Good morning, ladies and gentlemen. Welcome to the South Plains Financial 4th Quarter 2019 Earnings Conference Call. During today's presentation, all parties will be in listen only mode. Following the presentation, the conference will be opened for questions with instructions to follow at that time. As a reminder, this conference call is being recorded.
I would now like to turn the call over to Mr. Steven Crockett, Chief Financial Officer of South Plains Financial. Please go ahead, sir. Thank you, operator, and good morning, everyone. We appreciate your participation in our Q4 2019 earnings conference call.
With me here today are Curtis Griffith, our Chairman and Chief Executive Officer and Corey Newsome, our President. As a reminder, the telephonic replay of this call will be available through February 7, 2020. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements about our future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated future results, performance or achievements expressed in or implied by the forward looking statements.
Such risks and other factors are set forth in our prospectus filed with the Securities and Exchange Commission dated May 9, 2019. We urge listeners and readers of our earnings release to review the Risk Factors section of that perspective and the Risk Factors section of other documents that claims financial files with the SEC from time to time. Listeners and readers of our earnings release are cautioned not to place undue reliance on forward looking statements contained in this earnings call or in our earnings release. We do not undertake any duty to update such forward looking statements except as required by law. Additionally, during today's call, we may discuss certain non GAAP measures, which we believe are useful in evaluating our performance.
The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non GAAP measures to the most comparable GAAP measures can be found in our earnings release. At this point, I'll turn the call over to Curtis.
Thank you, Steve, and good morning. On today's call, I will briefly review the highlights of our Q4 of 2019 and then provide an update on our acquisition of West Texas State Bank or WTSB, which closed on November 12 last year. Corey will discuss the progress that we achieved in the 4th quarter, improving the return profile of Citibank as well as an update on the investments that we have made to drive organic growth in 2020 and beyond. Steve will then conclude with a more detailed review of our Q4 2019 financial results. To start, I continue to be very pleased with our results as we execute on our strategy to grow the bank and improve our returns as we scale our infrastructure and remain disciplined on expenses.
While we have more work to do to obtain our long term value of delivering returns in line with or better than our peers, I am very proud of the success that our employees achieved for this past year and would like to thank them for their hard work. Turning to our financials. Please note that they include WTSB's results for approximately half of the 2019 Q4, which will skew comparisons to the 3rd quarter. As a reminder, WTSB had $199,000,000 in loans, dollars 386,000,000 in deposits and $51,000,000 in capital upon closing of the acquisition, all of which were consistent with the levels that we reported on our Q3 2019 earnings call. For the 2019 Q4, we reported net income of $2,100,000 or $0.55 per diluted common share as compared to net income of $8,300,000 or 0.45 dollars per diluted common share in the Q3 of 2019.
Net interest income increased to $28,600,000 for the 4th quarter as compared to $26,600,000 for the Q3 of 2019. The increase was largely attributable to a rise in our average loans of $110,000,000 primarily from the WTSC acquisition and a decrease of 30 basis points in the rate paid on non time interest bearing deposits. Our net interest margin decreased modestly in the 4th quarter to 4.03% from the 3rd quarter's level of 4.07%. Of note, our average cost of funds declined 22 basis points to 76 basis points as compared to 98 basis points in the 2019 Q3. This improvement was largely driven by the acquisition of WTSB's low cost deposits.
As you can see, we experienced a strong initial benefit from our acquisition of WTSB and continue to be very pleased with the progress that we have achieved integrating their customers, employees and operations into Citibank. A focus of our team has been on both the customer and employee experience to ensure they continue to receive the support and information that they need to successfully transition to our bank. As an example, our marketing department has created educational materials for WTSD customers to proactively address questions and concerns as we remain focused on delivering a terrific customer experience, which is a critical part of Citibank's success over the years. We have a strong brand, which is well recognized for the best in class service that we provide, the high quality products that we deliver and the relationships that we build. Our focus on our customers and the communities that we serve is at the center of what we do every day, and we are working to deliver that commitment and service to our new customers in the Permian Basin.
