Allegiance Bancshares, Inc. (ABTX) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the Allegiance Bancshares First Quarter 2021 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, Executive Vice President and Chief Accounting Officer. Please proceed.
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.
Steve Retzloff: Thank you, Courtney. We welcome everyone to our conference call, and thank you for your attendance. The first quarter represented a very productive start for the year, highlighted by record earnings per share of $0.89, plus significant deposit growth of $386 million during the quarter, bringing our total deposit growth over the past 12 months to $1.42 billion or 30.9% (sic) 35.9% . Assets increased to $6.43 billion as we have now funded over $1.04 billion of PPP loans, with over $332 million being funded during the last quarter. All in, we remain in a strong position relating to capital and liquidity, and we increased our dividend to $0.12 per share of common stock in the first quarter. Our record earnings was aided by the accelerated recognition of PPP fees during the quarter and by the low provision number that came from having very little in the way of net charge-offs and an improving economy. That said, we absorbed added costs in the quarter due to asset write-downs, as Paul will describe, and incurred increased overtime and third-party staff augmentation expenses totaling approximately $400,000 in the quarter, which furthered our PPP production. Our stakeholders benefited from the continued extraordinary outpouring of effort from our staff, as we not only booked the large number of PPP loans, but also originated $325 million of core loans during the quarter for a total new loan production of $657 million in the quarter.
Ray Vitulli:
Paul Egge: Thanks, Ray. We are very proud to be posting record first quarter net income of $18 million or $0.89 per diluted share as compared to $15.9 million or $0.77 per diluted share in the fourth quarter and $3.5 million or $0.17 per diluted share in the first quarter of 2020. Our record earnings were despite elevated expenses in the quarter, the most significant of which were approximately $1.5 million in nonrecurring asset write-down expenses, most of which relating to a branch closure during the quarter. Pretax pre-provision income for the first quarter was $22.5 million as compared to $24.2 million in the fourth quarter and $15.3 million for the year ago quarter. Adding back the $1.5 million in nonrecurring expenses on adjusted measure for pretax provision income would have been approximately $24 million. Net interest income was the key driver to our pretax pre-provision earnings power during the quarter, where we saw an increase of $796,000 or 1.4% to $55.7 million from $54.9 million in the fourth quarter, primarily due to lower interest expense in the quarter and higher revenue recognized on PPP loans, partially offset by lower core loan income. Interest expense decreased by $1 million in the first quarter compared to the prior quarter. And total fee revenue related to PPP loans, which were recognized into interest income during the quarter, was $6.9 million, an increase from $6 million in the fourth quarter. Yield on loans in the first quarter was 5.15% as compared to 5.09% for the fourth quarter and 5.59% for the year ago quarter. Excluding PPP loans and related revenue, yield on loans would have been 5.06% for the first quarter, 5.07% in the fourth quarter and 5.59% in the year ago quarter.
Steve Retzloff: Thanks, Paul. With that, I will now turn the call over to the operator to open the line for questions.
Operator: Our first question comes from David Feaster with Raymond James.
David Feaster: It sounds like originations were really strong despite distraction from the PPP. Just curious kind of how the pipeline is shaping up and maybe what you're hearing from customers. How much of the production is kind of coming from existing clients that are more confident and willing to invest versus new client acquisition from either new lender hires or the PPP program? And just, I guess, the pulse of your clients.
Ray Vitulli: Thanks, David. Yes. So it was strong in that first quarter. The -- I'd say that while we would really like to target maybe a 50-50 of that growth coming from new and versus existing, it's probably more -- a little bit more of existing as we work with our established customers. We're still doing this customer acquisition on the PPP side. But the mood is very good, and the pipeline is at levels pre-pandemic-type pipeline levels. And that's -- when the pipeline grows, that's coming from our field saying these are the -- obviously, these are the requests that we have in place and the deals that we're talking about. So feel good about that and what the future prospects are for more originations.
David Feaster: Okay. That's encouraging. And then just how are new hires turning? You guys have always done a great job picking up new lenders. Just I guess, with bonuses being paid and some disruption in the market, have you seen an increase in conversations? And maybe how is the pipeline for new hires?
Ray Vitulli: Yes. We have -- conversations have picked up. You're right, first quarter is usually a little light because of that, because of the bonus. We did have one lender hire in the first quarter. And if you look back over the past 4 quarters in a COVID environment, we had 6 producer hires and 1 out of our homegrown, out of our analyst pools for a total of 7. So, given the circumstances over the past 4 quarters, we feel pretty good about being -- making those additions. But yes, the conversations are picking up, and we do see some disruption. And we'll -- there's kind of 2 forms of disruption. One is the -- what happens in the M&A world. The other one is as our -- in our space kind of in that business banking space as the competition continues to change their rules of what business banking means. Those -- that's a disruption for customers and bankers, and we have those conversations and hanging around the hoop for that.
David Feaster: Okay. That's great. And then it's encouraging to hear the new loan yields in the originations. It sounds like pricing might be troughing in here. I guess, do you think that's a function of mix? Or just how has pricing trended more recently? Has the steepening of the curve allowed for better pricing at all? And do you think maybe the shift towards larger credits that you talked about may impact new loan yields? Or do you think you'll still be able to get these premium levels of rate despite going upstream a bit?
