Q3 2019 Earnings Call
Greetings and welcome to the spirit of Texas, Bancshares' third quarter.
Earnings Conference call.
At this time, all participants are in listen only mode.
We have question answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Gary Coleman Chief operating officer. Thank you Sir you may begin.
Thank you operator, and good morning, everyone. We appreciate you joining us for the spirit of Texas Bancshares Conference call and webcast to review 2019 third quarter results.
With me today as Mr. named Best Chairman, and Chief Executive Officer, Mr., David Maguire, President and Chief lending Officer, and Mr., Jeff Powell, our Chief Financial Officer.
Oh in 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 Q1 night.
I would now like to cover a few housekeeping items, there will be a replay of todays call and it will be available by webcast on our website at www Dot LTB Dot com.
I will also be a telephonic replay available until October 32019.
More information on how to access. These replay features wasn't included in yesterday's release.
Please note that the information reported on this call speaks only as of today October 20, Threerd 2019.
And therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript breathing.
In addition, the comments made by management during the conference call may contain certain forward looking statements within the meetings 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 FCC for the year ended December 31 2018.
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.
Can be found on the spirit of Texas website.
Now I'd like to turn the call over to our chairman and CEO Mr. Dane Best thing.
Thank you Jerry and good morning, everyone.
I'm extremely pleased to report another solid quarter.
We had adjusted non-GAAP income for the quarter was 6.2 million.
Or 40 cents to non-GAAP EPS.
Significant organic loan growth of $69.4 million.
Or 19.4% annualized over the second quarter.
Total deposits at the end of Q3.
Were $1.59 billion, excluding the cyclical public fund deposits.
Deposit growth was 3.6% over Q2 or an annualized growth rate of 14%.
The citizens they think transaction.
We announced last quarter is on track to close in the fourth quarter 2019 subject to satisfaction of customary closing conditions, including regulatory approval.
Once closed the citizens transaction represents an exciting strategic financial opportunity for us to expand our footprint into East Texas region.
And reach a total of 36 well place locations throughout Texas.
We believe that citizens type thing a strong community bank with a shared commitment to providing exceptional customer service will be a great partner.
To the spirit franchise.
Together, we will be better position to take advantage of organic growth.
And acquisition opportunities that will enable us to better serve our customers and further enhance shareholder value.
I'd also like to take a moment and recognize the outstanding lift out bankers that we haven't been fortunate to employ.
Now I'd like to turn the call over to Mr., David Maguire, Our President Chief lending officer to discuss some of our quarterly credit metrics David.
Thank you Dan.
During the third quarter of 2019, the loan portfolio grew to $1.49 billion, an n. annualized increase of 19.4% over June Thirtyth 2019, and an increase of 54.9% over Q3 2018.
The yield on loans in the third quarter 2019 was 6.27%, which remained in line with Q2 2019 and increased 43 basis points from Q3 2018.
Interesting piece on loans increased by $9.2 million or 65.9% over Q3 2018, representing the growth in the loan portfolio as well as improved yields.
The provision for loan losses for the third quarter of 2019 was $900000, which increased Atlanta to $6.6 million or 44 basis points up our loans outstanding.
Nonperforming loans outstanding loans increased slightly to 61 basis points at the end of Q3 compared to 40 basis points at the end of Q2, 2019, and 39 basis points at the end of Q3 2018 annualized net charge offs were 17 basis points for the third quarter of 2019.
Asset quality remains a key emphasis for our lending culture, why the economics and all of our markets remained strong we keep a close watch on our portfolio for any signs of deterioration through a very thorough and conservative loan underwriting process and a very comprehensive third party line ready.
With that I'll turn the call back over to Jerry told me to provide a review of the funding side of the company.
Jerry.
Thank you David.
Total deposits at the end of Q3 $1.9 billion up slightly from the $1.57 billion at June 32019.
And an increase of 81.7% over Q3 2018.
Excluding the cyclical public fund deposits deposit growth was 3.6% over Q2.
On an annualized growth rate of 14%.
Noninterest bearing deposits represent 23.1% total deposits.
