Allegiance Bancshares Inc (ABTX) Q2 2021 Earnings Call Transcript

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Allegiance Bancshares Inc (ABTX)
Q2 2021 Earnings Call
Jul 29, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Allegiance Bancshares, Inc. Second Quarter 2021 Earnings Conference Call. [Operator Instructions].

I would now like to hand the conference over to one of your speakers today, Courtney Theriot. Please go ahead.

Courtney Theriot -- Executive Vice President and Chief Accounting Officer

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. 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'll now turn the call over to our CEO, Steve Retzloff.

Steven F. Retzloff -- Chairman

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, not withstanding $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.

While we are clearly pleased to be the largest community bank focused on this region of Texas, we do, however, recognize that other Texas geographies may present favorable market opportunities for a community bank like ours that possesses a proven ability to effectively serve the independent business owner. Finally, Allegiance serves all of our stakeholders, which includes active support of many local community initiatives, including financial support and volunteerism at the Houston Food Bank, the formation and fundraising effort for the new banking program at Texas Southern University, advocator and assistance to disadvantaged youth and affordable housing options for low-income families. These and other initiatives provide compelling evidence of the integral value that our community minded model is able to deliver.

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 A. (ray) Vitulli -- Chief Executive Officer

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. Moving now to our quarterly operating results. Total core loans, which excludes PPP loans, ended the second quarter at $3.96 billion, an increase of $30.8 million during the quarter. Our staff and lending team booked a previously mentioned $379 million of new core loans that funded to a level of $251 million by June 30 compared to the first quarter when $325 million of new core loans were generated, which funded to a level of $203 million by March 31.

The weighted average interest rate charged on the new second quarter core loans was 4.48% compared to the weighted average rate charged on the new first quarter core loans of 4.61%, and 4.64% in the fourth quarter of 2020. Paid off core loans were $238 million in the second quarter compared to $180 million in the first quarter. The $238 million of paid off core loans during the quarter had a weighted average rate of 5.06%. Carried core loans experienced advances of $129 million at a weighted average rate of 4.77% and paydowns of $114 million, which were at a weighted average rate of 5.07%. All in, the overall period end weighted average rate charge on our funded core loans decreased seven basis points, ending the quarter at 4.95% compared to 5.02% as of March 31, 2021. Over the past few quarters, we have provided information on several loan categories that could have heightened risk due to energy prices in the COVID pandemic. Those being our oil and gas portfolio, our hotel portfolio and our restaurant and bar portfolio. While we continue to keep a close eye on these categories, we feel it will take more time to see a return to pre code performance in the hotel portfolio.

At June 30, our hotel portfolio totaled $129 million or 2.88% of our funded loans, with a weighted average LTV of 72.4% on the $126 million that's categorized to CRE. A 30% stress test on the LTV, plus 6% in marketing expenses would result in a $5 million shortfall in the portfolio. We are seeing some improvement in occupancy and ADR, which is welcome news. In aggregate, our asset quality at quarter end remained in a manageable position. Nonperforming assets, including both nonaccrual loans and ORE, ended the second quarter up from 55 to 58 basis points of total assets. Nonaccrual loans increased a net of $1.5 million during the quarter from $35.1 to $36.6 million, primarily due to $7.3 million in additions, partially offset by $2.9 million in payoffs, $1.8 million in payments, $821,000 moved to other real estate, $176,000 in charge-offs and $64,000 in upgrades placed back on accrual. The $7.3 million in additions was comprised of a $4.3 million hospitality property with the additional $3 million increase coming from six relationships, one of which totaled $1.2 million, and the remaining $1.8 million was from five smaller relationships. ORE increased to $1.4 million during the quarter compared to $576,000 for the first quarter, primarily due to the addition of an $821,000 retail residential property. Our ORE is now comprised of two residential properties.

