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Edited Transcript of STXB.OQ earnings conference call or presentation 30-Apr-20 4:00pm GMT

Q1 2020 Spirit of Texas Bancshares Inc Earnings Call

Jun 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Spirit of Texas Bancshares Inc earnings conference call or presentation Thursday, April 30, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allison S. Johnson

Spirit of Texas Bancshares, Inc. - Interim CFO & CAO

* David M. McGuire

Spirit of Texas Bancshares, Inc. - President & Director

* Dean O. Bass

Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO

* Jerry D. Golemon

Spirit of Texas Bancshares, Inc. - Executive VP, COO & Secretary

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Conference Call Participants

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* Bradley Jason Milsaps

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Matthew Covington Olney

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Greetings, ladies and gentlemen, and welcome to the Spirit of Texas Bancshares First Quarter Earnings Conference call. (Operator Instructions)

It is now my pleasure to introduce your host, Jerry Golemon, Chief Operating Officer. Thank you, sir. You may begin.

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Jerry D. Golemon, Spirit of Texas Bancshares, Inc. - Executive VP, COO & Secretary [2]

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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 first 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, our Interim Chief Financial Officer.

Following my opening remarks, we will provide a high-level review and commentary on the financial details of the first quarter before opening up 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 May 7, 2020. 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, April 30, 2020, 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?

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Dean O. Bass, Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO [3]

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Thank you, Jerry, and good morning, everyone. I'd like to begin this morning by thanking all of our dedicated employees and their families for their service. Their commitment is truly what makes Spirit of Texas Bank a pillar of strength in the communities we serve. I would also like to thank our customers and shareholders for their continued support. Since becoming a public company in May of 2018, we have operated in a strong economy, exemplified by expanding GDP growth, robust loan demand and strong credit quality. As managers, we should be judged not only by our performance and a booming economy but in our ability to pivot in times of crisis and weakness.

Over the same period, we have maintained strict credit underwriting standards, diversification of loan portfolio both in geography as well as concentrations and retained experienced credit managers who have personally experienced entire credit cycles numerous times. We believe that these measures place us in a position of strength to work through the current phase of the credit environment, knowing very well that each economic battle is different.

Additionally, we must make the preservation of capital as a strategic focus, along with sustaining profitability and dynamically managing risk throughout the organization. The current economic environment has presented us with a challenge to assess, protect, utilize our strengths to ultimately provide us the ability to take advantage of the valuable growth opportunities once the economy stabilizes. In the short term, we must do our part to ensure the safety of our employees, customers, the communities we serve. We have instituted best processes and prescribed protocols to respond swiftly and appropriately to the COVID-19 and slow the spread of the global pandemic. All branches are fully functioning even though the lobbies are closed, and we are offering a full range of banking services in our drive-throughs or appointments with lenders.

Despite the current environment, we are pleased to announce adjusted net income of $4.8 million for the first quarter and adjusted earnings per share of $0.26. Additionally, we completed the successful closing of the branch acquisition with Simmons Bank during Q1 2020, which added over $260 million in loans and over $139 million in deposits as well as allowed us to expand our footprint into the Austin and San Antonio markets. To ensure that we can continue to report strong financial and operational results going forward, our strategic objectives in response to the current economic environment consists of preserving our strong capital position, managing risk and mitigating losses to quickly assess, resolve credit issues by working closely with our customers and addressing their needs timely, balancing loan growth with the need to stabilize net interest margin and diligently managing expenses. Additionally, we have been able to leverage our extensive experience with small business lending and our preferred lending status with the SBA to effectively and efficiently digest the provisions of the CARES Act and offer our customers Payroll Protection Program loans to support their working capital needs.

As of the date of this call, we have supported numerous customers and helped in preserving thousands of jobs in the communities we serve. I would like to conclude by personally thanking our hardworking health care professionals. I have experienced firsthand their level of care and know that these individuals are true heroes.

Now I'd like to turn the call over to Mr. David McGuire, our President and Chief Lending Officer, to discuss the loan portfolio and provide some additional detail on our participation in the Payroll Protection Program. David?