The average cost of deposits were 103 basis points in Q3 2019.
Representing a two basis point increase from Q2, 2019, and they one basis point increase from Q3 2018.
While the tax equivalent net interest margin decreased one basis point from Q2, 2019 and was down two basis points from Q3 2018.
Borrowings, including FHLB decreased to $74.2 million or 3.8% of assets compared to 4.7% at Q2, 2019 and 7.4% at the end of Q3 2018.
The loan to deposit ratio ended the quarter at 93.8% as compared to 90.3% at the end of Q2 2019.
And 110% at the end of Q3 2018.
Illustrating the impact of the Comanche and be they'll murders.
I would now like to turn the call a work to our Chief Financial Officer, Jeff Powell to provide a financial overview of the third quarter Jeff.
Thanks, Jerry and good morning, everyone. We provided detailed financial tables in yesterday's earnings release, highlighting some operational results. We ended the third quarter with approximately $2 billion in assets in July we announced our partnership with the citizens State Bank a few facts about the bank it's a community.
Bank establish 1967 and headquartered in Tyler, Texas.
There are seven branches located throughout Tyler and the surrounding markets Tyler serves as the hub for East, Texas with four major hospitals three colleges in a metropolitan area population of over 220000.
Noninterest bearing deposits to total deposits are over 36% with total cost of deposits approximately 86 basis points attractive profitability year to date return on average assets over 1.7% strong capital levels well diversified loan portfolio. This is a financially attractive.
Transaction.
Approximately 10% EPS accretion in the first for your combined operations, excluding the recent common equity raise.
Well capitalized pro forma excluding the common equity raise acceptable tangible book value dilution of 5.6% and an earn back period of 3.7 years, excluding the common equity raise it's accretive to tangible book value when capital ratios inclusive of the common equity raise.
What's the citizens State Bank track transaction closes in November our asset size will increase to approximately 2.3 billion with approximately 1.7 billion in loans.
We also raised capital in late July .
We issued 2.3 million shares a $21.50 a share this raised approximately 47 million after the 5% underwriters discount we use the net proceeds of this offering to pay off 21 million outstanding on line of credit with a third party lender and we use 19.2 million to pay the cash.
Portion of the consideration for upcoming merge and merger was Chandler Bancorp. This capital raise increased our average common shares outstanding since last quarter by approximately 1.5 million diluted shares to 15.7 average diluted shares outstanding.
In late August the Beville systems were seamlessly converted to the banks core processor, we will start seeing the 2.4 million of cost savings in the fourth quarter as we stop using the system and processes previously paid by beville since we converted late in the third quarter, we estimate a 25% or the cost savings will.
Occur this year, and we will see a 100% in 2020.
Moving onto our 2019 third quarter results for the period ended September Thirtyth 2019.
Third quarter 2019, GAAP net income, which includes 901000 of non gap after tax merger related expense increased to 5.3 million with fully diluted GAAP EPS of 34 cents compared to GAAP earnings of 5.8 million and fully diluted GAAP.
EPS of 41 cents and the second quarter of 2019, excluding the 901000 or non-GAAP . After tax merger related expense non-GAAP income for the quarter was 6.2 million or 40 cents and non-GAAP EPS the not the higher number of shares outstanding from the capital raise.
<unk> was also a driver of lower EPS quarter over quarter.
Our tax equivalent margin into third quarter came in at 4.63% against second quarter margin of 4.64% for one basis point decrease the key contributors to our decline in tax equivalent margin is primarily due to declines in the yield on securities and interest bearing deposits in other banks.
As a result at the impact of a decrease in interest rate by the federal open market Committee during the quarter.
Loan yields held up well from last quarter and the quarter over quarter net rate on deposits combined with borrowings also remained steady.
Our balance sheet continues to be asset sensitive, we anticipate that our cost of deposits and borrowings will continue to decline as we can immediately decrease rates and now and interest bearing demand as rates decline loan yields will probably decline with another rate decrease but we believe our margin will continue to remain one of the highest mistake.