Charge-offs for the quarter were minimal at an annualized rate of one basis point. In terms of our broader watch list, our classified loans as a percentage of total loans increased to 4.18% of total loans as of June 30 compared to 3.91% as of March 31. Criticized loans increased to 6.05% at June 30 from 5.98% in March 31. Specific reserves for individually evaluated loans ended the quarter at 17.2% of total reserves compared to 14% at March 31. On the deposit front, we saw an increase in total deposits in the second quarter by $59 million from the first quarter and up $733 million over the year ago quarter. We continue to see solid growth in noninterest-bearing deposits that contributed to the quarter-to-date increase, primarily the result of new accounts associated with PPP customers as well as higher balances in our carried accounts. With that, our noninterest-bearing deposits to total deposit ratio was 36.3% for June 30 compared to 35.6% from March 31 and 37.3% for the year ago quarter. Adding 48,600 jobs in the first six months of the year, the Houston area has now recovered 59% of the jobs lost at the onset of the pandemic. The housing market remains strong with record lows in terms of months of supply for single-family homes, while multifamily occupancy has now hit 90%. Our bankers are out meeting with customers and prospects, and we were encouraged by our healthy loan pipeline and look forward to carrying the momentum from the second quarter to the remainder of the year.

I now turn it over to our CFO, Paul.

Paul P. Egge -- Executive Vice President & Chief Financial Officer

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, pre-tax 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 pre-tax 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. Before moving on, I should note that as of quarter end, we had approximately $18 million of net deferred fee income remaining relating to PPP loans after recognizing that $6.4 million of net PPP income into yield during the second quarter and a total of $13.3 million year-to-date. Total yield on loans in the first quarter was 5.09% as compared to 5.15% for the first quarter and 5.13% for the year ago quarter. Excluding PPP loans and related revenue, yield on loans would have been 5.07% for the second quarter, 5.06% in the first quarter and 5.44% in the year ago quarter. Total yield on interest-earning assets was 4.41% for the second quarter, down from 4.67% for the first quarter and 4.87% for the year ago quarter, reflecting a growing earning asset mix that includes a higher proportion of cash and securities as well as significant PPP loan balances within total loans. With respect to interest expense, our cost of interest-bearing liabilities continue to track downwards in the second quarter to 67 basis points from 80 basis points for the first quarter and 119 basis points for the year ago quarter, driven principally by CD repricing.

The overall cost of funds for the second quarter was 44 basis points versus 54 basis points in the first quarter. We expect to see continued improvement in our funding costs going forward, driven by CD repricing and continued optimization. So with the help of lower interest expense in Q2 and PPP net fee income recognition, offsetting a significant shift in the composition of our earning assets, our taxable equivalent net interest margin was 4.02% for the quarter as compared to 4.19% in the first quarter and 4.1% in the year ago quarter. Excluding PPP loan balances and related revenue, net interest margin would have been 3.88% for the second quarter from 3.95% in the first quarter. Going forward, we continue to feel well positioned to maintain a relatively strong core net interest margin through optimizing our funding mix and maintaining discipline on loan pricing. But we do see excess liquidity and the resulting changes to our earning asset composition as a potential drag on NIM expectations. Noninterest income was up quarter-over-quarter, increasing to $2.3 million for the second quarter from $1.7 million for the first quarter, primarily due to a few small nonrecurring items to the positive and there being no loss on the sale of other real estate as compared to the $176,000 loss on ORE taken in the first quarter.

Total noninterest expense decreased in the second quarter to $33.6 million compared to $34.9 million in the first quarter. The difference is primarily due to the $1.5 million in nonrecurring asset write-downs we took in the first quarter. Thanks in part to an improved expense line, we saw our efficiency ratio for the second quarter decreased to 57.07% compared to the 60.85% from the first quarter and a small increase from the 56.92% for the prior year quarter. All note that the first quarter efficiency ratio would have been 58.29%, if you were to exclude the aforementioned asset write-downs during the quarter. Moving on to credit. We recorded a negative provision for credit losses of $2.7 million during the quarter, reflective of improving expectations for credit in our allowance model.

