Allegiance Bancshares, Inc. (ABTX) on Q1 2022 Results - Earnings Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Q1 2022 Allegiance Bancshares, Inc. Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Courtney Theriot, EVP and Chief Accounting Officer of Allegiance Bank. Please go ahead. Courtney Theriot: Thank you, operator, and thank you to all who have joined our call today. This morning's earnings call will be led by Steve Retzloff, CEO of the company; Ray Vitulli, President of the company and CEO of Allegiance Bank; Paul Egge, Executive Vice President and CFO; Okan Akin, Executive Vice President and Chief Risk Officer of the company and President of Allegiance Bank; and Shanna Kuzdzal, Executive Vice President and General Counsel. Before we begin, I need to remind everyone that some of the remarks made today constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend all such statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the act. Also note that if we give guidance about future results, that guidance is only a reflection of management's beliefs at the time the statement is made, and such beliefs are subject to change. We disclaim any obligation to publicly update any forward-looking statements, except as may be required by law. Please see the last page of the text in this morning's earnings release, which is available on our website at allegiancebank.com for additional information about the risk factors associated with forward-looking statements. We also have provided an investor presentation on our website. Although it is not being used as a guide for today's comments, it is available for review at this time. At the conclusion of our remarks, we will open the line and allow time for questions. I now turn the call over to our CEO, Steve Retzloff. Steven Retzloff: Thank you, Courtney, and good morning, everyone, who is participating with us on today's call. We thank you for your time and interest. A hallmark for Allegiance Bank has always been our ability to develop and maintain extraordinary customer relationships, most particularly as we serve the business owners in our region. It has been integrated into our organizational DNA since our inception and has led to quality, granular, organic growth consistency over an extended time frame. The level of new loan originations in the first quarter of '22 set a new record for our team and also resulted in a record level of core loan growth of $130 million after excluding the impact of our PPP loans, which are declining due to the forgiveness process. The 12.8% annualized core loan growth rate was accompanied by continued organic deposit growth of $115 million during the quarter. Overall, we continue to feel very good about our core banking activities and are very appreciative of the unwavering great effort being delivered by our entire team. The affirmation from customer and employee engagement surveys provide the added confirmation of a broad appreciation for our culture and sense of purpose as we serve both our direct customers, but are also increasingly active in the local community. In addition, earnings were strong. We are very pleased with the manageability of our asset quality and our capital and liquidity positions to provide a solid foundation to support continued organic growth. Ray and Paul will provide added color on the details for the quarter. I will add that it was great to see the positive economic activity and growing demand for our services. All the while we were breaking production records, we have been making excellent progress as we prepare for our merger with CommunityBank of Texas. The multitude of decisions and collaborative evaluations has led to a step-by-step but steadily increasing coming together of the 2 very talented banking teams. Technology, organizational staffing and design, operational consolidations, process changes, the alignment of policies, controls, risk management and governance are all being created for the coming combined company. Most importantly, the alignment and coming together as one team is gaining powerful momentum every working day. Given evidence such as the recent high level of population growth into the Houston MSA having gained 69,000 in the past year, which is second in the nation, we are more excited than ever about the prospects for our merged entities. With that, I'll turn it over to Ray for a more detailed review of our operational results followed by Paul, who will cover our financial results. Ramon Vitulli : Thanks, Steve. The momentum that was generated in the back half of 2021 continued into 2022 as our lending teams set all-time records in both core loan originations and core loan growth. I have mentioned team effort many times before, but when you set these type records and see both the attraction of new customers to the bank and expansion of existing customer relationships, team effort takes on a deeper meaning. For example, these results were executed on our new loan origination system, which required a team to implement, drive enhancements and train our lending and loan operations staffs to ensure technology adoption. In addition, we continue to integrate our new lenders and producers. Over the past 5 quarters, we have hired 13 new lenders, including 9 who were