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Edited Transcript of SGB earnings conference call or presentation 23-Jul-19 5:00pm GMT

Q2 2019 Southwest Georgia Financial Corp Earnings Call

Moultrie Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Southwest Georgia Financial Corp earnings conference call or presentation Tuesday, July 23, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Karen T. Boyd

Southwest Georgia Financial Corporation - Senior VP & Treasurer

* Ross K. Dekle

Southwest Georgia Financial Corporation - Executive VP & Moultrie Region President of Southwest Georgia Bank

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Conference Call Participants

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* Michael Shay

Strategic Value Bank Partners LLC - Analyst

* Craig Mychajluk

Kei Advisors LLC - SVP of Operations

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Presentation

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Operator [1]

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Greetings and welcome to Southwest Georgia Financial Corporation Second Quarter 2019 Financial Results. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Craig Mychajluk, Investor Relations.

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Craig Mychajluk, Kei Advisors LLC - SVP of Operations [2]

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Yes, thank you. And good afternoon, everyone. We certainly appreciate your time today as well as your interest in Southwest Georgia Financial Corporation.

Joining me on the call is Karen Boyd, Senior Vice President and Treasurer; Ross Dekle, Executive Vice President and Moultrie Region President; and Donna Lott, Executive Vice President and Chief Administrative Officer. Karen is going to provide the formal remarks on the second quarter, and then we will open up the call for Q&A. You should have a copy of our financial results that we released this morning, and if not, you can find them on our website at sgb.bank.

As you are aware, we may make some forward-looking statements during the formal discussion as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission. You can find these documents on our website or at SEC.gov.

So with that, I'd like turn the call over to Karen to begin the discussion.

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Karen T. Boyd, Southwest Georgia Financial Corporation - Senior VP & Treasurer [3]

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Thanks, Craig. Good afternoon, everyone, and thank you for being with us today. We had a solid quarter given the backdrop of increased investments related to our expansion efforts and other customer service-enhancing initiatives. Net income was up 13% to $1.3 million, and on a per share -- per diluted share basis, earnings were $0.51, which was up $0.03 over the first quarter of this year and up $0.06 over last year.

If you recall, in 2018, we achieved record earnings per share, and on a year-to-date basis, we are on track to beat that performance this year. We are seeing the extraordinary amount of pricing pressure on both sides of the balance sheet. However, our debt team has done a notable job managing these pressures. The average cost of all interest-bearing liabilities has increased 32 basis points to 1.16%, as interest-bearing deposits continue to move higher -- into higher-yielding CDs and tiered money market accounts. Balloon loans were being repriced at higher rates to help counteract this.

We were able to expand our net interest margin 10 basis points to 4.06%, as our continued focus on managing asset and liability mix combined with our customer-centric and community-focused approach has allowed us to maintain healthy levels of net interest income. For the quarter, net interest income was up $485,000 to more than $5 million, which replaced higher interest and fees on loans of $856,000, partially offset by higher cost on interest-bearing deposits of $493,000.

Our provision was higher, which was commensurate with the level of loan growth. Noninterest income was up $247,000 to $1.3 million, primarily due to a gain from the sale of fixed assets. Higher interest revenue of 9% was mostly offset by smaller declines in other business lines.

The $418,000 increase in noninterest expense was impacted by each line item but largely reflected the investments necessary to support our growth as well as from the tight labor market. Nearly half of that increase was within salary and employee benefits, and as a reminder, when we crossed the $500 million mark in total assets, base cost for enterprise software increased substantially.

As I mentioned, the strategic investments we've made to organically grow our franchise are paying off as demonstrated by our strong loan and deposit growth. And it is important to note that we are not chasing questionable credits or overpriced deposits.

Total assets reached $552 million, an increase of 9% year-over-year. Loans grew more than 12% to $388 million, with contributions coming from each of our markets. While demand has softened somewhat since the end of the first quarter, the loan portfolio has increased approximately $11 million or 11% on an annualized basis. And we still have a solid pipeline. We are maintaining high standards of credit quality, with our nonperforming asset ratios improving over last year at 0.41% of total loans and 0.3% of total assets.

Our loan growth was funded by strong deposit growth, which was up nearly 13% or $52 million to $468 million. More than 1/3 of that growth was from noninterest-bearing transaction accounts. Given the success of our deposit gathering activity, we have reduced our reliance on the Federal Home Loan Bank. Deposit growth during the recent quarter was down slightly but that was primarily due to seasonal fluctuations and prudent discipline given pricing pressure.

