Allegiance Bancshares, Inc. (ABTX) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the Allegiance Bancshares, Inc. Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will 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 one of your speakers today, Courtney Theriot. 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 Kessel, Executive Vice President and General Counsel.
Steve Retzloff: Thank you, Courtney. Welcome, everyone, to our conference call, and we really appreciate your attendance. As was highlighted in our press release this morning, the second quarter resulted in another record for net income for the company of $22.9 million or $1.12 per diluted share, which is due in part to our outsized PPP success and continued recognition of the fees associated as we proceed with the PPP for given this process. Also, as we continue to closely monitor our core loan relationships and assess economic factors that drive our allowance model, the quarter's earnings also benefited from a release from the allowance for loan losses. We feel great about our tangible book value having increased by 12.7% over the past year, notwithstanding $0.44 per share of dividends and with some share repurchases. Our service model has proven itself through a high level of customer acquisitions, both due to and separate from the PPP efforts. It has also been recognized through our recently completed customer survey that Ray will describe, where the results place Allegiance at an absolute top-tier level of customer satisfaction. Over the past 12 months, deposits have grown significantly by 15.6%, with the mix of noninterest-bearing deposits ending the second quarter at 36.3%. In addition, through the second quarter, we are continuing to reflect a steady decline in our cost of funds due to our disciplined approach in the current rate environment. Our relationship officers remain focused on growing the bank through competitive loan pricing and terms, extraordinary treasury management services and are experiencing loan pipelines that are prerequisites to continued high volumes of production. We believe our capital, liquidity, asset quality, steady growing brand loyalty and strong culture, provide an excellent posture from which Allegiance customers and shareholders will continue to build value. With much of the broader economy, we are glad to see that the Houston Beaumont region is rebounding well recently with a few notables such as higher oil prices, an excellent housing market and a purchasing managers index now well into positive territory.
Ray Vitulli: Thanks, Steve. From time to time, we have shared feedback from our customers describing the extraordinary service that our bankers provide. These stories, whether about the friendliness of our bankers, are going the extra mile to track down a wire or facilitating PPP loans to keep employees working while facing uncertainties with the pandemic, all speak to our culture of service and contribution. As Steve mentioned, in an effort to be proactive in listening feedback on customer experience, we recently launched our first ever Net Promoter Score, or NPS survey. This score can range from negative 100 to positive 100, and we are extremely pleased to report an NPS that has been exceeding 80 since the April launch, placing us in the 100 percentile in the broader banking industry. Customer experience drives our ability to retain and attract clients and has certainly contributed to the healthy pipeline that our bankers reported heading into the second quarter that produced a record level of loan originations totaling $379 million. We continue to take advantage of the market share opportunity that was presented with our outsized PPP success and are now starting to see core loan originations from our new customers. And our onboarding of new treasury management clients has remained steady, further reflecting the growth potential coming from those customers that are new to the bank. We had nice momentum in the back half of the quarter in terms of core loan growth and are as well positioned as ever for originations to remain strong, which is our leading indicator for net loan growth.
Paul Egge: Thanks, Ray. We are proud to report another record quarter of earnings with net income of $22.9 million or $1.12 per diluted share as compared to $18 million or $0.89 per diluted share in the first quarter and $9.9 million or $0.48 per diluted share in the second quarter of 2020. While these record results were driven in part by a negative provision for credit losses, we are pleased to note that the quarter would still represent a record for us without that negative provision, driven by lower funding costs, PPP related revenue and improved noninterest income and expense loss. Accordingly, pretax pre-provision income for the second quarter represented a record at $25.3 million as compared to $22.5 million in the first quarter and $22.6 million for the year ago quarter. Recall that in the first quarter, we had about $1.5 million in nonrecurring asset write-down expenses due to a branch closure. Improved net interest income, again, was a key driver to our pretax pre-provision earnings power during the quarter, where we saw an increase of $898,000 or 1.6% to $56.6 million from $55.7 million in the first quarter, primarily due to lower interest expense in the quarter, partially offset by slightly lower revenue recognized on PPP loans. Interest expense decreased by $894,000 during the second quarter compared to the prior quarter. Total net fee revenue related to PPP loans recognized into interest income during the second quarter was $6.4 million, a decrease from the $6.9 million in the first quarter.