homegrown from within. It takes a team to coach and mentor our lenders so that they can integrate and begin to build their customer base. I can't say team enough, and want to acknowledge all of our bankers for their contributions to the success. Moving now to our quarterly operating results. Our staff and lending team booked a record $469 million of new core loans that funded to a level of $307 million by March 31. Compared to the fourth quarter 2021 when $450 million of new core loans were generated, which funded to a level of $327 million. The weighted average interest rate charged on the new first quarter core loans was 4.55% compared to the weighted average rate charged on the new fourth quarter loans of 4.40%. Paid off core loans were $214 million in the first quarter compared to $223 million in the fourth quarter of 2021. For $214 million of paid off core loans during the quarter had a weighted average rate of 4.89%. Carried core loans experienced advances of $142 million at a weighted average rate of 4.70% and paydowns of $104 million, which were at a weighted average rate of 4.89%. All in, the overall period-end weighted average rate charged on our funded core loans decreased 3 basis points, ending the first quarter at 4.80% compared to 4.83% as of December 31. With record core loan growth of $130 million for the quarter, we were pleased to report core funded loans of just over $4.2 billion, setting another record for the bank. Turning to asset quality. Non-performing loans ended the first quarter at 37 basis points of total assets, up slightly from 34 basis points in the fourth quarter 2021. Non-accrual loans increased a net $2.2 million during the quarter, from $24.1 million for the fourth quarter 2021 to $26.3 million, primarily due to $7.5 million in additions, which was partially offset by $2.2 million in upgrades placed back on accrual, $1.2 million in payoffs, $1.2 million in payments and $654,000 in charged-off balances. Charge-offs for the first quarter totaled 3 basis points annualized. In terms of our broader watch list, our classified loans as a percentage of total loans decreased to 3.80% of total loans as of March 31 compared to 3.86% as of December 31. Criticized loans decreased to 5.01% at March 31 from 5.36% at December 31, and specific reserves for individually evaluated loans ended the first quarter at 16.04% of total reserves compared to 15.5% at December 31. In aggregate, our asset quality at quarter end remained in a manageable position with low single-digit charge-offs for the quarter. On the deposit front, total deposits increased $115 million in the first quarter compared to the fourth quarter, and were up $788 million over the year ago quarter. We continue to see solid growth in non-interest bearing deposits that contributed to the quarter-to-date increase primarily as a result of higher balances in our carried accounts. With that, our non-interest bearing deposits to total deposit ratio was 38.2% for March 31 compared to 37.1% for December 31 and 35.6% for the year ago quarter. In closing, Steve mentioned the solid population growth for the Houston region, but job growth remained equally as strong. In February, the region created 46,000 jobs which nearly closes the gap on recovering the 300,000 jobs lost due to the pandemic. The resilience of the business owners in the Houston region to create jobs, along with the continued population growth, has us as excited as ever about the upcoming MOE with CommunityBank of Texas, creating the business bank for the region. I'll now turn it over to our CFO, Paul. Paul Egge: Thanks, Ray. We are thrilled to report a great start to 2022 with meaningful loan growth and solid earnings. Net income for the first quarter was $18.7 million or $0.91 per diluted share as compared to $21.6 million or $1.06 per diluted share in the fourth quarter and $18 million or $0.89 per diluted share in the first quarter of 2021. Compared to the fourth quarter of 2021, the first quarter results were driven in part by lower PPP-related revenue and provision variance, partially offset by lower funding costs and M&A-related expenses, among other things. Our pretax pre-provision income for the first quarter was $24.7 million as compared to $23.8 million in the fourth quarter and $22.5 million for the year ago quarter. We recorded net interest income of $55.2 million for the first quarter, down from $58.1 million in the fourth quarter, primarily due to a change in the mix of interest-earning assets and a $3.4 million decrease in net PPP fee revenue recognized into interest income. Net interest income was down just slightly from $55.7 million for the first quarter of 2021 primarily due to lower revenue recognized on PPP loans, offset by lower interest expense and increased interest income from securities. Total net fee revenue related to PPP loans recognized into net interest income during the first quarter was $2.5 million compared to $5.9 million in the fourth quarter and $6.9 million for the first quarter of 2021. Interest expense decreased by $396,000 in the first quarter compared to the fourth quarter and by $2 million compared to the first quarter of 2021. Before moving on, I should note that as of March 31, we had approximately $2.3 million of