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Edited Transcript of ENFC earnings conference call or presentation 25-Jan-19 1:30pm GMT

Q4 2018 Entegra Financial Corp Earnings Call

Franklin Jan 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Entegra Financial Corp earnings conference call or presentation Friday, January 25, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Bright

Entegra Financial Corp. - Executive VP & CFO

* Roger D. Plemens

Entegra Financial Corp. - President, CEO & Director

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Presentation

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Roger D. Plemens, Entegra Financial Corp. - President, CEO & Director [1]

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Good morning, and welcome to the Entegra Financial Fourth Quarter 2018 Earnings Call. Thank you for joining us today. I'm Roger Plemens, CEO. And I'm joined by our CFO, David Bright.

Before we get started today, I would point you to the statement -- forward-looking and non-GAAP disclosure statement included on Slides 2 and 3 in the earnings call presentation. Also, we have a statement concerning the merger announcement. As noted on Slide 4, last week, we announced the execution of the merger agreement with SmartFinancial.

The purpose of our call today is to discuss our fourth quarter financial results, and we will not be taking questions today regarding the merger. For further information regarding the merger, we urge shareholders to refer to the Form 8-K that we filed on January 16, 2018, and the transcript of our announcement call on January 16, available on our website and through the SEC's EDGAR website.

In addition, shareholders should review the registration statement on Form S-4, the SmartFinancial file, including the joint proxy of SmartFinancial and Entegra, which will provide further important information about the proposed transaction and why the Entegra Board of Directors determined this transaction is in the best interest of shareholders.

At the end of our presentation, if you have questions concerning our fourth quarter results, you can submit them by e-mail at ir@entegrabank.com. Again, if you have questions on the fourth quarter results, you can submit those to -- by e-mail at ir@entegrabank.com.

We're very pleased with our fourth quarter results, and I'll let David dive into the numbers a little bit later. But first, I'll do an overview of our strategic plan. The recent merger announcement will not change our laser-focus on our strategy of -- execution of our strategic plan, as summarized on Slide 5.

We will continue to seek deposits in our rural markets, where there's less competition and price sensitivity. Our recent money market efforts have been very successful in those markets. We'll continue to focus on relationship banking in our high-growth markets, looking for both lending and deposit opportunities.

We continue development in the mortgage and SBA business. Of course, (inaudible) mortgage volumes with the higher rates. On the SBA business, we expect higher volumes in 2019. But of course, the government shutdown may have an effect on that business.

We remain focused on return on equity. Return on equity was over 12% for the fourth quarter.

We recognize talent recruitment is the key to success, focusing on recruiting additional talent in our high-growth markets of Greenville, Asheville and Gainesville. Southeast economy continues to be strong, providing mid-single-digit organic loan growth. As we previously reported, we have purchased an office in Asheville, North Carolina. We have moved our loan production personnel to that office. But we're doing some minor renovations to the branch area of the building, and we expect to be opening the full-service branch in the second quarter.

In the Greenville, South Carolina market, we have significant opportunities. We continue to ramp up our relationship banking resources in that market.

At this time, I'll turn it over to David, and he can go through the earnings summary for the quarter.

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [2]

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Good morning, everybody. Thanks for calling in this morning. Just remind everybody before I jump into comments on the quarter that we do present our results on an adjusted or non-GAAP basis. Those results generally exclude merger expenses, investment gains and losses, equity security gains and losses. And then, in the prior year, the effect of the tax law changes are also excluded. And as a reminder, we don't provide formal guidance.

So I'll start my comments on Slide 6 of the slide decks, the Q4 2018 highlights. As you can see on here, we had a good quarter. Our adjusted net income were up about 17% from the same quarter the prior year. We tend to look at things compared to the same quarter in the prior year because we have a bit of seasonality in many of our markets, especially the mountain markets. So good improvement over the same quarter last year.

Earnings per share, $0.60, about a 15% pickup from the same quarter in the prior year. And happy to report that return on average assets, we've finally hit the 1% goal we've had for quite a while, and we're very, very happy with that. In our return on equity, we hit just over 12.5%. So those were both the highest ROA and ROE we've had in our lifetime as a public company, and certainly, very pleased with that.

The fourth quarter did include about $0.05 from a life insurance death benefit and some other miscellaneous accrual true-ups that went in our favor. I've not pulled them out as noncore items. Individually, they're all fairly small. But I did want to highlight that there is approximately $0.05 of generally smaller items that had an impact favorably on the quarter. But I think even after consideration of that, it was still a good, strong quarter for us, and we're happy to be able to wrap up the year that way.

