CBTX, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the CBTX Q3 2021 earnings 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 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Justin Long. Thank you. Please go ahead.

Thank you, and good morning. I'm Justin Long, the General Counsel of CDTX, and our management team would like to welcome you to the CDTX Inc. earnings call for the third 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 10-Q for the third 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 factors section of our annual report on Form 10-K, our quarterly report on Form 10-Q for the third quarter, 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 used to the most directly comparable GAAP financial measures is included in our earnings release and investor presentation. I'm joined this morning by Robert Franklin, our Chairman, President, and CEO, Ted Piegett, our CFO, 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 third quarter of 2021. We are proud to present our third quarter results, which continue to be indicative of the transition from the COVID impacted economy through most of the first half of the year to an improved economic environment nationally and in our markets. As we enter the fourth quarter, our credit quality is stabilized and deposits continue to grow. Our customers are starting on new projects and continuing to grow their businesses as confidence grows in the local economic environment. During most of 2020 through early this year, we curtailed our commercial real estate lending due to uncertainty in the sector, largely due to uncertain effects of the pandemic. Additionally, we began in the second and third quarter a return to a natural flow of payoffs, but also have experienced some acceleration due to the pent-up demand for the products we traditionally finance. Thus, the combination of not continuing to fill that pipeline over the preceding quarters and the accelerated payoffs have slowed our portfolio growth. That said, our lenders have done a good job during the third quarter in rebuilding our loan pipeline, and we continue to see those efforts into the fourth quarter. We continue to remain disciplined in our credit decisions and believe that our portfolio will stabilize during the fourth quarter, allowing us to return to our traditional growth rate over the next couple of quarters. With the continued low interest rate environment and our liquidity build during COVID, we have increased our bond purchases during the third quarter and will continue additional bond purchases at a measured pace. However, we know that our best efforts should remain toward building our loan portfolio. Although we monitor our cost structure regularly, as we set our budget for 2022, we will be evaluating our expense base to look for ways to improve our efficiency. Lastly, we have made significant progress on the regulatory front. The OCC terminated the formal agreement relating to our Bank Secrecy Act and anti-money laundering program on September 7th. As I have said previously, the work on the Bank Secrecy Act program was a bank-wide effort, and the agreement was lifted in approximately 14 months. We believe this timing is a testament to our people, our program, and our work with the OCC. We believe that our BSA program today complies and is quite capable of taking on additional scale. In addition, as we set forth in our 10Q, we have entered a confidential settlement discussions with FinSTEM relating to a potential resolution of its investigation into our BSA program. Although I'm unable to speak to specifics of the settlement discussions, we are working diligently to resolve any outstanding matters relating to past workings of our BSA program. We believe that we are well positioned entering the fourth quarter. We have an experienced lending staff and significant capital that gives us flexibility in supporting our future growth and expansion decisions. We have strong liquidity and maintain a loyal, low-cost, relationship-driven deposit base that provides significant shareholder value. Our focus will remain on driving long-term value for our shareholders. Now we'll turn it over to Ted Feig and our Chief Financial Officer. Thank you, Bob. Certain financial information for the third quarter of the entire period begins on slide four of our investor presentation. The company reported net income of $14.4 million, or $0.59 per diluted share, for the quarter ended September 30, 2021, compared to $11.7 million, or $0.48 cents per share for the quarter ended June 30th, 21 and 6.4 million or 26 cents per deleted share for the quarter ended September 30th, 2020. Third quarter results. Our net income, net interest income for the third quarter 21 was 31.2 million, an increase of $231,000 from second quarter 21. The net interest margin on tax-equivalent basis was 3.22% for third quarter 21, a decrease of seven basis points from second quarter 2021. The loan yield increased 16 basis points to 4.52% for third quarter compared to second quarter 2021. The cost of interest-bearing liabilities was 30 basis points for second quarter compared to 32 basis points for first quarter 21. The provision for credit losses was a recapture of $4.9 million for the third quarter as compared to a recapture of $5.1 million for second quarter, primarily due to continued improvements in the national economy, economic forecasts, loan quality, and the size of our loan portfolios. My interest income for the third quarter of 21 increased $1.5 million from second quarter to $5.6 million, primarily due to an increase in earnings on bank-owned life insurance, which we realized was $1.9 million gains. Gains on other sales of assets were $246,000. Non-interest expense for third quarter decreased $825,000 from second quarter to $24.4 million. The increase in third quarter resulted from decrease in professional and director's fees of $874,000. Financial conditions. The total assets at September 30, 2021 increased $142.6 million to $4.2 billion compared to June 21. This growth was driven by net deposit and flows of $114.8 million. Loans, excluding loans held for sale at September 30, decreased $121.1 million to $2.6 billion compared to June 30, 2021. PPP loans net deferred fees and unearned discounts were $100.8 million at September 30, 2021, and $179.1 million at June 31, 30, 2021. Compared to September 30, 2020, loans, excluding PPP loans, decreased 5% on an annualized basis. Deposits at September 30, 2021, increased $114.8 million to $3.5 billion compared to June 30, 2021. Compared to September 30, 2020 deposits increased 11.4 percent on an annualized basis. The company maintains strong ratios, capital ratios, as the total risk-based capital ratio increased to 18.12 percent. The CTI-1 capital ratio increased to 16.87 percent, and the Tier 1 leverage ratio increased to 11.69 percent at the at the end of September 30, 2021. Asset quality. Non-performing assets totals 20.6 billion, or 0.49% of total assets at September 30, 2021, compared to $21 million, or 0.52% of total assets at June 30, 2021. The allowance for credit losses for loans was $32.2 million or 1.23% of total loans at September 30, 2021 compared to $32.2 million or 1.36% at total loans on June 30, 2021. The ACL decreased during the third quarter of 2021 primarily due to a recapture of $5.1 million in the ACL for loans and a provision of $893,000 for unfunded commitments due to improvements in the national economy, economic forecast, the reduction of loan portfolio, and the improvement of loan quality. Net qualities were $82,000 for the third quarter compared to net recoveries of $499,000 for the second quarter of 2021. Now we'll turn it over to Jill West.