CBTX, Inc.
Q4 2020 Earnings Call Transcript
Published:
- Operator:
- Ladies and gentlemen, thank you for standing by. And welcome to the CBTX Fourth Quarter 2020 Earnings Conference Call. At this time all participant lines are in listen only mode. After the speaker's presentation, there'll be a question and answer session. . Please be advised that today's conference may be recorded. . I would now like to hand the conference over to your host today. Justin Long. General Counsel, please go ahead.
- 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 the CBTX earnings call for the fourth quarter of 2020. We appreciate you joining us. We issued our earnings press release yesterday afternoon, copy of which is available on our website, along with the slide presentation that we will refer to during this presentation.
- Robert Franklin:
- Thank you, Justin. Welcome to the earnings call for CBTX Inc. for the fourth quarter of 2020. We entered the fourth quarter of 2020 with caution, as we experienced an ever increasing contentious political climate and an acceleration in COVID cases in our markets as well as across the country. These conditions remain as we enter 2021. We are watchful for the economic impact of the policies of the new administration while we continue to be encouraged by the distribution of various vaccines, allowing communities to move more freely again. Our customers remain resilient, even though our markets are not fully open. We continue to see a drop in our current deferrals and requests for new deferrals. Loan activity is beginning to pick up. And we expect that new loan relationships will steadily increase throughout the year slower in Q1 and Q2 but picking up in the last half of the year. The year 2020 was impacted by markets negatively affected by the pandemic, larger than normal loan loss provisions, lower interest rates and a large spin related to our BSA program. We believe we have identified our major risks in the portfolio and adequately reserved for them. We have lowered our cost of funding to meet our lower lending rates. And we are hopeful for the new vaccines and the complete reopening of our markets.
- Ted Pigott:
- Good morning. Thank you, Bob. We'll move into the fourth quarter 2020 results. Company reported net income of $10.2 million, or $0.41 per share for the quarter ended December 31 2020, compared to $6.4 million or $0.26 per diluted share for the quarter ended September 30 2020. Net income for the year ended December 31, 2020 were $26.4 million or $0.6 per diluted share compared to estimate $50.5 million or $2.02 per diluted share for December 31, 2019. For the fourth quarter of 2020, net interest income increased 2.6% compared to third quarter 2020. The yield on interest earning assets increased to 3.79% for fourth quarter 2020 compared to 375% for third quarter 2020. The cost on interest bearing liabilities was 0.39% for fourth quarter 2020 compared to 46 basis points for third quarter 2020. The net interest margin on the tax equivalent basis increased 7 basis points to 3.62% in fourth quarter compared to the third quarter. Net interest income for the fourth quarter 2020 decreased $501,000 compared to the third quarter. During the third quarter of 2020, the bank receives non-taxable death benefit proceeds of $2.2 million under a two bank-owned life insurance policies. And we recorded a gain of $769,000 over the carrying value during the third quarter. Non-interest expense for the fourth quarter of 2020 was $23.7 million, a decrease of $200,000 compared to third quarter 2020. Primarily due to a decrease in salaries and employee benefits of $1.5 million partially offset $663,000 increase in professional and directors fees mainly consulting fees related to Bank Secrecy Act anti-money laundering compliance matters. Net interest income for the year ended December 31, 2020 decrease 23.6% from 2019. The yield on earning assets was 3.98% for the year compared to 4.95% for the year 2019. The cost of our interest bearing liabilities was 0.57% for 2020 and 1.07% for 2019. The net interest margin or tax equivalent basis decreased 69 basis points to 3.73% for the year 2020. Net interest income for 2020 was $14.8 million. Earnings on bank life insurance for years 2020 and 2019 included $769,000 and $3.3 million, respectively, of non-taxable gains on death benefits on bank owned life insurance claims. Additionally, deposit account service charges decreased $1.5 million in 2020 due to lower transaction fee activity. Non-interest expense for 2020 increased $2.0 million or 2.2% from the year 2019. Professional and director fees include $3.9 million and consulting fees regarding the company's BSA AML class efforts.
