Spirit of Texas Bancshares, Inc. Reports Second Quarter 2020 Financial Results

Rhea-AI Summary

Spirit of Texas Bancshares (NASDAQ: STXB) reported strong second-quarter 2020 results with a net income of $7.7 million, or $0.44 per share, up from $5.8 million, or $0.41 per share, in Q2 2019. The bank played a crucial role during the pandemic, assisting over 3,200 businesses in obtaining $428 million in Paycheck Protection Program (PPP) loans, generating $15.3 million in origination fees. Despite challenges, gross loans grew 20.6% quarter-over-quarter, reaching $2.43 billion. The company maintains robust financial health, with a Tier 1 capital ratio of 9.49% and a return on average assets of 1.07%.

Positive

• Net income increased 32.8% year-over-year to $7.7 million.
• Gross loans grew 20.6% quarter-over-quarter, totaling $2.43 billion.
• Assisted over 3,200 businesses with $428 million in PPP loans.

Negative

• Net interest margin decreased by 43 basis points from Q1 2020.
• Provision for loan losses increased to $2.8 million due to COVID-19 impacts.
• Noninterest income slightly declined to $2.6 million from $2.7 million in Q1 2020.

CONROE, Texas, July 20, 2020 /PRNewswire/ -- Spirit of Texas Bancshares, Inc. (NASDAQ: STXB) ("Spirit", the "Company", "we", "our", or "us") reported net income of $7.7 million in the second quarter of 2020 representing diluted earnings per share of $0.44, compared to net income of $5.8 million in the second quarter of 2019, representing diluted earnings per share of $0.41. Record net income for the second quarter of 2020 was assisted by $1.0 million net accretion of origination fees on Paycheck Protection Program ("PPP") loans offset by increased provision expense for loan losses related to the COVID-19 pandemic.

Second Quarter 2020 Financial and Operational Highlights

• Deployed our talented and experienced lending team to assist more than 3,200 businesses in obtaining PPP loans totaling $428 million, as of June 30, 2020, generating $15.3 million of origination fees that will be accreted into income over the life of the loans.
• Capital continues to remain strong with a Tier 1 capital leverage ratio of 9.60% at Spirit of Texas Bank SSB (the "Bank") and 9.49% at the Company on a consolidated basis.
• Net interest margin for the second quarter as reported and on a tax equivalent basis⁽¹⁾ were 3.95% and 4.00%, respectively. Net interest margin was negatively impacted by the origination of PPP loans which yield 1.00% and reduced the net interest margin by 19 basis points.
• At June 30, 2020, return on average assets was 1.07% annualized.
• Book value per share increased to $20.01 at June 30, 2020 and tangible book value per share⁽¹⁾ increased to $14.97 at the same date.
• At June 30, 2020, total stockholders' equity to total assets was 11.73% and tangible stockholders' equity to tangible assets⁽¹⁾ was 9.04%.

Dean Bass, Spirit's Chairman and Chief Executive Officer, stated, "We are extremely pleased to report such strong quarterly results despite an extremely tough operating environment. We are truly blessed to have some of the strongest and most committed bankers in the business who worked tirelessly to assist current and new customers obtain capital through the Paycheck Protection Program. We were only able to accomplish the impressive volume of PPP loan originations during the quarter because of the robust staff that we maintain. Additionally, the origination fees, which will be earned over the relatively short life of these loans, represent an attractive return on investment for our shareholders. We remain absolutely committed to the safety of our employees and customers as the global pandemic continues to evolve and will continue to seek unique opportunities to deploy resources and create shareholder value during these challenging times."

Loan Portfolio and Composition

During the second quarter of 2020, gross loans grew to $2.43 billion, an increase of 20.6% from $2.01 billion as of March 31, 2020, and an increase of 71.2% from $1.42 billion as of June 30, 2019.  Loan growth, quarter over quarter, was primarily driven by participation in the Payroll Protection Program which added $428.0 million in loans.  Excluding PPP loans, organic loans increased $43.1 million, or 14.4% annualized, which includes approximately $13.3 million of participations purchased.   Organic loan growth for the quarter (excluding PPP loans) was the result of customers delaying projects and plans as opposed to the Bank decreasing the supply of funds available to lend.  We will continue to support our customers and are committed to making funds available while actively managing balance sheet risk.

We remain focused on credit quality and meeting the needs of our customers while ensuring adequate capital is conserved to cover potential losses due to the COVID-19 pandemic. The industries and related exposures currently being monitored by our credit administration personnel include retail strip centers, hospitality, restaurants and direct and indirect oil exposure. Retail strip centers consisted of $120.4 million, or 5.0% of the loan portfolio, at June 30, 2020. Hospitality exposure consisted of $91.4 million, or 3.8% of the loan portfolio, at June 30, 2020.  Restaurant exposure consisted of $30.5 million, or 1.3% of the loan portfolio, at June 30, 2020.  Finally, total oil exposure was $74.7 million, or 3.1% of the loan portfolio, at June 30, 2020.