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David M. McGuire, Spirit of Texas Bancshares, Inc. - President & Director [4]

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Thank you, Dean. As I'm sure you would expect, our strategic focus during the first quarter of 2020 quickly shifted from setting an appropriate pace and expectation for loan growth for the year to deploying all of our talented lending staff and accomplishing the mission of engaging with each of our borrowers and determining the unique challenges they face and their capital needs.

As we saw in 2008 and 2009, crisis and economic weakness is not unprecedented. However, when access to capital disappears, the problem is magnified. We are committed to providing the liquidity and funding that our quality borrowers need to weather this storm while aggressively managing our own liquidity and strong capital position. While some of our borrowers were -- will experience no loss of operating income during the global pandemic, it is imperative that we identify and monitor the industries in our loan portfolio that will be significantly impacted and continuously monitor the financial health of our customers operating in these industries to mitigate losses wherever possible.

Industry is currently being monitored by our credit administration personnel, and related exposures include: retail strip centers, hospitality, restaurants and direct and indirect oil exposure.

Retail centers at March 31, 2020, consisted of $116.2 million or 5.8% of the loan portfolio. Of these retail strip centers, 71% are nonowner occupied, and the remaining 29% are owner occupied.

Hospitality exposure at March 31, 2020, consisted of $90.1 million or 4.5% of the loan portfolio. Of these hospitality loans, 77% are term loans, and the remaining 23% are construction loans. At March 31, 2020, the loan portfolio consisted of $50.6 million of restaurant exposure or 2.5%. Of these restaurant loans, approximately 54% are quick-service restaurants, and the remaining 46% are full-service restaurants.

Total oil exposure in the loan portfolio at the end of the quarter was $73.4 million or 3.6% of total loans outstanding. Direct energy exposure was 2.2% of total loans outstanding, and 1.4% was indirect energy exposure. During the first quarter of 2020, the loan portfolio grew to $2 billion compared to $1.77 billion at December 31, 2019. The growth in our loan portfolio was primarily driven by the closing of the recent branch acquisition, which added over $260 million of loans.

Excluding the acquired loans, we are pleased to report total originations of $59 million or 19.9% annualized. During the quarter, we sold $50.2 million worth of loan participations to provide additional liquidity, which resulted in a net organic loan growth to $8.8 million. The yield on loans in the first quarter of 2020 was 5.94%, which decreased 9 basis points from Q4 2019. The reduction in yield was anticipated given the decrease in underlying index rates in the fourth quarter of 2019 and in the late first quarter of 2020. As of March 31, 2020, approximately 35% of our variable rate loans were at their floors. 58% of the remaining loans set to reprice will reprice in Q2 2020. For the remainder of 2020, our loan growth expectations will be driven by the ability to price deals at or above our current yield and the necessity of controlling risk within the portfolio.

Asset quality continued to remain strong in the first quarter of 2020. Nonperforming loans to outstanding loans were 38 basis points at the end of Q1 2020 compared to 37 basis points at the end of Q4 2019 and 52 basis points at the end of Q1 2019. The provision for loan losses for the first quarter was $1.2 million, which increased the allowance to $7.6 million or 38 basis points of our loans outstanding. The coverage ratio on the organic portfolio was 63 basis points on the $1.2 billion in organic loans outstanding at the quarter end. Annualized net charge-offs were 6 basis points for the first quarter of 2020.

Strong credit quality entering the current economic environment allows us the flexibility to work with borrowers to structure loan workouts, deferments, and other credit measures deemed prudent. Our 3 veteran Chief Credit Officers with a combined more than 115 years of experience provide the knowledge necessary to determine exactly when to deploy these measures to mitigate losses. Currently, we have received an approved relief request, including the periods of interest-only payments, full payment deferrals and escrow deferrals associated with loans on an unpaid principal balance of approximately $418 million. While these approvals were given for a period of 90 days to ease the impact of business closures and reduced demand, we also use this time to stay in contact with our borrowers and gain more insight into their long-term financial stability and our collateral position. We will evaluate the need for additional action throughout the second quarter based upon the status of the pandemic, the actions of federal, state and local government, and the needs of our borrowers.