net deferred fees remaining related to PPP loans. Yield on loans was 5.02% in the first quarter compared to 5.32% for the fourth quarter and 5.15% for the year ago quarter. Excluding PPP loans and related revenue, yield on loans would have been 4.87% for the first quarter, 4.95% in the fourth quarter and 5.15% in the year ago quarter. Total yield on interest-earning assets was 3.56% for the first quarter, down from 3.86% for the fourth quarter and 4.67% for the year ago quarter. These trends are primarily reflective of changes in interest rates and a mix shift in our growing earning asset base towards a higher proportion of lower-yielding securities in cash. With respect to interest expense, our cost of interest-bearing liabilities continued to track downwards in the first quarter to 51 basis points from 56 basis points in the fourth quarter and 80 basis points in the year ago quarter. This was driven principally by deposit repricing and lower borrowings. The overall cost of funds for the first quarter was down to 32 basis points versus 36 basis points in the fourth quarter, thanks to a higher proportion of non-interest bearing deposit balances. We are working hard to preserve our optimized deposit positioning as we manage expected changes in interest rates throughout 2022 and beyond. As we look at our tax equivalent net interest margin, lower PPP net fee income recognition along with lower interest expense in the first quarter and a significant shift in the composition of our earning assets resulted in a margin of 3.3% for the first quarter as compared to 3.57% in the fourth quarter and 4.19% in the year ago quarter. Excluding PPP loan balances and related revenue, net interest margin would have been 3.14% for the first quarter from 3.28% in the fourth quarter. Notwithstanding structural decreases in our go-forward net interest margin profile due to significant shifts in our average earning asset mix, we are really pleased to see core net interest income, excluding PPP fee income, growing nonetheless, thanks to the larger balance sheet. From here, we see upside in our NIM and net interest income profile and more so after completing our merger with CBTX. Non-interest income increased to $4 million for the first quarter from $2.5 million in the fourth quarter primarily due to a mix of factors, including $1.3 million in income from SBIC investments. We've been really pleased to see significant year-over-year increases in our interchange income as well as this line item increased to $819,000 in the first quarter compared to $623,000 in the year ago quarter. Total non-interest expense decreased in the first quarter to $34.5 million compared to $36.7 million in the fourth quarter. This was largely due to a decrease in professional fees and acquisition in merger-related expenses partially offset by increased regulatory assessments. Aside from these items, which we consider to be one-off, we are very pleased to be holding the line on expenses. Accordingly, our efficiency ratio for the first quarter decreased to 58.32% compared to 60.68% from the fourth quarter of 2021. Moving on to credit. We recorded a provision for loan losses of $1.8 million during the quarter, which is primarily reflective of the record core loan growth during the period. Our allowance for credit losses on loans ended the year at $49.2 million, representing 115 basis points of total loans and 117 basis points on core or non-PPP loans. Bottom line, our first quarter ROAA and ROATCE metrics came to 1.04% and 13.35% respectively, representing what we feel are solid results. Quarter end tangible value per share was $25.24, which represents a meaningful decrease since year-end, reflective of the AOCI impact of the significant shift in interest rates on the value of our available-for-sale securities portfolio. We went from an $18.2 million gain position in AOCI at year-end to a $63.6 million loss position at March 31. That said, we continue to feel very well positioned on capital. The company declared a dividend of $0.14 per share of common stock and authorized the repurchase of up to 1 million shares of common stock since our existing share repurchase authorization was set to expire at the end of April. In closing, 2022 is off to a great start, and we are extremely excited to close our pending merger with CBTX as soon as practicable. I'll now turn the call back to Steve. Steven Retzloff: Thank you, Paul. And with that, I'll now turn the call over to the operator to open the line for questions. Operator: Our first question comes from the line of Brad Milsaps from Piper Sandler. Brad Milsaps: I know there are a lot of moving parts kind of ahead of the -- hopefully, the close date around June 30, but just kind of wanted to ask about how you're thinking about managing the balance sheet, kind of ahead of the close? And then as the companies come together, both companies still have quite a bit of cash. Just kind of thinking about how -- what your plans are for deployment? And then maybe secondly, obviously, a great loan growth quarter this quarter. CBTX was solid as well. Can you just talk about kind of your thoughts around growing loans, the balance of the year and into 2023? Paul Egge: Certainly. I'll start kind of holistically with respect