Asset Quality

Asset quality remained strong in the second quarter of 2020. The provision for loan losses recorded for the second quarter of 2020 was $2.8 million, which served to increase the allowance to $9.9 million, or 0.41% of the $2.43 billion in gross loans outstanding as of June 30, 2020. The majority of the provision expense for the second quarter of 2020 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 0.77% of the $1.28 billion in organic loans outstanding, excluding PPP loans which are fully guaranteed and not reserved for as of June 30, 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.

Nonperforming loans to loans held for investment ratio as of June 30, 2020 was 0.31% compared to 0.38% as of March 31, 2020, and 0.40% as of June 30, 2019. Annualized net charge-offs were 10 basis points for the second quarter of 2020, compared to 18 basis points for the second quarter of 2019.

As of June 30, 2020, we have received and approved COVID-19 related loan relief requests, including periods of interest only payments, full payment deferrals, and escrow deferrals associated with loans with an unpaid principal balance of approximately $520.6 million.  While these approvals were initially given for a period of 90 days to ease the impact of business closures and reduced demand, we continue to stay in contact with our borrowers and monitor their long-term financial stability and our collateral position. Based on these conversations, more than 90% of these borrowers have resumed or are expected to resume payments this month. 

Deposits and Borrowings

Deposits totaled $2.41 billion as of June 30, 2020, an increase of 16.3% from $2.08 billion as of March 31, 2020, and an increase of 53.8% from $1.57 billion as of June 30, 2019.  Noninterest-bearing demand deposits increased $258.6 million, or 53.1%, from March 31, 2020, and increased $377.8 million, or 102.7% from June 30, 2019. The increase in noninterest-bearing deposits is partially due to deposit accounts related to PPP loan funding.  PPP related deposit accounts totaled $108.0 million at June 30, 2020. Noninterest-bearing demand deposits represented 30.9% of total deposits as of June 30, 2020, up from 23.4% of total deposits as of March 31, 2020, and 23.4% of total deposits as of June 30, 2019. The average cost of deposits was 0.67% for the second quarter of 2020, representing a 26 basis point decrease from the first quarter of 2020 and a 34 basis point decrease from the second quarter of 2019.

Borrowings increased by $79.8 million during the second quarter of 2020 to $193.1 million due primarily to participation in the Paycheck Protection Program Lending Facility with the Board of Governors of the Federal Reserve System.  Borrowings totaled 6.5% of total assets at June 30, 2020, compared to 4.4% at March 31, 2020 and 4.7% at June 30, 2019.

Net Interest Margin and Net Interest Income

The net interest margin for the second quarter of 2020 was 3.95%, a decrease of 43 basis points from the first quarter of 2020 and 66 basis points from the second quarter of 2019. The tax equivalent net interest margin⁽¹⁾ for the second quarter of 2020 was 4.00%, a decrease of 40 basis points from the first quarter of 2020 and a decrease of 64 basis points from the second quarter of 2019.  The decline from the first quarter of 2020 is primarily due to rate resets on interest-earning assets as a result of decreases in interest rates set by the Federal Open Market Committee during the first quarter of 2020 and PPP loans which yield 1.00%.  Excluding the impact of PPP loans, net interest margin and tax equivalent net interest margin were 4.14% and 4.21%, respectively.

Net interest income totaled $26.1 million for the second quarter of 2020, an increase of 9.5% from $23.8 million for the first quarter of 2020, and an increase of 31.9% from $19.8 million for the second quarter of 2019.  Interest income totaled $30.6 million for the second quarter of 2020, an increase of 6.0% from $28.8 million for the first quarter of 2020, and an increase of 25.7% from $24.3 million for the second quarter of 2019.  Interest and fees on loans increased by $2.5 million, or 9.1% from the first quarter of 2020, and increased by $7.7 million, or 34.7%, from the second quarter of 2019. Interest expense was $4.5 million for the second quarter of 2020, a decrease of 10.2% from $5.0 million for the first quarter of 2020, and relatively flat compared to the second quarter of 2019. 

Noninterest Income and Noninterest Expense

Noninterest income totaled $2.6 million for the second quarter of 2020, compared to $2.7 million for the first quarter of 2020. U.S. Small Business Administration loan servicing fees increased $246 thousand, quarter over quarter, as a result of a favorable servicing asset valuation. Additionally, during the second quarter of 2020, mortgage referral fees increased $155 thousand as mortgage activity increased as a result of lower interest rates during the quarter.  Gain on sale of loans and interest rate swap income declined $138 thousand and $369 thousand, respectively, in response to general declines in lending activity during the quarter.