Subsequent to the quarter end, we have approved and funded approximately $500 million of PPP loans. This program has allowed us to assist roughly 3,000 of our customers and has the potential to have saved as many as 60,000 jobs. Our lending staff has worked tirelessly over nights and weekends sacrificing their individual needs for the needs of the communities we serve. I would like to take a moment to publicly say thank you for this sacrifice and note that I am proud to work with many talented individuals who are positively impacting the lives of so many.

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

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Jerry D. Golemon, Spirit of Texas Bancshares, Inc. - Executive VP, COO & Secretary [5]

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Thank you, David. Total deposits at the end of Q1 2020 were $2.08 billion, an increase of 7.7% from Q1 2019, and an increase of 72.6% over Q1 2019. The year-over-year growth is largely due to the whole bank acquisitions of [Bill] and Tyler and the recent branch acquisition. Our acquisitions over the last 12 months have allowed us to reduce our reliance on certificates of deposit as a funding source.

As of March 31, 2019, time deposits made up 48% of our deposit base. At March 31, 2020, that number had dropped to 34%. This improved deposit mix has helped us keep our cost declines and deposit betas well under control. Our cost of interest-bearing liabilities is down 5 basis points from Q4 2020, and the average cost of all deposits declined 5 basis points to 0.93%.

Borrowings increased $8.1 million in Q1 to $113.3 million due primarily to drawing down on our third-party borrowing line at the holding company to support the company's repurchase plan. Borrowings totaled 4.5% of total assets at March 31, 2020. The loan-to-deposit ratio ended the quarter at 96.9% as compared to 91.7% at the end of Q4 2019, and 93.6% at the end of Q1 2019, illustrating the impacts of the acquisitions.

The bank maintains sound balance sheet liquidity with significant contingency funding sources. With the bank's active participation in the PPP, businesses were required to fund their loans into a specially created Spirit of Texas Bank account. This not only has eased the liquidity needs that arose from the program, but it also facilitates the proof of spending required for the eventual forgiveness of the debt. The bank is utilizing the federal reserve's APP liquidity facility to provide further liquidity as the businesses spend the funds. At the end of Q1, the bank had availability at the FHLB of $533 million, along with $90 million availability under Fed funds lines with correspondent banks.

I would now like to turn the call over to our Interim Chief Financial Officer, Allison Johnson, to provide a financial overview of the first quarter. Allison?

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Allison S. Johnson, Spirit of Texas Bancshares, Inc. - Interim CFO & CAO [6]

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Thanks, Jerry, and good morning, everyone. We provided detailed financial tables in yesterday's earnings release. On a consolidated basis, net income for the 3 months ended March 31, 2020, was $4.1 million, with fully diluted EPS of $0.22 compared to earnings of $3.8 million and fully diluted EPS of $0.30 in the first quarter of 2019. Non-GAAP earnings for the first quarter of 2020 were $4.8 million or $0.26 in non-GAAP EPS. The pretax non-GAAP adjustments for the first quarter of 2020 consisted of $1.6 million in merger-related expenses for conversion costs related to the Tyler acquisition and the recent branch acquisition and from contract termination penalties, offset by a $575,000 tax benefit related to an NOL carryback.

Our tax-equivalent margin in the first quarter of 2020 was 4.4% against fourth quarter 2019 margin of 4.43% for a 3 basis point decrease. The impact of the decrease in interest rates by the Federal open market committee during the fourth quarter of 2019 and in March of 2020 was partially offset by the migration of our low-yielding excess cash into higher-yielding loans through the recent branch acquisition. As of March 31, 2020, our yield on loans was 5.94%, a decrease of 9 basis points from Q4 2019. 35% of our variable rate loans are currently at their floors, and 58% of our remaining variable rate loans were repriced during Q2.