Steve Retzloff: Thank you, 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 the line of Brady Gailey with KBW.
Brady Gailey: So we saw kind of a continued buildup in cash in the quarter. When do you start thinking about more aggressively putting that to use in the bond portfolio? I know the bond book grew this quarter. But does that continue for the next couple of quarters as excess cash continues to grow?
Paul Egge: We think about it all the time, but we really don't want to take meaningful industry risk in the bond portfolio. So we have been growing the bond portfolio, but we've been staying pretty short duration and variable rate which it -- It doesn't really drive meaningful net interest or interest income, but it really reflects the extent to which we do want to get more incrementally more invested. But effectively, we're against taking a meaningful amount of interest rate risk through that securities portfolio.
Brady Gailey: Yes. That makes sense. And then there doesn't appear to be any share buybacks in the quarter. But if you look at how the stock has traded, it used to be over 40. It's now pulled back into the mid-30s. I think that's at a level where you guys have purchased stock before. Should we think about you guys reengaging in the share repurchase plan at this point?
Paul Egge: We feel like share repurchases are a really valuable tool for capital management. Our highest and best use of capital, of course, is going to be put and forth loan growth and supporting that loan growth with capital. And then secondarily, we want to maintain a meaningful amount of flexibility for M&A possibilities and things on those lines. So yes, share repurchases are definitely in the arsenal. But at the same time, we -- our preferred usage of cash is clearly going to be through either organic growth or inorganic opportunities that we want to have -- maintain a high level of when yes.
Brady Gailey: And then finally for me, I mean, if you look at the last couple of quarters, you guys have been growing core loans, kind of ex PPP in the low single-digit level. I mean a lot of banks are talking about growth kind of accelerating in the back half of this year and as we get into 2022. How should we think about loan growth for you guys going forward?
Paul Egge : Well, we saw -- we did see some nice growth in the back half of the second quarter, but we think the momentum will carry into the next 2 quarters of the year, the originations were strong. Those were on a pipeline that was strong and we -- and the pipeline looks similar going into this quarter. So I think if we get what we saw in the back half of the second quarter, Brady, we can tick up into that, what you're talking about, into that higher single-digit than what we should in the first 2 quarters.
Steve Retzloff: We're really pleased with the pipeline and the sort of the production from the staff. After PPP, they basically were no longer distracted by that. So we're seeing them making those calls no longer distracted by PPP and feel very good about our team out there shaking the bushes.
Operator: And our next question comes from the line of Matt Olney with Stephens.
Matt Olney : Want to start on the fee side and the fees were a little bit higher than the recent run rate. Paul, I think you mentioned in prepared remarks, there were a few items and that we should take note of. Anything you can detail for us on that.
Paul Egge : Really nothing meaningful. They were so small that they didn't merit delineation. What we're really happy with on the fee income line and probably the new addition with respect to a breakout is the great trend we've got going on interchange or debit card and ATM card income as it's listed on our financials. We broke that out here for the first time this quarter. Really, it's grown from a low base, but we're extremely proud of being able to grow that number 50% year-over-year and the track record we're building there. So all in all, we like the trend that's manifesting itself on the noninterest income side, albeit we still got room to go to make it a more meaningful mix of our revenue profile.
Matt Olney : Okay. Great. And on the interest-bearing deposit costs, those continue to move quite a bit lower in 2Q. Any color on how much more room is remaining within that?
Paul Egge : There's more room. I mean ultimately, you're going to see most of it manifest itself on the CD line, but we've been measured and gradual in working down non-maturity rates. But it is largely growing, a function of the higher rate CDs rolling off and really, in this environment, especially with the level of liquidity we have, being highly more disciplined as it relates to how we approach pricing, everything that comes on the balance sheet and walking down any exception rates that have been out there and the overall sheet rates that we've got. So we've got some room to go still, but we're still want to be measured about it. So to not upset the apple cart as it relates to the nature of our deposit base.
