SFBS
#Thanks, Will.
Good afternoon, and welcome to our fourth quarter earnings call.
We'll have Tom <UNK>, our CEO; and Bud <UNK>, our CFO, covering some highlights from the quarter, and then we'll take your questions.
I'll now cover our forward-looking statements disclosure, and then we can get started.
Some of the discussion in today's earnings call may include forward-looking statements subject to assumptions, risks and uncertainties.
Actual results may differ from any projections shared today due to factors described in our most recent 10-K and 10-Q filings.
Forward-looking statements speak only as of the date they are made, and ServisFirst assumes no duty to update forward-looking statements.
With that, I'll turn the call over to Tom.
Thank you, <UNK>, and good afternoon.
Welcome, all, to our conference call.
First, I'll cover a few things.
It is sort of an unusual quarter, as everyone knows, with the tax law changes and the DTA write-off in the quarter.
I'll first say that I'm very pleased with our loan and deposit growth for the quarter and, obviously, for the year as well.
We had a great year.
All the metrics are good in terms of where we are, and I'll come back to talk about loans and deposits a little bit.
I will say that Bud and our tax advisers did an outstanding job of minimizing their DTA write-down, and Bud will go into more detail on earnings and our DTA write-down in a few minutes.
Just I'll cover a few normal metrics that are covered in terms of where we are, in terms of ---+ we don't see any slowdown in loan demand.
At this point in time, it's still very robust.
Our pipeline is down a little bit from prior quarter.
When I say it's down, it's down about the amount of 1 loan.
So if we'd had 1 more loan in the pipeline, it would have been even with the September 30 number and even with December 31, 2016 numbers, so just we don't see any ---+ again, we don't see any decline in loan demand, still a very robust pipeline from that standpoint.
From our production standpoint, we had the same number of production people at the end of the quarter as began, 129 people.
Again, we're not ---+ it's not a typical quarter where we see a lot of growth in personnel during the fourth quarter.
But again, we're continuing to focus on all of our production personnel being more efficient and having a larger loan and deposit portfolios.
I will say the loan and deposit growth for the quarter was strong throughout our footprint.
There's almost no weakness in terms of loan.
No ---+ not every region had very strong loan and deposit growth, but every region had either strong loan or deposit growth, and most of them had very strong loan and deposit growth.
So from that standpoint, we are very pleased with where we ended the year.
We're pleased where we're starting the year.
We don't see any impediments to success at this point in time.
And I'll turn it over to Bud <UNK> now to talk more about specific numbers for the quarter.
Thanks, Tom.
Good afternoon.
First, on our margin ---+ our net interest margin was 3.66% for fourth quarter, 3.77% in the prior quarter.
Our excess liquidity on average increased in the fourth quarter by $225 million.
Average growth in the fourth quarter.
Loans was $277 million; investment securities, $18 million; and Fed funds sold $225 million.
From a deposit standpoint, non-interest-bearing DDAs increased $81 million; total deposits, $503 million.
Loan yield went up by 2 basis points in the fourth quarter, 4.68%.
Our deposit cost increased 5 basis points, so 77 basis points in the fourth quarter.
Just overall growth, loans grew $222 million in fourth quarter; deposits, $295 million; and total assets, $370 million.
From a noninterest expense standpoint, we've moved into our new building in fourth quarter.
Costs related to that move were $347,000.
Our incentive, we reversed $786,000 over accrual in the fourth quarter.
And our efficiency ratio improved.
We were 32.05% in the fourth quarter and 34% in the third quarter.
Credits, still excellent credit quality.
Nonperforming loans to total loans is 0.19.
It was 0.26 at September.
And our nonperforming assets to total assets, 0.25 versus 0.28 at September.
Fourth quarter net charge-offs, above normal, they were 56 basis points.
Fourth quarter charge-offs, 70% of the charge-offs had to do with one industrial contractor.
And we also had 5 other charge-offs that were already fully impaired.
Nonperforming assets decreased from September.
They were $17.5 million at the end of the year versus $18.8 million at September.
ORE did increase $6.7 million at the end of the year versus $3.9 million at September 30.
ORE expenses were up a little bit for the fourth quarter but still very low.
They were $160,000 in the fourth quarter.
We did add TDRs.
We added one TDR for $4.2 million.
That was changed to an interest-only loan, so that did ---+ we did add that in the fourth quarter.
From a tax standpoint, our tax rate for fourth quarter was 41.25%; without the deferred tax adjustment, 32.76%.
And if you also back out the stock option credit, it was 33.73%.
Year-to-date tax rate, 32.2%; 30% without DT<UNK>
And if you also take out the stock option credit, it was 33.4%.
And for 2018, we are projecting our tax rate to be 20.94%, let's see, and then year over ---+ just stock option credits year-over-year, the credits were $4.6 million in 2017, $7.2 million in 2016.