While we are still early in the integration of WTSC, we are very pleased with the initial results and feedback that we have received. From a systems perspective, we expect to have our conversion completed by the end of the Q1 of 2020 and believe that we will hit our target of 20% earnings accretion over 4 quarters beginning in 2020 with a tangible book value per share earn back of less than 4 years. From a revenue perspective, we also see synergies, which are not included on our earnings accretion outlook. As we discussed on the Q3 2019 earnings call, we have several cross sell initiatives underway given the demand that we anticipate for our mortgage, wealth management and trust products. We believe there is a real need for mortgage lending in WTSB's more rural markets and believe there will be a strong demand for our wealth management and trust products in our new Permian Basin customer base.
In addition, we've also gained significant experience over the last 6 months working to integrate WTSB, and we're developing a process which we can protect and utilize in future acquisitions. M and A will continue to be an important growth driver for our bank and we see several strong potential acquisition candidates across our core markets, which will enable South Plains to increase the franchise value of the bank for the benefit of all our stakeholders. While we still have more to do to fully integrate WTSC, we are now at a point where we can begin looking at additional M and A opportunities. I need to emphasize that the timing of acquisitions is always uncertain and dependent on many factors often outside of our control. Turning to our markets.
The outlook for the Texas economy is robust as unemployment remains low and economic activity remains healthy. In the Permian Basin, we have seen a small slowdown in drilling activity, but we are seeing more pipeline construction, which we expect to spur more development. In our ag portfolio, 2019 was a very tough year for our producers. We're proud of the support that we continue to provide to our producer customers, which we hope will position us well when the market improves and are optimistic that a resolution of the U. S.
Trade issue with Mexico, Canada and China will prove a tailwind to our agricultural customers. Looking to 2020, we expect loan growth to reaccelerate given the sizable market backdrop and which Corey will touch on in more detail. Corey?
Thank you, Curtis, and good morning, everyone. As discussed, we are very pleased with the integration of WTSB and extremely excited to expand our business into the Permian Basin given the opportunities that we see to expand our franchise and grow the bank. The acquisition of WTSC should allow us to leverage the significant investments in our systems and infrastructure, which continue to have ample room for further growth. As we grow organically and through future acquisitions, we expect to be able to scale our business without commensurate additional expenses. Benefits of this scale and leverage can already be seen in our 4th quarter results where our efficiency ratio improved by almost 400 basis points to 69.7% as compared to 73.6% in the 2019 Q3.
Our return on average assets increased by 14 basis points to 1.32% annualized as compared to 1.18 percent annualized in the 2019 Q3. And our return on average equity increased by more than 200 basis points to approximately 13.3 percent annualized as compared to 11.1% annualized in the 2019 Q3. While we are pleased with our results, we recognize that this is a journey and we know that we have more to accomplish. Turning to loan growth. Loans held for investment increased $181,000,000 to $2,140,000,000 at December 31, 2019, compared to $1,960,000,000 at September 30, 2019.
This growth was largely the result of $199,000,000 of acquired loans from WTSB, offset by $36,000,000 in seasonal agricultural production loan paydown. As we discussed on our Q3 2019 earnings call, we continue to experience an increase in low prepayments and payoffs, which have continued to be a headwind to loan growth. Another headwind has been our commitment and discipline in maintaining strict credit standards, which is central to our culture at the bank. We will not sacrifice credit quality for loan growth. Looking to 2020, we do believe that we are well positioned for a return to loan growth given a strong economic backdrop combined with investments in bankers that we have made through the second half of twenty nineteen.
We've been adding high quality, experienced lenders in our major Texas markets as we continue to see an opportunity to take market share and grow the bank organically. In our new lenders ramp up, we expect loan growth to reaccelerate to a low single digit rate. That said, there is a seasonality to our business, and we further expect that our ag portfolio will continue to experience pay downs to the Q1 before stabilizing in the 2nd quarter and rebuilding. Turning to fee income, which is a priority for our team. We generated $16,700,000 of non interest income in the 2019 Q4, which compares favorably to $14,100,000 that we generated in the 2019 Q3.
