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spk09: Ladies and gentlemen, thank you for standing by and welcome to the CBTX Q2 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. If you have a question during the session, you need to press star 1-1 on your telephone. I would now like to turn the call over to your host, Justin Long, General Counsel. You may begin.
spk08: 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, 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 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 Bob Franklin, our Chairman, President, and CEO, Ted Paget, 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.
spk06: Thank you, Justin. 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 have also seen some of the benefits of our low price deposit base that 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. 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 two 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 adjusts to inflation and higher interest rates, we are very optimistic on the long-term future of our bank. Now I'll return the meeting over to Ted Pygott, our Chief Financial Officer.
spk05: Thank you, Bob. Certain financial information for the quarter into June 30, 2022 and prior periods begins on slide six of our investor presentation. The company has reported net income of $11.7 million, or 48 cents per diluted share, for second quarter 2022, compared to net income of 10.6 million, or 43 cents per diluted share, for first quarter 2022, and net income of 11.7 million, or 0.48 cents 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 deposits in other financial institutions. from first quarter 2022. The net interest margin adjusted on a tax equivalent basis increased 27 basis points to 3.49% from first quarter of 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 percent for second quarter 2022 and 0.32 percent for second quarter of 2021. The provision for credit losses was $126,000 for second quarter 2022 compared to a 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 included 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 assets underlying a portion of the company's equity investments, partially offset by a $1.2 million loss, including net gain on sales assets for the disposal of the building and improvements for 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 of 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 a $1.3 million decrease in professional and director's fees, primarily related to PSA AML compliance matters and legal fees, partially offset by $1 million cost related to the pending merger with Allegiance Bank shares. Our efficiency ratio for the second quarter 2022 was down to 61.84%. Our assets were 4.32 billion at June 30, 2022, a 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, 2022. and increased 303.4 million or 11.1% from June 30th, 2021. Loans excluding loans held for sale and PPP loans increased 473.6 million or 18.6% to 3.2 billion from June 20, 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%, the CET1 capital ratio was 14.49%, and the Tier 1 leverage ratio was 11.48% at June 30, 2022. Non-performing assets total 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% at June 30, 2022. It was 1.09% at March 31, 2022, and 1.36% at June 30, 2021. I'll now turn it over to Joe West. Thank you, Ted. I'll speak a bit to our loan portfolio, beginning with slide 9 from the investor presentation.
spk04: 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 paydowns or payoffs, excluding PPP loans. For the quarter, C&I, including the effect 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 up 87.6 million, or 18.5% compared to the first quarter. One to 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 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 loans 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 to $8.9 million, and we received $8.8 million related to forgiveness or 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 when you take 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 1.06% 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.
spk06: Thank you, Joe. With that, we'll open it up to questions.
spk09: Ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your touch tone telephone. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Brady Gailey with KBW. Your line is open.
spk07: Hey, thanks. Good morning, guys. Morning, Brady. I just wanted to start with the lack of said 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?
spk06: Well, 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 ticker 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've talked to other folks that have gone through this process, Fed doesn't communicate with you much. 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 our understanding is that we are in line We just don't know where we are in line, and there's some 20 to 25 deals pending right now before the Fed. So it's very frustrating to us, very frustrating to our employees and folks in trying to get this deal done, because we're poised, ready to hit the button. But we are waiting on the Fed.
spk07: Doug? 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?
spk06: 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, a little over 93,000 shares this 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 this continues to go on, we do feel like that's a good place for us to go. Okay.
spk07: And then finally for me, I know you guys have talked about kind of a 5% to 8% lung growth rate. You clearly did a lot more than that this quarter. What's the update on how you're thinking about kind of core organic loan growth going forward?
spk06: 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 feel like there's opportunities for us. The 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. 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. It's still a good economy for us. I think we'll see bone growth start to wane a bit just because that seems to be what the Fed and everybody wants to happen. But we're going to continue to take our opportunities where we can. I don't think we're going to do necessarily this type of lung growth for the next several quarters, but I do think it'll come off a bit.
spk09: Okay.
spk07: Great. Thanks for the call, Bob.
spk01: Thank you. One moment for our next question. Our next question comes from Brad Millsaps with Piper Sandler. Your line is open. Hey, good morning, guys. Good morning, Brad.
