Spirit of Texas Bancshares, Inc.
Q4 2020 Earnings Call Transcript
Published:
- Operator:
- Greetings, and welcome to Spirit of Texas Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note, this call is being recorded. I will now turn the conference over to management to begin the presentation.
- Jerry Golemon:
- Thank you, operator, and good morning, everyone. We appreciate you joining us for the Spirit of Texas Bancshares conference call and webcast to review 2020 fourth quarter results. With me today is Mr. Dean Bass, Chairman and Chief Executive Officer; Mr. David McGuire, President and Chief Lending Officer; and Ms. Allison Johnson, Chief Financial Officer.
- Dean Bass:
- Thank you, Jerry, and good morning, everyone. The key to victory in any contest depends upon having a solid strategy, positioning yourself for success with respect to both offense and defense and executing on that strategy. When we first raised public capital in 2018, we knew we had a winning strategy. Over the next 2.5 years, we would partner with 3 bank groups, some of the best and brightest bankers in Texas. And most recently, the Simmons team that we welcomed through the branch acquisition earlier in 2020, which also allowed us to expand our footprint into the San Antonio and Austin markets. We also rolled our loan production office into a de novo branch in Corpus Christi in Q4 and deployed branch optimization efforts through one branch sale and consolidating three locations in existing markets.
- David McGuire:
- Thank you, Dean. I would like to echo and expand Dean's sentiment. I am also tremendously proud of our dedicated staff who have achieved something that is nothing short of amazing. I would also like to expand this sentiment to our borrowers who have operated their businesses and projects this year under an enormous weight. We knew that Texans are tough, but the level of resilience and fortitude shown by our borrowers is truly inspiring. It is a key part of our core values to ensure that our one officers stay close with their borrowers to ensure that needs are met timely. However, during the current year, we asked our loan officers to go above and beyond to work with our borrowers to help all viable businesses and projects survive. The result was hopefully a bond between lender and borrower that will be strong and lasting has emerged from the pandemic. The strength and resilience of our borrowers is best exemplified by their status of loans, which were on deferment periods at the start of the fourth quarter. During 2020, $546 million in loans had requested some form of relief from regularly scheduled payments. At December 31, 2020, and only 15.9% of these loans remained on deferment with the overwhelming majority of these expected to resume payments during the first quarter of 2021. Additionally, we have completed a thorough review of portfolio and downgraded any loans associated with industries expected to have a slower recovery. Hospitality and entertainment centers continue to be negatively impacted and are expected to continue to recover at a slower pace in the coming quarters. These two segments represent $100.6 million or 4.2% and $3.2 million or 0.13% of the total portfolio, respectively. At this time, we believe that the general and qualitative reserve associated with these loans are adequate and any loans demonstrating an inability to pay are quickly moved to specifically impaired and evaluated. Additionally, we continue to see improvement in restaurants, retail centers and loans associated with oil and gas exposure. Thanks to the Main Street Lending Program and demand for traditional lending starting to show signs of life, we were able to achieve loan growth of $88.7 million for the quarter. This was offset by $150.8 million of PPP loans per given during the quarter. We continuously update our loan pipeline with new opportunities and are excited to see many borrowers revisiting plans and updating project time lines. The yield on loans in the fourth quarter of 2020 was 5.42%, which increased 55 basis points from Q3 2020. The increase in yield was expected as PPP loans begin to pay off and the entire net origination fee is recognized. Excluding the impact of PPP the yield on loans for the fourth quarter was 5.3% compared to 5.4% for the third quarter of 2020. We remain committed to effectively balancing market rates for new loans and the strategic priority of reducing compression within the net interest margin. We are exceptionally pleased with the stability of the asset quality during the fourth quarter as loans exit deferment periods and updated borrower information is received and digested.
- Jerry Golemon:
- Thank you, David. Total deposits at the end of Q4 were $2.5 billion, an increase of $172 million or 7.5% from Q3 2020 and an increase of $531 million or 27.5% over Q4 2019. Of the $172 million sequential increase from Q3 of 2020, approximately $126 million was related to the Main Street Lending Program. Noninterest-bearing deposits increased $60.3 million or 9% from Q3, again, with Main Street deposits, representing the bulk of the increase. Noninterest-bearing deposits now make up 29.6% of total deposits, up from 23.1% at the end of Q4 2019. This improved shift in deposit mix along with aggressive repricing of deposits, resulted in a 0.46% cost of deposits, a decrease of 12 basis points from Q3 2020. The bank has no broker deposits. The reported loan-to-deposit ratio at the end of Q4 was 97.2%. Excluding PPP activities, the loan-to-deposit ratio drops to 85.9% down slightly from 88.8% at the end of Q3. Borrowings decreased by $25 million during the fourth quarter to $252.7 million due to payoff of PPP LF borrowing after obtaining PPP forgiveness on the loans pledged against it. Borrowings totaled 8.2% of assets at the end of Q4. The company has significant resources of available liquidity, including $50 million in a holding company line of credit, Fed funds lines totaling $118 million and Federal Home Loan Bank availability of $654.9 million. I would now like to turn the call over to our Chief Financial Officer, Allison Johnson to provide a financial overview of the fourth quarter. Allison?
- Allison Johnson:
- Thanks, Jerry, and good morning, everyone. I would like to start this morning by thanking you, Dean, for those kind words and vote of confidence. I think I can speak for the majority here at Spirit of Texas that none of these results would be possible without your vision and execution. We provided detailed financial tables in yesterday's earnings release. Consolidated net income for the three months ended December 31, 2020, was $12.5 million with fully diluted EPS of $0.72 and compared to earnings of $6.2 million and fully diluted EPS of $0.35 in the fourth quarter of 2019.
