Q4 2019 Earnings Call
Greetings, ladies and gentlemen, and welcome to the Spirit of Texas Bancshares fourth quarter earnings Conference call. At this time, all participants are to listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero any telephone keypad is now my pleasure to introduce your host.
Mr. Jerry Goldman. Thank you Sir you may begin.
Q, operator, and good morning, everyone.
We appreciate you joining us for the spirit of Texas Bancshares Conference call webcast.
To review 2019 fourth quarter results.
With me today as Mr., Dane bass, Chairman and Chief Executive Officer, Mr., David Maguire, President and Chief lending Officer.
Ms. Allison Johnston, our interim Chief Financial Officer.
Following my opening remarks will provide a high level review and commentary on the natural details of the fourth quarter before opening the call for QNX.
I'd now like to cover a few housekeeping items.
I'll be a replay of todays call and it would be available by webcast on our website at www Dot <unk> Dot com.
Well also be a telephonic replay available until February six 2020.
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 January 32020, and therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.
In addition to comments made by management during the conference call may contain certain forward looking statements within the meaning of the United States Federal Securities laws.
These forward looking statements reflect the current views of management, however, various risks uncertainties and contingencies could cause actual results performance or achievements to differ materially from those expressed in the statements made by management.
The listener a reader is encouraged to read the company's annual report Form 10-K filed with the SBC for the year ended December 31, 2018 to understand certain of those risks.
Certainties and contingencies.
The comments today will also include certain non-GAAP financial measures additional details and reconciliations to the most directly comparable GAAP financial measures are included in yesterday's earnings release, which can be found on the spirit of Texas website.
Now I'd like to turn the call over to our chairman and CEO Mr. being best thing.
Thank you Gerry and good morning, everyone.
Extremely pleased to report fourth quarter results, which continue to demonstrate our commitment to growth.
During the quarter, we closed citizens acquisition, we announced the Simmons branch acquisition.
We grew the legacy loan portfolio organically.
And managed anticipated margin compression through controlling the cost of funds.
These factors continue to build the strong support foundations that are necessary for the future success of this organization.
These initiatives resulted in net income of $6.2 million and dilutive earnings per share or 35 cents compared to 22 cents year over year.
Going forward, we remain focused on continued growth through increasing volumes of quality, earning assets and controlling margin compression through deposit mix and cost of funds.
The citizens acquisition closed in the fourth quarter and the conversion is on track early in the second quarter of 2020.
With anticipated cost savings to be realized post conversion.
We're also excited about the upcoming branch acquisition with Simmons Bank to obtain for branch locations and one mortgage loan office as well as it related deposits loans and other assets.
The addition of these five locations will expand our footprint to be able to serve our major Texas metropolitan areas through our 41 locations.
In conjunction with the Semmens branch acquisition, we're excited to welcome some talented bankers and dedicated employees, who will continue to provide exceptional product and customer service to the markets based or.
Together, we will be better positioned to take advantage of organic growth and acquisition opportunities that will enable us to better serve our customers and further enhance shareholder value.
Now I'd like to turn the call over to Mr., David Maguire, our president and Chief lending officer to discuss some of our quarterly credit performance results David.
Thank you doing.
During the fourth quarter, a 29 team the loan portfolio grew to $1.76 billion compared to $1.49 billion at the end of September Thirtyth 2019, the continued growth in our loan portfolio is the results of our commitment.
Defined strategic partners through acquisition and wind quality deals in the markets we serve.
Excluding the acquired loans, we're pleased to report organic loan growth at $35.9 million for the three months ended December 31st 2019 or 9.6% annualized.
The most significant driver of organic loan growth during the quarter was production from the strategic banker lift outs, which occurred in the third and early fourth quarters of 2019.
These bankers bring long standing business relationships in our markets, which we expect to continue to drive organic loan growth and represent a meaningful return on investment from expenses incurred from the lift outs.