The increase was primarily the result of a $1,500,000 in annual profit share bonuses related to top insurance activities that we recognized in the 2019 Q4 combined with continued strength in our mortgage banking services given the tailwind that we have experienced from the decline in interest rates. Overall, our fee income is primarily driven by our mortgage operations, debit card and other bank service charge income and income from our insurance, trust and investment services. Our fee income provides shareholders with a recurring and diversified earnings stream as it represented 37% of total revenue for the Q4. Looking forward, we're excited about the opportunities that we see to further expand our fee income through the potential cross selling of our products into the more rural communities in which WCSC is operated as well as expanding our crop insurance business. As a reminder, our crop insurance business is a good business for us as it generates healthy fee income without preventing the banks with underwriting risk.
Last but certainly not least, I'm very pleased to announce that we have completed our search for a Chief Credit Officer. We are very excited to have Brent Bates join the bank as our new Chief Credit Officer on February 1. Brent has tremendous experience having spent the last 3 years as the division Credit Officer for Simmons First National Corporation following their acquisition of Southwest Bancorp, where he served as EDP and Chief Credit Officer. Throughout Brent's career, he has had significant experience building and managing bank credit teams, executing acquisitions and managing challenged assets. Brent's skill set and experience will align very well with Southlake's credit culture, and we believe that he will be a tremendous asset as we grow the bank most organically and through strategic M and A.
I would now like to turn the call over to Steve. Thank you, Corey. This morning, I will briefly review the remainder of our Q4 2019 results as Curtis and Corey have touched on many aspects of our results before turning the line back over to Curtis for concluding remarks. In the Q4 of 2019, deposits increased $411,000,000 to $2,701,000,000 as compared to $2,290,000,000 in the 2019 Q3. The increase in deposits during the quarter was largely a result of the assumption of $386,000,000 in deposits from the WTSB acquisition.
We ended the Q4 of 2019 with total non interest bearing deposits of $791,000,000 or 29.3 percent of total deposits compared to $556,000,000 or 24.3 percent of total deposits at the end of the Q3 2019. $222,000,000 of our non interest bearing deposits are attributed to the WTSC acquisition. This shift to a higher percentage of non interest bearing deposits contributed favorably to the 22 basis point decline in our cost of funds in the Q4 of 2019. Corey touched on our loan growth, but I would like to reiterate that we remain committed to our disciplined credit culture and remain diligent on not sacrificing our underwriting standards to drive loan production. I would also like to reiterate that we have seasonality in our business as we experienced $36,000,000 of ag loan production pay downs in the Q4 of 2019 and expect further pay downs in the Q1 of 2020, which will be a headwind to our net interest income.
A fee income also benefited from $1,500,000 in annual profit sharing bonuses in 2019, which will not repeat in the Q1 of 2020. We recorded an $896,000 provision for loan losses in the Q4 of 2019 as compared to 400 and $20,000 in the 2019 Q3. The rise was primarily attributable to the increase of $460,000 dollars in net charge offs for the Q4 of 2019. As loan growth picks up through 2020, we expect our provision expense to modestly rise to more normal levels. The yield on average earning assets was 4.89% for the Q4 of 2019, a decrease of 10 basis points as compared to the same quarterly period in 2018 and was driven by the overall decline in interest rates for the Q4 of 2019.
Additionally, our interest earning assets increased $307,000,000 dollars with approximately twothree of this increase attributable to increases in investments and other interest earning assets. Overall, credit quality remained solid as our nonperforming assets to total assets ratio declined 6 basis points to 25 basis points in the Q4 of 2019 as compared to the Q3 of 2019. Given our excess liquidity after the acquisition of WTSC, we made the decision to purchase investment securities as we work to better optimize our balance sheet. In the Q4 of 2019, we purchased approximately $300,000,000 of investment securities, primarily consisting of mortgage backed securities and municipal bonds. Looking forward, we plan to continue to better manage our liquidity to further drive interest income.