On Slide 7, you can see some of the trends. It backed up a little bit this year, in a couple of the prior quarters, but, again, finishing out strong. A couple of things we're really focused on right now are: volume growth. When margin is under pressure like it is now, you've got to make it on volume. And so that's certainly been a focus of ours, trying to grow deposits and keep the volume growth going.

And then expense control, also a big focus for us right now. When revenue growth is a challenge, we feel like controlling expenses and keeping the efficiency ratio as low as possible is the key. So those are 2 things we've been real focused on.

On Slide 8, I think everyone knows this, but yield curve continues to really kind of work against us. So we're trying to work through that. I will say in my view, every yield curve has challenges and opportunities, and we're trying to take advantage of the flatness to work in our favor where possible.

A few things we've been trying to do is lock in some longer-term funding. The FHLB rates, in particular, some of those are inverted right now, where some of the longer rates are actually less than some shorter rates. So we're trying to take advantage of some of that.

Certain swaps are less expensive in this less -- in this really flat environment. So over the last couple of quarters, we've tried to take advantage of some of that. And then also, just the ability to invest in shorter floating-rate assets at positive yields has helped us as well. So again, trying to take the flatness of the yield curve and where possible, use it to our advantage.

Slide 9, net interest income. As I mentioned a few minutes ago, we've been really successful at growing net interest income. There's a fair amount of focus now on margin. We believe that it's net interest income dollars that drive EPS, and those can grow, even if your margin isn't, if you're getting the volume growth. So that's really been our focus. And this slide highlights that over the last 4, 5 years, we've done a good job, really doubled our margin income since 2013 or 2014.

So that's not to say we're not focused on our margin. We certainly are. We're trying to maintain our margin the best we can. But it really is net interest income dollars that flow to the bottom line, and that's our focus. So in light of that, we're willing to accept some higher funding costs, especially on the deposit side, if that higher volume drives EPS growth.

Slide 10. Our margin has been fairly steady here in recent quarters, came in at 3.29% in the fourth quarter, a slight improvement from last quarter. You can see on the slide here that our deposit and advance costs do continue to increase. We've had some help on the investment side with some of the floating rate and shorter assets repricing up.

On the loan side, we've also had some success, but honestly, when you look at the slide, the funding costs are definitely going up faster than the asset side. So this has definitely put stress on our margin. We've been able to combat some of this with some swaps and other strategies. But definitely, the margin picture continues to be a challenge, and we're trying to do the best we can with that.

Noninterest income on Slide 11. Fee income has definitely been a challenge here in recent quarters. In the mortgage business, the last 2 or 3 quarters, our volumes have been down there. The higher rates certainly had an impact on us there. SBA sales were growing. This past fourth -- this past quarter, we had very minimal gains, partially -- in part due to the government shutdown and in part just due to some timing issues. Some of that backlog and some of the gains will be pushed into 2019.

Deposit-related fee income has been fairly flat. We've had a little bit of growth in interchange income as transaction accounts have grown. But generally speaking, the fee income has not been a driver of the growth -- has not driven the bank's income. And as I mentioned before, we're really dependent on spread income to drive the bottom line and to drive earnings per share growth.

A good picture, I think, on Slide 12. We've been really focused on expense control. Again, if the revenue side is under pressure, you really -- I think you've got to control the expense side. And so I've laid out for you here some expense trends. And really, all of the major categories of expenses we have, have been very flat, I would say very much under control. And so we're happy with that, and we need to continue to control these costs.

Don't expect any material increases in 2019. We think we're in good shape on technology and people. And so really no major expense increases planned as we look ahead into 2019.

Asset quality, Slide 13. Again, good picture here. Asset quality remains well under control, really no signs of any weakening here. We remain at, for us, historically low levels of NPAs and NPLs and at least right now, don't see any signs of that changing here in the near future.

Loan growth, Slide 14. Growth definitely slowed a little bit in fourth quarter. That's not unusual for us. The weather challenges in some of the mountain communities can definitely be an issue. For the year, we averaged 7% growth. That's about what we're expecting for next year, that -- in the kind of 5% to 7% loan growth. Still feel fairly confident about that based on what our pipeline and other indicators look like.

We are continuing to be very careful on pricing under the assumption that we're in the later stages of economic expansion. So we are trying to be careful about that. We're not reaching for deals that don't make sense. We're not giving things away. But even with that discipline, we still feel good about the 5% to 7% growth for next year.

As Roger mentioned earlier, continuing to try to really invest in some of our higher-growth markets like Asheville, Greenville and Gainesville with more relationship bankers. We believe that getting deposits along with the loan relationship is really, really key. And so that continues to be a focus for us.

Most of our loan growth continues to be CRE. We'd like to do more C&I in the future. And we think the key to that is finding the right talent and the right bankers, and so that continues to be a focus for us. And lastly on loans, I'll just mention that we remain well below the 100 to 300 regulatory limits and definitely still have some room there.