The yield on loans in the fourth quarter of 2019 was 6.3%, which decreased 24 basis points from Q3 2019.
The reduction in yield was anticipated given the decrease in underlying index rates in the third quarter and early fourth quarter of 2019.
While margin compression is primarily due to market forces, we remain committed to stabilizing the net interest margin through disciplined balance sheet management.
Asset quality continued to remain strong in the fourth quarter 2019, nonperforming loans to outstanding loans decreased to 37 basis points at the end of the Q4 compared to 61 basis points at the end of Q3, 2019, and 46 basis points at the end of Q4 2018.
The provision for loan losses for the fourth quarter was $775000, which increased the allowance to $6.7 million or 38 basis points of our at loans outstanding the coverage ratio on the organic portfolio was 57 basis points on the $1.18 billion.
Organic loans outstanding at year end.
Annualized net charge offs were 14 basis points for the fourth quarter of 2019.
Asset quality remains a key emphasis for our lending culture as a simplified by our commitment to adding quality loans to the portfolio portfolio resolving issues timely and adjusting portfolios dynamically to manage risk.
With that I'll turn the call back over to Jerry Goldman to provide a review at the funding side of the company Jerry.
Thank you David.
Total deposits at the end of Q4 were $1.93 billion, an increase of 21.4% from Q3.
And an increase of 63% over Q4 2018.
The increase from Q3 is largely the impact of the citizens transaction, but also represents a 13.9% annualized growth rate excluding the acquisition.
The year over year growth is largely due to the acquisitions of the be bill and citizens banks.
Our acquisitions over the last 15 months have allowed us to reduce our reliance on certificates of deposit as a funding source.
18 months ago time deposits made a 52%.
Of our deposit base.
At December 31, 2019.
That number had dropped to 35%. This improved deposit mix has helped us to keep our cost of funds and deposit betas well under control.
Our cost of interest bearing liabilities is down 10 basis points from Q3, and the average cost of all deposits declined five basis points to 0.98%.
Typically will be borrowings increased $31 million to $105 million due to the citizens acquisition.
These borrowings totaled 4.4% for total assets compared to 3.8% at Q3 2019.
The loan to deposit ratio ended the quarter at 91.8% as compared to 93.8% at the end of Q3 2019.
And 93.5% at the end of Q4 2018.
I would now like to turn the call over to our interim Chief Financial Officer, Allison Johnson to provide a financial overview of the fourth quarter Allison.
Thanks, Jerry and good morning, everyone.
We provided detailed financial tables in yesterday's earnings release.
On a consolidated basis net income for the three months ended December 31st 2019 was 6.2 million with fully diluted EPS of 35 cents compared to earnings of two and a half million and fully diluted EPS of 22 cents in the fourth quarter 2018.
non-GAAP earnings for the fourth quarter of 2019 were 5 million, our 28 cents non-GAAP EPS.
The pretax non-GAAP adjustments for the fourth quarter of 2019 consists of a 2.4 million dollar gain on the sale of investment Securities and 821000 merger related expenses.
During the fourth quarter, we reviewed all funding needs for 20 to 20, including the seventh branch purchase anticipated loan growth from strategic banker lift out and general liquidity needs.
This analysis resulted in the sale of approximately $90 million of security.
The resulting 2.4 million dollar gain assisted in offsetting the initial investment of this strategic banker lift out and merger related expenses incurred during the quarter.
Our tax equivalent margin in the fourth quarter came in at 4.43% against third quarter margin of 4.63% for 20 basis point decrease.
The key contributors to the decline in the tax equivalent margin is primarily due to declines in the yield on interest, earning deposits and other banks at 43 basis points and the decline of the yield on loans of 24 basis points. As the result of the impact of the decrease in interest rate by the federal open market Committee during the third quarter.
Well the majority of the impact from decreases in March that market rate was experienced in the fourth quarter. We will continue to experience a slight decrease and our yield on loans as variable rate loans continue to reset throughout the first quarter 2020 as well as the addition of 272 million of loans being added through the Simmons branch acquisition.