Great. That's our cost of funds will decline in line with the yield on loans.
GAAP, our away was 110% compared to 78 basis points in the fourth quarter of 2018.
Adjusted our away taking out onetime items would be 1.29%.
The reported GAAP efficiency ratio was 67.17% when compared to 72 point, 11% in the third quarter 2018, and 80.4% in the fourth quarter of 2018.
Adjusted efficiency ratio, excluding onetime items was 62.4% in Threeq, you 2019 compared to the adjusted 62% in the same period last year and 71.8% in the fourth quarter 2018.
Book value continues to improve reaching $18.41 a share compared to $16 from 42 cents per share at December 31, 2018 tangible book value at the ended the third quarter was $15 a one cents per share compared to the $14.12 at December 31 2018.
You will notice that we grow our tangible book value every quarter that doesn't have a merger recurring I'd now like to turn the call back over to Mr. bass for wrap up theme.
Thank you Jeff to conclude we are extremely pleased with our performance during the third quarter and believe we are well positioned to take advantage of opportunities in our market, while serving our strong and growing customer base.
I'd like to thank everyone involved with spirit or taxes Bancshares success.
Lastly, the banks directors management investors and of course, our outstanding employees.
This concludes our prepared remarks I'd like to ask the operator to open up the line for any questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad.
Confirmation total indicate your line is and the question Q.
The press star to he would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we pull for questions.
Thank you. Our first question comes from the line of Brad Milsaps with Sandler O'neil. Please proceed with your question.
[laughter].
Hey, good morning.
Good morning or more.
I was curious if you have you guys can maybe just give little more color on the.
On the net interest margin, Jeff you talked about a little bit you know you would expect loan yield to come down with another cut from the fed just kind of curious you know by order of magnitude kind of what you guys are kind of thinking in terms of NIM compression. Obviously the loan yields have held in very well for the last couple of quarters, but it sounds as if you may see some some pressure as you.
On a move.
Through the next several quarters.
Yeah, I think is is rates it when the fed brings rates down and all that Jerry and David give a little bit more color on it.
But I think overall, our margin will hold up it will probably dropped a couple of basis points, but I think overall it will hold up David I don't know if you want to give any color that Brad This is David.
We're seeing since the last cut the rates that are in the competition out there kind of stable. So there was a and the yield was impacted slightly by the last cut I'd say overall, but as you can see from our results were able to me.
Maintain our margins through that and if we get another cut I would expect to say.
On the on the deposit side, the our cost of deposits you know Weve I think we've done a really good job.
Over the last year on controlling our deposit beta.
And up and I think we're in a good position with our improved.
Deposit mix that will enable us to to react quickly to further rate cuts.
A year ago, we were 50% almost 50% Cds that number now is down to 39% and that should come down even further with the with the citizens acquisition. So I think we should be able to trend our our deposit rates down as our loan yields go.
Yeah, Yeah, a couple of other things as far as citizens State bank that that merger I think 30, 638% of their book is noninterest organic number seems noninterest. In addition, we right now we have over $100 million and cash on the balance sheet. So that puts us in the good position, where we don't have to negotiate up.
On deposits, we can we can make sure that we're doing it a favorable rate both for the customer and for ourselves.
David much the the loans that you put on this quarter. They are they still coming on the books above 6%.
Yes.
Okay and then.
Just a one follow up on for Jeff I was writing quickly on expenses.
Sounds like you'll start to see some additional cost saves into fourth quarter.
Look to like you also may have had a little bit of credit from the FDIC like like other banks have seen this quarter, just kind of wanted to get a sense of kind of the absolute level of expenses.
You kind of expect going forward you know given given the cost saves and then other investments that you're also making.
Yes, so that's a really good question.
I'm thinking that expenses.
We were told noninterest expense was 50 million five for this quarter as in second quarter is 15 million eight so I'd expect it to still keep trending down.
I'd say, we'll be in the low fifteens, oh for the quarter, but usually at yearend you've got some holiday celebrations and different things in there, but it's not going to go up that much.
