Q4 2019 Earnings Call
Thanks Allie. Good morning. And thanks for joining our Q4 call this morning before I get started. I'd like you to please refer to page two of the deck with our legal staff and forward-looking disclaimer with me this morning Billy Carroll our CEO Ronald grzywinski. Our CFO sent the akane our senior vice president Financial Planning and Frankie with investor relations. As you know, we reported out our Q4 99 earnings at the close of business yesterday, and we're excited to chat about those numbers this morning a couple of highlights from Q4 wage strong income. It's 6.7 million really strong EPS. We feel with $0.48 gap earnings and 46% operating earnings versus the consensus of about forty cents strong quarterly Roa at one point one to our asset quality remain pristine and we're very proud of that with npas at a point to one strong loan growth right where we project.
said about 7% annualized on
Tangible Book value increased to $16.82 really proud of that 14.9% increase for the for the year 2019. We did announce another acquisition of Progressive Financial and we initiated the first ever quarterly dividend with our company and we think that's a a landmark move for us to as you can. See we've never been busier here at the bank and we've never been more excited about the future this think our board is very bullish on our markets and our team and our economic outlook for the southeast sure. There are a few headwinds with the current low-rate environment, but we are confident we will still continue to outwork others and gain market share without I'm going to turn it over to Billy care and let him dive into some of the details Billy sounds good. Thanks Miller and thanks everyone for joining the call today is it was Miller said a really solid quarter for us while we had several moving Parts over the past few months. We continue to really make nice dog.
Dinner company and in closed out or really?
Successful year we accomplished a number of our goals in nineteen and and I believe we've set ourselves up really. Well as we look into 2020. We had a bunch of change in our bank draft 2019 and still ended up hitting most all of our targets for the for the fourth quarter, you know as as Miller Lew to I came in with a nice Roa had an operating Roa of a 1.08% and it sucks operating r o e of just over 11 again some moving parts that helped us hit those numbers and Ron's going to give some additional color on that just a second. But as you see the overall return trends that we have continued to progress and continue to be solid loan growth was in line with our expectations coming in at 7% annualized for the quarter and right at 7% year-to-date, you know, and we looked at our pipelines and over the last last week or so and we're starting to see the new sales hires that we added in 2019 starting to hit stride wage.
Do feel we can continue our organs?
Space at that 7% plus or minus level and still maintain the credit quality we want is we look into the coming year. We do continue to fight some margin head wage, but came in right within our projected range as we closed out the year. We're going to discuss a little more are thoughts on twenty-twenty margin in a moment, but I feel confident that given were rates are forecasting currently that we can stabilize, uh, this this margin in the next couple of quarters after we get through q1 and get this Progressive deal closed before I handed over to Ron. I want to point to a couple of slides in our deck and slide is before I handed over look at slides six and seven, you know slide 6, I would draw your attention to the consistent Trend in our operating earnings growth while sometimes a little bumpy quarter-to-quarter. This trend is very positive and continues to be a key Focus for us and Ed.
slide seven shows several of
Performance Trends and are return metrics show a nice uptick from earlier in the year and we're very proud of that given the margin compression. The last bullet on slide seven is them pulling asset totals Miller alluded to that number a second ago 0.21% you know, we really continue to put a high bar on credit. And in fact very solid with with our credit quality and the continued growth of our loan portfolio. We really sound loans. So overall. I'm really nice wage order and a really good year for Smart Financial and and I'll stop there. I'm going to pick it back up in a minute with some additional comments, but I'm going to go ahead and hand it over on and let him dive into the numbers and some details. So Ron thanks, Billy and good morning. Everyone during my portion of this presentation. I will be providing some forward-looking guidance. So please be mindful of our forward-looking discouraging.
Your statements and the beginning of this slide.
Check our guidance will largely be for the first part of 2024 Legacy Standalone Bank. We will update our guidance during our first quarter earnings call to include the acquisition of progressive with that said, let's start though it slide a balance sheet Trends all of our trans are showing continued stable growth for 2019. We increased our total <expletive> off with the $175 million dollars of growth both Total loans and deposits of increased around $125 million are tangible Book value as milord indicated had increased 14.9% for the year. We are continuing to build value for our shareholders moving on to slide nine net interest income.
We continue to have steady increases in our average earning assets and liabilities as our company grows. Our margin for the current quarter was 3.84% a 7 basis-point decrease from the Firelink quarter primarily driven by lower loan yields as well as decrease investment yields.
