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spk08: Good morning, everyone, and welcome to the CBTX Q1 2021 earnings call. At this time, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at the time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host. Mr. Justin Long, please go ahead, sir.
spk02: Thank you. Good morning. I'm Justin Long, the General Counsel of CBTX, Inc., and our management team would like to welcome you to our earnings call for the first quarter of 2021. 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. We also filed our quarterly report on Form 10Q for the first quarter yesterday afternoon. 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 factor section of our annual report on Form 10-K, our quarterly report on Form 10-Q for the first quarter, and our other filings with the SEC, all of which can be accessed on our investor relations website at ir.cbtximc.com. Any forward-looking statements are made only as of the date of this call, and we assume no obligation to update any such statement. 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, CEO, Ted Piegett, our CFO, Joe West, our Chief Credit Officer, and Joseph McMullen, our Comptroller. 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, Bob Franklin.
spk05: Thank you, Justin. Welcome to the earnings call for CBTX for the first quarter of 2021. We entered the first quarter with cautious optimism as the economy continued to rebound in response to stabilizing conditions related to the pandemic. including the accelerated distribution of vaccines. Over the course of the first quarter, our markets in Texas continue to improve as companies work toward returning to pre-pandemic operations. We have seen businesses in the communities begin to regain their footing after the difficulties of 2020. And as of March 31st, 2021, the governor of the state of Texas removed restrictions initially set in place allowing businesses to reopen at full capacity. During the first quarter, we also noted a build in liquidity in the system and continued to increase our deposits. We anticipate that our customers in the bank will be able to put that liquidity to work during 2021, particularly as conditions in our markets continue to rebound. Our asset quality remains strong, During the quarter, we have seen a decline in the number of loans subject to deferral arrangements for businesses impacted by COVID-19 pandemic, which allows us to focus on those businesses hardest hit by the pandemic. New loan activity continues to slowly pick up as markets reopen, and we expect that we will maintain this upward trend, especially during the second half of the year. Through the first quarter, we have minimally adjusted our economic qualitative factors associated with our ACL that would be more aligned with an improving economy. However, our expectation is that in coming quarters, with the continued economic improvement, we will be adjusting for the economy, bringing our ACL back in line with more traditional levels. Our capital remains strong, which allows us to increase our dividend to our shareholders. We will continue to evaluate our dividend policy along with the share buybacks to make sure we maintain a strong capital base that allows us to take advantage of acquisition opportunities. Our focus is to create shareholder value and enhance shareholder return when opportunities are available. We continue to work with the OCC with respect to compliance regarding the conformal agreement and to focus time and resources on our Bank Secrecy Act program to meet the regulatory expectations. We will continue to do so until the release of the formal agreement. The OCC just recently completed its examination and we await its final conclusions. We are optimistic about the remainder of 2021, particularly in the second half of the year, as our great team, our customers, and our communities can shift their focus from the difficulties associated with the pandemic to a more opportunistic aspirations and growth. We maintain our strong balance sheet and capital position to allow us maximum flexibility in meeting our goals for the company and our shareholders in 2021. I'll now turn this over to Ted Paget, our Chief Financial Officer.
