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Spirit of Texas Bancshares (NASDAQ:STXB)
Q4 2020 Earnings Call
Jan 26, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to Spirit of Texas Q4 2020 earnings conference call. [Operator instructions] I will now turn the conference over to management to begin the presentation.

Jerry Golemon -- Executive Vice President and Chief Operating Officer

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. Following my opening remarks, we will provide a high-level review and commentary on the financial details of the fourth quarter before opening the call to Q&A. I'd now like to cover a few housekeeping items.

There will be a replay of today's call and it will be available by webcast on our website at www.sotb.com. There will also be a telephonic replay available until February 2, 2021, and more information on how to access these replay features was included in yesterday's release. Please note that the information reported on this call speaks only as of today, January 26, 2021, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management during the conference call may contain certain forward-looking statements within the meaning of the United States federal securities laws.

These forward-looking statements reflect the current views of management. However, various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the company's annual report, Form 10-K, filed with the SEC for the year ended December 31, 2019, to understand certain of those risks, uncertainties and contingencies. The comments today will also include certain non-GAAP financial measures.

Additional details and reconciliations to the most directly comparable GAAP financial measures are included in yesterday's earnings release, which can be found on the Spirit of Texas website. Now, I'd like to turn the call over to our chairman and CEO, Mr. Dean Bass. Dean?

Dean Bass -- Chairman and Chief Executive Officer

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 two and a half years, we would partner with three 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. We have continually looked for ways to grow and expand while playing defense in response to a global pandemic. It is tempting after reporting such an outstanding quarter to spend my time with all of you this morning discussing in detail our record financial and operational results, an increase in our quarterly cash dividend and our strong position with respect to both capital and asset quality.

However, I believe our results and strength speak for themselves for the fourth quarter. Instead, I would like to use my time to highlight the importance of execution and thank all of those who made Q4 results possible. This executive management team, like any team and any bank in the country set strategic priorities and initiatives intended to improve customer experience and satisfaction and drive strong financial and operational results for our investors and other stakeholders. The difference here at Spirit of Texas lies with our talented bankers and seasoned support staff who are able to execute flawlessly on those priorities and initiatives and exceed expectations every single day.

Our quarterly results reflect the outstanding efforts of our entire bank. Our strong lending staff was able to work through Paycheck Protection Program loan forgiveness applications while achieving tremendous success boarding and funding loans associated with the Main Street lending program. It is extremely difficult to implement these government programs with often changing and shifting rules and regulations. However, our team has done so impressively.

Additionally, our support staff have shown tremendous resilience and the ability to execute while sometimes having to work from remote locations far too often, while dealing with the impact of the global pandemic hitting close to home. This dedication, which some might call devotion to excellence has not gone unnoticed. Finally, during the quarter, we named Allison Johnson, our chief financial officer. It was demonstrating months of ability to navigate and execute in a tough financial environment that this decision was very easily made.

She will continue to perform with excellence for this organization. I'd like to conclude my prepared remarks this morning by discussing the year to come. With an election behind us, a vaccine currently being distributed and the sentiment of uncertainty declining in capital markets, it is now time to turn our gaze toward growth opportunities. Throughout 2021, we will continue to look for growth opportunities and Non-interest income, which has a large part of our success in 2020.

We'll continue to vigorously serve our communities funding needs through government programs and traditional lending and we will look for opportunities presented by strategic partnerships, which have been a huge part of our growth story since inception. We have been able to emerge from this pandemic stronger than ever due to the strategy and our professional team of bankers. Now, I'd like to turn the call over to Mr. David McGuire, our President, chief lending officer, to discuss the loan portfolio and asset quality.

David?

David McGuire -- President and Chief Lending Officer

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 loan 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 as we emerge 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, 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 forgiven 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.

Non-performing loans to outstanding loans decreased to 30 basis points at the end of Q4 2020 compared to 36 basis points at the end of Q3 2020. The provision for loan losses for the fourth quarter was $4.4 million, which increased the allowance to $16 million or 67 basis points of our loans outstanding. At quarter end, the coverage ratio on the organic portfolio was 104 basis points, excluding PPP loans. Annualized net charge-offs were 9 basis points for the fourth quarter of 2020.

With that, I'll turn the call back over to Jerry Golemon to provide a review of the funding side of the company. Jerry?

Jerry Golemon -- Executive Vice President and Chief Operating Officer

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 and a half percent over Q4 2019. Of the $172 million sequential increase from Q3 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 -- Chief Financial Officer

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 compared to earnings of $6.2 million and fully diluted EPS of $0.35 in the fourth quarter of 2019. Record net income and earnings per share were achieved primarily due to a $3.7 million gain on sale of Main Street loans. Net PPP origination fees of $4.5 million and swap fees of $2.4 million. While current $3.3 million of net origination fees on PPP loans remain, which should be recognized over the next two quarters.

The Main Street lending program is not currently expected to continue and the elevated level of swap fees should return to a more normalized level in the next two quarters. Non-interest income was $8.8 million for the fourth quarter of 2020 compared to $4.8 million in the third quarter of 2020. As previously mentioned, we do not currently expect Non-interest income to remain at these levels in the coming quarters. However, the expansion of Non-interest income through treasury management offerings and swap products remains a strategic initiative for 2021.

