, like the things that would affect the go forward operating piece of this is better than what we projected. But I’m sure if somebody looked real hard to find something that wasn’t, so I hate to generalize like that. But for the most part, I’ll say, we look like we’ve improved over what we have projected.
Brad Milsaps
Great, thanks, Bob.
Robert Franklin
Thank you.
Operator
And one moment for our next question. Our next question comes from Matt Olney with Stephens. Your line is open.
Matt Olney
Hey, good morning, everybody. Going back to Brad’s question around cost savings and the timeline. Just curious, since you’re still waiting on final deal approvals? Did you have to push back the original systems conversion date? Or is that date still in the future? And we could still hit this if we get an approval soon.
Robert Franklin
That’s a good question, Matt. We’re getting really close. We’ve got a couple of dates identified. So we don’t — we’re pressed for a little bit on the first one, I think, second one hidden far behind that. So I mean, we’re still in this year. If it goes too longer or too much longer, I think we’re — we may have to push that conversion into next year. But I will say that that it still appears that we can get it — get approval within the next few weeks that we still have a conversion day that we can make in 2022.
Matt Olney
Okay, appreciate that, Bob. And then, on the loan growth front, it looks like a lot of that growth this quarter was driven by construction which led to hear more about this and looks like it was diversified based on your disclosures from commercial to multifamily the land. I think you disclosed that the construction balances are now over the 100% guidelines, would love to appreciate, this is short-term in nature or anything else you can disclose around the construction pace Thanks.
Robert Franklin
In a normalized operating environment, firstly, there’s been sort of two larger components of the C&D bug and one of those is just our normal C&D business which is fairly diversified and what it is. And just our normal C&D business which is fairly diversified and what it is and actually geography too because we’re doing some things in Dallas, we’re doing some things in Austin, we’re done various parts of the state that are really having some pretty good economies. The other is our low-income housing piece and that depending on where we are project wise with those guys that drives that C&D piece up.
And we probably, it depends on the volume that we do. But it’ll 6 to 10 projects a year. And those tend to be fairly good size in certain circumstances. It’s something that the regulators really like to see us do for one. And so, when they look at our C&D 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. And 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 it’s something that the regulator’s like to see. So when they look at us, and you take that piece out, it drops down to the mid-80s. So it’s — the same thing, if you look at CRE, and where we are in CRE versus 300. So we get the benefits of that, I think the regulators like it, so it hasn’t, and we’ve been doing that for basically, since we came together with Community Bank in 2013. So if that helps.
Matt Olney
Yes. That’s great color, Bob. I appreciate that. That’s helpful. And then, I guess shifting over towards deposit cost. Seems like most banks we’ve spoken with didn’t really move their deposit pricing higher until we got into that May and then June timeframe, and then we’ve moved a few times. Since then, we’d love to hear more about the banks deposit pricing and how it kind of changed during 2Q if at all and kind of any recent pricing adjustments. Since the Fed announcement this week. Thanks.
Robert Franklin
We’ve moved a little bit in certain categories. We’ve got some banks in our market that are a little more aggressive about pricing on the deposit side and in some others. But we, I think after this last move, we can expect to move pretty much across the board, at least a little bit. So we’ll get back a little bit of what we’re getting on the other side.
Most of the market has stayed fairly disciplined around pricing, but we are seeing some folks that are a little more aggressive. But we’ve been able to hold deposit costs down up into this point and I think we’ll continue to lag behind. The most important pieces to us as, one maintaining that strong demand deposit base that we have, which you’ve seen that piece stay 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.
And so 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 because most of our customers aren’t here because of the relationship and then they typically are not — they’ll [indiscernible] without bags, but it’s for the most part, it’s when they get those statements from Schwab or whoever they might have their brokerage accounts with and see that those guys are moving and we’re not, we really can’t let that happen.
So we’re never going to be the highest priced deposit in town, but we’re going to stay competitive. So we’ll move with the market. And right now the market seems to be fairly well behaved.
Matt Olney
Okay. That’s all for me. Thanks, guys. Congrats for the quarter.
Robert Franklin
Thank you.
And I’m not showing any further questions at this time. I’ll like to turn the call back over to Bob for any closing remarks?
Robert Franklin
Well, thank you very much. Thanks for everyone that 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’re really doing two jobs and getting ready for a merger that I think will really be beneficial to this organization in the future. So thank you for participating in our call today.
Operator
Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.
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