spk04: Thank you, Bob. References to certain financial information for the first quarter and prior periods begins on slide four of our investor presentation, if you want to follow along. The company reported net income of $10 million, or 41 cents per diluted share, for the quarter ended March 31, 2021, compared to $10.2 million, or 41 cents per diluted share, for the quarter ended December 31, 2020. Net interest income for the first quarter was $33.1 million, an increase of $570,000 from the fourth quarter of 2020. The net interest income on a tax equivalent basis was 371 for the first quarter, 21, which is an increase of nine basis points from the fourth quarter of 2020. The loan yield increased 22 basis points to 464 for the first quarter, compared to the fourth quarter of 2020. It was assisted by accrued net origination fees of $3.2 million and $2.1 million, respectively, from the Paycheck Protection Program loans. The cost of the interest-bearing liabilities was 34 basis points for the first quarter, compared to 39 for the fourth quarter of 2020. The provision for credit losses was $412,000 for the first quarter of 21 and was primarily due to increases of $237,000 and $126,000 in the ACL for loans and unfunded commitments, respectively, in addition to $49,000 in net loan charge-offs. Non-interest income for the first quarter was $3.1 million, a decrease of $411,000 from the fourth quarter. The decrease from the fourth quarter primarily resulted from decreases in gains on sales of assets and deposit account service changes with $187,000 and $77,000 respectively. The decrease in non-interest income for the first quarter of 2020 resulted from decreases in swap fees and deposit service account fees of $964,000 and $292,000, respectively. Non-interest income for the first quarter of 2021 was $23.3 million, a decrease of $373,000 from the fourth quarter. First quarter of 2021, Professional and director fees decreased $1.7 million from fourth quarter 2020. In consulting-related fees associated with BSA AML compliance matters, salaries and employee benefits increased by $1.3 million to $14.2 million. Turning to the balance sheet, total assets in March 31 increased by $7.9 million to $4 billion compared to $3.9 billion in December 31, 2020. The growth was driven by net deposit inflows of $83 million during the period. Loans, excluding loans held for sale at March 31, 2021, decreased $32.5 million to $2.9 million compared to December 31, 2020. PPP loans, net of deferred fees and unearned discounts, were $268.8 million at March 31, 2021, and $271.2 million at December 31, 2020. Deposits at March 31, 2021 increased $83 million to $3.4 billion compared to $3.3 billion at December 31, 2020. The company maintains strong capital ratios as the total risk-capital ratio increased to 17 percent, the CET-1 capital ratio increased to 15.75, and the Tier 1 leverage ratio was 11.90 at March 31. Nonperforming assets totaled 23.6 million 59% of total assets in March 31, 2021, compared to 24 million, or 0.61% of total assets in December 31, 2020. The allowance for credit losses for loans was 40.9 million, or 1.41% of total loans in March 31, 2021, compared to 40.6 million, or 1.39%, total loans in December 31, 2020. The ACL increased in the first quarter of 2021, primarily due to increases of $237,000 and $126,000 in the ACL loans and unfunded commitments, respectively, in addition to $49,000 in net loan charge-offs. Now we'll turn it over to Jill West.
spk03: Thank you, Ted. I'll speak a bit to our loan portfolio, beginning with slide seven from the investor presentation. For the first quarter, our net loans were down slightly at $2.85 billion versus $2.88 billion at the end of 2020, a decrease of approximately $32.7 million, primarily due to pay downs during the first quarter of 2021. Our average loan yield for Q1 was up from 4.42% for Q4 2020 to 4.64%. Our average yield on loans for Q1 when excluding the PPP loans was 4.49%. For the quarter, C&I loans were up by approximately 13.8 million, or 1.9% compared to Q4. CRE was up 2.9% quarter over quarter. C and D was down 11.2% compared to the fourth quarter. One to four family was down 6.3%, and multifamily was up 5.2%. Slide eight sets forth the components of our commercial loans, and our gross commercial loans stayed relatively flat for the first quarter, 2.56 billion versus 2.56 billion at the end of 2020. As you turn to slide 9, you will see our construction and development loan components and our construction and development loans were down approximately $58.6 million when compared to December 31, 2020, due to existing C&D levels reaching completion and moving to permanent loan classification, as well as some payoffs. Slide 10 sets forth our oil and gas exposure, including how we quantify direct and indirect exposure. Our exposure for the first quarter remained relatively flat compared to the exposure at the end of 2020. Slide 11 sets forth information about our PPP loans. During the first quarter, our team worked with customers on the latest round of PPP financing and