That are yielding five 111%.
However, overall, we expect the net interest margin will improve due to the migration of our low yielding excess cash into higher yielding loans.
Return on average assets of one point, 11% compared to 78 basis points in the fourth quarter 2018.
Adjusted ROI, taking out onetime items would be 90 basis points.
The reported GAAP efficiency ratio was 68.4% when compared to 67.2% in the third quarter 2019, and 80.4% in the fourth quarter 2018.
Adjusted efficiency ratio, excluding onetime items was 71.8% in Q4 2019 compared to the adjusted 62.4% linked quarter and 71.8% in the fourth quarter 2018.
Book value continues to improve reaching $18, a 93 cents a share compared to $16.42 per share at December 30, Onest 2018.
Tangible book value at the end of the fourth quarter was $14.56 per share compared to the $14.21 at December 30, Onest 2018.
Moving on to upcoming event as mentioned previously in December this them in France acquisition will add 272 million in loans that are yielding five 111%. It will also add approximately 160 million in deposit with the cost of 88 basis points.
32% of these deposits are noninterest bearing which is consistent with our current deposit mix.
The citizens acquisition, which added pre tax income of approximately 1.1 million in the fourth quarter is expected to continue to be accretive to earnings per share throughout 2020 with anticipated cost savings to start being realized in the second quarter post conversion.
Throughout 2020, our financial initiatives include diligent expense management, and realizing expected return on investment from strategic partnership and lift out.
I'd now like to turn the call back over to Mr. bass for wrap up 18.
Thank you Alison.
To conclude and with a heavy heart I wanted to share a final tribute to our colleague, Jeff Powell, who passed away unexpectedly.
Earlier this month.
To summarize the life of anyone is difficult.
It is even harder when you call that person a friend.
There are so many things people can and will say about Jeff.
Hi, Fondest memories of Jeff include as humor.
With intelligence and Insightfulness.
We were blessed to have him as part of our bank.
And send our condolences to Jeff's friends and family.
Well, Jeff was an integral part of.
The financial management group.
Our succession plan ensures that our financial integrity.
Remains intact.
We remain very optimistic on the future spirit or Texas Bancshares, we continue to believe that we are well positioned to change the banking landscape in Texas.
With one strategic merger partner at a tough.
This concludes our prepared remarks I'd like to ask the operator to open up the line for any questions.
Operator.
Thank you, ladies and gentlemen, I will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad confirmation Tony.
Ladies and the question Q.
For star to if you'd like to remove your question from the Q.
Participants using speaker equipment, it may be necessary to pick up the handset before pressing the star.
One moment, please always poll for questions.
Our first question comes from the line of Matt Olney Stephens. Please proceed with your question Hi, Thanks, Good morning, guys.
Format.
First off I want to share my condolences further to the spirit of family I know, Jeff was a big part of the other bank and a good friends. So we're going to miss him on the call. So my condolences.
Thank you.
The press release mentioned, some investments and new producers can you give us some more details behind us and typically how many bankers have you hired in the third quarter and the fourth quarter and can you characterize what types of banks Theyve come from.
Previously and what does this mean for organic growth I think we're trying to.
See the higher expense space and in the fourth quarter and trying to interpret.
What this means as far as how quickly these new investments could pay for themselves. Thanks.
Matt Good morning this David.
We have.
Brought on nine.
End market lift outs during the third and fourth quarters in 2019.
With.
When they come from banks that you know the names of out on the marketplace are well known veterans that carry substantial of portfolios in half for.
All of these individuals or 20 plus year veteran bankers in these.
In our markets. The expectation is is it they'll be.
Able to move good portions of their existing portfolios as well as Keith or.
Their relationships intact that will mean, new business as the year goes on.
With the.