Ray Vitulli: Well, I mean, we feel good about the past 3 quarters of that rate on the new production hanging around as 4.63%, 4.64%, but it's still very competitive. So I'm not sure about hitting the floor there, but we're really pleased with the last 3 quarters and where we -- where things landed.
Steve Retzloff: Yes. And this is Steve. In terms of the larger loans, it's -- really, we're looking at larger loan relationships. There's -- we have a number -- a lot of customers that have multiple loans, multiple projects. And if you restrict that to a certain maximum relationship size, then you're going to miss the next deal. So we're just kind of opening up that door a little bit. It's not appreciably larger loans so much to this more -- opening the door for bigger relationships.
Operator: Our next question comes from Brad Milsaps with Piper Sandler.
Brad Milsaps: Ray, I think I heard you correctly say you've added 5,800 customers over the last 12 months, which is a tremendous number. It looks like thus far, those have really translated into deposit balances. I know this is probably tough to handicap, but how much loan growth do you think you pull forward with your guys' participation in the PPP program? Just trying to get a sense of kind of when some of this production you're seeing can actually translate into actual loans outstanding on the books.
Ray Vitulli: Yes. Great question. When you look at the 4,000 of the PPP, I mean, as we try to penetrate that and what we call convert those to full customers, I mean, we're seeing low, maybe 1/4 of that at this moment has something other than the PPP loan. So I mean, it's a process to work through and generate additional business, and we're working on that. So I mean I think it's -- we'll pick up gains every quarter. And as we -- we have several touches with these customers, not only on the origination side but on the forgiveness side and then a number of the second round were to some -- to the same -- to our existing customers from the first round. So we have a number of touch points plus an effort to convert these, so I think it's just going to be incremental over the next few quarters. But we have -- optimistic about what's ahead of us with that conversion opportunity.
Paul Egge: PPP customers are getting liquidity through the PPP loan program, which stands to reason has an impact on their loan demand and how they may be positioning. So when they're ready for their next loan, could be -- could involve some lag time being that they're the beneficiary of this PPP program in the near term and the recent past.
Ray Vitulli: Yes, for incremental loan.
Brad Milsaps: Sure, sure. And so Ray, would you say that maybe grows kind of low single-digit type rate kind of in the near term, and then hopefully, maybe by next year, you can guys can start ramping back up closer to what you've done historically?
Ray Vitulli: Are you talking all in on the whole growth on the entire loan?
Brad Milsaps: Yes, ex PPP.
Ray Vitulli: Yes. Yes, yes, core loans. Yes, I think that.
Brad Milsaps: Okay, okay. And then just curious kind of how you guys are thinking about resolution on some of the loans that are -- you're still having issues coming out of the pandemic. I think it sounded like kind of criticized, classified had stabilized just under 6%. Just kind of wanted to get a sense of kind of how you guys are thinking about potential losses as you kind of get in the back half of the year and how that might relate to your -- how you're approaching the level of reserve and the provision going forward.
Steve Retzloff: Well, we obviously feel like we've got -- we have them all identified properly, and we assess them every quarter. We've experienced very good low charge-offs at this point. And we -- again, there's probably not a way to extrapolate that out into a quarter-by-quarter projection. But we feel like we're in the right place with those that we're participating with deferrals and their underlying business model getting better over time, such as like local hotels and so forth. So I think we feel pretty, pretty good that it shouldn't be outsized in terms of any kind of experience for problem assets getting worse. I really feel like it's actually more on getting better from here. Obviously, lot depends on the pandemic and so forth. But.
Paul Egge: And I might note that anything that merits individual valuation under CECL, we have evaluated and considered in our provision and allowance for credit losses.
Ray Vitulli: Yes.
Okan Akin: Yes. In addition to that, this is Okan, I'll add the fact that we're seeing a deceleration, significant deceleration of downgrades in our portfolio and actually also experiencing in the number of instances, upgrades. And that's a very pronounced with our high-risk portfolio as well, where the -- that portfolio is hanging on better-than-expected originally set.
Brad Milsaps: Great. And just final question for Paul. Excluding the branch write-down, that $33 million or so of expenses this quarter, would you think that's a pretty good run rate? Or was there anything else that you may have benefited from maybe FAS 91-related from PPP in 1Q that might cause that to go up appreciably? Or is $33 million or so a decent run rate?
Paul Egge: I think $33 million handle is a decent run rate. I might hedge just, say, $33.5 million, give or take, a half is where you'll see things. There's some level of noise in the second quarter. We'll still be paying for some of the staff augmentation that was used to kind of really put our shoulder into the PPP effort, and we'll now pivot a little bit more into the forgiveness effort. So there's still something singing out there, but nothing -- I think you're in the zone.
Steve Retzloff: Yes. And things like a record earnings bring record bonus kind of profit sharing accruals and things of that nature as well.
Operator: Our next question comes from Brady Gailey with KBW.
