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00:07 Greetings and welcome to the Spirit of Texas Bancshares twenty twenty one Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

00:29 It is now my pleasure to introduce your host, Jerry Golemon, Chief Operating Officer. Thank you, sir. You may begin..

00:38 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 third 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 third quarter before opening the call for Q&A. 01:11 I would 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 November 4, twenty twenty one 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, October 28, twenty twenty one 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.

01:52 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.

02:19 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. 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. 02:50 Now, I would like to turn the call over to our Chairman and CEO, Mr. Dean Bass.

Dean?.

2:56 Thank you, Jerry and good morning, everyone. Welcome. I’m extremely pleased to announce a strong performance for Q3. Our goal has always been to service the vibrant markets in which we operate. The engine that drives Community Banking is the demand for quality loans.

Our strategy has always been to retain talented bankers and high growth markets and capitalize on opportunities as they arise. 3:30 While the past eighteen months have been extremely challenging for the banking industry, we are now experiencing the loan demand that will drive organic loan growth and profitability higher in the coming quarters.

During the third quarter, loans grew an impressive twelve percent annualized, when excluding the impact of PPP loans. We anticipate these trends to continue and expect to have an exceptional fourth quarter with respect to loan growth.

04:02 In addition to strong loan growth, during the quarter, we earned net income of ten point five million dollars representing fully diluted EPS of zero point five nine dollars and a return on average assets of one point three three percent annualized.

We also increased our quarterly dividend from zero point zero nine dollars per share to zero point one two dollars per share and have maintained our net interest margin near four percent despite market pressures with respect to rates.

04:33 I continue to be extremely impressed with the resilience and commitment of our talented bankers who drive successful results quarter-after-quarter.

We are well positioned to meet the needs of our community with respect to loan demand and are truly excited to see successful projects that our borrowers will bring to the community in the coming quarters. 04:57 Now I'll turn the call over to David to discuss the loan portfolio and asset quality.

David?.

05:04 Thank you, Dean. As Dean mentioned, we are extremely pleased to return to low double digit annualized loan growth. The deals currently being funded are high quality projects at competitive rates. Many of these deals carry opportunities to earn swap fees as our new borrowers are more concerned with future interest rate swings.

We anticipate the fourth quarter to also be a strong quarter with respect to loan growth despite increasing competition in many of our markets. 05:35 We are working diligently to assist remaining PPP borrowers through the forgiveness process and hope that by the end of the fourth quarter, the remaining balance of PPP loans will be negligible.

Asset quality continues to improve with loans migrating into lower risk ratings during the quarter due to improved financial performance. 5:57 Non-performing loans declined one point three million dollars or sixteen point seven percent from the second quarter of twenty twenty one.

Non-performing loans to outstanding loans decreased to twenty eight basis points from thirty three basis points during the quarter, as more borrowers begin to show signs of strength coming out of the COVID-19 pandemic.

6:17 The yield on loans in the third quarter of twenty twenty one was five point zero nine percent, which increased twenty two basis points from Q2 twenty twenty and decreased twenty one basis points from Q2 twenty twenty one.

The yield on loans continues to be impacted by increased PPP forgiveness and accretion of purchase loan discount which is earned as the acquired portfolios mature. 06:42 While loan demand has returned to near pre-pandemic levels, competitive pressure has also returned that may require us to record loans at a lower rate to remain competitive.

Wherever possible, when competing on a rate, we also offer customers swap offerings that lock in lower rate for the customer while generating new non-interest income. The loan pipeline continues to build each month and we are currently experiencing higher closer rates as more deals pull through to funding.

07:13 The provision for loan losses for the third quarter was three hundred and six thousand dollars. The lower provision for the quarter was due to risk rate migration within the organic portfolio. At quarter end, the coverage ratio on the organic portfolio was eighty two basis points, excluding PPP loans.

Annualized net charge-offs were ten basis points for the third quarter of twenty twenty one. 07:37 Charge-offs for the quarter related to pre-pandemic impaired loans that were fully resolved during the quarter. Overall, charge-off activity for the remainder of twenty twenty one is expected to remain closer to our annual historical charge-off activity.