How did it did you recognize kind of all your credit this quarter or do you still have a more to come from Oh evenly up yet.
No we pulled it all through.
Okay, Great alright, thanks, all back into queue.
As a reminder, if he would like to ask question Press Star one on your telephone keypad.
Our next question comes from a line of Brett Rabatin with Piper Jaffray. Please proceed with your question.
Hi, good morning, guys.
But.
Good morning, Ben.
I was wondering if you guys can talk about your loan to deposit ratio seems like every time you.
Really outsized growth roughly 20% this quarter. It jumps up and then you bring on partnership is a good solid deposit. So I was wondering since you guys are now bigger bankers Randy you had any sort of threshold. So that you would be operating obviously you are much lower than you were.
A year ago. So I was wondering if that that's dances change on where youre at that too.
Right now we're we're at and then once we bring citizens on it looks like that number if you use 930, but citizens is filed their call report.
If you combine at 930, we we'd be at North 94.8, which you know we're right around 94 ourselves so.
That's I think 94 90 596 in that area is a sweet spot you make more money when you're running in the at that level, but you know in the past I think we've been up as high as 100 and Dan.
But there's no anticipation and run it that hot.
Okay.
Looking to go above.
But the plan.
Well Im sorry, Gary the and part of that increase in Q3 on the loan to deposit ratio is because of the drop in public fund deposits, which as we mentioned in the.
That is that it is cyclical and those funds should start coming in again late Q4 in in Q1 of 2020, So I.
I think if you adjust for that.
Our.
I would anticipate our Q4 loan to deposit ratio being stable or possibly going down a little bit because of that inflow of deposits.
Okay, great. Thank you.
Stepped back and to have a bigger picture with M&A.
Over the past 12 months is kind of having a little bit of a rollercoaster with last year everything kind of freezing up in the <unk>.
<unk> falling out if you will and begin to half years Lions you guys any update any commentary on conversations you might have had way some other banks in Texas or if you're you're more focused on just the integration of kind of what you put on past couple of years in partnerships that you've created.
Two things I really like your term partnership [laughter], you get it and I like that yeah. It's it's a in you also I like what you said freezing up and Boeing.
It seems like a as the market the economy the pressure on on bank stocks in different issues play into this psyche of of the directors and teams.
Around the state is trying to analyze and and and make the right decision for their or their boards and their shareholders and so it does frees up some it and seems like are we track back a little bit through the discussion.
But we're actively involved with different partnerships throughout the state at different stages different levels different locations that strategic to us.
And we like trying to add a I think we going to try one partnership at a time you know that strategically impacts. So I I think weekend or you can look forward to test.
Having more of the same we didn't think this was a roller coaster we thought it was normal [laughter].
Okay. Yeah. That's that's great color I appreciate the answers now I'll jump back in Q.
A final reminder, if he would like to ask question Press Star one on your telephone keypad. If you are using a speaker phone you may need to pick up your hands up before pressing star keys.
Our next question is they follow up question from Brad Milsaps with Sandler O'neil. Please proceed with your question.
Hey, guys I just wanted to follow up on a couple of things.
Really great long growth. This quarter, you know the kind of bounce back after maybe a little slower start to Didier than is typical for you guys, but kind of curious you know it just just on the pipeline and you know how you think about you know that near 20% pace do you think that was up a little bit of an aberration or you know do you expect to stay kind of you know in that mid high teen kind of pace.
Over the near term.
Hi, Brad. This is David you know our pipeline is still remaining very very strong all across the state and all of our markets. We're not seeing any economic deterioration in any in the markets and so with that I I've got to expect that we would still be able to.
So the portfolio organically in the low to mid teens like we've always said this years a you know it was a little bit tepid in the first half the year, but we we were and I think a lot of it went back to that the a interest rate increases in the fourth quarter of 18 and it made a lot.
One of our customers stop and think and so now that we've got a cat one potentially more they're coming back into the market wanting to go forward with the projects. They had planned for their businesses or ordered and development. So I feel good about a you know a low to mid teen growth organically for the bank over the year.
And going into next year I'm thinking that we can do the same again.