Expectation that bill pay for themselves before they've been here six months and give us a good return by the end at 12 months of their anniversary date of joining the company.
Okay Thats great David Thank you for that and then I want to shift over to the margin and looks like the margin comprise more than expectations in the fourth quarter.
It seems like part of this with from the channel acquisition, but not all of it. So how would you characterize how much of the compression in fourth quarter was from Chandler versus legacy Spirit, and then as we roll into one Q into Q2 lots of moving parts can you help with that and kind of pointed towards some numbers in the near term for the for the margin.
Yeah.
Matt we're seeing there.
With some of the rate changes in the middle of year, and you're starting to see that kind of flow through.
Our portfolio and I believe we've seen probably most of it by now.
We are on the all new loans and renewal loans were still maintaining.
Our yields that we want to see to maintain.
Our margins so I feel good about the rest of this quarter going forward January looks.
So for this month looks pretty good force in reviewing all the loans were we continue to.
See the yields that we want to were not feeling a lot of pressure from competition on on on the yields that we're able to get.
And I guess more specifically with the moving parts you've got the remaining impact of the Chandler deal, which I guess by itself will create some pressure on the one Q margin but.
It seems like the impact on the some of the branch Joe could go the other direction, but that won't be until late in the quarter. So when you balance all that out I'm just trying to appreciate if there would be incremental margin compression and one Q before it stabilizes or do we think it's already stabilize from here and the fourth quarter.
No. This is Allison, yes, we really think that it's probably stabilizing I ran the numbers this morning, and a little bit of the portfolio is set to reprice, but that shouldn't be anything significant and again as we mentioned as we take that out as a lower yielding cash and move it into loan. The overall net interest margin, we expect to see a slight improve.
And in Q1.
Okay, great. Thank you guys.
Thank you Matt.
Thank you.
Ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Brad Milsaps with Piper Sam.
Please proceed with your question.
Hey, good morning.
Good morning.
Alan just wanted to get a follow up on the expense discussion.
I think you mentioned.
Chandler out of $1.1 million pretax.
Benefit to pre tax earnings this quarter, just kind of curious what the headwind was from Mike, although lending hires kind of what over the impact on expenses and kind of where do you expect the expense run rate to go with all the moving parts that doesn't that noted.
Sure. So the citizens acquisition, we have them for two months, which cost us approximately 700000 additional salary expenses as well as the addition of the nine lift out that David spoke about it was an additional 400000 expenses now you know weve in the last in the last 15 months.
We've had three whole bank acquisition and in 2020, we're definitely going to focus on getting those economies of scale. So for your projection for your projections I would expect in Q1, probably leave your total noninterest expense flat, but we're definitely focusing on expense management. This year and that's going to be a priority for us and.
We'll start seeing those cost saves at the end of Q1 and into Q2 for the rest of the year.
Okay, all but all the expense savings that we initially talked about not only with the branch deal, but the other acquisitions still hold do you see anything different. There then that you would have seen initially with with win from when you announce those acquisitions.
No, we're still expecting to make those cost savings and we're committed to doing so.
Okay, and just on the team lift outs.
How many total lenders do you have now just kind of curious kind of what percentage.
Increase that is in terms of total lenders and then.
It seems to me youre guiding to kind of mid teen type growth before the lift outs.
You know when you it seems like your guidance is still sort of in that mid teen type range for loan growth.
So it's whether things we needed the new lenders to kind of kind of continue to keep that growth why why maybe are we seeing you accelerate above that given given all the folks you have you brought in.
To answer your first question, Brett, we're we're going to approach 90 lenders state wide.
Maybe a little bit few more than that but.
In the end, we always believe in adding a talented bankers that we didnt have access to in the past at a different size that we do today and we still believe that a low to mid teens growth in loans organically is attainable even in 2020 provided that <expletive> .
It continues to work with us.
These lenders that we did bring on our as I stated earlier.