07:53 With that, I'll turn the call back over to Jerry to provide a review of the funding side of the company.

Jerry?.

07:59 Thank you, David.

Deposits continue to show strong growth as Q3 ended the total deposits of two point seven billion dollars, an increase of ninety eight point four million dollars or fifteen point three percent annualized from Q2 twenty twenty one, and an increase of three hundred and eighty three point one million dollars or sixteen point eight percent over Q3 twenty twenty.

08:23 Non-interest bearing deposits decreased four point six million dollars or zero point five nine percent from Q2 with a reduction due to PPP related deposits as borrowers put the proceeds to use. Non-interest bearing deposits currently make up twenty eight point seven percent of total deposits.

08:42 Interest bearing demand deposits increased thirty five point three million dollars or six point seven percent from Q2, primarily due to balances associated with new accounts, opened by customers generated from the paycheck Protection Program and the Main Street Lending program.

09:00 Savings and money market accounts increased ninety one point two million dollars or fourteen percent from Q2 also due to success retaining in growing the relationships associated with COVID-19 related assistance programs. Time deposits decreased by twenty three point four million dollars or three point eight percent from Q2 twenty twenty one.

09:25 Due to aggressive repricing, the cost of time deposits decreased to eleven basis points from Q2 twenty twenty one to zero point six eight percent. This improved shift in deposit mix resulted in a zero point two eight percent cost of deposits, a decrease of four basis points from Q2 twenty twenty one. The bank has no broker deposits.

09:49 The reported loan to deposit ratio at the end of Q3 was eighty four point four percent excluding PPP activities, the loan deposit ratio is eighty point four percent. Borrowings decreased by thirty nine point eight million dollars during the third quarter to seventy nine point three million dollars due to the payoff of PPP LF borrowings.

Borrowings totaled two point five percent of assets at the end of Q3.

10:17 The company has significant sources of available liquidity, including fifty million dollars in a holding company line of credit, Fed funds land totaling one hundred and eighteen million dollars and Federal Home Loan Bank availability of eight hundred four point eight million dollars.

10:35 I would now like to turn the call over to Alison to provide a financial overview of the third quarter.

Alison?.

10:40 Thanks, Jerry and good morning, everyone. We provided detailed financial tables in yesterday's earnings release.

Consolidated net income for the three months ended September thirty, twenty twenty one was ten point five million dollars with fully diluted EPS of zero point five nine dollars compared to earnings of seven point one million dollars and fully diluted EPS of zero point four four dollars in the third quarter of twenty twenty.

11:04 Net income and earnings per share were primarily driven by the recognition of two point two million dollars net accretions of origination fees on PPP loans. We anticipate the majority of the remaining two point five million dollars of net origination fees on PPP loans to be recognized during Q4 twenty twenty one.

11:23 Non-interest income was three point three million dollars for the third quarter of twenty twenty one compared to three point nine million dollars for the second quarter of twenty twenty one, a decrease of five hundred and seventy three thousand dollars linked quarter. The decrease for Q2 was primarily due to lower swap related fees.

11:41 Demand for swap products began to increase during the second half of the third quarter, and we expect non-interest income to increase in the coming quarters due to demand for swap products. Loans held for sale grew three million dollars, as SBA loan production has begun to increase from our SBA department restructuring.

This will translate into loan sales in the coming quarters and a return to the gain on sale of SBA loans contributing out to the overall non-interest income.

12:10 Non-interest expense totaled eighteen million dollars in the third quarter of twenty twenty one, an increase of one point two million dollars from the sixteen point eight million dollars reported in the second quarter of twenty twenty one.

The increase was primarily due to an increase in salaries and benefits expense of one point four million dollars, resulting from higher medical expenses due to non-recurring large claims during the quarter and in additional pay period.