In light of the current economic environment, we are revisiting our current strategy related to earning assets, updating our forecast with respect to loan growth with the goal of stabilizing net interest margin during the second quarter. The provision for loan losses for the first quarter was $1.2 million, which increased the allowance to $7.6 million or 38 basis points of our loans outstanding. The majority of the provision expense for the quarter related to increasing qualitative reserves in response to the current economic environment as opposed to a deterioration in credit quality or an increase in impaired loan balances. The coverage ratio on the organic portfolio was 63 basis points on the $1.2 billion in organic loans outstanding at quarter end. We have reviewed each of the acquired loan portfolios and have determined that it is not appropriate at this time to reserve for these loans beyond the $7.7 million unamortized discount at March 31, 2020. As an emerging growth company, we have opted to delay the adoption of CECL until 2023. Under our current incurred loss model, our reserves are based upon an estimate of loss events, which have occurred as opposed to forecasting future loss events. Over the next two quarters as we gain additional insight into how our borrowers have been impacted, we anticipate elevated provision expense and a corresponding increase in coverage ratios.

Noninterest income was $2.7 million for the quarter. We saw $165,000 increase quarter-over-quarter in service charges and fees, primarily as a result of the recent branch acquisition. Additionally, during Q1 2020, we began offering our customers interest rate swaps, which are administered by a third-party correspondent bank. The bank is not a counterparty in the swap but instead earns a referral fee when our customer enters into the interest rate swap with the correspondent bank. This new product generated $580,000 in fee income during the quarter, which assisted in offsetting the decline in loan sales for the quarter.

SBA servicing fees net were down $381,000 due to prepayments and fair value adjustments. We currently believe that future declines in the SBA servicing asset due to fair value adjustments will not continue going forward. However, we do anticipate a continued period of fewer loan sales.

Noninterest expense was $21 million for the quarter, an increase of $2.3 million or 12.3% from Q4 2019. Of the $21 million of expense, $1.6 million related to pretax merger-related expenses. Additionally, during the quarter, we incurred $486,000 in onetime employee-related expenses. For the second quarter, we expect noninterest expense to be flat at $18.8 million as the conversion for Tyler has been postponed to the third quarter of 2020.

Our effective tax rate for the quarter was 7%. During the quarter, we took advantage of the provision in the CARES Act that allows us to carry back net operating losses to a prior tax year. This resulted in a reduction of income tax expense of $575,000.

We currently have a strong capital position at both the bank and the company on a consolidated basis. We closely monitor the Tier 1 leverage ratio and maintain a targeted minimum of 8%. As of March 31, 2020, the bank had a Tier 1 leverage ratio of 10.79% and the company, on a consolidated basis, had a Tier 1 leverage ratio of 10.96%. Additionally, by using the federal reserves' PPP liquidity facility, loans originated under the Payroll Protection Program are neutral to capital.

During the quarter, our stock began trading below tangible book value per share. We view this as an opportunity to repurchase 321,000 shares of undervalued stock. The company has previously considered the repurchase of shares as long as the internal rate of return from purchasing shares exceeds the return earned on other investment opportunities. The stock buyback plan currently in place expires in June of 2020. We will continue to reevaluate our stock repurchases as we get better clarity on the length and severity of the pandemic.

I'd now like to turn the call back over to Mr. Bass for wrap up. Dean?

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Dean O. Bass, Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO [7]

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Thank you, Allison. While challenging times are ahead for many, we believe we will emerge from this period stronger and with the ability to significantly enhance shareholder value.

This concludes our prepared remarks. I'd like to ask the operator to open up the line for any questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Matt Olney with Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [2]

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Dean, it's great to hear from you, and glad you're feeling better.

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Dean O. Bass, Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO [3]

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Well, thank you. Glad to be heard.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [4]

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Sure. I want to start on the loan participation sold of around $50 million. It's a pretty sizable chunk. What's the normal level of participations that you guys typically sell? And what drove the decision to participate these loans out? And I guess it sounds like we could see additional participations in the rest of the year. Just kind of update us on your strategy there.

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David M. McGuire, Spirit of Texas Bancshares, Inc. - President & Director [5]

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Matt, this is David. When we closed the branch transaction with Simmons, there's a gap there that we needed to cover between the loans and deposits, and that was part of the reason behind that. And to make ourselves as liquid as possible going into the end of the quarter, not knowing really what difficulties lie ahead for us in concern with the coronavirus. But we don't anticipate any more at this point. We're in a good position right now. And with the PPP program in place, we're able to fund that with our own money on the front end and then we have the ability to go and -- go to the PPP loan fund and get borrowings there as needed.