originated 834 new PPP loans with principal balances totaling $122.3 million. Our team also continued to work with our borrowers on forgiveness applications, and at March 31, we had received payments totaling $123.4 million compared to $60.8 million of payments received during the fourth quarter. During the second quarter, our primary focus in this area will be on forgiveness applications as we stop accepting PPP loan applications beginning April 25. The table at the bottom of slide 11 sets forth our average yield on our loan portfolio our average yield on our PPP loans and the average yield on our portfolio when taking out the PPP loans. Slide 12 sets forth information regarding deferral arrangements that we entered with our customers as a result of the COVID-19 pandemic. The total number of our deferred loans was down to 16 at March 31, and the principal balance of both loans remaining on deferral at the end of March was $34.3 million. The largest category of our remaining deferred loans is in our commercial real estate portfolio with seven loans, principal of approximately $22.7 million. The bottom of slide 12 sets out a breakout of what we think are the elements of our portfolio that are most sensitive to the COVID-19 virus. Retail centers, oil and gas, convenience stores, gas stations, hotels, and restaurants, and a comparison across Q1 and Q4 of 2020. Those elements comprise approximately 25.3% of our total loans at March 31 and December 31. Slide 13 sets forth information about our allowance for credit losses during 2021. As Ted noted, our allowance for credit losses to loans was 1.41% at March 31-21. Turning to slide 14, our non-performing assets decreased slightly during the first quarter, and our credit quality remains strong. Slide 16 shows information regarding our non-performing assets to our total assets, which was 0.59% as of March 31, 2021, compared to 0.61% as of December 31, 2020. Our net charge-offs remained low at 0.01% of average loans on an annualized basis. With that, I'll turn it back over to Bob Franklin. Bob Franklin Thank you, Joe.
spk05: Andy, I think we're ready for questions.
spk08: Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We have our first question from the line of Graham Dick from Piper Sandler. Your line is open.
spk07: Hey, good morning, guys. Good morning. So loan balances excluding PPP originations were down just a bit this quarter. Sounds like, you know, mainly on pay downs. But then on last quarter's call, I think we had talked about you all getting back to that 5% to 8% growth rate, you know, maybe after the first part of the year. you'll still feel good about getting in this range going forward, maybe in the back half of the year mainly.
spk05: Can we turn that up a little bit? I'm sorry, Graham. I couldn't hear the last part of your question.
spk07: Yeah, sorry about that. Can you hear me a little better now? Any better?
spk02: Yes.
spk07: So, yeah, basically just wondering... how you guys are feeling about getting back to that 5% to 8% growth rate going forward, mainly, I guess, in the back half of the year as things start to pick up in your economies?
spk05: Yeah, I think, you know, we were feeling fairly good that we were able to hold sort of loan balances pretty well flat through the pandemic and into the first quarter and that We were able to keep up with paydowns and at least keep ourselves in a relatively flat position. But really, I think the growth prospects are starting to come in, pipelines starting to build a bit during this quarter, but I think the growth will come primarily in this third and fourth quarter. We're starting to see a lot of good economic activity here. And as we get towards the end of the year, we still feel like it may be at the lower end of that range. It just depends on the economic activity here. But I still think we can get back to that 5% to 8% growth rate.
spk07: OK, great. That's helpful. And then I guess I'm moving on to the BSA AML compliance efforts. So I know you guys just had your examination here in February. I'm not sure how much you guys can discuss in the call, but I just wanted to get maybe a little color on how encouraged you guys might be by it or what you kind of think I guess the investigation looks like going forward.
spk05: Yeah, I mean, there's not too much I can say here. I think it's We were encouraged by the examination, and it'll take them a month or two. I'm not sure we will get the examination back until sometime probably late May or early June, but just the way that things work. But we're waiting on those results, and as we get those back, we'll give folks more information.
spk07: Okay. And then I guess last for me, we've started to see a bit of a trend with some larger M&A transactions recently. But obviously, you guys are looking for something completely different than those deals. So I just want to get your thoughts on how smaller bank M&A conversations have been progressing and then maybe what the main roadblocks might be to getting something that fits your criteria, I guess, across the line.