12:35 With respect to net interest margin, the tax equivalent margin in the third quarter twenty twenty one was four percent compared to second quarter twenty twenty one tax equivalent margin of four point fourteen percent, representing a fourteen basis point decrease sequentially.

While the overall cost of funds continues to decline, competitive pressures on loan production is negatively impacting the yield on loans. However, using excess liquidity to fund strong loan growth will assist the overall margin in the coming quarters.

13:08 The provision for loan losses for the third quarter was three hundred and six thousand dollars, which increased the allowance to sixteen point three million dollars or seventy two basis points of our total loans outstanding or seventy five basis points excluding the one hundred percent government guaranteed PPP loans.

The provision expense for the quarter related primarily to the provisioning of new loans. 13:31 The coverage ratio on the organic portfolio was eighty two basis points on the one point eight billion dollars in organic loans outstanding, excluding PPP loans at quarter end.

Additionally, we have two point one million dollars unamortized discount on the acquired loan portfolio at September thirty, twenty twenty one. We would not expect elevated provision expense for the remainder of twenty twenty one beyond those amounts needed to fund net charge offs and loan growth.

13:57 As of September thirty, twenty twenty one, capital ratios remain strong and book value per share and tangible book value per share have increased to twenty two point four nine dollars and seventeen point six seven dollars respectively. 14:11 I'd now like to turn the call back over to Dean for closing remarks.

Dean?.

14:15 Thank you, Allison. It makes my job very easy, when we report solid earnings, improved credit quality and strong loan demand. All that is left to say is, thank you to our team who made these results possible. Our bankers have expertly navigated us through very challenging times.

And I am excited to see what is in store for Spirit of Texas in the coming quarters. Expectations are high. 14:52 This concludes our prepared remarks. I'd like to ask the operator to open up the line for any questions.

Operator?.

15:00 Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brad Milsaps with Piper Sandler. Please proceed with your question..

15:31 Hey. Good morning, guys..

15:34 Good morning, Brad..

15:35 Good morning, Brad..

15:38 Just wanted to maybe touch on loan growth for a moment. I know you guys expressed confidence in hitting your eight percent to twelve percent goal for the year. I think that would -- we need to believe there would be a pretty big step up in the fourth quarter.

Are you expecting kind of outsized kind of catch up in the fourth quarter to get to that goal and kind of how do you think about growth heading into twenty twenty two?.

16:09 Yes, Brad, excuse me, we are continuing to believe that we're going to be in that eight percent to twelve percent growth year-over-year into the fourth quarter.

We're not quite ready to guide for the first or second quarter of twenty twenty two yet, but the pipeline in place today supports continued growth in the low double-digits at this point..

16:40 Okay. Thank you. And then Allison, I was writing quickly, expenses maybe came in a touch higher than I was looking for. Can you maybe speak to any additional color there, maybe on the expense run rate? I know you guys have been working hard to continue to find synergies, but you’re small growth companies as well, so you have to reinvest.

Just kind of want to get a sense of the expense rate run rate going forward?.

17:03 Sure. So this quarter we kind of had an anomaly come through in our medical expenses. So that was about four hundred thousand dollars higher than we had expected. With that being said though, we do have an additional pay period in December. So I'm going to keep that expense run rate for Q4 at eighteen million dollars conservatively.

With potentially a little bit lower than that, but I’m going to give myself a little later room at that eighteen million dollars..

17:28 Okay, great. And then maybe just last two housekeeping items for me.

Do you have any average balance of PPP loans? And then I think I may have missed this, how much loan discount accretion did you recognize in the third quarter?.

17:41 Yeah. Great question. So as far as accretion, accretion came in lighter this quarter than normally. Normally, we collect about eight hundred and twenty five thousand a quarter. This quarter was only three hundred thousand. We've got two point one million dollars remaining on that mark out of that portfolio.

And as far as average balances of PPP loans that was roughly one hundred million dollars for Q3..

18:06 Okay, great. I'll hop back in queue. Thank you very much..

18:09 Hey, Brad. One more is still on. Let me just mentioned to you.