O'Neill's
When removing accretion have decreased fifteen basis points to 5.07% in comparison with the prior link quarter. We will we will continue to experience a decline a year olds as we move forward into Q1 2020 as we see the full effects of the last rate cut then we are expecting to see some stabilization after that.
During the current quarter. We recorded 29 basis points of loan accretion a slight increase from the 26th basis points in our prior linked order.
We continue to experience accelerated prepayments and pay Downs in our acquired portfolio.
Our margin less accretion was 3.59% for the fourth quarter a decrease of 9 basis points from the 3.6 a reported in Q3.
I just bearing deposit cost of decreased 8 basis points the 1.29% when compared it to the prior linked order. We have reduced rates primarily in our money market and time deposit account Thursday. We are still seeing opportunities for possible rate reductions with the majority of the opportunities within our time deposit portfolio. We will have approx 20% of our time deposits birthday detail and brokered maturing and repricing during the first quarter of 2020.
Let me pause here.
And explain our process during the second half of 2019. We created a management pricing committee to address are declining rate environment head on this committee is comprised of the executive management team Regional presidents and the finance team. The committee has been a tremendous asset to the bank as we progress through this lower interest rate environment. The members are not only coaching our Associates wage, but bringing a strategies and ideas forward.
Going forward are forecasted. Margin for q1 20/20 is scheduled around 3.75 to 3.8% which includes estimated accretion of 15 to 20 basis am moving on a slide 10 operating non-interest income.
Our operating non-interest income which excludes non-operating items has been continually increasing quarter-over-quarter.
During the quarter. We have experienced nominal increases for the majority of our non-interest income categories Mortgage Banking revenues had a minimal decrease when compared to the prior link quarter as a news were slightly elevated Additionally the fourth quarter has been a historically lower Revenue reported quarter.
overall
Mortgage Banking, you're still experiencing high production levels from the variable rate environment year-over-year revenues have trended upward we have also experienced some late month activity in December that should bolster out of r Q1 20 reporting.
Moving on to wealth revenues from our wealth platform has remained stable from the prior linked quarter reporting approximate $260,000 of Revenue year-over-year are well that form continues to build momentum as revenues increased over 68% finishing 2019 with revenues of approximately $950,000 going forward into twenty-twenty package will be reporting well as a separate line item on an honest income.
Our operating income to average assets for the fourth quarter. And for the year was approximately 35 basis points.
Item of note during the fourth quarter the state of Alabama terminated a loan program in which they had guaranteed a portion of the of the loan principle through this termination that essentially thought the guarantees out with us receiving a total of 1.4 million dollars and $720,000 of that was recorded non-interest income. The remaining proceeds were held in reserve or potential losses on specific identified loans within this program. We had classified the $720,000 as a non-operating item going forward our forecast. 20/20 is 39 basis points of average assets or two point four million dollars.
and so I
You'll find our operating non-interest expenses.
What's our restructured finance team in place during the fourth quarter. We had taken advantage of one opportunities to reduce expenses to correct some prior-year irregularities and three deploy learning enhancing strategies.
Our operating not interest expense which is excludes non-operating items had increased $700,000 from the prior link quarter primarily from the overall growth of the company and contains following items salaries and employee benefits increased by $600,000 for the quarter which which consisted of increased salaries quarter-over-quarter commissions and increased pertaining to life adjustment and an overall troop of your incentive programs.
After your after you have seen Insurance posted a credit balance of $250,000 for the third quarter and no expense for the fourth quarter our data processing increased 259,000 the fourth quarter as the third quarter included a core processor credit.
In the fourth quarter, we record a $468,000 credit for state of Tennessee franchise taxes. This credit was a result of tax credits generated during the quarter that were in excess of our courtesy tax liability, and we're allowed to offset current Franchise Tax expense. I will discuss this in more detail in a few.
We've also had nominal increases in other expense categories as we continue to grow our franchise.
Our operating hours are operating non interest expense to average assets for the fourth quarter. And for the year was approximately 2.56% our operating efficiency ratio Hubbard around 65% for the fourth quarter and for the year.
Item of note during the fourth quarter of 2019. Some of our non-operating items were $427,000 of merger-related boxes $603,000 for a prior salary and benefit adjustment $312,000 benefit for a prior-year franchise adjustment relating to the 2018 tax true up going forward our forecast for Q1 2019, which is expense is $1,560 million and our forecast for salary or benefits package is 9.5 to 9.7 million.