spk05: Well, as you guys have seen across the board, and it's been reported in the press, there's a lot of conversations going on, a lot of combinations happening. And I think more and more of that is going to continue to go on. I've thought for a long time that it was going to take something to get people's realistic expectations around pricing. And I think the pandemic maybe has done some of that. And we've also seen a pretty significant shift in the way people are looking at financials to give people a better currency to use to go out and do deals. So a lot of conversations going on. I think if we can match expectations of price along with what people can afford to pay, We'll see a lot more of this, and it just seems to me that those things are happening right now. We're having a lot of conversations with whether it be bigger, equal to, or smaller. I mean, I think it's all, we're having all of those conversations and trying to figure out what the right way to go. For us, it's nice to have options, and I think that's where we sit today.
spk07: Okay, great. Thank you. Congrats on a good quarter, guys. Thank you.
spk08: Thank you, sir. Again, everyone, if you would like to ask a question, you will need to press star 1 on your touchstone telephone. We have our next question from the line of Thomas Wendler from Stevens. Your line is open. You may ask your question, please.
spk01: Thank you, and good morning, everyone. I have a few questions for you. First, when we saw a nice move up in the security portfolio last quarter, Should we expect to see continued deployment of excess liquidity into the security book? And then do you have any internal limits on how large you want to get the security book?
spk05: Yeah, Thomas, we did start to increase the securities portfolio really over the last half of the year in trying to find opportunities to deploy some of the excess liquidity that we had. We're very cautious around... making mistakes and deploying too much into the things that would cause us problems later on. My contention is after going through a few of these over the years, as you come out of these things and you have a lot of excess liquidity, a lot of mistakes get made, whether it be in the loan portfolio or the bond portfolio. So I think we'll remain cautious around what we do on both sides of that to make sure we're not chasing yield in one way or the other. But we will probably continue to add a bit to our bond portfolio, making sure that we have cash flows available to reinvest over time. But we have to be a bit cautious, especially with interest rates as low as they are, to not get ourselves in a situation that we would regret later on. Yes, you did see a trend there, and I think we'll continue to look at that.
spk01: Good. Thank you. That's some good color. And then on the repurchase program, what kind of appetite are you guys having for repurchasing shares at current prices?
spk05: Well, we're always looking at it. We've got a program out there right now. We haven't been able to buy as much as we may have liked before. over time, but we continue to look at that, continue to look at the prices that we would pay and what that effect is to our balance sheet. And so right now we feel like we're okay, I think, but we will continue to look at share buybacks. We looked at our dividend policy and it felt like it was a good idea to increase our dividend. We did that by about 50% last last quarter and we'll continue to look at that over time. So trying to enhance shareholder return in various ways along with trying to really find ways to lever the capital in really by utilizing an acquisition which we think is probably the best way to help us gain some scale and put to work the liquidity that we have along with the excess capital.
spk01: Yep, sounds pretty consistent. And then one last housekeeping item from me. Can you give me an idea of the forgiveness timeline you're expecting for the remaining PPP loans and fees?
spk05: Yeah, you know, that's an interesting question. I don't know that we necessarily have a timeline. Our suspicion is that the second round of this or Third round, as you might call it, might be quicker in that these people, I think, are going to be looking for forgiveness pretty quick after this. Rules are a little bit different. But it's been fairly consistent the way we've gone through on a month-to-month basis, but I know that we'll be concentrating more on trying to get people to go ahead and get this done. It's hard to tell exactly where people are going to be, but it seems to me the second part of this is going to go faster than the first.
spk01: Okay. Yeah, no, that sounds great. Thanks for answering all my questions, guys.
spk05: Appreciate it.
spk08: Thank you, sir. We do have another question from the line of Will Jones from KBW. Your line is open.
