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

Q1 2019 Southwest Georgia Financial Corp Earnings Call

Moultrie May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Southwest Georgia Financial Corp earnings conference call or presentation Tuesday, April 23, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George DeWitt Drew

Southwest Georgia Financial Corporation - President, CEO & Director

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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 the Southwest Georgia Financial Corporation First 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. Good afternoon, everyone. Certainly appreciate your time today as well as your interest in Southwest Georgia Financial Corporation. Joining me on the call is DeWitt Drew, our President and CEO; and Karen Boyd, our Senior Vice President and Treasurer. We'll start with DeWitt's formal remarks on the first quarter and then we'll open up the call for Q&A.

You should have a copy of our financial results that were 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 risk and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risk 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, let me turn the call over to DeWitt to begin the discussion.

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George DeWitt Drew, Southwest Georgia Financial Corporation - President, CEO & Director [3]

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Thank you, Craig. Good afternoon, everyone, and thank you for being with us today. Coming off of a strong year where we had record results, we delivered mixed results in the first quarter. We experienced higher net interest income, sound asset quality and solid deposit growth, those achievements are reflective of our team's continued hard work and dedication to meeting the needs of our customers. We are, however, finding challenges in deposit pricing and labor cost, particularly, in the cost of hourly wages. Our pretax income for the quarter was up $241,000, or nearly 20%, to $1.5 million. Net income of $1.2 million was comparable with last year's first quarter, largely due to prior years benefiting from an adjustment to estimated tax accruals. On a per diluted share basis, earnings were $0.48. We have seen some contraction in our net interest margin, which on a tax equivalent basis was 3.82%. After 4 rate increases last year, the overall cost of interest-bearing deposits increased 46- basis points as customers migrated to higher yielding accounts.

During the prior year, both mix and pricing moved in ways unfavorable to the bank. We continued to reprice balloon loans at higher rates to help offset this, and believe our continued focus on managing asset and liability mix will allow us to maintain healthy levels in net interest income. For the quarter, net interest income was $318,000, up to $4.8 million, which reflects higher interest in fees on loans of $828,000, partially offset by higher cost on interest-bearing deposits of $678,000. Our loan loss provision nearly halved to $116,000 due to a decrease in nonperforming loans and a reduced level of loan growth in the recent quarter. Noninterest income was up 24% to $1.2 million, primarily due to a gain of $143,000 related to the extinguishment of debt as well as from higher insurance and brokerage revenue, and swipe fees from debit cards. We continue to invest in people and technology to drive our success. The $420,000 increase in noninterest expense was largely a reflection of investments necessary to support our growth as well as from the tight labor market. We have seen turnover in hourly staff and are being proactive in protecting valued staff as well as being strategic and adding new associates in key areas of the bank. Cost associated with our hourly employees increased approximately $132,000 compared to last year. While we also saw a 17% increase in the cost providing employee health insurance. Those increases were partially offset by a $44,000 decrease in accruals for incentive-based and profit-sharing compensation.

In addition, our occupancy of equipment and data processing cost have all increased over the prior year. When we crossed the $500 million mark in total assets, base cost for enterprise-priced software improved substantially. Also our focus on gathering business checking deposits increased activity charges, which show up in data processing expenses. Total assets reached $551 million, an increase of 8% year-over-year. At quarter end, total loans were $378 million, up $42.5 million or almost 13% from last year. That growth was broad-based across our footprint. Loan origination in the first quarter, however, was somewhat muted. We continue to replace scheduled payments and payoffs, but the pipeline is not as robust as has been in the past. We have a pipeline of large prospects, but overall activity appeared to have slowed in our markets and we're taking a cautious stance about the general economy. We continue to maintain an appropriate discipline around loan quality with nonperforming assets at 0.24% of loans and 0.19% of total assets, but are continuing to work through a few stress -- problem credits. The stress has been primarily weather-related and should not be significant to our operations. We have been successful in attracting deposits to support our loan growth and reduce our reliance on the Federal Home Loan Bank. Total deposits were up $70 million to $489 million, an increase of 17% since last year's first quarter. Last year's growth was primarily in business interest-bearing checking, money market accounts and certificates of deposits as customers search for yield. Deposit growth during the recent quarter looks just as strong with mix being more favorable. Half of the year-over-year increase, $35 million, occurred in the first quarter of this year. 2/3 of this year's increase came from business transaction accounts, specifically, $12 million from non-interest-bearing business checking, $5 million in interest-bearing business checking and $6 million in public NOW accounts. We will continue to focus on deposit pricing and mix this year, and will adjust as needed to accommodate changes and opportunities to originate earning assets in our markets. We paid total dividends of $0.12 per share in the first quarter. That was the 91st consecutive year paying dividends. We're pleased overall with the past quarter and remain focused on long-term success. We have an incredibly talented and dedicated group of associates who continue to be disciplined in our approach to growing the business. And we'll continue to make the appropriate investments in both back-office and customer-facing areas of our operations, all while maintaining standards of excellence.