Matt Olney : Sure. Okay. And then last question on operating expenses. Paul, I think we came in around $33.5 million, kind of a core number. I think that was pretty much in line with your guidance from last quarter. What are the thoughts from here on operating expenses?
Paul Egge : We're working to hold the line. So that prior guidance kind of still sits there. There's definitely some variability that has the potential to try to ticket ever sit slightly upwards. But we feel pretty decent about that guidance. And ultimately, we're focused on maintaining a growth posture. And in doing so, the goal is to hold the line, but there's -- we're going to be opportunistic about what we can do to position the bank for growth. And we're pleased that at least with some of what's driven that line has been a function of the strong bottom line performance that plays into certain things like profit sharing and zones and stuff like that. So there's definitely things in there that are pushing it up while we're trying to be good about how we manage it overall.
Operator: . Our next question comes from the line of Graham Dick with Piper Sandler.
Graham Dick: So obviously, there's been some disruption in M&A arena in Texas recently caused by M&A. And this probably only accelerate, I guess, as deals start picking up in the region. But I'm just wondering -- I'm just trying to get a sense of how effective you guys have been in attracting quality lenders over the past quarter and maybe how many you'll try to add each quarter from here as they become available?
Steve Retzloff: Sure. So the -- so last quarter, we actually -- as far as external hires for lenders, we did not last quarter. First quarter, we hired one. Although last quarter, we did have 2 promotions internally from our lender development program, which is -- we're really proud of that and expect some more of that. But this quarter has actually already started off with a couple of hires. We've onboarded a new lender this month, and we expect one next month. So at one time, we were talking about one producer a month type run rate. It's probably not that. And I think it will be a combination of both external hires, as you mentioned, from maybe some disruption in the market, but also some of our internal promotions from our lender development program in the homegrown category.
Graham Dick : Okay. Great. That's helpful. And then, I guess, more broadly on M&A, obviously, seen a pullback in bank stocks recently, but I'm just wondering how conversations are going for you guys. And basically, if you think -- I think you might be able to get something over the line over the next 12 to 16 months just depending on seller expectations, I guess.
Steve Retzloff: We're always out there talking and meeting with the folks locally. We have an interest in looking even a little bit beyond the territory if opportunities arise. So we're active. We've got the capital to accomplish it. And obviously, like you say, the market has kind of pulled back a little bit. But I think our focus has always been and will be -- continue to be with sellers on their day 365 value. And we think we provide a great opportunity for them to gain value over time in joining us. So I think we've got the flexibility and certainly are interested in that right company rightsized. But we're active. We haven't shut that door, let's put it that way.
Graham Dick : All right. Great. And then just the last thing for me is, I guess, a quick one here. Do you guys have the number for what average PPP loans were in the quarter? Just I guess we can get a better idea of what the balance sheet looks like.
Paul Egge: Sure thing. It was $604 million.
Operator: Our next question is a follow-up question from Matt Olney with Stephens.
Matt Olney : Just want to circle back on the M&A question. And it seems like the Allegiance footprints between Houston and Beaumont, kind of in that South Texas markets. I'm curious how much appetite there is to extend the footprint beyond the South Texas markets?
Steve Retzloff: It's hard to gauge a degree or level of appetite. There's interest. We're $6.5 billion, the largest player in the market, and you have to look at -- I'm an old manufacturing guy, and I look at it as an inventory issue. There's an inventory of available candidates in this region, and then there's an inventory outside of this region. So I think your options are obviously better if you expand the shelves that you're looking at. And so it's just a simple matter that we want to be consistent and prudent and very careful about any conversation that we have. But I think we're certainly getting there quickly in terms of the scale needed to consider other regions or maybe just nibbling a little bit away, but it's a -- it's a process. Let's put it that way. It's just a process for -- and I think there's growing interest and certainly looking at other deals that could advantage the bank.
Operator: And I'm showing no further questions at this time. And I would like to turn the conference back over to Steve Retzloff for any further remarks.
Steve Retzloff: Well, once again, really appreciate everybody's interest in the bank. We feel great about where we are. We've got a commitment to perform and create value. So thank you, and we'll speak to you again next quarter.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
