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spk02: Good day and thank you for standing by. Welcome to the Allegiant Bank Shares, Inc. second 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 this session, you will need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to one of your speakers today, Courtney Theriault. Please go ahead.
spk01: Thank you, Operator, and thank you to all who have joined our call today. This morning's earnings call will be led by Steve Redsoft, CEO of the company, Ray Vitulli, President of the company and CEO of Allegiance Bank, Paul Eggie, Executive Vice President and CFO, Okon Akin, Executive Vice President and Chief Risk Officer of the company and President of Allegiance Bank, and Shanna Kussel, Executive Vice President and General Counsel. Before we begin, I need to remind everyone that some of the remarks made today constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend all such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Act. Also note that if we give guidance about future results, that guidance is only a reflection of management's beliefs at the time the statement is made, and such beliefs are subject to change. We disclaim any obligation to publicly update any forward-looking statement, except as may be required by law. Please see the last page of the text in this morning's earnings release, which is available on our website at allegiancebank.com, for additional information about the risk factors associated with forward-looking statements. We also have provided an investor presentation on our website. Although it is not being used as a guide for today's comments, it is available for review at this time. At the conclusion of our remarks, we will open the line and allow time for questions. I now turn the call over to our CEO, Steve Retzlaff.
spk05: Thank you, Courtney. Welcome, everyone, to our conference call, and we really appreciate your attendance. As was highlighted in our press release this morning, the second quarter resulted in another record for net income for the company of $22.9 million, or $1.12 per diluted share, which is due in part to our outsized PPP success and the continued recognition of the fees associated as we proceed with the PPP forgiveness process. Also, as we continue to closely monitor our core loan relationships and assess economic factors that drive our allowance model, the quarter's earnings also benefited from a release from the allowance for loan losses. We feel great about our tangible book value having increased by 12.7% over the past year, notwithstanding $0.44 per share of dividends and with some share repurchases. Our service model has proven itself through a high level of customer acquisitions, both due to and separate from the PPP effort. It has also been recognized through our recently completed customer survey that Ray will describe where the results place Allegiance at an absolute top-tier level of customer satisfaction. Over the past 12 months, deposits have grown significantly by 15.6%, with the mix of non-interest-bearing deposits ending the second quarter at 36.3%. In addition, through the second quarter, we are continuing to reflect a steady decline in our cost of funds due to our disciplined approach in the current rate environment. Our relationship officers remain focused on growing the bank through competitive loan pricing and terms, extraordinary treasury management services, and are experiencing loan pipelines that are prerequisites to continued high volumes of production. We believe our capital, liquidity, asset quality, steady growing brand loyalty, and strong culture provide an excellent posture from which Allegiance customers and shareholders will continue to build value. As with much of the broader economy, we are glad to see that the Houston-Beaumont region is rebounding well recently, with a few notables, such as higher oil prices, an excellent housing market, and a purchasing manager's index now well into positive territory. While we are clearly pleased to be the largest community bank focused on this region of Texas, we do, however, recognize that other Texas geographies may present favorable market opportunities for a community bank like ours that possesses a proven ability to effectively serve the independent business owner. Finally, Allegiant serves all of our stakeholders, which includes active support of many local community initiatives, including financial support and volunteerism at the Houston Food Bank, the formation and fundraising effort for the new banking program at Texas Southern University, advocacy for and assistance to disadvantaged youth, and affordable housing options for low-income families. These and other initiatives provide compelling evidence of the integral value that our community-minded model is able to deliver. With that, I'll turn it over to Ray for a more detailed review of our operational results, followed by Paul, who will cover our financial results.