Our allowance for credit losses ended the quarter at $49.6 million, representing 111 basis points on total loans and 145 basis points on core or non PPP loans. The bottom line, our second quarter ROAA and ROATCE metrics came to 1.42% and 17.2%, respectively, both again representing all-time highs. Quarter end, tangible book value per share was $27.17, which, as Steve mentioned, makes for an increase of approximately 12.7% since the year ago quarter, notwithstanding dividends and share repurchases over the last year. Entering the second half of 2021, we feel very well positioned to continue to drive franchise and shareholder value. It never gets old to be able to say that we are bigger and better than ever at over $6.5 billion in assets with profitability, capital and liquidity levels at or near all-time half. We look forward to building on the momentum from our tremendous PPP success to continue adding market share at Houston's largest community bank.

I will now turn the call back over to Steve.

Steven F. Retzloff -- Chairman

Thank you, Paul. With that, I will now turn the call over to the operator to open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Brady Gailey with KBW. Your line is open. Please go ahead.

Brady Gailey -- KBW -- Analyst

Hi. Thank. Good morning guys.

Paul P. Egge -- Executive Vice President & Chief Financial Officer

Good morning.

Brady Gailey -- KBW -- Analyst

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 P. Egge -- Executive Vice President & Chief Financial Officer

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 -- KBW -- Analyst

Yes. Alright. 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 P. Egge -- Executive Vice President & Chief Financial Officer

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 -- KBW -- Analyst

Yes, 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 P. Egge -- Executive Vice President & Chief Financial Officer

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 two 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 two quarters.

Steven F. Retzloff -- Chairman

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.

Brady Gailey -- KBW -- Analyst

Okay. Great. Thanks guys.

Operator

And our next question comes from the line of Matt Olney with Stephens. Your line is open. Please go ahead.

Matt Olney -- Stephens -- Analyst

Thanks. Good morning guys.

Paul P. Egge -- Executive Vice President & Chief Financial Officer

Good morning Matt.

Matt Olney -- Stephens -- Analyst

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 P. Egge -- Executive Vice President & Chief Financial Officer

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 -- Stephens -- Analyst

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 P. Egge -- Executive Vice President & Chief Financial Officer

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 -- Stephens -- Analyst

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 P. Egge -- Executive Vice President & Chief Financial Officer

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.

Matt Olney -- Stephens -- Analyst

Okay. Thanks guys.

Paul P. Egge -- Executive Vice President & Chief Financial Officer

Great. Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Graham Dick with Piper Sandler. Your line is open. Please go ahead.

Graham Dick -- Piper Sandler -- Analyst

Hi guys. Good morning.

Steven F. Retzloff -- Chairman

Good morning Graham.

Graham Dick -- Piper Sandler -- Analyst

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?

Steven F. Retzloff -- Chairman

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 two 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 -- Piper Sandler -- Analyst

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.

Steven F. Retzloff -- Chairman

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 -- Piper Sandler -- Analyst

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 P. Egge -- Executive Vice President & Chief Financial Officer

Sure thing. It was $604 million.

Graham Dick -- Piper Sandler -- Analyst

Alright. Great. Thanks guys.

Paul P. Egge -- Executive Vice President & Chief Financial Officer

Great. Thank you.

Operator

Our next question is a follow-up question from Matt Olney with Stephens. Your line is open. Please go ahead.

Matt Olney -- Stephens -- Analyst

Thanks guys. 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? Thanks.

Steven F. Retzloff -- Chairman

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.

Matt Olney -- Stephens -- Analyst

Okay. That's all from me. Thanks guys.

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.

Steven F. Retzloff -- Chairman

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

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Courtney Theriot -- Executive Vice President and Chief Accounting Officer

Steven F. Retzloff -- Chairman

Ramon A. (ray) Vitulli -- Chief Executive Officer

Paul P. Egge -- Executive Vice President & Chief Financial Officer

Brady Gailey -- KBW -- Analyst

Matt Olney -- Stephens -- Analyst

Graham Dick -- Piper Sandler -- Analyst

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