- Joe West:
- Thanks, Ted. Let me speak a bit to our loan portfolio starting with Slide 8 from the investor presentation. For the fourth quarter, our loans were down slightly at $2.92 billion versus $2.96 billion at the end of the third quarter of this year, a decrease of approximately $40.4 million. As a result of the forgiveness and pay off of our PPP loans, which are down to $275.4 million on a gross basis at the end of the year. Our average yield was up from Q3 2020 with a yield of 4.37% to 4.42% for the three months ended December 31. Our average yield on loans for Q4 when excluding the PPP loans was 4.51%. For the quarter, C&I loans were down by approximately $87.7 million or 10.8% compared to Q3, that's a $56 million pay down in the PPP loans and $31 million pay down in the non PPP for portfolio. CRE was up 9.7% quarter over quarter. C&D was up 3.2%, one to four family was up 5.5% and multifamily was down 13.5%. As you turn to Slide 10, you will see our construction and development loan components and our construction and development loans were up approximately $16.5 million when compared to September 30, 2020 due to additional construction funding in the community development portfolio and some land development planning.
- Robert Franklin:
- Thank you, Joe. And with that, we'll go ahead and open it up for questions. Operator?
- Operator:
- Our first question comes from a line of Graham Dick with Piper Sandler. Your line is now open.
- Graham Dick:
- Good morning. Can you just go into a little more detail about the loans have moved to nonperforming this quarter. You know, just kind of like what industries they might have been focused in, and then on the CRE loan like kind of, whereas might be sitting on a loan to value basis. Just really any additional color here, I think would be great.
- Robert Franklin:
- Yes, I'm going to make one comment then I'm going to let Joe give you more detail. You know, we have chosen, and I don't know how everybody else would do it. From our standpoint, we chosen to treat problem credits the same way we always have. We don't use the Cares Act to determine whether something's a TDR or not. If it’s a TDR we feel like it's then we treat it as such COVID related or not. So in that light, you can you can understand some of the detail that that Joe will give you. Joe go ahead.
- Joe West:
- There are two relationships that make up the bulk of the dollars that we moved into nonaccrual in Q4. One relationship was in the automotive repair industry and business was down significantly due to COVID. So, we granted them a deferral, but they granted additional deferral, but when we did the additional deferral in Q3 we downgraded substandard, but not did not place it on nonaccrual at that time and then as operating results continue to suffer in Q4 we went ahead and put it on nonaccrual. The other one is an industrial metal fabricator, a lot of their businesses in the marine industry. And that's not a COVID issue that was had been substandard for like a couple of years. And we just kind of have been limping along. And as the business has deteriorated, we moved it in Q4 and move that to nonaccrual. There's no real estate associated with that. There is some commercial real estate associated with the automotive company that I mentioned a while ago. That is their primary, its commercial real estate, it’s a primary location and loan to value on that particular loan is 80%.
- Graham Dick:
- Okay, great. That's a great color. Thank you. And then also, I guess, what are you seeing in terms of migration into criticized and then classifieds compared to where you're at in the third quarter? And what do you kind of expecting in 2021? Have you already factored in some more migration into your reserve and do you think where it fits right now is pretty good considering what you're expecting?
- Robert Franklin:
- We think -- as I wanted to emphasize in for this increase in NPA that we had in Q4 before problems that we identified in Q3 or earlier and so if you look at our total levels of classified, it's remained fairly constant over the last four or five months. And elevated obviously as compared to a year ago but over the last four or five months, that total number has remained constant. And we're not seeing new things migrate that way to any major extent, we think that we've got a handle on the problems. And we're continuing to work with people, because we probably think in most cases that are the best way to get repaid, probably give them a little additional work time to work the issue out. So we don't see, as we look forward into 2021. We're not seeing deterioration in the credit quality of the portfolio. I think we think we've got our problems identified at this time and we don't see this by too much new problems hitting books in 2021.
- Graham Dick:
- Okay. And then, I guess just one last question here switching expenses, excluding that $2.4 million BSA AML consultant expense. Looks like you guys did a pretty good job managing the expense basis quarter, mainly on lower salaries. Is there anything specific that happened here in the fourth quarter? And can you give me a sense of where you think the quarterly run rate might settle out in early 2021?
- Robert Franklin:
- Yes, the biggest adjustment, and I'll let Ted speak to the run rate for 2021. But the biggest adjustment in the fourth quarter, was there some adjustment to some bonus accruals that we had had based on a better year. So it's, we had some adjustments in the fourth quarter to salary expense around that. As far as run rate going forward, I'll let Ted address that one.
- Ted Pigott:
- I think we normalized the fourth quarter for . So given that as our run rate going forward, I think the only thing you'll see in the first quarter, we generally do our salary adjustments first quarter, which I think we'll not be on the same runway that you've seen in prior years. We've already looked at that and tighten that down. Other than that, I don't really know of any major things that are going to affect this going forward like that.