spk04: Thanks, Steve. From time to time, we have shared feedback from our customers describing the extraordinary service that our bankers provide. These stories, whether about the friendliness of our bankers, or going the extra mile to track down a wire, or facilitating PPP loans to keep employees working while facing uncertainties with the pandemic, all speak to our culture of service and contribution. As Steve mentioned, in an effort to be proactive in soliciting feedback on customer experience, we recently launched our first ever Net Promoter Score or NPS survey. This score can range from negative 100 to positive 100, and we are extremely pleased to report an NPS that has been exceeding 80 since the April launch, placing us in the 100th percentile in the broader banking industry. Customer experience drives our ability to retain and attract clients and has certainly contributed to the healthy pipeline that our bankers reported heading into the second quarter. that produced a record level of loan originations totaling $379 million. We continue to take advantage of the market share opportunity that was presented with our outsized PPP success and are now starting to see core loan originations from our new customers. And our onboarding of new treasury management clients has remained steady, further reflecting the growth potential coming from those customers that are new to the bank. We had nice momentum in the back half of the quarter in terms of core loan growth and are as well positioned as ever for originations to remain strong, which is our leading indicator for net loan growth. Moving now to our quarterly operating results. Total core loans, which excludes PPP loans, ended the second quarter at 3.96 billion, an increase of 30.8 million during the quarter. Our staff and lending team booked the previously mentioned 379 million of new core loans that funded to a level of 251 million by June 30, compared to the first quarter, when 325 million of new core loans were generated, which funded to a level of 203 million by March 31. The weighted average interest rate charged on the new second quarter core loans was 4.48%, compared to the weighted average rate charged on the new first quarter core loans of 4.61%, and 4.64% in the fourth quarter of 2020. Paid off core loans were 238 million in the second quarter, compared to $180 million in the first quarter. The $238 million of paid off core loans during the quarter had a weighted average rate of 5.06%. Carried core loans experienced advances of $129 million at a weighted average rate of 4.77% and pay downs of $114 million, which were at a weighted average rate of 5.07%. All in, the overall period end weighted average rates charged on our funded core loans decreased seven basis points, ending the quarter at 4.95% compared to 5.02% as of March 31, 2021. Over the past few quarters, we have provided information on several loan categories that could have heightened risk due to energy prices and the COVID pandemic. Those being our oil and gas portfolio, our hotel portfolio, and our restaurant and bar portfolio. While we continue to keep a close eye on these categories, we feel it will take more time to see a return to pre-COVID performance in the hotel portfolio. At June 30, our hotel portfolio totaled $129 million, or 2.88% of our funded loans, with a weighted average LTV of 72.4% on the $126 million that's categorized as CRE. A 30% stress test on the LTV plus 6% in marketing expenses, would result in a $5 million shortfall on the portfolio. We are seeing some improvement in occupancy and ADR, which is welcome news. In aggregate, our asset quality at quarter end remained in a manageable position. Non-performing assets, including both non-accrual loans and ORE, ended the second quarter up from 55 to 58 basis points of total assets. Non-accrual loans increased a net of $1.5 million during the quarter, from $35.1 million to $36.6 million, primarily due to $7.3 million in additions partially offset by $2.9 million in payoffs, $1.8 million in payments, $821,000 moved to other real estate, $176,000 in charge-offs, and $64,000 in upgrades placed back on accrual. The $7.3 million in additions was comprised of a $4.3 million hospitality property with the additional $3 million increase coming from six relationships, one of which totaled $1.2 million, and the remaining $1.8 million was from five smaller relationships. ORE increased to $1.4 million during the quarter, compared to $576,000 for the first quarter, primarily due to the addition of an $821,000 retail residential property. Our ORE is now comprised of two residential properties, Charge-offs for the quarter were minimal at an annualized rate of one basis point. In terms of our broader watch list, our classified loans as a percentage of total loans increased to 4.18% of total loans as of June 30, compared to 3.91% as of March 31. Criticized loans increased to 6.05% at June 30, from 5.98% in March 31. Specific reserves for individually evaluated loans ended the quarter at 17.2% of total reserves, compared to 14% at March 31. On the deposit front, we saw an increase in total deposits in the second quarter by $59 million from the first quarter, and up $733 million over the year-ago quarter. We continue to see solid growth in non-interest-bearing deposits that contributed to the quarter-to-date increase primarily the result of new accounts associated with PPP customers, as well as higher balances in our carried accounts. With that, our non-interest-bearing deposits to total deposit ratio was 36.3% for June 30, compared to 35.6% for March 31, and 37.3% for the year-ago quarter. Adding 48,600 jobs in the first six months of the year the Houston area has now recovered 59% of the jobs lost at the onset of the pandemic. The housing market remains strong, with record lows in terms of months of supply for single-family homes, while multifamily occupancy has now hit 90%. Our bankers are out meeting with customers and prospects, and we were encouraged by our healthy loan pipeline and look forward to carrying the momentum from the second quarter to the remainder of the year. I now turn it over to our CFO, Paul.