spk06: Hey, great. Thanks. Good morning. Good morning. Good morning. Hey, so Bob, I just wanted to flip back to M&A for just a brief moment. You know, it has been a notable year in M&A, particularly with larger, more transformational type deals. And, you know, one of those happened to be right in your backyard with, you know, the Cadence Stainforce South deal right there in Houston. You know, I'm sure you know with a transformative deal like this, it often brings along a bit of market disruption and a bit of dislocation. Just curious how CBTX is positioned to capitalize on some of this disruption, whether it be market share takeaway, lender hiring. Where does the company see the most opportunity to capitalize here?
spk05: Yeah, in that particular transaction, well, I'm not sure. Cadence really positioned themselves, at least in what we've seen, in doing a lot larger transaction and really went about the market in a sort of a larger bank way. A lot of what they were doing doesn't necessarily fit into what we were doing. The other side of that transaction really was still trying to build out market share here and so there may be a few opportunities there to look at as people try to figure out what their positions are in these new organizations. And we certainly have our feelers out. But in some cases, it may be more along the lines of additional customer opportunities than it is officer opportunities just based on the types of things that they were doing.
spk06: Got it. That makes sense. And then maybe just last for me, just looking back to the buyback for one second, you know, your stock is not quite as cheap as it used to be. I think trading around 1.7 times tangible now. You know, it sounds like the appetite for the buyback is still there, even at these, you know, higher price levels. Is there a point where the buyback doesn't make as much sense for CBTX from a capital deployment standpoint?
spk05: Well, I think That's two separate things. The appetite to buy back stock is probably still there. What's being served up to us today, it's a higher price. And we have to look at that in the context of what we feel is a good earn back. And so it's obviously not nearly as attractive to us today as it was when when it was trading a lot lower because it just doesn't make sense for us as a buyer. But I think we feel strongly about the future of the organization and certainly still don't believe that we're necessarily being priced at what we think the organization's worth. But we certainly feel like The market is starting to recognize the value in our organization and so we like that, but we'll always gauge what's proper for us as a bank to determine what the right price to buy these shares back is. That's what we'll do going forward.
spk06: That makes sense. And just lastly for me, if I could slip one more quick one in here, it's great to hear the commentary, you know, around the reserve levels. It feels like the confidence level is certainly picking up as the economic outlook, you know, kind of brightens a little bit, brightens a little bit. Could you just remind us, you know, what's your day one, you know, CECL reserve was? you know, back in 1Q20, you know, if you kind of strip out some of that COVID provisioning and then, you know, longer term, do you feel like the reserve could steadily trickle back down towards those levels? Is that a fair way to think about it?
spk05: Yeah, I do. I mean, I think we're, you know, we typically, I guess, run in the 1 to 115 range. I think that's That's something that we would see over time would be sort of the right place for us to be. Now, CECL drives us in different ways, and maybe that's slightly higher based on CECL today, but we do feel like we've gone through the terror of June of 2020 when we saw 500 people million plus of deferral requests come in and now we're down to very few. And so I think we also have seen many of our borrowers, most of our borrowers back on track again and we understand the ones we have to work with. And even the ones that we thought were the most stressed appear to have some light at the end of the tunnel, and it looks like they're starting to come back. So we feel pretty strong about the portfolio, and the reserve as it sits today is really high level for us. I mean, that's something that we're not used to and don't feel like it may be necessary as we move through the rest of the year. Now, loan growth will impact that also, but it also means that we won't have to to add to it maybe as we go forward. So it's a balancing act between loan growth and what the reserve needs to be to cover what we have.
spk06: Great. Thanks for taking my question.
spk05: Appreciate it, Will.
spk08: Thank you, sir. Again, everyone, if you would like to ask a question, you will need to press star 1 on your touchtone telephone. There are no further questions at this time, Mr. Sanders. I would like to turn back the call to Mr. Bob Franklin. Go ahead, sir.
spk05: Thank you very much. I appreciate everyone's interest in CBTX, and we look forward to speaking with you next quarter. Thank you.
spk08: Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you for participating.
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