I'm not at this has been bass the.
We had a solid core a strong production team in place very experienced and then and it worked closely with with executive management over the years and we've we've continued to add these outstanding Bank owned these outstanding performers and these different reasons.
And now we're adding.
The citizens State Bank with David month, and John Mills, and some outstanding performers in the region and so we see that continued continuing in that region and so you add that unless you had the lift out.
From.
From a activity that's going on with in each of our market areas and we've been very successful and pulling those those.
He lift out personnel that can help us going forward. So that's why I think Dave is very confident and how he speaks in the direction of the portfolio.
Okay. That's helpful. One and maybe just one final follow up look like there might have been just a small tick up and Npls, obviously coming off a very small numbers anything to note there.
Or is that just kind of normal ebb and flow within the book.
You know it's it it I would characterize is exactly that it is one loan and it will be dealt with in this quarter with the expectation that will go back into our historical.
NPL numbers by the end of the year.
Great. Thank you guys.
Thank you. Thank you.
Our next question comes from the line of not only with Stephens. Please proceed with your question.
Good morning, guys. This is Doug Garrett on for Matt.
Running here Hi, Gary.
Hey, So just wanted to start off I'm looking at your fee income line. This quarter I noticed that you guys had a substantial boost in your SPJ loan servicing fees I just wanted to see what you guys are thinking.
Going into Fourq, you 19 in terms of kind of a run rate on that do you expect a boost and could you just provide a little color on that going forward.
Yeah.
Gary This is Jeff what I'll tell you to me that is the one of the trickiest parts of trying to project our income stream on that and because that is a valuation.
That is done on the servicing portfolio meeting what are those servicing rights work and it takes into account a what rates are doing it takes into account payoffs and takes into account a number of Oh <unk> variables and I think the even look out of what's going on with peers as well.
It tends I mean, if you left it alone if you didnt put the devaluation on it it would run around $500000 a core.
And but once the valuation pieces added that's why you see it I think in the.
Fourth quarter last year, it went up $500000 and I think in January It went down 500000, and then in the second quarter and when you do they talk about $500000 out of it as well too.
And then this quarter it picked up a devaluation came back so easy there.
Well I'm going to say, it's almost like a black box when we ship those numbers over to it the ended the quarter.
If if there were no valuation adjustments on it I'd say it'd be worth about $2 million a year.
Okay got you sounds great and then just as a quick follow up question, taking a look at your loan growth this quarter.
So that it was.
Very solid.
5.6% linked quarter.
Just wanted to get a little bit more color from you all on what drove the loan growth whether it was a.
Decline on Paydowns or seasonal strength, if you just.
Provide a little bit more insight on that.
Gary It again as I said earlier it yeah I think there is a <unk> the market that we were in in Texas.
And I I don't know outside of Texas, what I was like but I'm, telling you that our customers took a hiatus as far as borrowings and the first half the year because of the cost what they were looking at and with the anticipation of rates going higher as you remember in the first quarter, there's a lot of talk about that and.
And that and a lot of misdirection means signal by on what race, we're going to be done doing and the customers are looking at that and so a after they got comfortable after the last rate decrease that helped it seemed to help a lot to in just that kind of color.
For our markets, but you know that this happened to us before in a 2016, where we had very little gross in the in the first half of the year and then we.
We're able to do it in the second half of the year and it's kind of looking like that and then sound way.
But I will say that our pipeline remains as large as I've ever seen it in the history of this bank and that we've got a and credible lending staff that is out there trying to grow their book of business and then you know the port the pay downs, we're not we didn't see a slowdown paydowns or kind of running.
You know somewhere between 15, and 25 million a mountain that that seems to be where it's at and and we're doing our part to replace it and grow the book.
Alright sounds great well appreciate the info on that Ah, that's all I've got be guy, so I'll jump back into the queue. Thanks.
Thank you.
We have no further questions at this time I would now like to turn the floor back over to management for closing comments.
Just want to thank everyone for being on the call and we look forward to another another great quarter and.
Thank you very much for being on.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.