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Dean O. Bass, Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO [6]

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And I might add one thing, David. We were tracking it, in the what, 98% to 99%, Allison, if I'm remembering that right? Loan-to-deposit ratio, 99%-plus, maybe 99.3%. And so what we were thinking is give a little more room there for us to build that back up. We have the capacity and ability for the latter part of the quarters this year. We felt comfortable not knowing exactly what might come at us. So we mellowed that, created a little more funding sources there. And I think we positioned ourselves very well back down in the 96% range. Is that correct, Allison?

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Allison S. Johnson, Spirit of Texas Bancshares, Inc. - Interim CFO & CAO [7]

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Correct.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [8]

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Okay. That's helpful. I guess just taking a step back on loan growth for 2020. Can you just kind of talk about the pushes and pulls and some of the new hires that you guys have made over the last few months? And I understand the visibility is challenging here, but what's the expectation for loan growth this year?

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David M. McGuire, Spirit of Texas Bancshares, Inc. - President & Director [9]

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Matt, right now, it's pretty foggy out there to be able to even look out 30 days to say if we're going to all of a sudden have a big loan surge. But I can tell you that we believe that coming out of this that customers will need to reborrow or borrow additionally for working capital purposes. And so we see that actually benefiting us in the SBA world and possibly in our conventional loan portfolio. So too early to tell anything about that. But most of our customers, as you can expect, probably nationwide, you're hearing hit the pause button, and it's just going to be -- I think it's towards the end of the quarter. On the second quarter, we'll have a little bit clearer picture of what the rest of the year will look like.

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Dean O. Bass, Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO [10]

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Yes. I might add something. This is Dean. As the world turns back and we see the new normal, the pains and ills will be seen in different places. But also the high-net-worth individuals and those that see opportunity and gain advantage during downtimes, those are some of the individuals that we have been able to pull in, their lenders in those -- that customer base over the last 6, 9 months. And so that's also an additional group that came with us from Simmons and Jeffrey. And that group is an outstanding banking group that has joined us along with our Dallas team and our corporate team that's joined us in metroplex.

And so as things normalize, turn back around, we think we'll be well positioned. We were heading into the quarter as good as we've ever looked into February and positioned ourselves very well and really liked our positioning and like the team and the army we had behind us. So we're still optimistic as to where we're going to be this year as soon as we can see the end of -- the light at the end of this tunnel.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [11]

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Okay. Very good. And then, I guess, for Allison, the margin outlook from here, obviously, there's lots of moving parts with the acquisition and the liquidity. But any kind of commentary you can give us as far as the direction of the margin more near term? And obviously, PPP adds another wrinkle to that. So if that's something you want to exclude from -- just for your response, that would be fine too.

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Allison S. Johnson, Spirit of Texas Bancshares, Inc. - Interim CFO & CAO [12]

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Sure, Matt. Yes. So I'm going to exclude any discussion around the Payroll Protection Program right now because that just creates so much noise. But going into Q2, as we mentioned on the call, currently, 35% of our variable rates are at their floors. We do in Q1. As of April 1, we're going to have 58% of our remaining variable rate loans repriced. So you are going to see some compression in the loan yield. However, we do expect to see CDs repriced in Q1, so we'll get some relief in our cost of funds. So going into Q2, I expect probably a compression of the net interest margin of approximately 15 basis points and then seeing the stabilization and going into Q3.

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Operator [13]

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Our next question comes from the line of Brad Milsaps with Piper Sandler.

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Bradley Jason Milsaps, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [14]

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Dean, great to hear your voice. Glad you're back and feeling well. Yes, you guys addressed a lot of my questions already, but Allison, you mentioned that you thought expenses would kind of remain flattish linked quarter. Would you still expect to see some cost saves in the back half of the year and maybe the run rate falls off a bit from the second quarter level after you complete the conversion that you mentioned that got pushed off into the third quarter?