Deposit growth, Slide 15 and 16. We made a decision, really, midyear to really kind of increase our rates and to be more aggressive on the deposit side. We've gone several quarters. As you can see there on the chart, with slightly negative deposit growth, we had an investment portfolio and some other things that we could lean on during that time, but eventually got to the point where we believe that we needed to begin growing deposits again. And as you can see, the last couple of quarters, we've had pretty good success. Being more aggressive on rates has definitely made a difference, and we finished up the second half of the year really with some nice deposit growth.

We've primarily been leaning on the money market. A promotional that we've run for about the last 6 months has been very successful for us. We brought in a lot of funds from that. That's generally priced in the 1.75% to 2% range. We believe we can still make a reasonable spread even at those rates.

If we're making 5.25%, 5.5% loans on 2% money, that's still 3%, 3.25% spread, and we think that's a reasonable spread and something that we should accept. So I think that continues to be our plan moving forward. We're going to continue to be more aggressive on rates as long as we can get a reasonable spread on that. And we'd like to continue this growth into 2019.

I'd laid out our betas on Slide 16. Definitely dropped off some this quarter, pushing 60% in Q3, down to about 30% for this quarter. That's not an indication that we're going to stop being aggressive on deposits. As I mentioned a minute ago, we are going to continue to be competitive and aggressive on deposit rates.

Again, we think it's net interest income that grows EPS and not necessarily net interest margin. So we would rather have the deposits and get the relationships at a slightly lower margin than to not get them at all. So hard to predict what betas will be going forward, but we are going to continue to do what we need to do to get deposit growth.

And then I'll wrap up my comments on Slide 17 with a couple of final comments here. Our capital ratios were definitely on the lower end, a little bit below what we would have -- what we would have preferred a year ago after the Chattahoochee Bank of Georgia acquisition. Our TCE was slightly below 8%. Our regulatory leverage ratio had dropped below 9%. So one of our focuses this year was to get both of those things back to a little bit more comfortable level. So happy to report here, as you see on the slide, that our TCE is back up close to 8.5%, and our regulatory leverage is back up close to 9.5%.

We still have $10 million in capacity on holding company revolver if we need it. We don't need it right now. We're -- our earnings are at a level now where we're actually building capital. So we feel like we're in a little better shape capital-wise, and happy with that.

Sensitivity, I'll just mention, like I normally do, that we continue to be very neutral. A few quarters ago, much of the community bank world was very, very convinced that rates were going to rise and continue rising. And at the time, we did not jump on that bandwagon, and we said, "You know what, we're going to be neutral. We don't know which direction rates are going. It's not our job to make bets or predict the future. We're going to stay neutral." I think as we sit here today that was the right decision. Rates, as everyone on the call knows, have actually gone down.

We still don't know where rates are going. It's not our job to predict those kinds of things. And so we work very hard every quarter to stay neutral. And that continues to be our position, and that position has served us very well here in the last few quarter. So that -- I think that's enough said on that.

A couple of final comments. Taxes, really nothing to talk about there. Our effective rate continues to be kind of in the high 17s, right in line with expectations.

I will say our federal NOL is just about exhausted. We probably have 3 to 6 months left of that, and we will have completely utilized our NOL. We'll have more disclosures on that in our 10-K. We do have an NOL protection plan that we put in place several years ago to protect that NOL. And with that NOL close to being completely utilized, we'll look at whether that plan needs to be dropped here in the coming quarters.

On the legal front, we continue to aggressively pursue recovery of the tax penalty we incurred on the Chattahoochee acquisition. We're not able to make any further comments on this, but I did want to mention that we are continuing to pursue that.

And then finally, I'll mention that, on CECL, our preparation is largely complete. We expect to disclose our initial CECL estimate in the 10-K. We've completed our planning and the sort of data scrubbing, and we're at a point now where that estimate is actually able to be run. So we should have an estimate on that here by the time we file the 10-K.

So that wraps up my prepared comments. I'll remind everybody again that we're happy to take questions.

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Questions and Answers

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [1]

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If you have a question, you could submit it to ir, as in Investor Relations, @entegrabank.com. Again, that's ir@entegrabank.com. And we're happy to take whatever questions you may have on the quarter, although we're not taking comments -- questions on the merger. We'll give it -- we'll give things just a minute or 2 here. If you have a question and want to submit it, we'll wait a minute or 2 before we respond.

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Roger D. Plemens, Entegra Financial Corp. - President, CEO & Director [2]

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Well, having not received any e-mails, questions on the quarter, we'll adjourn the meeting. Thank you for joining us today.

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David A. Bright, Entegra Financial Corp. - Executive VP & CFO [3]

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Thank you.