I think it’s important that the twelve percent is a strong number and by anyone's measurement on the loan growth, but at the same time, of course, income is generated by how soon it gets into the quarter, right? And so as we start trying to fund these, sometimes it's later in the quarter, which was the case this time.

So it didn't generate as much revenue as we would have wished early on, but of course, that's a catch up in twenty fourteen. So you'll see that continue to help us along the way..

18:48 Great. Thanks, Dean..

18:52 Thank you. Our next question comes from the line of Brady Gailey with KBW. Please proceed with your question..

18:58 Hey, thanks. Good morning, guys..

19:01 Good morning..

19:02 So, you're talking about better and higher level of fee income going forward. You specifically mentioned that swap fees doing well and it sounds like you'll have some added fee income from the restructuring of your SBA.

Let me just talk about the upside you think you could see from those two initiatives and where you think fee income could get to on a quarterly run rate by next year?.

19:32 Yes. So I'm expecting swap fees to come in. We're budgeting around one million dollars a quarter. And then with our SBA production, we'll see a pickup in Q4, but really in twenty twenty two is where we expect that group to really shine through.

So from my run rate on non-interest income for Q4, I'm anticipating between three point five million dollars and four million dollars and that just continue to grow into twenty twenty two because of that SBA department restructuring..

20:04 All right. And then, when you look at the net interest margin, there's a lot of moving parts here.

How do you think your net interest margin or either NII will trend from here?.

20:18 So, I think this quarter was kind of a low point, I expect it to go up from here. As Dean alluded to the majority of our loan growth occurred towards the end of September. So you'll see that pick up in NII in Q4 as well as with David's pipeline, we fully expect our asset mix to improve as we deploy some of that excess liquidity into loans..

20:45 All right.

And finally for me, just anything on the M&A front, you’ll continue to look for downstream targets or conversations active, what's the latest on M&A?.

20:57 Yeah. Very active things -- from my side, I see more discussions going on than in the past, there's a lot more interest by a lot more different sized banks..

21:15 All right. Thanks guys..

21:21 Thank you. Our next question comes from the line of Matt Olney with Stephens. Please proceed with your question..

21:28 Thanks for taking my question guys. I want to circle back on loan growth. I think historically, much of the banks or lot of the bank's borrowers have seasonal borrowing needs that results in fourth quarter being the strongest quarterly growth for the bank in most years.

How much of the outlook in the four quarters from seasonal tailwinds versus how much of it is in more of a inflection in borrower needs that we could see carry into twenty twenty two?.

22:04 Well, Matt, that's seasonal versus what we see, I'd say the fourth quarter is traditionally been very strong for us historically. It's been that way every year. So I think the hate to attach anything to any seasonality other than that's just the way it works. But in the last couple of years have been extremely strong even in twenty twenty.

So our expectation is that we'll continue this quarter based on the pipeline I have in place that we're almost forty percent loans that are in the pipeline are approved and have a good chance of being closed and funded in this quarter and there'll be some run over into the first quarter just like there was earlier this year.

So the needs of the borrower seem to be normalized now and the activity that we're seeing is just normal in all respects to us. And we're just trying to get it done and get it in as quickly as possible.

We see an opportunity here to continue to grow our market share in each of our major metros, which -- with the teams that we have in place, we have the capacity to do so.

23:23 And then as I've said before, we are continuing to look for those veteran bankers in market that will give us additional capacity to continue to grow our pipeline so that in twenty twenty two, we can maybe guide to the high teens growth for twenty twenty two..

23:41 Matt, I might add something to it, what David has seen in the past is strong finish for the year except for COVID.

When COVID hit now that brings to bear what we've seen over the last six to nine months, I would say post-COVID is at buildup and an excitement that we haven't seen in our lifetime, so to speak, people trying to come alive, so can get their lives back.

24:09 At the same time, some favorable taxes we've seen in the last twelve months where people would be selling their properties and trying to reduce through debts and some areas and you see some payoffs, some early payoffs and some properties that they might would have turned or kept for earnings producing and they might have gone ahead out of that fear.