The temporary elevation in Non-interest income has provided the time necessary to maintain superior profitability while performing a detailed review of Non-interest expenses. Non-interest expense, which totaled $18.4 million during the fourth quarter of 2020 compared to $19.3 million in the third quarter of 2020 reflect our continued focus on reducing the core expense run rate. The Citizens conversion, which occurred in late July 2020 has allowed us to begin realizing cost savings from the transaction, which were delayed due to the COVID-19 pandemic. Additionally, branch optimization will continue to be a focus in 2021 and as we look at the impact of the pandemic on our branch structure and any lasting effects that may warrant action.

Net interest margin on both a realized and tax equivalent basis were also assisted by PPP loan forgiveness given that origination fees, net of costs, are recognized through the margin. The tax equivalent margin in the fourth quarter of 2020 was 4.44% compared to third-quarter 2020 tax equivalent margin of 3.97%, representing a 24 basis point increase. Excluding the impact of PPP loans, our core tax net equivalent net interest margin for the fourth-quarter 2020 was 4.21% compared to 4.28% for the third quarter of 2020. While we continue to see compression within the net interest margin from traditional lending, the extent of the compression has slowed to a manageable level.

The provision for loan losses for the fourth quarter was $4.4 million, which increased the allowance to $16 million or 67 basis points of our total loans outstanding or 76 basis points, excluding the 100% government-guaranteed PPP loans. The elevated provision expense for the quarter related primarily to downgrades of loans requesting additional deferment periods and the increase in specific reserves on impaired loans. The coverage ratio on the organic portfolio was 104 basis points on the $1.49 billion in organic loans outstanding, excluding PPP loans at quarter end. Additionally, we have $5.4 million unamortized discount on the acquired loan portfolio at December 31, 2020.

We would not expect elevated provision expense for at least the next two quarters as many of the significant qualitative factors have reached their maximum, and credit quality is currently stable. As of December 31, 2020, we continue to enjoy strong capital ratios with the Tier 1 leverage ratio at the bank of 10.3% and 9.9% as the company on a consolidated basis. Maintaining a strong capital position is a current priority so that we can capitalize on any growth opportunities that arise in the coming quarters. On January 8, 2021, we completed the previously announced sale of our Jacksboro branch location to First State Bank of Graham.

Under the terms of the transaction, the bank sold loans of approximately $3.5 million, deposits of approximately $5.7 million and the real property in which the branch was located. I'd now like to turn the call back over to Mr. Bass for closing remarks. Dean?

Dean Bass -- Chairman and Chief Executive Officer

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?

Questions & Answers:


Operator

[Operator instructions] Our first question is from Brad Milsaps with Piper Sandler. Please proceed.

Brad Milsaps -- Piper Sandler -- Analyst

Hi. Good morning.

Dean Bass -- Chairman and Chief Executive Officer

Good morning, Brad.

David McGuire -- President and Chief Lending Officer

Good morning, Brad.

Allison Johnson -- Chief Financial Officer

Good morning.

Brad Milsaps -- Piper Sandler -- Analyst

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 the last quarter, you talked about the pipeline, had built to prepandemic, 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 -- President and Chief Lending Officer

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 -- Piper Sandler -- Analyst

OK. 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 -- Chief Financial Officer

Yeah. 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 -- Piper Sandler -- Analyst

OK. 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 -- Chief Financial Officer

Yeah. 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%.

Brad Milsaps -- Piper Sandler -- Analyst

OK, great. I'll hop back in the queue.

Operator

Our next question is from Woody Lay with KBW. Please proceed.

Woody Lay -- KBW -- Analyst

Yup. Hey. Good morning, guys.

David McGuire -- President and Chief Lending Officer

Good morning, Woody.

Allison Johnson -- Chief Financial Officer

Good morning.

Woody Lay -- KBW -- Analyst

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 -- President and Chief Lending Officer

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 cat 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 -- KBW -- Analyst

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 -- Chief Financial Officer

So I'm expecting our quarterly core non-interest 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 for throughout 2021.

Woody Lay -- KBW -- Analyst

OK. 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 $11, $12 at tangible book value right now?

Allison Johnson -- Chief Financial Officer

Yeah. 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 was 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.

Woody Lay -- KBW -- Analyst

OK, got it. Thanks guys.

Operator

[Operator instructions] Our next question is from Thomas Wendler with Stephens. Please proceed.

Thomas Wendler -- Stephens Inc. -- Analyst

Hey. Good morning, everyone. This is Tom Wendler 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 -- Chief Financial Officer

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 Wendler -- Stephens Inc. -- Analyst

OK. Yeah, 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 -- President and Chief Lending Officer

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 Wendler -- Stephens Inc. -- Analyst

OK, thank you. Just 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 -- President and Chief Lending Officer

The decline?

Thomas Wendler -- Stephens Inc. -- Analyst

Yes.

David McGuire -- President and Chief Lending Officer

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.

Thomas Wendler -- Stephens Inc. -- Analyst

All right. Sounds good for me. Thank you.

David McGuire -- President and Chief Lending Officer

Thank you very much.

Allison Johnson -- Chief Financial Officer

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for final remarks.

Dean Bass -- Chairman and Chief Executive Officer

Thank you, everyone for being a part of this announcement today. I appreciate your continued support. Have a good day.

Operator

[Operator signoff]

Duration: 29 minutes

Call participants:

Jerry Golemon -- Executive Vice President and Chief Operating Officer

Dean Bass -- Chairman and Chief Executive Officer

David McGuire -- President and Chief Lending Officer

Allison Johnson -- Chief Financial Officer

Brad Milsaps -- Piper Sandler -- Analyst

Woody Lay -- KBW -- Analyst

Thomas Wendler -- Stephens Inc. -- Analyst

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