Veterans in their markets their end markets, we know and it will be in with the expectation is that they can help us maintain that organic growth targets that we've.
Continue to talk about and I will say this with it with the addition of them in our pipeline is our highest theyve ever been looking at deals that are right down the middle of the fairway like we'd like to do and and not not having to go out and develop new lines of business. We're just supplementing what we have in place.
With good a veteran talent.
Great. That's helpful and maybe just one final one from me for prowess in the the fee income I know some of those line items can can bounce around particularly related to some of the SBA and loan sale gain businesses, but just.
The additional thoughts you have there.
You know maybe changes you're making or.
Kind of color on on what Youre seeing on on the fee income growth side.
Sure so for Sta servicing fees on what to expect to keep that flat at about 300000, Sta gains going into probably Q1 in Q2 are running at about 600000, we are looking for other ways to supplement noninterest income.
And now I think we'll see a little bit of pickup there, but for modeling purposes, our keep keep that'd be a flat for the next two quarters.
And that the valuation to amount to address the.
So.
Using that can be quarter to quarter right. So as you know you know the volatility with SK as far as valuing the servicing asset that's beyond our control, let's really market forces driving that so that's why there's so much volatility and why we're kind of strategically shifting away from focusing on asked on the SK products. So much and that's why we're looking.
For other sources of noninterest income.
Great. Thank you guys really helpful and I would also echo Matts comments, we'll miss working with Jeff certainly a big loss.
Oh, Thank you very much appreciate that.
Thank you we now have a follow up question from the line on that only with Stephens. Please proceed with your question.
Thanks for taking the follow up.
Just a follow up on the expenses I.
I think Allison I believe I believe you mentioned your expectations are for the operating expenses.
From Fourq you into one Q to be relatively flat did that I hear that correctly and does that include the incremental impact of chandler's until I got two months or the impact in the fourth quarter or is that exclude that.
That includes so that includes Chandler and you are correct for Q1, I'm going to say that that's going to be flat and you'll start seeing some cost saves really more in Q2 and for the rest of the year.
Okay. So it sounds like the fourth quarter expense base may have been a little bit unusually.
Elevated on its own and I think you mentioned a few items.
Previously that the lift out.
Of about 4000 dollar impact.
This isn't the impact about 700000.
But there is still seem to be another I don't know the number but it still seems like there's something else in there that push that expense base to be a little bit elevated in the fourth quarter any more color on.
What that could have been from in the fourth quarter.
Yeah, I think our CVI amortization is running in a little bit high as well as we changed benefit providers. So we're picking up additional benefit expense in that number for salaries.
I was about 200000.
Okay and that example in is that something Allison that can be volatile or do you think.
And that example of what the benefits that's it's kind of see higher.
Let me a onetime expense.
Okay got it alright, thank you guys.
And Matt This Jerry Goldman you had earlier asked about the margin one of the things to keep in mind on that the citizens acquisition did.
Bravado sub.
Or help too.
Give us a.
Helped in our deposit mix.
Moving away from Cds into noninterest bearing in.
Interest bearing transaction accounts.
So so that'll that'll help the margin as well we are still slightly asset sensitive.
As rates started coming down in the third and fourth quarters.
Our our deposit rates did start coming down, but there is a lag and as those Cds repriced.
I think thats will.
Also contribute to keep that margin.
Close where it is.
Also just wanted to mention one other thing.
That.
The company does have a stock buyback plan in place to support the stock price and and we believe that that stock prices very attractive and and is very undervalued at this point.
Thank you thank you Matt.
Thank you.
Thank you. This concludes our today's session I would now lets turn it back to the best for any closing comments.
Thank you very much. Thank you for everyone being on the line today.
Our focus.
We'll continue to be on.
Going through 20.
On expense control.
And revenue building and we have a strategic focus on those areas.
And so with that being said.
Okay.
This concludes our call for today.
Thank you ladies and gentlemen, thank you for your participation you may disconnect your lines at this time.