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Spirit of Texas Bancshares (STXB)
Q4 2019 Earnings Call
Jan 30, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, ladies and gentlemen. And welcome to the Spirit of Texas Bancshares fourth-quarter earnings conference call. [Operator instructions] It's now my pleasure to introduce your host, Mr. Jerry Golemon.
Thank you. Sir, you may begin.
Jerry Golemon -- Executive Vice President and Chief Operating Officer
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 fourth-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, our interim chief financial officer. Following my opening remarks, we will provide a high-level review and commentary on the financial details of the fourth quarter before opening the call for Q&A.
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 February 6, 2020, 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, January 30, 2020.
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. 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.
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, 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, which can be found on the Spirit of Texas website. Now I would like to turn the call over to our Chairman and CEO, Mr.
Dean Bass. Dean?
Dean Bass -- Chairman and Chief Executive Officer
Thank you, Jerry. And good morning, everyone. I'm 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 of $0.35, compared to $0.22 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 are also excited about the upcoming branch acquisition with Simmons Bank to obtain four branch locations and one mortgage loan office, as well as 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 Simmons branch acquisition, we are excited to welcome some talented bankers and dedicated employees who will continue to provide exceptional products and customer service to the markets they serve. 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 would like to turn the call over to Mr. David McGuire, our president and chief lending officer, to discuss some of our quarterly credit performance results. David?
David McGuire -- President and Chief Lending Officer
Thank you, Dean. During the fourth quarter of 2019, the loan portfolio grew to $1.76 billion, compared to $1.49 billion at the end of September 30, 2019. The continued growth in our loan portfolio is the result of our commitment to find strategic partners through acquisition and win quality deals in the markets we serve. Excluding the acquired loans, we are pleased to report organic loan growth of $35.9 million for the three months ended December 31, 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 6.03%, 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 of 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 $775,000, which increase the allowance to $6.7 million or 38 basis points of our loans outstanding.
The coverage ratio on the organic portfolio was 57 basis points on the $1.18 billion in 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 exemplified by our commitment to adding quality loans to the portfolio, resolving issues timely and adjusting portfolios dynamically to manage risk. With that, I will turn the call back over to Jerry Golemon to provide a review of the funding side of the company.
Jerry?
Jerry Golemon -- Executive Vice President and Chief Operating Officer
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 of 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 Beeville 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 up 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 5 basis points to 0.98%. FHLB borrowings increased $31 million to $105 million due to the Citizens acquisition. These borrowings totaled 4.4% of 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?
Allison Johnson -- Interim Chief Financial Officer
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 31, 2019 was $6.2 million with fully diluted EPS of $0.35, compared to earnings of $2.5 million and fully diluted EPS of $0.22 in the fourth quarter of 2018.
Non-GAAP earnings for the fourth quarter of 2019 were $5 million or $0.28 in non-GAAP EPS. The pre-tax non-GAAP adjustments for the fourth quarter of 2019 consists of a $2.4 million gain on the sale of investment securities and $821,000 in merger-related expenses. During the fourth quarter, we reviewed all funding needs for 2020, including the Simmons branch purchase, anticipated loan growth from strategic banker lift-outs and general liquidity needs. This analysis resulted in the sale of approximately $90 million of securities.
The resulting $2.4 million gain assisted in offsetting the initial investment of the 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 a 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 in other banks of 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 rates by the Federal Open Market Committee during the third quarter. While the majority of the impact from decreases in market rates was experienced in the fourth quarter, we will continue to experience a slight decrease in our yield on loans as variable rate loans continue to reset throughout the first quarter of 2020, as well as the addition of $272 million of loans being added through the Simmons branch acquisition that are yielding 5.1%.
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 was 1.11%, compared to 78 basis points in the fourth quarter of 2018. Adjusted ROA, 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 of 2019 and 80.4% in the fourth quarter of 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 of 2018. Book value continues to improve, reaching $18.93 a share, compared to $16.42 per share at December 31, 2018. Tangible book value at the end of the fourth quarter was $14.56 per share, compared to the $14.21 at December 31, 2018. Moving on to upcoming events.
As mentioned previously in December, the Simmons branch acquisition will add $272 million in loans that are yielding 5.11%. It will also add approximately $160 million in deposits with a 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 the 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 partnerships and lift-outs. I would now like to turn the call back over to Mr. Bass for a wrap-up. Dean?
Dean Bass -- Chairman and Chief Executive Officer
Thank you, Allison. 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. My fondest memories of Jeff include his humor, quick wit, intelligence and insightfulness. We were blessed to have him as part of our bank and send our condolences to Jeff's friends and family. While 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 of Spirit of 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 time. This concludes our prepared remarks. I would like to ask the operator to open up the line for any questions.
Operator?
Questions & Answers:
Operator
Thank you. [Operator instructions] Our first question comes from the line of Matt Olney with Stephens. Please proceed with your question.
Matt Olney -- Stephens Inc. -- Analyst
Hey. Thanks. Good morning, guys.