spk08: Thanks, Ray. We are proud to report another record quarter of earnings with net income of $22.9 million or $1.12 per diluted share as compared to $18 million or $0.89 per diluted share in the first quarter and $9.9 million or $0.48 per diluted share in the second quarter of 2020. While these record results were driven in part by a negative provision for credit losses, We are pleased to note that the quarter would still represent a record for us without that negative provision, driven by lower funding costs, PPP-related revenue, and improved non-interest income and expense lines. Accordingly, pre-tax pre-provision income for the second quarter represented a record at $25.3 million as compared to $22.5 million in the first quarter and $22.6 million for the year-ago quarter. Recall that in the first quarter, we had about $1.5 million in non-recurring asset write-down expenses due to a branch closure. Improved net interest income, again, was a key driver to our pre-tax, pre-revision earnings power during the quarter, where we saw an increase of $898,000, or 1.6%, to $56.6 million from $55.7 million in the first quarter, primarily due to lower interest expense in the quarter partially offset by slightly lower revenue recognized on PPP loans. Interest expense decreased by $894,000 during the second quarter compared to the prior quarter. Total net fee revenue related to PPP loans recognized into interest income during the second quarter was $6.4 million, a decrease from the $6.9 million in the first quarter. Before moving on, I should note that as of quarter end, we had approximately $18 million of net deferred fee income remaining relating to PPP loans after recognizing that $6.4 million of net PPP fee income into yield during the second quarter and a total of $13.3 million year-to-date. Total yield on loans in the first quarter was 5.09% as compared to 5.15% for the first quarter and 5.13% for the year-ago quarter. Excluding PPP loans and related revenue, yield on loans would have been 5.07% for the second quarter, 5.06% in the first quarter, and 5.44% in the year-ago quarter. Total yield on interest-earning assets was 4.41% for the second quarter, down from 4.67% for the first quarter and 4.87% for the year-ago quarter, reflecting a growing earning asset mix that includes a higher proportion of cash and securities as well as significant PPP loan balances within total loans. With respect to interest expense, our costs of interest-bearing liabilities continue to track downwards in the second quarter to 67 basis points, from 80 basis points for the first quarter and 119 basis points for the year-ago quarter, driven principally by CD repricing. The overall cost of funds for the second quarter was 44 basis points versus 54 basis points in the first quarter, We expect to see continued improvement in our funding costs going forward, driven by CD repricing and continued optimization. So, with the help of lower interest expense in Q2 and PPP net fee income recognition offsetting a significant shift in the composition of our earning assets, our taxable equivalent net interest margin was 4.02% for the quarter, as compared to 4.19% in the first quarter and 4.1% in the year-ago quarter. Excluding PPP loan balances and related revenue, net interest margin would have been 3.88% for the second quarter from 3.95% in the first quarter. Going forward, we continue to feel well-positioned to maintain a relatively strong core net interest margin through optimizing our funding mix and maintaining discipline on loan pricing. But we do see excess liquidity in the resulting changes to our earning asset composition as a potential drag on NIM expectations. Non-interest income was up a quarter over quarter, increasing to $2.3 million for the second quarter from $1.7 million for the first quarter, primarily due to a few small non-recurring items to the positive and there being no loss on the sale of other real estate as compared to the $176,000 loss on ORE taken in the first quarter. Total non-interest expense decreased in the second quarter to $33.6 million compared to to $34.9 million in the first quarter. The difference is primarily due to the $1.5 million in non-occurring asset write downs we took in the first quarter. Thanks in part to an improved expense line, we saw our efficiency ratio for the second quarter decrease to 57.07% compared to the 60.85% from the first quarter and a small increase from the 56.92% for the prior year quarter. I'll note that the first quarter efficiency ratio would have been 58.29% if you were to exclude the aforementioned asset write-downs during the quarter. Moving on to credit, we recorded a negative provision for credit losses of $2.7 million during the quarter, reflective of improving expectations for credit in our allowance model. Our allowance for credit losses ended the quarter at $49.6 million. representing 111 basis points on total loans and 125 basis points on core or non-PPP loans. The bottom line, our second quarter ROAA and RATC metrics came to 1.42% and 17.2% respectively, both again representing all-time highs. Quarter end tangible book value per share was $27.17. which, as Steve mentioned, makes for an increase of approximately 12.7% since the year-ago quarter, notwithstanding dividends and share repurchases over the last year. Entering the second half of 2021, we feel very well positioned to continue to drive franchise and shareholder value. It never gets old to be able to say that we are bigger and better than ever at over $6.5 billion in assets with profitability, capital, and liquidity levels at or near all-time highs. We look forward to building on the momentum from our tremendous PPP success to continue adding market share at Houston's largest community bank. I will now turn the call back over to Steve.