We will continue to focus on deposit pricing and mix this year and will make the appropriate adjustments as needed to take advantage of opportunities in our markets. We also believe continued disruptions in the banking industry will create additional deposit opportunities for us. We paid a total dividends of $0.24 per share through the first half of the year, representing the 4% increase over last year's comparable period. This year also marks the 91st consecutive year of paying dividends.

We continue to make excellent progress in growing the business and earnings in a very competitive banking market and challenging rate environment. The contributions of our talented and dedicated staff that tirelessly focused on providing superior customer service has made this possible. We believe that future looks bright and that our strategic plan and strong balance sheet positions us for continued success.

And that concludes my formal remarks. With that, we would like to open the call for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mike Shay with Strategic Value Bank Partners.

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Michael Shay, Strategic Value Bank Partners LLC - Analyst [2]

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So just maybe a little bit more on the funding side. And if you could kind of go into a little bit more detail on the driver of those noninterest-bearing deposits in Q2 and kind of how that tracks over the full year. And then just kind of to curtail off that thoughts on margin, kind of where the overall rate backdrop is now maybe versus where we were a year ago. Kind of what you're seeing there and expecting for the second half of the year.

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Karen T. Boyd, Southwest Georgia Financial Corporation - Senior VP & Treasurer [3]

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Okay. Ross, I'll defer on you on the deposits and then I can take over from there if needed.

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Ross K. Dekle, Southwest Georgia Financial Corporation - Executive VP & Moultrie Region President of Southwest Georgia Bank [4]

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Thank you, Karen. I appreciate the question. Primarily, our focus and I believe your group has attended these calls in the past, we changed our deposit mix last year in an aggressive attempt to grow our core deposit base. And what we're seeing now in the growth in noninterest-bearing accounts is the fruition of that plan. As Karen mentioned, our deposit and our interest expense, primarily based on deposit pricing has gone up, but what has -- what that has resulted in is the growth in noninterest-bearing account because of a relationship focused on our customer acquisitions and the actual -- obtaining more wallet share per actual SGB customer through the course of our normal business and calling efforts.

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Michael Shay, Strategic Value Bank Partners LLC - Analyst [5]

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Okay. Great.

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Karen T. Boyd, Southwest Georgia Financial Corporation - Senior VP & Treasurer [6]

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Does that answer your question, Mike? Or do you need anything further?

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Michael Shay, Strategic Value Bank Partners LLC - Analyst [7]

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That does on the deposit side. Just the kind of same point on the margin front, but maybe 2 -- you mentioned the disruption piece and maybe kind of where you're seeing that market-wise, if that's kind of closer to home or Tifton, or where exactly that's kind of being felt the most.

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Karen T. Boyd, Southwest Georgia Financial Corporation - Senior VP & Treasurer [8]

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Yes. As far as the margins, we are -- we have increased some of our deposit rates a little to try to sustain those relationships that Ross was talking about a while ago. But we do have to be considerate of the fed and the moves that they make. And just make sure that we make sound decisions on the pricing strategy. And then as far as the markets, I'll let Ross speak to the pressures in the market.

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Ross K. Dekle, Southwest Georgia Financial Corporation - Executive VP & Moultrie Region President of Southwest Georgia Bank [9]

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Well, to speak to Karen's portion on the question 2, what we're realizing is the repricing of -- and scheduled renewals of loan assets on the book as well. And that has allowed us to gain some yield particularly on loans that had 5-year calls, as improvements in the rate environment in that 5-year period has allowed us to continue to gain yields on our loan assets, and we will continue to see some of that as we progress forward. As far as market competition, we have been really focused on banking relationships both from a retention aspect and from a prospecting perspective. With that being said, our pricing in that regard and the stress we see in the way of interest expense on deposit accounts is subject to a little bit of fluctuation just out of sheer competition. But we have been very successful in retaining key relationships. And a good portion of that increase you saw during the quarter was a result of those efforts and to combat what are competitive prices on deposits in all of the markets we share across our footprint.

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Operator [10]

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(Operator Instructions) There are no further questions at this time. And I would like to turn the call back to Karen Boyd for closing remarks.

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Karen T. Boyd, Southwest Georgia Financial Corporation - Senior VP & Treasurer [11]

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Thanks, everyone, for joining us on the call. We certainly appreciate your continued interest and support. Please feel free to reach out to us at any time, and we look forward to talking with you all again after our third quarter results. Again, thank you for participating today and have a great day.

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Operator [12]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.