- Graham Dick:
- Okay, that's very helpful. I'll jump back in the queue. Congrats on the quarter guys.
- Operator:
- Our next question comes from a line of Will Jones with KBW. Your line is now open.
- Will Jones:
- Good morning, guys. So I just wanted to let you know switching back to the credit a little bit, just wanted to touch on those COVID deferrals that were moved to TDR this quarter, just maybe get a little more clarity around the decision to move those loans? And has anything really changed regarding the mechanics of those loans, or how they'll be treated moving forward?
- Robert Franklin:
- I didn't quite. The partner question I didn't quite understand it. Can you repeat it.
- Will Jones:
- Yes, just a little more clarity around the COVID deferrals that were moved to TDR this quarter, does anything really change about how those will be treated moving forward?
- Robert Franklin:
- I would say, not they may, we're going to continue to work with them. There could be additional deferral given depending on how we gauge their prospects for business in 2021. One of them, the problem is that the one have been classified for a longer period of time is really not a COVID issue. They've had revenue problems prior to the to the pandemic. So it will continue to work, we might grant some additional forbearance there, if we can see our way to better collection process this year. So if both of those are sort of at a point where we're evaluating their. The plans they've given us for the near and medium term and trying to decide what's in the best interest of the bank regarding the additional restructure of loans.
- Will Jones:
- That's helpful. Thanks. And then maybe just moving on to growth. You know, you guys sound pretty optimistic about 2021. And I think CBTX was one of the few banks that outside of PPP, was actually able to get a little bit of organic growth this year. Does the mid-single digit growth range feel like a fair number next year?
- Robert Franklin:
- Yes, well, I think our expectation is that we get back to our normalized growth, which is 5% to 8% a year, this is our typical target. Now, I can't give that guidance really and with any kind of specifics, just because I just don't understand what first and second quarter are going to give us. And really clouds the rest of the year because I think it's going to be difficult to understand exactly. Most of our business comes from shoe leather marketing. So when we can get out and visit with our customers and our prospects that makes it difficult for us. So lot of our load generation is coming from existing customers, which is great. And that happens on a regular basis, year in year out COVID or not. And so that business will continue at a much better pace, then what are they maybe new prospects and new businesses. And so it's too difficult at this point to really know that that we will be back on that track. Our expectation and feeling is that we possibly could get there. But I can't fit with any certainty tell you that. That we're going to be able to but that's our goal anyway.
- Will Jones:
- Understood, great. Definitely a tough environment to look ahead and forecasts a little bit. Just last one for me on the buyback. You know, you guys were a little active this quarter 150,000 shares, which is great to see. Surprised, it wasn't a little more than that. Just given your stock has been trading so cheaply, especially at the time that you guys reinstated. Just wanted to hear your thoughts on your buyback appetite moving forward and how you guys think you'll deploy some of your excess capital?
- Robert Franklin:
- Well, we always look at that everything. We're looking at buybacks, looking at possibly increasing the dividend and still are hungry for some M&A and I think M&A is something that's, that's top of mind right now. I think as people have a lot of conversations, we continue to have a lot have conversations with people. But as far as the buyback goes, I mean, the limitations around the programs that are available to us make it a little bit difficult. The flow of the stock makes a little difficult, but it's, we're buying what we can every day. So we continue to be in the market to buy our stock back, we still think it's cheap relative to what other uses we might have for that capital. So we feel like it's still a good buy for us. But we're also looking to employ that capital in a very different way. And we think that maybe this COVID debacle will provide some opportunities. I think people are reassessing where they are and what their opportunities are. And we were encouraged by the conversations that we're having out there that that more and more people are considering transactions. So we'll see what happens over the next 12 months, but we're looking at several different ways to try to employ some of that excess capital that we have. We're hoping it's not in a negative way.
- Will Jones:
- No, absolutely not. Okay, that's it for me, guys. Thanks for all this color, and congrats on the quarter.
- Robert Franklin:
- Thank you very much.
- Operator:
- Thank you. There are no further questions at this time. I will now turn the call back over to Bob Franklin forclosing remarks.
- Robert Franklin:
- Well, very good. We appreciate everyone joining us on the call today. Thank you for your interest in CBTX. And with that we are adjourned. Thank you.
- Operator:
- Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.