spk02: 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, you know, further margin expansion from here. You know, pre-COVID, you know, you were much higher. I know the balance sheet's a little bit different, but... What would you view as kind of your opportunity to, you know, improve the NEM from here?
spk04: Yeah, we think, this is Joe, we think that we're through these floors. You know, the first couple of moves, you know, there was the March 17th quarter pump, quarter point bump, and the May 5th half point bump. Those pretty much cost up to the floors. And this last bump, the June bump was, you know, 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, yeah, we've caught up to the floors for the most part, and that should have helped us expand the margin a little bit.
spk02: 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 looked like headcounts down about 40 people. Just kind of curious, I know you outlined 15% expense saves when you announced the deal. Are some of those savings maybe already in the run rate? Just kind of curious how to think about, you know, kind of the expense save opportunity. Have you identified more, any change in regard to that?
spk06: Well, you know, I think the answer to your question is yes around all those things. The thing for us is we are moving towards getting these two banks put together. And as you think about people and And as we identify certain folks that will go forward, certain ones that won't, ones that are going to stay through certain dates, this is all taking place right now. So some of this stuff is associated with what we're doing and the combination. And I think that's a good thing to some extent. It does put pressure on some of our folks 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. We've got one more hurdle to get over and we're not sure where they placed the hurdle.
spk02: Okay. Thanks, Bob. And maybe just a 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 with rates, but just kind of curious if you guys had any plans just to maybe –
spk06: kind of level set expectations there in terms of kind of how we should think about you know the two companies coming together given given all the things that have happened yeah i think there'll be some opportunities to do that i don't think we're really prepared to do that today but um 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.
spk02: 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 the companies, you know, could earn. It would seem to me that that would have only improved given kind of where rates have moved.
spk06: Yeah, I don't. I'm 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's been better. I think pricing's been better. I think the things that would affect the go-forward operating piece of this is better than what we projected. I'm sure if somebody looked real hard, they'd find something that wasn't. So I hate to generalize like that, but for the most part, I'll say that we look like we've improved over what we had projected. Great. Thanks, Bob.
spk01: Thank you. And one moment for our next question. Our next question comes from Matt Only with Stevens.
spk09: Your line is open.
spk03: 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 approval soon?
spk06: Well, that's a good question, Matt. We're getting really close. We've got a couple of dates identified. So we're pressed a little bit on the first one, I think. The second one isn't far behind that. So, I mean, we're still in this year. If it goes too much longer, I think we may have to push that conversion into next year. But I will say that it still appears that if we can get it, get approval within the next few weeks that we still have a conversion date that we can meet in 2022. Okay.
spk03: Appreciate that, Bob. And then on the loan growth front, it looks like a lot of the growth this quarter was driven by construction. We'd just love to hear more about this. And it looks like it was diversified based on your disclosures from commercial to multifamily to land. I think you disclosed that the construction balances are now over the 100% guidelines. Would love to appreciate if this is short-term in nature or anything else you can disclose around the construction piece. Thanks.
spk06: Well, in a normalized operating environment, there's been sort of two larger components the C&D book and that one of those is just our normal C&D business, which is fairly diversified in what it is and just our normal C&D business, which is fairly diversified in what it is and actually geography too, because we're doing some things that in Dallas, we're doing some things in Austin, we're doing 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 be six 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. 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 regulators like to see. So when they look at us and you take that piece out, it drops down to the mid-80s. And the same thing if you look at CRE, and where we are in the CRE versus the 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.
spk03: Yeah, that's great, Keller. I appreciate that. That's helpful. And then I guess shifting over towards deposit costs, it seems like most banks that 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 bank's 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?
spk06: Thanks. 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 than some others. But 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 until this point, and I think we'll continue to lag behind. The most important pieces to us is one, maintaining that strong demand deposit base that we have, which we'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 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 are here because of the relationship and they typically are not, they'll shop us a bit with other banks, but for the most part, 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. We're never going to be the highest priced deposit in town, but we're going to stay competitive. So we will move with the market. And right now, the market seems to be fairly well behaved.
spk03: OK. That's all for me. Thanks, guys. Congrats on the quarter. Thank you.
spk09: And I'm not showing any further questions at this time. I'd like to turn the call back over to Bob for any closing remarks.
spk06: Well, thank you very much. Thanks for everyone that's 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.
spk09: Ladies and gentlemen, this concludes today's presentation. You may have a wonderful day.
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