to the balance sheet, and I'll let Ray as it relates to expectations on loan growth. Really, what we want to do in position the pro forma company is position it to support meaningful loan growth, our potential for loan growth without -- while still preserving an interest -- an asset-sensitive balance sheet. Traditionally, CBTX has been very asset sensitive and we've been very neutral, but in particular, given the direction of rates and the flexibility we want from a balance sheet standpoint, since we want to be able to support loan growth without taking meaningful interest rate risk, we are going to do everything to kind of maintain that flexibility. And for that reason, adopting a more asset-sensitive stance, similar to what our partner has traditionally had, is going to be, I think, very important to support our loan growth and without changing that aspiration to stay asset-sensitive. Ray? Ramon Vitulli : Brad. The -- so the pipeline started building kind of mid-'21, and we saw originations start to pick up, and that just carried into the first quarter. And so as we look at the pipeline for the second quarter, it looks similar to the first quarter. So this -- whether it's going to be another record or not, we don't know. But as far as what we're seeing in the market and what our lenders are seeing, we're reporting solid pipelines going into the -- to get us through the first half of the year. And the rate environment is challenging, but we're winning business. Brad Milsaps: That's great. And maybe, Ray, just as my follow-up. I was encouraged to see, I think, that the new funded yield is up linked quarter. You just mentioned competitive pricing. Can you talk about that a little bit? And then just remind us kind of your mix of loans that would be fixed versus maybe tied to prime, and kind of how you see things repricing as -- if the Fed, in fact, continues to raise short-term rates? Ramon Vitulli : Sure. I'll talk a little bit about just what happened in the quarter, and then Paul can maybe touch on the whole portfolio with fixed and floating. But yes, we picked up 15 basis points on the loans we originated in the first quarter compared to the fourth quarter, so we're very pleased about that. And just on the pricing, we're just looking at it and you see some things out there from some other banks, and we're just kind of plowing through it. And as a high service provider, we're -- we feel good about where we are, but we just got to watch that to where we don't chase it down to the 2s or something, which is -- we've seen a little bit of that, which is kind of crazy. But on the loans originated for the quarter, it was nice to see that just for that quarter of that record, fixed was 54%, floating 46%. And if you look at it the year ago quarter, it was more like 70-30. So we've seen a nice shift from fixed to floating, and I think that will help us, obviously, as we -- whatever we get in May with the rating -- if we get a rate increase. Paul Egge: Yes. And following up on the portfolio at the end of the quarter, we have about, technically speaking, 32.3% of our loan portfolio is variable rate loans. But the majority -- more than the super majority of that is in variable rate loans that are at above or -- at above or no force. So really, 25% of our loan portfolio is purely variable, and then the remaining 7% is below floors. Operator: Our next question comes from the line of Matt Olney from Stephens. Matt Olney: Just piggybacking on that last discussion as far as rate sensitivity in loan repricing. So if 25% of the loans are variable, can you confirm that, that 25%, or call it about $1 billion, did those get the benefits of the Fed repricing from mid-March? And do we see that, I guess, reset at the beginning of April? Just trying to figure out there's some kind of timing reset mismatch or if, indeed, all 25% of those reverberate loans did get that benefit over the last few weeks? . Paul Egge: All did not. So that is -- I'm quoting you statistics as of 3/31. So there would be some of that, very few, I should say, since it went from low 20s to 25% as it relates from pre-rate change to post-rate change. So there is a small portion of that, that would have been above floor or maybe it is at floor, so to speak. So really, when I speak to this, it's more prospectively rate hikes from here are going to be reflected 25%. And actually, if the rate hike ends up being higher than expectations, it might blow a couple through floors. Matt Olney: Got it. Okay. And then, I guess, shifting a little bit over towards the securities portfolio. I think we saw the yields on that come down a little bit this quarter. Any color on that coming down? Was that just a result of the purchases from late last year, given the full quarter impact? And then kind of as you look forward and think about some of the recent purchases, just any color on kind of the yields of the securities book? Paul Egge: Certainly. It's exact. You answered your own question as it relates to the nature of those securities. The go-forward yields, they are most certainly higher. And really, we're pressing pause as it relates to putting meaningful money to work in anticipation of the merger closing as soon as practicable. Because really, we want to think