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Allison S. Johnson, Spirit of Texas Bancshares, Inc. - Interim CFO & CAO [15]

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Yes. So short answer, yes. I would like to say that when we started out this year, our strategic focus was on organic growth and expense reductions. We did see -- we started making a lot of progress with strong organic loan growth and brought on an additional source of fee income through our new interest rate swap product as well as made a reduction in the headcount for some redundancies on staff. But then, of course, as a result of the pandemic, that kind of got derailed. So our focus shifted more to the preservation of capital, liquidity and credit quality. So with that being said, the Tyler conversion got pushed back into Q3, which we were expecting in Q2 to get some cost saves from there. So we will see those cost saves coming in, in Q3 assuming that, that doesn't get pushed back further. So excluding the merger-related expenses and the onetime employee-related expenses that ran through Q1, yes, I do expect interest expense -- noninterest expense to remain flat at $18.8 million for Q2. And obviously, we're going to remain cognizant of any discretionary spending during that time. But no, we will start seeing the cost savings again coming back in Q3.

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Bradley Jason Milsaps, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [16]

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Got it. So 2Q might be a peak, all else equal for the year?

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Allison S. Johnson, Spirit of Texas Bancshares, Inc. - Interim CFO & CAO [17]

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Yes.

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Bradley Jason Milsaps, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [18]

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Got it. You guys also talked about, I believe, if I heard you correctly, felt like the provisioning would remain elevated. I think I heard you say the reserve represents about 62 basis points of the organic portfolio. And the quick math, I think is about a 1% or a little less than 1% reserve or discount on the acquired book. Any sense in your mind what you might like to see that reserve level go to over the next 2 or 3 quarters? Obviously, I know a lot is dependent upon the environment but just kind of wanted to get a sense of where that 62 basis point number could go over the remainder of the year.

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Allison S. Johnson, Spirit of Texas Bancshares, Inc. - Interim CFO & CAO [19]

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So I'm just really hesitant to answer that question because it's really too soon to tell. We are aware that we do expect our provision expense to be elevated going forward as well as seeing that corresponding increase in the coverage ratio. We are going to closely monitor our credit portfolio and work those loans to boost those reserves. But as far as where we want to land, I just -- I really, at this point, can't you give you any guidance there.

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Bradley Jason Milsaps, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [20]

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Okay. And then final question just as it relates to the margin. Was there any significant amount of purchase accounting accretion or other discount that you recognize in the first quarter that might not be there in the second? Just kind of curious kind of what that number was, if any, in the first quarter.

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Allison S. Johnson, Spirit of Texas Bancshares, Inc. - Interim CFO & CAO [21]

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Yes. So accretion -- purchase accounting accretion is less than 3% of our -- of that number. So it's really insignificant. I expect that to probably remain flat going forward. So that's really not going to be a significant portion of the NIM.

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Bradley Jason Milsaps, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [22]

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Got 3% of interest income?

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Allison S. Johnson, Spirit of Texas Bancshares, Inc. - Interim CFO & CAO [23]

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Yes. Yes.

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Operator [24]

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Our next question comes from the line of Brady Gailey with KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [25]

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Glad you're doing better, Dean.

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Dean O. Bass, Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO [26]

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Thank you.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [27]

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So $500 million of P3 loans is a big number for you guys. I mean, if you put the average 3% fee on there, that's $15 million of pretax income. Was that -- is that the right way to think about the opportunity there?

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David M. McGuire, Spirit of Texas Bancshares, Inc. - President & Director [28]

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Brady, this is David. That's the way we're looking at it.

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Dean O. Bass, Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO [29]

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Yes. I think our -- that's an approximation, of course. But that's in the ballpark.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [30]

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And what's the opportunity on round 2 of P3? Do you have any idea how active you could be beyond the $500 million?

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David M. McGuire, Spirit of Texas Bancshares, Inc. - President & Director [31]

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It's starting to slow down. We're still actively accepting applications. We're -- all of our customers who asked for them got them. Proud to say that, and we were able to attract some other new customers to us that are going to lead to some opportunities in the future for us. But we are still getting calls from people that we all know from our past, and saying, "Hey, XYZ Bank said I couldn't -- they couldn't do it for me." And these are big national banks. And others have said -- and they come to us, and we're able to do them still. So we have processed every loan application in the PPP program as of yesterday morning. And so as long as money is available still in the PPP program, round 2, we'll be open to accepting new applications. And then if there's a round 3, all of our employees now are certainly scalable. They can do a lot. And we'll get even more efficient than we were the first 2 rounds.