What you've seen is that sort of settled down a bit. So the pay down, payoff on the large side and you see now we're actively building on the future. So you see a lot more excitement in that way. And I think that contributes to each of these metro market communities that are now looking for the opportunities for the future.

And so I think that's building David's pipeline and right at the right time for us..

24:54 Okay. Thanks for that.

And then I guess what about on the competitive side as far as loan growth? I think we saw a move down on the core loan yield front? Lots of banks talking about increased competitive pressures, what are you guys seeing on core loan yields more in newer production and how much pressures we’d be anticipating on these core loan yields from here as we start to book some increased production in next few quarters? Thanks..

25:26 Our targets have changed just because of competition. We have a lot of liquidity like a lot of banks in our markets. It's down to pricing in a lot of respects. The competition that we're seeing is mainly around pricing and not necessarily around credit, which I like actually. So it gives us an honest chance.

If it's a good deal, we're going to play ball. If it's a deal that's marginal it's got to pay the rate we're not interested, marginal from not from a credit perspective. But in the end, our rates are falling in the prime plus one range. And if it's a fixed strength deal is going to be in the mid fours to closer to five depending on the term.

And we're still able to compete at those levels. A lot of -- we're seeing some stuff that we don't like that we're seeing sub three fixed rate ten year fixed deals that's not who we are and we would rather bring them as a customer and get them a good deal. Swap fixes them for seven to ten years, we pick up an fee on that.

And then we've got floating rate loan. So, right now, we're really good shape, sixty two percent of our loans are floating, half of those if we got a rate month are going to be immediately impacted and possibly for us and our net interest income appreciably increase..

27:04 Good. Okay. Perfect.

And then on the deposit side, Allison, we saw some really good improvement on the funding costs coming down, just any color on how much more room you had to bring down deposit costs there? And I think there was a comment on the prepared remarks that mentioned that you expect most of the fourth quarter loan growth to be funded buy liquidity, just any clarification there? Thanks..

27:31 Well, from a cost to deposit standpoint, there is a little room for come down a little bit further. What we saw in Q3 is each month of the quarter it ticked down a little bit more. So about half of our CD portfolio reprices in the next six months, so that will provide us some additional benefit there.

We also had some pretty sizable public fund contracts that re-priced in September. So we'll see the full quarter impact on that where those reprice to much more favorable terms. So, again, a little bit of room, maybe another three or four basis points in Q4 is what I'm looking for..

28:21 Yeah.

And we saw quite a bit of deposit growth during the quarter, I don't know if you want to touch on where that came from Jerry?.

28:27 Yeah. We keep expecting the deposit growth to moderate and it's just not happening again, another fifteen percent annualized in Q3. And a lot of that came from new customers that we picked up through the PPP process or the Main Street Lending process. And those have ended up being very good deposit customers.

But those are businesses that are -- their smart businesses they're looking to put that money to use at some point in time. But right now, they are very liquid as well in that cash is sitting on their balance sheet in our bank.

But we're again, they're going to have future borrowing needs outside of Main Street or PPP that we're going to be able to step up and meet..

29:24 And just lastly on the stock repurchase plan, just remind me of the authorization and any commentary on the appetite to focus the buyback or near term? Thanks..

29:40 Yeah. So, we still have our stock repurchase plan in place with an authorization of ten million dollars to repurchase there. Again, we've got that plan under 10b5-1. And if it's activated then it will go ahead and start repurchasing shares. We have seen some improvement in our tangible book. So excuse me our multiple – are trading multiple.

So again, I think we're seeing some improvement there to allow us to use our capital in other ways, but we're constantly monitoring that..

30:14 Okay, guys. Thanks for your help..

30:17 Thank you..

30:17 Thanks, Matt..

30:21 Thank you. There are no further questions at this time. I'd like to turn the floor over to Dean Bass for closing comments..

30:29 Thank you for attending our Q3 twenty twenty one earnings announcement. Appreciate your continued support. Thank you..

30:38 Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day..