Spirit of Texas Bancshares (STXB) Q4 2021 Earnings Call Transcript

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Spirit of Texas Bancshares (STXB)
Q4 2021 Earnings Call
Jan 27, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. And welcome to the Spirit of Texas Bancshares fourth quarter 2021 earnings call. [Operator instructions] A brief question and answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jerry Golemon, chief operating officer for Spirit of Texas Bancshares. Thank you, sir. You may begin.

Jerry Golemon -- 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 2021 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 for 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 3, 2022 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 27th, 2022. 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, 2020, to understand certain of those risks, uncertainties and contingencies.

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. Welcome. From our humble beginnings of approximately $50 million in assets in Snook, Texas, with a population of about 450 souls, we have grown the Spirit of Texas franchise to over $3 billion in assets over the past 13 years. Throughout our journey, we have maintained a culture that is committed to quality, adding quality assets organically, identifying talented bankers, acquiring solid institutions.

We have always strived for the most advantageous strategic path to add value for our investors and the communities we serve. I'm very proud that our history of commitment to quality has produced another great quarter of financial and operational results. During the quarter, we earned $9.1 million or $0.51 per share and fully diluted earnings per share. We saw the return of SBA loan sales which generated $812,000 in gain during the quarter.

In addition, we are pleased to report strong organic loan growth, with over $2 billion in loans and still growing in double digits. Our goal back in 2008 was to build a profitable, safe, competitive local bank. As time passed, our goals expanded to be a strong Texas regional bank. And finally, becoming a public bank that began to reach throughout Texas.

The upcoming merger with Simmons First National Corp. is not the end of the Spirit of Texas story but starts a new chapter that will be filled with further growth in Texas markets. Our partnership with Simmons will provide the scale and resources that our talented bankers need to elevate their performance and better execute in the highly competitive market for quality banking opportunities. Now, I'll turn the call over to David to discuss the loan portfolio and asset quality.

David?

David McGuire -- President and Chief Lending Officer

Thank you, Dean. During the quarter, on an annualized basis, we grew loans an impressive 24.3%, excluding the impact of PPP loan forgiveness. The majority of the growth came from the C&I and construction loan portfolios on an annualized basis of 77% and 40%, respectively. Despite loans moving from the pipeline to the portfolio, the pipeline also expanded to a record $1.2 billion, up $100 million from fiscal year-end 2021.

Our lenders have worked powerlessly to assist PPP loan borrowers with their forgiveness applications and we are pleased to start 2022 with only $43.9 million in PPP loans outstanding which when forgiven, will generate $979,000 in fee income, net of related costs. We continue to see improvement in asset quality with non-performing loans to outstanding loans declining to 22 basis points. Working through previously impaired loans did not result in material charge-offs during the quarter with annualized charge-offs to net loans of 15 basis points. The provision for loan losses for the fourth quarter was $970,000.

Provisioning for the quarter was primarily due to our organic loan growth. At quarter end, the coverage ratio in the loan portfolio was 71 basis points. The yield on loans in the fourth quarter of 2021 was 5.08%. Despite the stability in the loan yield quarter over quarter, we expect compression in loan yields for 2022 as competitive pressure for quality deals increases.

However, overall, we expect to see a higher net interest margin going forward as a result of the change in the asset mix from lower-yielding cash into loans. With that, I'll turn the call back over to Jerry to provide a review of the funding side of the company. Jerry?

Jerry Golemon -- Chief Operating Officer

Thank you, David. Deposits continue to show strong growth as Q4 ended with total deposits of $2.8 billion, an increase of $111.8 million or 16.6% annualized from Q3 2021 and an increase of $323.3 million or 13.2% over Q4 2020. Non-interest-bearing deposits increased $36.1 million or 18.8% annualized from Q3. Non-interest-bearing deposits currently make up 28.9% of total deposits.

Interest-bearing deposits, including money markets and savings increased $96.6 million or 29.1% annualized from Q3, primarily due to our success in retaining and growing client relationships from COVID-related assistance programs. Time deposits decreased by $20.9 million or 3.6% from Q3 2021. Due to aggressive repricing, the cost of time deposits decreased 10 basis points from Q3 2021 to 0.58%. This improved shift in deposit mix resulted in 0.22% cost of deposits, a decrease of 6 basis points from Q3 2021.