Dean Bass -- Chairman and Chief Executive Officer
Good morning.
David McGuire -- President and Chief Lending Officer
Good morning, Matt.
Matt Olney -- Stephens Inc. -- Analyst
First off, I want to share my condolences to the Spirit family. I know Jeff was a big part of the bank and a good friend, so we're going to miss him on the call. So my condolences.
Dean Bass -- Chairman and Chief Executive Officer
Thank you.
Matt Olney -- Stephens Inc. -- Analyst
The press release mentioned some investments in new producers. Can you give us some more details behind this? And specifically, how many bankers have you hired in the third quarter and the fourth quarter? And can you characterize what types of banks they've come from previously? And what does this mean for organic growth? I think, we're trying to see the higher expense base in the fourth quarter and trying to interpret what this means as far as how quickly these new investments could pay for themselves. Thanks.
David McGuire -- President and Chief Lending Officer
Matt, good morning. This is David. We have brought on nine end market lift-outs during the third and fourth quarters of 2019. And they come from banks that you know the names of out in the marketplace are well-known veterans that carry substantial portfolios.
And all of these individuals are 20-plus-year veteran bankers in our markets. The expectation is that they'll be able to move good portions of their existing portfolios, as well as keep their relationships intact that will mean new business as the year goes on with the expectation that they'll pay for themselves before they've been here six months and give us a good return by the end of 12 months of their anniversary day of joining the company.
Matt Olney -- Stephens Inc. -- Analyst
OK, that's great, David. Thank you for that. And then I want to shift over to the margin. It looks like the margin compressed more than expectations in the fourth quarter.
It seems like part of this was from the Chandler acquisition but not all of it. So how would you characterize how much of the compression in the fourth quarter was from Chandler versus legacy Spirit? And then as we roll into 1Q and 2Q, lots of moving parts. Can you help us out and kind of point us toward some numbers in the near term for the margin? Thanks.
David McGuire -- President and Chief Lending Officer
Matt, with some of the rate changes in the middle of the 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 all-new loans and renewal loans. We're 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 far this month, looks pretty good for us.
And in reviewing all the loans, we continue to see the yields that we want to. We're not feeling a lot of pressure from competition on the yields that we're able to get.
Matt Olney -- Stephens Inc. -- Analyst
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 1Q margin. But it seems like the impact on the Simmons branch deal could go the other direction, but that wouldn't begin 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 in 1Q before it stabilizes? Or do we think it's already stabilized from here in the fourth quarter?
Allison Johnson -- Interim Chief Financial Officer
Matt, this is Allison. Yes, we really think that it's probably stabilizing. 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 this out of the lower-yielding cash and move it into loan, the overall net interest margin we expect to see a slight improvement in Q1.
Matt Olney -- Stephens Inc. -- Analyst
OK, great. Thank you, guys.
Dean Bass -- Chairman and Chief Executive Officer
Thank you, Matt.
David McGuire -- President and Chief Lending Officer
Thank you, Matt.
Operator
Thank you. [Operator instructions] Our next question comes from the line of Brad Milsaps with Piper Sandler. Please proceed with your question.
Brad Milsaps -- Piper Sandler -- Analyst
Hey. Good morning.
Dean Bass -- Chairman and Chief Executive Officer
Good morning.
Brad Milsaps -- Piper Sandler -- Analyst
Allison, just wanted to kind of follow up on the expense discussion. I think, you mentioned Chandler had a $1.1 million pre-tax benefit to pre-tax earnings this quarter. Just kind of curious what the headwind was from like all the lending hires, kind of what was the impact on expenses? And kind of where do you expect the expense run rate to go with all the moving parts that Matt noted?
Allison Johnson -- Interim Chief Financial Officer
Sure. So the Citizens acquisition, we had them for two months, which costs us approximately $700,000 in additional salary expenses, as well as the addition of the nine lift-outs that David spoke about was an additional $400,000 in expenses. Now in the last 15 months, we've had three whole bank acquisitions. And in 2020, we're definitely going to focus on getting those economies of scale.
So for your projections, I would expect in Q1 probably leave your total noninterest expense flat. But we are definitely focusing on expense management this year, and that's going to be a priority for us. And you'll start seeing those cost saves at the end of Q1 and into Q2 for the rest of the year.
Brad Milsaps -- Piper Sandler -- Analyst
OK. 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 that you would have seen initially from when you announced those acquisitions?
Allison Johnson -- Interim Chief Financial Officer
No, we're still expecting to make those cost saves. And we are committed to doing so.
Brad Milsaps -- Piper Sandler -- Analyst
OK. And just on the team lift-outs. David, 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 you're guiding to kind of mid-teen type growth before the lift-outs.
And it seems like your guidance is still sort of in that mid-teen type range for loan growth. So is it one of the things where you needed the new lenders to kind of continue to keep that growth? Why maybe aren't we seeing you accelerate above that given all the folks you've brought in?