Noninterest expense totaled $16.1 million in the second quarter of 2020, a decrease of 23.2% from $21.0 million in the first quarter of 2020. The primary reason for the decline in noninterest expense was the deferral of $4.9 million of salary expense recorded in conjunction with PPP loan originations.  These loan costs will amortize on a straight-line basis over the life of the loans.

The efficiency ratio was 56.28% in the second quarter of 2020, which was assisted by the deferral of $4.9 million of salary expense related to PPP loan originations, compared to 79.06% in the first quarter of 2020, and 67.27% in the second quarter of 2019.

(1)

Adjusted Basic and Diluted Earnings Per Share, Tax Equivalent Net Interest Margin, Tangible Book Value Per Share, and Tangible Stockholders' Equity to Tangible Assets Ratio are all non-GAAP measures. Spirit believes that for Adjusted Basic and Diluted Earnings Per Share, the adjustments made to net income allow investors and analysts to better assess its basic and diluted earnings per common share by removing the volatility that is associated with merger-related expenses and gain on sale of investment securities that are unrelated to its core business.  In Spirit's judgment, regarding Tax Equivalent Net Interest Margin, the fully tax equivalent basis is the preferred industry measurement basis for net interest margin and that it enhances comparability of net interest income arising from taxable and tax-exempt sources.  Regarding Tangible Book Value Per Share and Tangible Stockholders' Equity To Tangible Assets, Spirit believes that that these measures are important to many investors in the marketplace who are interested in changes from period to period in book value per share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing its tangible book value.  The non-GAAP financial measures that we discuss in this news release should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that it discusses in this news release may differ from that of other banking organizations reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures Spirit has discussed in this news release when comparing such non-GAAP financial measures. Please see a reconciliation to the nearest respective GAAP measures at the end of this news release.

Conference Call

Spirit of Texas Bancshares has scheduled a conference call to discuss its second quarter 2020 results, which will be broadcast live over the Internet, on Tuesday, July 21, 2020 at 10:00 a.m. Eastern Time / 9:00 a.m. Central Time. To participate in the call, dial 201-389-0867 and ask for the Spirit of Texas call at least 10 minutes prior to the start time, or access it live over the Internet at https://ir.sotb.com/news-events/ir-calendar.  For those who cannot listen to the live call, a replay will be available through July 28, 2020 and may be accessed by dialing 201-612-7415 and using pass code 13706886#. Also, an archive of the webcast will be available shortly after the call at https://ir.sotb.com/news-events/ir-calendar for 90 days.

About Spirit of Texas Bancshares, Inc.

Spirit, through its wholly-owned subsidiary, Spirit of Texas Bank, provides a wide range of relationship-driven commercial banking products and services tailored to meet the needs of businesses, professionals and individuals.  Spirit of Texas Bank has 41 locations in the Houston, Dallas/Fort Worth, Bryan/College Station, Austin, San Antonio-New Braunfels, Corpus Christi and Tyler metropolitan areas, along with offices in North Central and South Texas.  Please visit https://www.sotb.com for more information.

Forward Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties and are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended.  Any statements about our expectations, beliefs, plans, predictions, protections, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking.  Forward-looking statements are typically, but not exclusively, identified by the use of forward-looking terminology such as "believes," "expects," "could," "may," "will, "should," "seeks," "likely," "intends" "plans," "pro forma," "projects," "estimates" or "anticipates" or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters.  Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events.  Factors that could cause our actual results to differ materially from those  described in the forward-looking statements include, among others: (i) changes in general business, industry or economic conditions, or competition; (ii) the impact of the COVID-19 pandemic on the Bank's business, including the impact of actions taken by governmental and regulatory authorities in response to such pandemic, such as the Coronavirus Aid, Relief, and Economic Security Act and the programs established thereunder, and the Bank's participation in such programs, (iii) changes in any applicable law, rule, regulation, policy, guideline, or practice governing or affecting bank holding companies and their subsidiaries or with respect to tax or accounting principles or otherwise; (iv) adverse changes or conditions in capital and financial markets; (v) changes in interest rates; (vi) the possibility that any of the anticipated benefits of the Bank's proposed transaction with Moody National Bank ("Moody"), pursuant to which Moody will purchase certain assets and assume certain liabilities (the "Branch Sale") associated with the Bank's branch located at 1010 Bay Area Boulevard, Houston, Texas  77058 (the "Branch"), will not be realized or will not be realized within the expected time period; (vii) the risk that converting the operations of the Branch to Moody will be materially delayed or will be more difficult than expected; (viii) the effect of the announcement of the Branch Sale on customer relationships and operating results; (ix) the possibility that the Branch Sale may be more expensive to complete than anticipated, including as a result of unexpected factors or events; (x) higher-than-expected costs or other difficulties related to integration of combined or merged businesses; (xi) the inability to realize expected cost savings or achieve other anticipated benefits in connection with business combinations and other acquisitions; (xii) changes in the quality or composition of our loan and investment portfolios; (xii) adequacy of loan loss reserves; (xiii) increased competition; (xiv) loss of certain key officers; (xv) continued relationships with major customers; (xvi) deposit attrition; (xvii) rapidly changing technology; (xviii) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xix) changes in the cost of funds, demand for loan products, or demand for financial services; (xx) other economic, competitive, governmental, or technological factors affecting our operations, markets, products, services, and prices; and (xxi) our success at managing the foregoing items.   For a discussion of additional factors that could cause our actual results to differ materially from those described in the forward-looking statements, please see the risk factors discussed in our most recent Annual Report on Form 10-K for the year ended December 31, 2019, filed with the U.S. Securities and Exchange Commission (the "SEC") on March 16, 2020, its Quarterly Report on Form 10-Q for the three months ended March 31, 2020, filed with the SEC on May 15, 2020 and its other filings with the SEC.