As Corey and Curtis have commented, expense discipline is a focus of our management team. During the Q4 of 2019, our non interest expense was $31,700,000 as compared to $30,000,000 in the 2019 Q3. This increase was primarily due to our acquisition of WTSB, which included a $1,100,000 increase in personnel expense, new occupancy and other non interest expenses for the acquired branches, $634,000 of related fees such as legal, accounting and consulting fees and finally, $202,000 in core deposit intangible amortization expense. As the transition period for WTSB is still very much underway, we also expect to generate further efficiencies without sacrificing customer satisfaction, which will positively impact our expense run rate. To conclude, we remain well capitalized to support our growth with Tier 1 capital to average assets of 10.74 percent at the end of the Q4 2019 compared to 9.63% in the Q4 of 2018.
Our priorities for capital remain unchanged. With the closing of the WTSC acquisition, we continue to be focused on strategic M and A designed to increase the franchise value of South Plains Financial and the Bank. Organic growth is also a top priority as we invest to drive loan growth. Our second priority is to return capital to shareholders through a consistent dividend. Last week, we announced that our Board of Directors had approved our 3rd consecutive quarterly dividend of $0.03 per share.
Looking forward, we remain committed to maintaining a thoughtful and balanced capital allocation strategy designed to maximize value for all stakeholders. I will now turn the call back to Curtis for concluding remarks.
Thank you, Steve. To conclude, I'm very excited with the progress that we've achieved executing on our strategic plan to grow the franchise value of Citibank, which is focused on organic growth, strategic acquisitions and achieving the benefits of scaling our infrastructure, which can handle significant asset growth. Our Q4 2019 financial results demonstrate the success that we are achieving as we markedly improve the return profile of the bank and we have made strong progress integrating WTSB. I would once again like to thank all of our employees for their hard work, for they are the key to our success. With that, I'd like to ask the operator to open up the line for any questions.
Operator? Thank
you. We'll now be conducting a question and answer session. Our first question is coming from the line of Woody Ray with KBW. Please proceed with your question.
Hey, good morning guys.
Good morning, Woody. Good morning.
So I'm just trying to nail down events for Q1 for 1Q 'twenty certain seasonality and the rest of the WPSC activity. So is it fair to sort of assume the NIMs would be down in the like 10 basis point range in the next quarter?
Yes. This is Steve.
I would believe that's correct. As we mentioned, we've got our seasonal lag pay downs. We really started seeing that toward the end of Q4 and then in the very first part of January. So we will be down on our outstanding loan balances just due to that. So yes, we would expect to see the Q1 NIM drop and then start building back up in the second to third quarter as we fund back those loans.
Got it. And I know last quarter, you sort of highlighted that there was 5 to 6 basis points of sort of onetime interest term charges. Was did that sort of normalize in the Q4? Or does it take you through persist?
There wasn't there was not anything significant like what we saw last quarter. I mean, there's always a few smaller things in there, but nothing along the lines of what we saw in Q3.
Got it. And then in the press release, you point to around that $800,000 increase in subsidiary income linked quarter. And I was wondering if you think that is sustainable going forward or if that was sort of a onetime in the Q1?
This is Corey. I mean, we feel like that that's something that we will move forward with in the near term. We've done a major focus on trying to increase the business that we run through our trust and wealth management department. We've actually even brought on some new leadership in that area, and we're starting to see some benefits from having done that.
Yes, that's great to hear. And then last for me, it's great to hear you all still focused on expense management. And I know during the first half of twenty twenty, it gets a little messy just with WCSP being on for the full quarter and then you have cost base running through. But just longer term, as sort of the core bank, how do you see the expense in growth rates going forward?
You're exactly right. 1st quarter and even a little bit into the second quarter as we try to as we get a full quarter's worth of WTSB numbers in there. And then, of course, we'll still have some conversion expenses and some other acquisition related expenses that flow through the Q1. We're projecting net interest expense in the range of $33,000,000 to $34,000,000
for the quarters.
That should encompass those additional transactional expenses that we're talking about, but that's our current estimate at this point. This is Corey. I really think if you hit a focus that we have on it, I mean, at worst, I think it's flat and I think it does. You see some improvement as we move forward because I mean, sure, the growth that we'll have to be able to absorb in bringing on any salvage that's tied stripping to production. We're focused on cutting expenses.