David McGuire -- President and Chief Lending Officer
To answer your first question, Brad, we're going to approach 90 lenders statewide, maybe a little bit, a few more than that. But in the end, we always believe in adding talented bankers that we didn't 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 the economy continues to work with us. These lenders that we did bring on are, as I stated earlier, veterans in their markets.
They're in markets we know. And with the expectation is, is that they can help us maintain that organic growth targets that we've continued to talk about. And I will say this, with the addition of them in our pipelines are the highest they've ever been, looking at deals that are right down the middle of the fairway that we would like to do and not having to go out and develop new lines of business. We're just supplementing what we have in place with good veteran talent.
Brad Milsaps -- Piper Sandler -- Analyst
Great. That's helpful. And maybe just one final one for me for Allison. The fee income, I know some of those line items can bounce around, particularly related to some of the SBA and loan sale game businesses.
But just any additional thoughts you have there about maybe changes you're making or kind of color on what you're seeing on the fee income growth side?
Allison Johnson -- Interim Chief Financial Officer
Sure. So for SBA servicing fees, I would expect to keep that flat at about $300,000. SBA gains going into probably Q1 and Q2 are running about $600,000. We are looking for other ways to supplement non-interest income.
And I think, we'll see a little bit of pickup there. But for your modeling purposes, I would keep SBA flat for the next two quarters.
Dean Bass -- Chairman and Chief Executive Officer
And that valuation, too, you might address and sometimes how confusing that can be quarter to quarter.
Allison Johnson -- Interim Chief Financial Officer
Right. So as you know, the volatility with SBA, as far as valuing the servicing asset, that's beyond our control. It'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 the SBA products so much.
And that's why we're looking for other sources of non-interest income.
Brad Milsaps -- Piper Sandler -- Analyst
Great. Thank you, guys. Really helpful. Oh, and I would also echo Matt's comments.
We will miss working with Jeff. It's certainly a big loss.
Dean Bass -- Chairman and Chief Executive Officer
Oh, thank you very much. Appreciate that.
Operator
We now have a follow-up question from the line of Matt Olney with Stephens. Please proceed with your question.
Matt Olney -- Stephens Inc. -- Analyst
Thanks for taking the follow-up. Just to follow up on the expenses, I think, Allison, I believe you mentioned your expectations are for the operating expenses from 4Q into 1Q to be relatively flat. Did I hear that correctly? And does that include the incremental impact of Chandler since you only got two months of the impact in the fourth quarter? Or does that exclude that?
Allison Johnson -- Interim Chief Financial Officer
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.
Matt Olney -- Stephens Inc. -- Analyst
OK. 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, the lift-out of about $400,000 impact; the Citizens impact, about $700,000, but there still seems to be another, I don't know the number, but it still seems like there's something else in there that pushed that expense base to be a little bit elevated in the fourth quarter. Any more color on what that could have been in the fourth quarter?
Allison Johnson -- Interim Chief Financial Officer
Yes, I think, our CDI amortization is running in a little bit high, as well as we've changed benefit providers, so we're picking up additional benefits expense in that number for salaries of about $200,000.
Matt Olney -- Stephens Inc. -- Analyst
OK. And in that example, is that something, Allison, that can be volatile? Or do you think in that example with the benefits that it's going to be higher?
Allison Johnson -- Interim Chief Financial Officer
That's going to be a onetime expense.
Matt Olney -- Stephens Inc. -- Analyst
OK, got it. Thank you, guys.
Jerry Golemon -- Executive Vice President and Chief Operating Officer
And Matt, this is Jerry Golemon. You had already asked about the margin. One of the things to keep in mind on that, the Citizens acquisition did provide us or helped in our deposit mix, moving away from CDs into noninterest-bearing and interest-bearing transaction accounts. So that will help the margin as well.
We are still slightly asset sensitive. As rates started coming down in the third and fourth quarters, our deposit rates did start coming down, but there is a lag. And as those CDs repriced, I think that will also contribute to keep that margin closer to where it is. Also, I just wanted to mention one other thing is that the company does have a stock buyback plan in place to support the stock price.
And we believe that the stock price is very attractive and is very undervalued at this point.
Dean Bass -- Chairman and Chief Executive Officer
Thank you, Matt.
Matt Olney -- Stephens Inc. -- Analyst
Thank you.
Operator
Thank you. This concludes our Q&A session. I would now like to turn it back to Dean Bass for any closing comments.
Dean Bass -- Chairman and Chief Executive Officer
Thank you very much. Thank you for everyone being on the line today. Our focus will 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, this concludes our call for today.
Operator
[Operator signoff]
Duration: 30 minutes
Call participants:
Jerry Golemon -- Executive Vice President and Chief Operating Officer
Dean Bass -- Chairman and Chief Executive Officer
David McGuire -- President and Chief Lending Officer
Allison Johnson -- Interim Chief Financial Officer
Matt Olney -- Stephens Inc. -- Analyst
Brad Milsaps -- Piper Sandler -- Analyst