And that concludes my formal remarks. And with that, we'd 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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Congrats on what I'm looking at is a very successful quarter from a deposit standpoint. And you know I look back over the past couple of quarters, say, going back to the second quarter of '18, kind of looking at your year-on-year deposit-gathering activities from, say, 6% to 11%, 15% and now 17%, so really fantastic trend overall. But I was wondering if you can maybe shed a bit more color on essentially how those transaction accounts, more so on the business end, are really being won? And kind of where you're seeing the rest of full year '19 tracking out from here, from that standpoint?

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George DeWitt Drew, Southwest Georgia Financial Corporation - President, CEO & Director [3]

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Well, I'm going to have to give credit where credit is due and that's -- and also, this is the only person in our organization that worked really hard. We have our President in Valdosta, Jud Moritz, really did come up with an idea last summer when we talked about reducing our reliance on Federal Home Loan Bank borrowings -- is to be more competitive with our money market accounts in order to attract and gather business checking accounts. And that discussion really came about as a result of a mailer I got from Capital One, paying me 2.5%, I think it was, on a money market account for 6 months. And he just said, if we can offer something more competitive than we have been in our markets we can use that as a lead to get our foot in the door in a lot of places. And he was right, I mean, we really did exceed expectations and that was a large part I think of driving the exceptional growth we've had over the past year. Part of it also is Tifton, we opened Tifton and Tifton, gosh, I don't have the number in front of me. But in 6 months have gone from $0 to I think more than $25 million in deposits in that market or real close to it. So they've had good success there. And Moultrie too. Moultrie is -- Colquitt County is not a growth market. But we grew deposits over 8% in Colquitt County. And I think it's really the entire sales staff, just talk about our banking division. Jeff Hanson is Head of our Banking Division. And our 3 market presidents, they just do a great job. I mean we're beating on the doors, telling people what we have to offer and at times, moving some cheap funding to something that's advantageous for the customer, when we think they're going to be searching for yield anyway, if they're not already. And that has shown up in our deposit cost. Our deposit costs have gone up because of those efforts.

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Michael Shay, Strategic Value Bank Partners LLC - Analyst [4]

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Sure, sure. I look at things now too ending the first quarter just from a loan-to-deposit standpoint, I think the most liquid I've seen, right around 77-or-so-percent. I imagine that's probably also a way of, say, getting your foot in the door from a lending standpoint. And I know you mentioned a little bit of a weakness in the market, kind of more than anything else. If you could just maybe shed a little bit of color on that too? Just kind of the main drivers and what really is kind of causing some of that near-term weakness with respect to the -- maybe not the pipeline but more so just the market in general?

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George DeWitt Drew, Southwest Georgia Financial Corporation - President, CEO & Director [5]

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Well, I think a lot of it is commodity prices. You know we have a tariff on cotton being shipped to China. And that tariff, the cost of it has been passed on to producers so far. That is a large, large part of it. The ag economy in general, we don't do much grain farming around here, not a lot of -- our row crop is principally peanuts and cotton. And the cotton prices are pretty good. Peanut production -- nationally, peanut consumption is down, but it's still strong in this market, the production of peanuts and the sale of peanuts, but long term, I wonder about what the future is for peanut production, I think it may be less going -- at some point, going forward. And also over in Valdosta, we've had a pretty good run over the last 7 or 8 years of some industrial developments and commercial development, warehouses being built. That has slowed also. And of course, anything attached to a big-box retailer right now is a little stressed, rents are going down. We're seeing some rents going down for big-box facilities anyway. So those things are, we think, all things to be cautious about.

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Operator [6]

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(Operator Instructions) Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to management for closing remarks.

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George DeWitt Drew, Southwest Georgia Financial Corporation - President, CEO & Director [7]

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Okay, well, 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 to all of you again after our second quarter results. Again, thank you for participating today and have a great day.

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Operator [8]

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