And I mean, it is a company wide concerted effort to make sure that we do that and all the while, though, making sure that we don't do it in any way to deliver cost discipline for customer service.
While it was really great to see that substantial drop in our efficiency ratio number in Q4, So I sure want everybody to hear that in all of profitability, that number will actually go back the other direction in Q1 just because of all the factors that we looked at when we got some issues regarding the $1,500,000 received in the crop insurance side as non interest income, other factors in there. However, we still feel pretty confident that on a year over year basis, we're going to continue to see good improvement in our efficiency ratio the end of 2020 over what we achieved in 2019.
All right. That's great color. Congrats on a nice quarter and thanks for taking my questions.
Thank you, Wade. Our next question comes from the line of Graham Dyck with Piper Sandler. Please repeat your question.
Hey, guys. Good morning.
Good morning, Graham.
Good morning.
So you know that most of the decline in cost of deposits this quarter was due to
the effect of the WTSB acquisition.
Can you talk a little bit about like what kind of success you all had this quarter in reducing that cost organically, kind of like ex the WTSB effect?
So we definitely did decrease our own organic deposits with rate cuts that were down at the end of Q3. So we did see a full quarter's worth of that benefit. And then also, with knowing the liquidity that we were bringing on from the acquisition, we were able to reposition some of our other deposits that allowed us to gain that drop in the cost of funds. So we did it both organically, but then as well as bringing on the WTSD accounts.
Okay, great. So what kind of additional opportunities do you think you have here, maybe like 4 or 5 basis points in cost of interest bearing deposits in 1Q 'twenty? Or what kind of lagging effect are
you kind of expecting to see? Well, I mean, we definitely expect that to drop just from having WTSD balances on for the 4th quarter. But there will be other things at work. Obviously, we're not sure what the economic interest rate environment will be. But given a flat environment, we always know we'll have to be fighting pressure from specific accounts in pricing, but we definitely should see that drop just from having those accounts on for the full quarter.
Okay, great. And then lastly for me, you guys obviously closed that acquisition this quarter and sound pretty ready to reenter the M and A market. And given your infrastructure, which is really solid, what do you guys kind of estimate as the biggest in asset bank that you'd be like willing to pursue or digest at this point? And are there any particular markets where you'd really like to deepen your presence, maybe more rural or even more into the metro area?
We're looking in several locations right now. Some of those would be certainly more rural. We're still primarily focused in the western part of the state. As far as size, we believe we can handle something up to $1,000,000,000 in size. But I don't know if there will be anything that works for But I think we'll be able to handle that.
Clearly, that would involve some exchange of stock, most likely to make such a purchase work. But in terms of just pure infrastructure and our ability to integrate the bank, I think we could build it up to around $1,000,000,000 in size.
Okay, great. That's it from
me, guys. Thanks again, and congrats on another great quarter. Thank you, Jim. Thank
you. At this time, I'll turn the call back to Mr. Griffiths for further remarks.
Thank you, operator. I thank everybody for being on the call today, and we're very proud of the quarter that we achieved. Clearly, as we mentioned, when we had in the roadshow and in other discussions with investors, Our Q3 is generally an excellent quarter for us. We had a little bit of cyclicality largely due to our agricultural engine activities. And we see a substantial drop off in that level of income during the Q1 because of the pay down that we recently wouldn't expect to see from our operating lines that we have to have to have producers.
We are excited to see some resolution out in the area of the trade agreements. Hope that that will move forward and we can then ramp up some export business and that's certainly going to help our producers financially. But clearly, our Q1 numbers will see the effect of having those reduced loan balances in place and also not having some of the seasonal things that will have happened in Q4 each year. So I certainly want to not have any surprises for anyone out there as we look at what we do in Q1 because we do not expect to have quite the level of results that we saw here in Q4. But we think we're still on a solid track moving forward and expect 2020 to be even better than 2019.
So thank you all for participating and for being part of our growth in Southland Financial.
This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.