Brady Gailey: So I know accretable yield has been a fairly small number for you guys recently. I think last quarter, it was only about $300,000. Did that remain fairly small and immaterial this quarter?
Paul Egge: Yes, it's getting more immaterial every quarter, which is really why we thought we might economize here in our first quarter of 2021. It's weaning off, weaning away towards dropping.
Brady Gailey: Okay. Great. And then when you look at the buy back, it's great to see you all active in the quarter. It looks like you bought stock at around 135x tangible. If you look at the stock now, it's now 1. 5 to 1.6x tangible, so it's not as cheap. So do you still have a pretty good appetite to execute on the buyback despite the stock price being a little higher?
Paul Egge: Price is one of many considerations that we look into when we're evaluating the share repurchases, but more so than ever, our #1 use of excess capital is core loan growth. Secondary to that, we want to maintain a high level of flexibility for potential M&A activity. And then, of course, there's pricing dynamics that drive a little bit of the volume-based appetite around the share repurchases. So a lot of moving parts. Not intimidated too much by the current share price, but more focused on executing on the most accretive ways for us to put that capital to work.
Brady Gailey: Okay. And then lastly for me is just on how Allegiance fits into the M&A landscape. It's been a little quieter in Texas than I would have thought. And then we saw BancorpSouth and Cadence, which was a big deal in this backyard. But how do you think Allegiance fits into M&A? Is it you guys would consider acquiring some smaller, more downstream targets? Or do you think it's more something either transformational like an MOE type of transaction?
Steve Retzloff: Well, it's good to see the larger transactions out there. And of course, inside the pandemic, it's probably been more appropriate to do a life-sized -- a transaction like that because of the kind of the risk profile of uncertainties. Coming out of the uncertainties though, I think it opens the door for smaller transactions. You have better currency. So I'd say that we're actively assertive right now in terms of an M&A profile or posture. We are probably still thinking -- yes, we would think across the board, but acquisitions would be certainly welcomed around here, smaller, medium-sized. I think they can make a difference We're working hard on the organic side, but we're also stay in touch with the community bankers around and probably know that community as well as anybody through all of our contacts.
Operator: Our next question comes from Matt Olney with Stephens.
Matt Olney: The PPP, I want to circle back on that, $22 million of unamortized net fee still as of March 31. I'm curious kind of what the crystal ball says about how those will be recognized over the next few quarters.
Paul Egge: As are we. Predicting in the future is one of those things. We think the second round is going to go faster than the first, but we do recognize that there's potential for stragglers as it relates to the way that the forgiveness process is ultimately going to play out. So tentatively, the way we've modeled it for our own purposes is around 70% or so being forgiven by the end of the year. It could be higher, but we feel that it's probably right for us to think about it in that context.
Matt Olney: Okay. And then circling back on some commentary that Steve made earlier, you mentioned a few times some larger loans. I'm curious, I mean, it's all relative, I guess, in terms of larger to Allegiance, wouldn't be larger to other banks. But is that more of a -- would you call a traditional middle market strategy, or is it just a little bit larger on the small business loan side? Any numbers you can put behind that?
Steve Retzloff: I'd say larger on the small business side is the kind of the right way to put that. We just don't have loan relationships that exceed $20 million, very few over $10 million. And given our asset size and loan footings, I mean, it's time that we're willing to take a look at that more closely. A lot of opportunity there. Gradually, I think it just gives us a little bit more raw material to look at that number one use of capital and that's loan growth, and we're really focused there.
Matt Olney: And to clarify on that, is it going to be new producers and new individuals that are doing this? Or is it just looking at the existing team and existing customers that you were willing to grow it larger than before?
Steve Retzloff: Well, our existing team has -- and you can calculate it different ways, but close to $800 million of capacity. And when you look at the loan -- the lenders that are below our kind of average norm, so we've got a lot of capacity in our current lending staff to build portfolio. We have a lot of growth continuing though on those at 85-or-so percent of our lending staff that are at or above our normal portfolio size, and they continue to grow their portfolios. But when we tell them that -- we don't want larger loan relationships. Their customers go other places because they're continuing to do projects, and this is historic. So we're just kind of giving them an opportunity to go back to those customers that they can actually add another loan or take another loan back, that type of thing. So it's still smaller loans, but we believe that it just gives the entire lending staff the opportunity to grow that book. It's not so much new -- for new lenders or certainly don't want it to be interpreted as that's going to the middle market.
Operator: Our next question comes from John Rodis with Janney.
John Rodis: Paul, maybe just -- I guess, I missed this, but on the PPP loans, you said $22 million remaining. What was in the first quarter?
Paul Egge: We recognized in fee income of approximately $6.9 million into yield during the fourth -- first quarter, pardon me. That's net fee income. We've got a slide on PPP that detailed this in the investor presentation, but yes, that's $6.9 million. Total revenue was a little higher if you include the interest.
Operator: And I'm currently showing no further questions. At this time, I'd like to turn the call back over to Steve Retzloff for closing remarks.
Steve Retzloff: Very good. Well, we're just -- again, thank you, everybody. I appreciate your time and interest in the bank. And we look forward to speaking to you again next quarter, and thank you very much.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