Calling for Gress to the next slide. Let's discuss income taxes during the fourth quarter. We strategically originated Community investment loans through the state of Tennessee took us our 2019 tax liability.
State tax been for received our first applied to our tax liability than any excess is applied to our current franchise taxes are fourth-quarter overall benefit was 1.6 million of that amount 1.1. Excuse me. One point 1 million was applied directly to the Tennessee income tax and the remainder of $468,000 was applied to send it to franchise tax as mentioned prior going forward. We will take advantage of this program and seek more opportunities to lower our effective tax rates.
Our effective tax rate for the fourth quarter was 6.6% compared to 24.6% for the third quarter.
I am know during the fourth quarter of 2019. We had a non-operating item of a tax benefit for a three hundred four thousand relating to amended 2017 federal tax return.
going for
Lord our forecast for q1 20/20 is our our effective tax rate will be in between 24 and 5 to 25% Now moving on to slide 12 deposit on the bar chart to the right you'll see that our deposits have experienced overall steady growth of 2018 with overall deposits increasing 6.5% Annually additionally non-interest-bearing demand accounts have increased 13.7% for the year.
No longer left the lower left portion of the slideshows our cost of funds decreasing 7 basis points from the linked quarter and increasing six basis points year-over-year.
During the first half of the year. We were combating increased deposit pricing from Market competition and the second half of the year. We were trying to reverse course with the several rate cuts that had occurred Thursday forecast for deposits. We're looking at an annualized growth rate of 6% or approximately 125 million dollars.
Slide 13 provides an overview of our loan portfolio.
The bar chart shows steady overall growth during 2019 total loans increased 7.1% year-over-year with an increase of 7.4% compared to the link off. Our loan pipelines are strong coming into twenty-twenty our loan-to-deposit ratio held at 93%
a long composition presented on the pie chart has been relatively consistent year-over-year as we manage our growth to obtain a relatively stable portfolio mix. We also manage our six years. I've seen on the lower left graph. We have been consistent over the past five quarters with our ratio levels remaining steady. This has been a large Focus within our lending Department as well. As our phone. Now. I continued credit quality forecast for loans. We're looking at an annualized growth rate of 67% or approximately $130 and our forecast for acid growth approximate 6%
Page 14. I'm moving on the page 14 ask the quality. This continues to be our best performance area. We have continued to benefit from strong asset quality both through to our internal external reporting and comparing us with our peer group.
Non-performing assets a total assets was at 21 basis points a much lower level from the 59 basis points than that of our peer group at quarter-end. Our non-performing assets total 5.1 million our allowance for loan losses two loans had increased slightly 54 basis points larger from increases in our originated loan, portfolio our remaining fair value discounts total 50.3 million at quarter-end.
It's like 15 reported an operating earnings during the past year. Our our quarterly earnings had much lumpiness as as signified by the quarterly check on the left hand side of the graph.
We had many moving pieces to Corral and many events to deal with our team has accomplished much and at the end of the day. We are heading in the right direction. Our full-year earnings graph tells us a story. We are picking up both Gap and quarter earnings growth. We had a great 2019 and with that back over to Billy.
Thanks, Ron.
I think you'll see from Ron's comments and in the deck, you know, it really was a an interesting quarter a lot of moving pieces. Ron did a great job explaining all of them, but it didn't the day, you know, a really nice quarter even all things considered backing it out from a career standpoint and we really feel great as we look ahead and 2:25, you know big picture the strategy that we've talked about is working and it continues to work and our company has really made great Improvement year-over-year. We had some real nice movement from the beginning of the year on a number of fronts most importantly earnings and Ron alluded to slide fifteen of the deck. I think if you if you look at that, you see a quarterly earnings graph and a full year or take a look at that slide slide fifteen between organic growth and the Acquisitions over the last over the last year. We're showing a 20% growth in our operating earnings from mm. Yep.
Change 2019.
That said we still have a number of opportunities to continue to enhance revenue and continue to drive are efficiency ratios down and as I closed out the third slide 16, and I'm going to walk through some of this we put this in several quarters back. We just to to communicate some of the initiatives that we've got going on. This is the last time that you'll see these completed initiatives that were a key Focus for our management team near in 2019, and we've checked those off and we're ready to tackle some new ones in 2020. So you'll notice that we've added some new initiatives to these chart down at the bottom, you know, first, we've got to that that that are ongoing and I think will always be ongoing as we continue to look to higher-quality bank Talent wage. We we we did made some great strides in that in two thousand and in nineteen as we added some great sales depth to our team and we're going to continue to evaluate new m&a opportune time.