spk05: Thank you, Paul. With that, I will now turn the call over to the operator to open the line for questions.
spk02: Thank you. As a reminder, if you have a question at this time, please press star then 1 on your touchtone telephone. To withdraw your question, please press the pound key. Our first question comes from the line of Brady Gailey with KBW. Your line is open. Please go ahead.
spk03: Hey, thanks. Good morning, guys. Good morning, Brady. Good morning. So we saw kind of a continued buildup in cash in the quarter. When do you start thinking about more aggressively putting that to use in the bond portfolio? I know the bond book grew this quarter, but does that continue for the next couple quarters as excess cash continues to grow?
spk08: We think about it all the time, but we really don't want to take meaningful interest rate risk in the bond portfolio. So we have been growing the bond portfolio, but we've been staying pretty short duration and variable rate, which doesn't really drive meaningful net interest or interest income, but it really reflects the extent to which we do want to get more incrementally, more invested. But effectively, we're against taking a meaningful amount of interest rate risk through that securities portfolio. All right.
spk03: That makes sense. And then there doesn't appear to be any share buybacks in the quarter. But if you look at how the stock has traded, it used to be over 40. It's now pulled back into the mid 30s. I think that's at a level where you guys have purchased stock before. Should we think about you guys re-engaging in the share repurchase plan at this point?
spk08: We feel like share repurchases are a really valuable tool for capital management. Our highest and best use of capital, of course, is going to be putting forth loan growth and supporting that loan growth with capital. And then secondarily, we want to maintain a meaningful amount of flexibility for M&A possibilities and things along those lines. So, yes, Shared repurchases are definitely in the arsenal, but at the same time, our preferred usage of cash is clearly going to be through either organic growth or inorganic opportunities that we want to have maintain a high level of flexibility.
spk03: Yep. And then finally, for me, if you look at the last couple quarters, you guys have been growing core loans, kind of ex-PPP. In the low single-digit level, a lot of banks are talking about growth kind of accelerating in the back half of this year and as we get into 2022. How should we think about loan growth for you guys going forward?
spk04: Well, we did see some nice growth in the back half of the second quarter that we think the momentum will carry into the next two quarters of the year. The originations were strong. Those were on a pipeline that was strong, and the pipeline looks similar going into this quarter. So I think if we get what we saw in the back half of the second quarter, Brady, we can tick up into what you're talking about, into that higher single digit than what we showed in the first two quarters.
spk05: We're really pleased with the pipeline and sort of the production from the staff. After PPP, we they basically were no longer distracted by that. So we're seeing them making those calls and no longer distracted by PPP and feel very good about our team out there, you know, shaking the bushes.
spk03: Okay, great. Thanks, guys.
spk02: Thank you. And our next question comes from the line of Matt Omini with Stevens. Your line is open. Please go ahead.
spk06: Thanks. Morning, guys. Morning, Matt. I want to start on the fee side, and the fees were a little bit higher than the recent run rate. Paul, I think you mentioned in prepared remarks there were a few items in there we should take note of. Anything you can detail for us on that?
spk08: Really nothing meaningful. They were so small that they didn't merit delineation. What we're really happy with on the fee income line, and probably a new addition with respect to a breakout, is the great trend we've got going on interchange or debit card and ATM card income as it's listed on our financials. We broke that out here for the first time this quarter. Really, it's grown from a low base, but we're extremely proud of being able to grow that number 50% year over year and the track record we're building there. So all in all, we like the trend that's manifesting itself on the non-interest income side, albeit we still got room to go to make it a more meaningful mix of our revenue profile.
spk06: Okay, great. And on the interest-bearing deposit costs, those continue to move quite a bit lower in 2Q. Any color on how much more room is remaining within that?
spk08: There's more room. I mean, ultimately, you're going to see most of it manifest itself on the CD line, but we've been measured and gradual in working down non-maturity rates. But it is largely going a function of the higher rate CDs rolling off. And really, in this environment, especially with the level of liquidity we have, being highly more disciplined as it relates to how we approach pricing everything that comes on the balance sheet and walking down any exception rates that have been out there and the overall sheet rates that we've got. So we've got some room to go still, but we still want to be measured about it so as to not upset the apple cart as it relates to the nature of our deposit base.
spk06: Sure. Okay. And then last question on operating expenses. Paul, I think we came in around $33.5 million, kind of a core number. I think that was pretty much in line with your guidance from last quarter. What are the thoughts from here on operating expenses?