- Dean Bass:
- Thank you, Allison. While it is too early to declare victory in the fight against the global pandemic, I can say with absolute confidence that our quarterly and fiscal year results proves that we have a team in place that can rise to the challenge and thrive in even the toughest of times. I am incredibly proud of the team we have in place at all levels and look forward to watching them all, execute our vision of reaching even higher heights in 2021. We are well positioned to seize opportunities with increased scale, improved efficiencies, strong credit metrics and enhance earning power to continue our focus on creating shareholder value. This concludes our prepared remarks. I'd like to ask the operator to open up the line for any questions. Operator?
- Operator:
- Our first question is from Brad Milsaps with Piper Sandler. Please proceed.
- Brad Milsaps:
- Maybe just wanted to start with loan growth. It looks like you guys had some positive growth in the quarter, which is encouraging. I think last quarter, you talked about the pipeline, had built to pre-pandemic, if not higher levels, kind of how should we be thinking about loan growth in '21 kind of based on what you guys are seeing out there?
- David McGuire:
- Brad, this is David. We're currently budgeting a mid- to high single digits right now. And based on the pipeline that we have in place, that we believe is readily attainable at this point. The pipeline continues to be refreshed on a monthly basis. We're seeing good deal flow. And excited about the prospect of being able to grow our loans organically during the year 2021.
- Brad Milsaps:
- Okay. Great. And then, Allison, I noticed you took some of the liquidity that you had and maybe built out the securities portfolio a little bit more. With the loan growth that you have coming, do you think you're finished there? Or might you use some of the additional liquidity to add to securities? Or are there other options that you're looking at this point?
- Allison Johnson:
- Yes. So we're currently modeling that and seeing -- really, we got a lot of deposits in at the end of the year from the Main Street Lending Program. So we're really trying to evaluate how sticky those deposits are actually going to be. But I think after we'll reevaluate the liquidity position, once the effects of the recent election and the vaccine distribution works its way through the economy and our -- and see what our borrowing base, how they respond to that.
- Brad Milsaps:
- Okay. I think I heard Allison, you said that you thought the margin would kind of maybe modest compression, but it would be sort of manageable in your view over the near term?
- Allison Johnson:
- Yes. We -- so core net interest margin for Q4 was 4.21%, which declined 7 basis points from Q3. Again, the majority of that was due to compression in loan yields, which decreased 10 basis points linked quarter. We still expect to see some release on cost of fund side as 22% of our higher rate CDs are going to reprice in the next 90 days, and then 80% will reprice in the next 12 months. So we will get some relief there. But we know we're going to face some headwinds on that front, but we're going to maintain committed to maintaining a core net interest margin of 4%.
- Operator:
- Our next question is from Woody Lay with KBW. Please proceed.
- Woody Lay:
- So I wanted to take a closer look at the loan growth that occurred during the fourth quarter, excluding the PPP forgiveness. Was there any particular portfolio segments or geography that really drove the growth this quarter? Or was it more broad-based?
- David McGuire:
- Woody, this is David. I would characterize it as more broad-based. All of our markets are performing very well. And so we're seeing activity throughout the state. And we're seeing some good opportunities that and new relationships that were kind of muted last year to be honest with you, but there's no single loan type or category that we're focusing on. We're just looking for the general opportunities that come our way from our customer base.
- Woody Lay:
- Got it. That makes sense. And then looking at the expense side, you mentioned in your opening remarks, you were going to continue looking at the branch optimization into 2021. I was just trying to figure out, do you think expenses could take a take a step down from the 4Q level? Or is that a pretty good run rate heading into 2021?
- Allison Johnson:
- So I'm expecting our quarterly quarter noninterest expense to be consistent with what we saw in Q4 going forward. We made a lot of progress in 2020 through bridge optimization. And then reducing our redundancies related to our acquisitions. So I really think that allowed us to determine what our core run rate would be going forward. So I would model that as pretty much consistent throughout 2021.
- Woody Lay:
- Okay. That's helpful. And then last from me. I understand the organic growth is a top priority at this point. But just was wondering if you had any thought -- updated thoughts around share repurchases, just with the stock trading around 1 1, 1 2 tangible book value right now?
- Allison Johnson:
- Yes. So we've got an additional $6 million remaining to repurchase shares. We took advantage during 2020 by actively repurchasing our shares when our stock price is trading at a discount. However, now that we're trading above tangible book, we've tapered that off significantly, and it's not been as active. But again, if that stock price takes a dip, we have the availability to go back in and aggressively repurchase shares.
- Operator:
- Our next question is from Thomas Windler with Stephens. Please proceed.
- Thomas Windler:
- This is Tom Windler on for Matt Olney. I got a few quick questions. Of the remaining $3.3 million in PPP fees, can you give me an idea of when those will be recognized?
- Allison Johnson:
- So I'm modeling those currently. Again, that's really dependent upon what the government decides to do, but I'm modeling those evenly throughout Q1 and Q2.
- Thomas Windler:
- Okay. Yes, that sounds good. And then with the main Street lending program, it got extended in the -- like January 8, 2021. Are there going to be any more fees recognized through that? Or is that completely over?
- David McGuire:
- We closed the last Main Street loan in the nation on January 4 or 5. And so that fee income would come into the first quarter.
- Thomas Windler:
- Okay. One last one for me, actually. Can you give me an idea of what happened with the classified and watch list as of December 31?
- David McGuire:
- The decline?
- Thomas Windler:
- Yes.
- David McGuire:
- Nothing significant. We're just continuing trying to work on that list of customers that was impaired and trying to get them off our books.
- Operator:
- This concludes our question-and-answer session. I would like to turn the conference back over to management for final remarks.
- Dean Bass:
- Thank you, everyone for being a part of this announcement today. I appreciate your continued support. Have a good day.
- Operator:
- This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.