in concert with respect to the pro forma as it relates to the interest rate positioning. So we both have really meaningful levels of cash to put to work, and both companies have high preference for that to be put to work in loans rather than securities. But we're really pleased that the securities market has made the investment of excess liquidity incrementally more worthwhile to our bottom line. Matt Olney: Okay. Perfect. And then, I guess, last for me. I think you said PPP fees remaining around $2.4 million. Do you expect to recognize all of those into 2Q? Or could that leak into the back half of the year? Paul Egge: It's going to leak into the back half of the year. Generally speaking, we're kind of at the tail and it's slowing down. Hard to predict. I mean, we could have a wave, but as it's behaved year-to-date. It was heavier in January and February, and it's -- we're petering off. It will very likely leak into the third quarter, but -- and the impact -- expect the impact likely to be half again as much in the second quarter as it was in the first quarter, not all too dissimilar to the first quarter being about half as much as the fourth quarter. Operator: Our next question comes from the line of Brad Milsaps from Piper Sandler. Brad Milsaps: Paul, just curious around expenses. I know you're pleased to kind of hold it in that $34 million to $35 million range. But just kind of thinking about as the companies come together, I mean, do you think 1Q represents a good run rate? Or do you think maybe that's a little light just because maybe you aren't spending some money on some things that you otherwise might be as you kind of wait things out? Just both companies kind of this quarter were -- had lower-than-expected expenses, and just trying to want to get a sense of -- would I be too aggressive sort of assuming this rate kind of going forward? Paul Egge: We are getting a little bit of a pull forward, so to speak, of -- I don't want to say pull forward of cost savings, but we've both been holding the line and been very thoughtful about incremental spend from announcement to close trend. We have spend relating to the deal. But then as we think about our staffing plans and things along those lines, we're really putting our heads together. So we're really pleased to be holding the line here, and we actually see the current level of spend when you take out the noise to be pretty representative of expectations going forward. Once again, that's not counting non-recurring M&A-related expenses, but the driver of that is partially us putting our heads together with respect to staffing plans in the pro forma and positioning ourselves best for putting these 2 companies together. Brad Milsaps: Got it. So maybe the -- some of the $36 million of original cost savings that you expected, we're starting to maybe see a little bit of that now. Not -- obviously not the lion's share of it, but maybe some of it is currently in the run rate? Paul Egge: There's definitely some. And it's a function of discipline, and it's a function of really thinking together with our partners about how we want the expense story to shape up. Brad Milsaps: Got it. And in your mind, no real change to that target that you guys kind of laid out back in November? Maybe, if anything, it could be a little bit better given the growth that both companies have seen? And then maybe actually some more assurance that we're actually going to see sort of the rate hikes that you guys put in the pro formas initially? Paul Egge: , what? Unidentified Company Representative: '23 expectations. Paul Egge: Your EPS expectations, you're saying? Brad Milsaps: Yes, for the pro forma company. Paul Egge: I don't think we presented numbers for the pro forma company. We actually gave the numbers for each separate company. But we actually do feel good. Actually when you look at both companies' respective levels of earnings in the first quarter, even when you take out anything that can be deemed to be one-time in nature, we feel really good about those inputs, stand-alone inputs. We feel like both companies are outpacing the expectations that we set when we announced the merger in November. Steven Retzloff: There's a lot of variables out there, as you know, and in terms of the economy and interest rates and so on and so forth. But we have not revisited that to the extent that we would alter any of those future expectations. Paul Egge: I'll say that we feel good about just broad -- how the market setup has been like for all banks, credit, experience and the economy plays into so much of this. But we very -- we feel very good about the interest rate backdrop and other kind of market setup supporting our respective earnings profile, and that works great to the pro forma. Steven Retzloff: I mean, bottom line, our core assumptions remain intact. Operator: At this time, I'm showing no further questions. I would like to turn the call back over to Steve Retzloff for closing remarks. Steven Retzloff: Well, just once again, we appreciate all of your time and interest in Allegiance and we look forward to speaking to you again in the future. So thank you all very much. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
ABTX Ratings Summary
ABTX Quant Ranking
Related Analysis