spk08: We're working to hold the line. So that prior guidance kind of still sits there. There's definitely some variability that has the potential to try to take it ever so slightly upwards. But we feel pretty decent about that guidance. And ultimately, we're focused on maintaining a growth posture. And in doing so, the goal is to hold the line. But we're going to be opportunistic about what we can do to position the bank for growth. And we're pleased that at least with some of what's driven that line has been a function of the strong bottom line performance that plays into certain things like profit sharing and bonus and stuff like that. So there's definitely things in there that are pushing it up while we're trying to be good about how we manage it overall.
spk06: Okay. Thanks, guys. Thank you.
spk02: Thank you. And again, ladies and gentlemen, if you have a question at this time, please press star then 1. And our next question comes from the line of Graham Dick with Piper Sandler. Your line is open. Please go ahead.
spk07: Hey, guys. Good morning. Good morning, Graham. So obviously there's been some disruption in M&A or in Texas recently caused by M&A. And this is probably only going to accelerate, I guess, as deals start picking up in the region. But I'm just wondering... I'm just trying to get a sense of how effective you guys have been in attracting quality lenders over the past quarter and maybe how many you'll try to add each quarter from here as they become available.
spk04: Sure. So last quarter we actually, as far as external hires for lenders, we did not last quarter. First quarter we hired one, although last quarter we did have two promotions internally from our lender development program, which is we're really proud of that and expect some more of that. But You know, this quarter's actually already started off with a couple hires. We've onboarded a new lender this month, and we expect one next month. So, you know, at one time we were talking about, you know, one producer a month type run rate. It's probably not that, and I think it'll be a combination of both external hires, as you mentioned, from maybe some disruption in the market, but also some of our internal promotions from our lender development program in the homegrown category.
spk07: Okay, great. That's helpful. And then I guess more broadly on M&A, obviously seen a pullback in bank stocks recently, but I'm just wondering how conversations are going for you guys. And basically, if you think you might be able to get some over the line over the next 12 to 16 months, just depending on seller expectations, I guess.
spk05: We're always out there talking and meeting with the folks locally. We have an interest in looking even a little bit beyond the territory if opportunities arise. We're active. We've got the capital to accomplish it. Obviously, like you say, the market has pulled back a little bit, but You know, I think our focus has always been and will be, continue to be with sellers on their day 365 value. And we think we provide a great opportunity for them to gain value over time in joining us. So I think we've got the flexibility and certainly are interested in that, you know, right company, right size. But we're active. We haven't shut that door, let's put it that way.
spk07: All right, great. And then just the last thing for me is, I guess, a quick one here. Do you guys have the number for what average PPP loans were in the quarter? Just so I guess we can get a better idea of what the balance sheet looks like.
spk08: Sure thing. It was $604 million.
spk07: All right, great. Thanks, guys. All right, thank you.
spk02: Thank you. And our next question is a follow-up question from Matt Loney with Stevens. Your line is open. Please go ahead.
spk06: Thanks, Guy. I just want to circle back on the M&A question. And it seems like the allegiance footprints, you know, between Houston and Beaumont County and that South Texas markets, I'm curious how much appetite there is to extend the footprint beyond the South Texas markets. Thanks.
spk05: It's hard to gauge a degree or level of appetite. There's interest. I mean, we're You know, at $6.5 billion, the largest player in the market, and you have to look at – I'm an old manufacturing guy, and I look at this as an inventory issue. There's an inventory of available candidates in this region, and then there's an inventory outside of this region. So I think your options are obviously better if you expand the shelves that you're looking at. And so it's just a simple matter of that. We want to be consistent and prudent and very careful – about any conversation that we have. But, you know, I think we're certainly getting there quickly in terms of the scale needed to consider other regions or maybe just nibbling a little bit away. But, you know, it's a process. Let's put it that way. It's just a process for – and I think there's growing interest and certainly looking at other deals that could advantage the bank.
spk06: Okay. That's all for me. Thanks, guys. Great, man.
spk02: Thank you. And I'm showing no further questions at this time, and I would like to turn the conference back over to Seaver's Loft for any further remarks.
spk05: Well, I once again really appreciate everybody's interest in the bank. We feel great about where we are. We've got a commitment to perform and create value. So thank you, and we'll speak to you again next quarter.
spk02: this concludes today's conference call thank you for participating you may now disconnect
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