So we kind of have those two as an ongoing.
And then the three new ones I'm going to touch on just briefly first initiative integration of Progressive Financial, you know, we touched on that just a little bit on the call, but I tell you we remain we're very excited to get this this Bank deal closed this Progressive transaction with its low-cost funding base along with a couple of new lines of business to generate non-interest income. We think these things are going to reflect really well in our 2020 financials and we've got that transaction slated to close late first-quarter hear the second initiative that you'll see on the list price on interest income acceleration. You've heard me mentioned in the past. We've been primarily a margin Bank, you know, and that's some reason the the these margin headwinds and really it really kind of muted are ability to grow that that net interest line as we had hoped and I you know is we talked about we think we as we get some stabilization and pick that back up that's going to take care of itself off.
But we really want to start.
Putting more focus on this non-interest income growth. We've been able to grow this line over the last couple of years, but we really just kept pace with the a same road. Our goal now is to expand these areas to create a stronger non-life independent income line. We're going to put more management resources behind this and get this needle moving more. So on this front a couple of examples in there Ron touched on Thursday, we made some big Investments and wealth and 2019 with the addition of several financial advisors in the purchasing of a couple of books of business. We see that number starting to really move the needle for us into he's out in 2020. We're doing a service charge scrub. This is part of this looking for opportunities to pick up revenue from some of our service fees. We're digging in their ability to move pricing there where we can be and still remain and are competitive is set in our in our geographies. And then finally the progressive deal now gives us some new opportunities that we haven't had before PNC in, Georgia.
a title company
For the servicing group that can be leveraged out throughout our bank platform. So that's a big initiative. We've got several management team members spending some significant time focusing on that page and we firmly expect to see that needle move as we we move later into twenty-twenty are smart spin project. You'll see that last initiative down there. That's an internal word that I'm using smart spend we've done a nice job, I think of with expense control and getting our call safe from recent acquisitions, but but there's more I really believe we've got more opportunity there and with this new financing in place, which is just doing a fabulous job. We're going to dive into these numbers a little bit deeper using the talent on Ron's team. It's got some great larger Community Bank experience now to find additional opportunities just drink some of those expense lines while there's probably not a lot of home runs in that number. I do believe we've got some solid singles and doubles so bottom log.
I love where we're positioned right now. I think the environment is is I think we're set well for 20.
20 with the additions and changes that we made last year were operating now at a really high in much higher level and I know we continue to drive these returned levels and the coming quarters. So our futures very very bright. We're excited about it and I'll stop there and we'll open it up for questions.
We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question. You can press * then two.
Our first question will come from Kevin Fitzsimmons with d a Davidson.
Hey, good morning. Everyone. Good morning, Kevin just to follow up on a couple of comments. You you made Billy Miller on home early. How would you characterize the Outlook there? Obviously, you're going to close Progressive. Um, just in terms of number of conversations the receptivity of potential sellers the price expectations. Is it something where you see the likelihood picking up in terms of smaller deals like Progressive looking out?
Gotcha.
Certainly a lot of activity in the market even a couple of deals and now it's just the afternoon after close the business. We're starting to getting a lot of looks a lot of calls. Probably I would say Billy probably getting as many as ever gotten before so that activity is is certainly a busy time. You know, we feel like we got a lot of opportunity in our organic side with you know, between the wealth and the insurance and the progressive integration, but you know had gone as we've said on every call for for many quarters and and all our meetings. We think we've been a approving acquire. We think we've done a good job with our partners that we brought on board. We feel like we've been able to integrate them. Well, we like that line of business. We have a team that we feel like does a good job of those Integrations and and we're going to continue to look back we will be very disciplined and and how we look and what we look at but shoot you how there's a lot of opportunity out there in Kevin. I'll I'll add. Yeah, I mean hit the nail on the head I did there was a lot of there is a lot of activity.
He going on in the market. I think there's a lot of folks just in in this environment just really looking strategically. So I think with with where we are and they're located where we're located or geography Thursday. We we we've we've got
A number of opportunities We Believe Miller said it, you know, we're at this spot now where we've we've been able to get some scale in in really, you know, we're we're still focusing while I still think maybe in the past acquisition has been probably and I said this a little more one a organic one B. I see that you know flipping. I do think we're stronger organic play the teams that we put together in their ability to grow there is tremendous. So I don't think we we really felt a lot of pressure but if the right deals are there and we can get the right pricing and makes the math life with obviously it's unfortunate for some of these Community Banks, you know, these five hundred million and under that are barging banks. That just doesn't come margin squeeze makes it tougher for them as we transition to a bigger Bangkok. So, you know, our our Horizons are broadening and there's unfortunately they're getting getting dimmer.