While forward-looking statements reflect our good-faith beliefs, they are not guarantees of future performance.  All forward-looking statements are necessarily only estimates of future results.  Accordingly, actual results may differ materially from those expressed in or contemplated by the particular forward-looking statement, and, therefore, you are cautioned not to place undue reliance on such statements.  Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.

Contacts:	Dennard Lascar Investor Relations
	Ken Dennard / Natalie Hairston
	(713) 529-6600
	STXB@dennardlascar.com

 

SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
		For the Three Months Ended
		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019
		(Dollars in thousands, except per share data)
Interest income:
Interest and fees on loans		$           29,912		$               27,409		$                     25,160		$                      23,064		$           22,204
Interest and dividends on investment securities		457		504		997		1,143		1,302
Other interest income		185		900		918		794		794
Total interest income		30,554		28,813		27,075		25,001		24,300
Interest expense:
Interest on deposits		3,945		4,507		4,434		4,097		3,938
Interest on FHLB advances and other borrowings		558		508		416		425		611
Total interest expense		4,503		5,015		4,850		4,522		4,549
Net interest income		26,051		23,798		22,225		20,479		19,751
Provision for loan losses		2,838		1,171		775		900		332
Net interest income after provision for loan losses		23,213		22,627		21,450		19,579		19,419
Noninterest income:
Service charges and fees		1,270		1,311		1,146		866		969
SBA loan servicing fees, net		256		10		391		234		40
Mortgage referral fees		357		202		232		173		198
Gain on sales of loans, net		326		464		675		1,151		1,384
Gain (loss) on sales of investment securities		-		-		2,448		-		1,053
Other noninterest income		356		725		162		257		131
Total noninterest income		2,565		2,712		5,054		2,681		3,775
Noninterest expense:
Salaries and employee benefits		7,946		11,789		10,684		9,502		8,765
Occupancy and equipment expenses		2,761		2,315		2,222		1,710		1,690
Professional services		716		895		1,200		791		1,022
Data processing and network		849		743		936		884		731
Regulatory assessments and insurance		379		402		265		(256)		315
Amortization of intangibles		919		946		1,006		1,015		1,006
Advertising		119		153		225		134		167
Marketing		38		160		131		136		132
Telephone expense		483		407		226		289		338
Conversion expense		69		1,477		180		314		453
Other operating expenses		1,825		1,673		1,584		1,037		1,206
Total noninterest expense		16,104		20,960		18,659		15,556		15,825
Income before income tax expense		9,674		4,379		7,845		6,704		7,369
Income tax expense		1,980		305		1,676		1,374	<

FAQ

What were the earnings results for Spirit of Texas Bancshares in Q2 2020?

Spirit of Texas Bancshares reported a net income of $7.7 million for Q2 2020, or $0.44 per diluted share.

How much did Spirit of Texas Bancshares assist in PPP loans?

The bank assisted over 3,200 businesses in obtaining $428 million in Paycheck Protection Program loans.

What was the loan growth for Spirit of Texas Bancshares in Q2 2020?

Gross loans increased by 20.6% quarter-over-quarter, reaching a total of $2.43 billion.

What is the current Tier 1 capital ratio for Spirit of Texas Bancshares?

The Tier 1 capital ratio for the company is 9.49%.

What are the key challenges faced by Spirit of Texas Bancshares in Q2 2020?

Challenges included a decrease in net interest margin and an increase in provision for loan losses.