The bank has no broker deposits. The reported loan-to-deposit ratio at the end of Q4 was 83.5%. Borrowings decreased by $4.3 million during the fourth quarter to $74.9 million due to repayment of maturing Federal Home Loan Bank advances. Borrowings totaled 2.3% of assets at the end of Q4.

The company has significant sources of available liquidity, including $50 million in a holding company line of credit, Fed funds lines totaling $115 million and Federal Home Loan Bank availability of $841.9 million. I would now like to turn the call over to Allison to provide a financial overview of the fourth quarter. Allison?

Allison Johnson -- Chief Financial Officer

Thank you, Jerry and good morning, everyone. We provided detailed financial tables in yesterday's earnings release. Consolidated net income for the three months ended December 31, 2021, was $9.1 million with fully diluted EPS of $0.51 compared to earnings of $12.5 million and fully diluted EPS of $0.71 in the fourth quarter of 2020. Non-GAAP consolidated net income for the three months ended December 31, 2021, was $9.8 million, with fully diluted EPS of $0.55, excluding the impact of elevated professional services associated with the anticipated merger.

Net income and earnings per share were primarily driven by the recognition of $1.5 million net accretion of origination fees on PPP loans and $812,000 of gain on sale of SBA loans. We anticipate the remaining $979,000 of net origination fees on PPP loans to be recognized during Q1 2022. Non-interest income was $4.3 million for the fourth quarter of 2021 compared to $3.3 million for the third quarter of 2021, an increase of $1 million linked quarter. The increase from Q3 2021 was primarily due to an increase in gain on sale of SBA loans of $812,000.

Non-interest expense totaled $20.3 million in the fourth quarter of 2021, an increase of $2.3 million from the $18 million reported in the third quarter of 2021. The increase was primarily due to an increase in salaries and benefits expense of $412,000 related to bonus accruals, an additional $800,000 in professional fees related to the merger. The tax equivalent net interest margin in the fourth quarter of 2021 was 3.89% compared to third quarter 2021 tax equivalent margin of 4%, representing an 11 basis point decrease sequentially. While the overall cost of funds continues to decline, increases in our average cash balance during the quarter drove the compression of our net interest margin.

However, using excess liquidity to fund strong loan growth will assist the overall margin in the coming quarters. The provision for loan losses for the fourth quarter was $970,000, which increased the allowance to $16.4 million or 71 basis points of our total loans outstanding. The provision expense for the quarter related primarily to the provisioning of new loans. Additionally, we have $1.3 million unamortized discount on the acquired loan portfolio at December 31, 2021.

As of December 31, 2021, capital ratios remained strong and book value per share and tangible book value per share have increased to $22.79 and $18.02, respectively. I'd now like to turn the call back over to Dean for closing remarks. Dean?

Dean Bass -- Chairman and Chief Executive Officer

Thank you, Allison. As we approach the upcoming merger with Simmons, I'm confident of our continued success and I'm looking forward to seeing what our team is able to accomplish with access to a broader array of products and services, including an increased capacity to lend by leveraging a larger balance sheet. I'm very proud of our team and their performance over the past 13 years by achieving impressive growth without sacrificing asset quality and providing an attractive return for our shareholders. This concludes our prepared remarks.

I'd like to ask the operator to open up the line for any questions. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] It seems there are no questions at this time. I'll turn the floor back to Mr. Bass for any final comments.

Dean Bass -- Chairman and Chief Executive Officer

Thank you very much. I guess due to the pending merger, the questions, many of the questions have been answered either by the press release. But at the same time, I'd like to thank each of you for calling in today. What a year.

What a year-end review. What two years. What a challenging two years. Our group was up for the challenge over these past two years.

During the war on COVID, our employees showed up, showed up every day and fought the battle and performed well, as you can see by our numbers. We have an outstanding team of directors and employees and it couldn't be done without each and every one of them. To our shareholders, thank you for believing in the Spirit of Texas story over these last 13 years and especially over the last nearly four years as a public company. And to our customers, thank you for letting us to review.

And as a good friend always told me about Spirit of Texas Bank, the best is still yet to come. Thank you very much. Have a good day.

Operator

[Operator signoff]

Duration: 18 minutes

Call participants:

Jerry Golemon -- Chief Operating Officer

Dean Bass -- Chairman and Chief Executive Officer

David McGuire -- President and Chief Lending Officer

Allison Johnson -- Chief Financial Officer

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