Right, and I guess if you know, you're you're going to have certain traits that you're looking for. I would assume anything that's enhancing to the funding base is something that is going to be on your list. I think that I think that's exactly right. I think we're you know, we're over the last several years is probably been more of a build scale. Now. It's it progresses progresses of example, well, not a large deal at you know around three hundred million in assets. It gives us some great give us a great funding base and gives us some great non-interest income on this page very strategic play and I think those are the types of deals that were probably would be more interested in as we look forward things that really compliment the foundation that we built now. Mm. I help us driver turns it at this point. It's it's it's about stronger driving of the RO and r o e numbers and if we can if we can find deals that enhance our ability to do that will would definitely be dead.
We definitely entertain them.
And you alluded to it a few minutes ago though the other mergers in your region were in.
Some regions so with that deal announced yesterday and there's other larger deals going on. Does your view change or accelerate in terms of hiring of attorneys. I know you've been at that and been focusing on that for a while, but it's something to that if the right team or the right situation came up you'd be willing to to pounce and step up hiring. But of course that comes with with a little bit of a lag in terms of getting the revenues. Sometimes it comes with the call sheet. Does the day's your question? Yes, I think you know really the you know, we we felt like we we were in several markets were in several markets where we really needed some sales Talent over the last year and so Greg Davis are cheap blender and his team's going out and did a great job recruiting. We've added a lot of depth strategically last year. So we made a lot of spin there that we we we believe will start seeing better benefit for um, this this year going forward, you know with the Dead
Yeah, there's there's always disruption. I think there could be opportunities there and and I I do think we we want to continue to be in will be opportunist.
Thinking that hiring. Um, I like the teams that we've got in the markets where we are today. We've got some really good leadership and some really nice sales Talent. Now that said if we do a job opportunity to add good sales people, we will definitely want to be able to to take a look at that and we'll cheaper than an acquisition.
That's right. It almost is like knock it is yeah, right. Okay. Thanks. Thanks very much guys. Thanks.
Our next question comes from fetty Strickland with Janney Montgomery Scott.
Morning, guys. Thanks for taking my question. Just a little more follow up on Kevin's questions on m&a has your I guess criteria for geography changed at all that still kind of Alabama, Florida Tennessee. I know last four of you talks especially kind around Birmingham area. Just curious if your outlook geographically it's really changed. I don't know that it's changed. Any I mean Market density is is critically important to us and obviously makes this continues our efficiency and and scale and so Market density would would anywhere in our current market would probably be one day and if we got out of Market it have to be off of clothes and and attractive but yeah close proximity. Yeah, same same fetty I think you know for us, you know enough said we've kind of we kind of staked out the outer bounds and we like, you know East Tennessee over to to to Middle, Tennessee down I sixty-five, you know throughout Thursday.
Alabama now with Huntsville and Tuscaloosa. We've got opportunities to fill density in there and um and then and then I'll probably not as many operatives.
The Panhandle the coastal region that we have is still is still performing nicely for so so those zones we've we've got a lot of opportunities in in those zones we believe and and that's going to be our primary focus.
Got it. Appreciate it guys and one unrelated question. Looks like the FED might pause for now, but with future rate Cuts still maybe one day on the horizon. Have you considered putting off any of your new Loan Production of the sort head? We evaluating that right now cuz I do think you know, we're still I think Ron is we've looked through kind of, you know, we still slightly sensitive and so, you know, the the these these down rates and then we're not unusual in in this a lot of banks experience and you know a little bit of you know, a little bit of head winds, you know this year with these these cuts that we weren't anticipating a year ago that said we've got we're exploring some strategies to try to defend that margin if if we do get further rate Cuts in comments, G as part of our Progressive transaction. We are revisiting some restructuring on our balance sheet and getting ideas on what worked what didn't work. Where do we have to be going phone number?
So that's something we are going to tackle the next two months.
That's a great quarter. Thanks, buddy.
again, if you have a question, you can press * then 1
as I'm showing no further questions. This will conclude our question-and-answer session. I would like to turn the conference back over to Miller Welborn for any closing remarks.
Well, thank you folks for joining us today. We appreciate your interest in the bank and hope you all have a great day. Take care. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Got it. Thanks guys so much and