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Dean O. Bass, Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO [32]

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I'm going to add one thing. This is Dean. It took a lot of prework. The good thing and the bad thing with SBA being delayed coming out was -- or getting approval, it gave us more time. And David and team did an excellent job prepping and preloading and getting as much of the legwork done so that when it clicked on, it wasn't on our end because it didn't go through. And so it was very time consuming.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [33]

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Okay. And then on share buybacks, it looks like you repurchased a little under 2% of the company in the first quarter. I mean, your stock is still at about 80% of tangible. You still have 10.5% TCE. Will you be buying back stock going forward?

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Allison S. Johnson, Spirit of Texas Bancshares, Inc. - Interim CFO & CAO [34]

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We're going to continue to reassess that based upon the length and the severity of the pandemic and the current economy. But given that it's so undervalued at this time and trading below tangible book, we just feel like it's a good investment opportunity to continue doing that at least through the end of our repurchase plan, which expires in June.

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Dean O. Bass, Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO [35]

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And we -- this is Dean. We like the position we're in -- we don't like the position we're in, but we certainly like, as a Board, we'll make that assessment, look at that regularly and try to do what's in the best interest of the company. We'll reassess that through June.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [36]

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And how much is left in the buyback authorization?

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Allison S. Johnson, Spirit of Texas Bancshares, Inc. - Interim CFO & CAO [37]

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$4 million.

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Dean O. Bass, Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO [38]

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That's under that program though. It's not ripe. So we still have alternatives.

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Allison S. Johnson, Spirit of Texas Bancshares, Inc. - Interim CFO & CAO [39]

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Correct.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [40]

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Yes. And then the new fee income from the swap referrals, I think it was about $600,000 this quarter. Was that -- is that something -- is that 1Q run rate kind of the right way to think about the run rate going forward knowing that will be a little volatile to the upside and downside?

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Allison S. Johnson, Spirit of Texas Bancshares, Inc. - Interim CFO & CAO [41]

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So it's -- honestly, it's a little too soon to tell. Again, deals are kind of on hold right now. So that probably is going to remain pretty nominal going into Q2. But I'll let David elaborate anything further than that.

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David M. McGuire, Spirit of Texas Bancshares, Inc. - President & Director [42]

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Brady, we turned that program on kind of in the middle of the quarter, really not -- and so we thought that the run rate might be easily double that. But right now, no. We had several deals that were scheduled to close right before the end of the quarter or right after the end of the quarter that got put on hold. I think every customer out there is, and rightfully so, assessing their situation and assessing what's around them and before they're making these big decisions, including new borrowings that this product would be great for.

But we have a lot of faith in this product because it's allowing us to compete in a pricing arena that we hadn't been able to do before. And so -- and that was very helpful to our new corporate banking group and other large borrowers around the company. So we still see it as a very viable product for us. But it's -- like I said, it's going to be based on new volume -- new loan volume and any fixed-rate customers that we can pull into that, that are currently on the books.

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Dean O. Bass, Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO [43]

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And let me -- this is Dean. Let me just add. It looked like mid-February that, that would be the -- any offset and be a positive plus or any maybe offset on SBA that might be lagging or slacking or whatever might would happen there that offset from those loans would penetrate over any type of target ranges there. And we -- and the pipeline itself was so strong, not just in that market overall that it certainly looked like that was going to be an extremely strong quarter. And that particular 1 component area was going to exceed expectations as well.

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Operator [44]

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Ladies and gentlemen, this concludes today's Q&A session. I'd like to turn it back to Dean Bass for closing comments.

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Dean O. Bass, Spirit of Texas Bancshares, Inc. - Chairman of the Board & CEO [45]

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Thank you very much, and thank you for your participation and interest in our company. We hope to see you soon when things normalize, and it will. Please stay away from the virus. That's all I can advise. Thank you.

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Operator [46]

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Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.