Going back to the deferred tax allowance adjustment, different components.
Net charge-offs are part of that equation.
From a tax standpoint, your net charge-offs are your actual deductions that you booked provision so the fourth quarter charge-offs had an impact on the deferred tax adjustment.
We also have proprietary tax credits that factor into that adjustment.
That was part of our deferred tax allowance or helped to lower our deferred tax allowance.
Plus, there was bonus depreciation in 2017 related to our new building, and that also helped reduce our deferred tax adjustment.
And I think that's it for me, Tom.
And I think that's it for me Tom, right now.
Well, we'll open it up to questions today because I'm sure we have a few.
Will, can we take the first question, please.
This is actually Peter <UNK> on for Brad.
I just wanted to get a little bit of color, maybe if you could on just the charge-off this quarter.
I know you still have tremendous and pristine asset quality here.
Just wanted to get a little bit more color on maybe the characteristics of it and kind of the moving parts, and maybe if you see anything systemic there.
Appreciate that, that's really great.
Maybe just touching on the net interest margin a little bit.
Obviously, you had an influx of liquidity this quarter.
You had a sub debt and, obviously, deposit growth was really strong.
Can you just talk about the moving parts here going forward.
How much ---+ can you remind us, one, the seasonality in the deposits, and maybe kind of what it looks like in terms of deploying just over the next couple of quarters.
Yes, Peter, this is Bud.
Historically, first quarter, slower growth.
Historically, really, from deposit side, we've probably stayed even or actually decreased in deposits in the first quarter, starts to tick up in the second quarter and keeps building to the fourth quarter.
Fourth quarter is always our strongest quarter.
I think we're like everyone else, we're looking at deposit costs just to make sure that we're trying to control that.
We did December ---+ month of December, the margin had an improvement from loans that repriced in December.
84% of our loans that have a floor are now above that floor, but we also had $152,000 in interest income we had to reverse on that one credit that we're talking about so ---+ and then there's also loans that will reprice at the 1st of January to mid-January.
Some of our loans don't reprice immediately, it's usually the next month.
It usually takes 60 to 90 days to get all the loans repriced.
They're tied to a floating rate.
Peter, this is Tom <UNK>.
I think what we saw in December is, I think, many banks anticipated the Fed rate increase in December and went ahead and increased deposit rates either on special ---+ on a one-off basis for specials or ---+ and probably a little bit less on posted rates.
But that's pretty typically in our industry, I think, to see the rate increases in December on the money market side, especially.
No, I did not break ---+ I think that we should be ---+ I think we've covered that in the third quarter or it broke it down.
I don't have that with me.
Only thing I had was what actually repriced in the month of December.
Go ahead, Bud.
It didn't really make any ---+ I know when we did the budgets, no real major changes from an income standpoint.
I don't ---+ I think if you look at mortgage rates, they're still pretty low.
Every time we think refinancing or something along that line is finished, that doesn't seem to happen so ---+ but I mean, we did not make any major changes to what we're projecting for fee income for 2018.
I think that'd be a good estimate.
Historically, it happens in the first quarter.
It could change, but I could see that happening in the first quarter.
You're talking about fourth quarter 2016.
That was a one-time event.
Do you want ---+ tell me again what your ---+ was it offset or anything, is that what you were saying.
Not in fourth quarter of last year, no, because that was ---+ we had incentive over accruals.
There were some other positive income adjustments also, the one along with that in 2016.
Betas, we've looked ---+ we've hired Darling Consulting Group to help us with our ---+ assist on our asset liability management.
Deposit betas really haven't meant a whole lot, I guess, in the last few years.
I think we're like a lot of people where you're doing one-off special rates, we haven't really ---+ we just now have increased our posted rates.
So it's kind of hard to say we're going to do x based on the next Fed increase.
That kind of went out the window when rates got so low in '09 and forward.
So we looked at it but we just not ---+ just hadn't been really any change since the Fed increases from December 2016 forward.
Yes.
We really haven't seen that in our markets where people are changing posted rates.
I think like Tom was talking about, people are still doing specials or anticipating future Fed increases, so we really haven't seen the ---+ just overall posted rates increase.
That, I don't have with me, but I can ---+ I will look at that.
So given sort of the, I guess, once in a lifetime benefit from tax reform, is there kind of a skew with how you guys are feeling about strategically using that benefit, people, platforms, clients, one more than the other.
Maybe just kind of ---+ any color on that.
Yes.
<UNK>, this is Tom.
We're going to use it for the shareholders, 100% of it.
We don't ---+ what we say is we're a disciplined growth company.
I realize there are some competitors who do some different things.
What ---+ most of the people we compete against have a significantly lower return on equity than we do, and some of them are very low compared to our return on equity.
So we try to have discipline about how we do our business and how we price our loans, how we price our deposits.
We think we do have discipline, and we're going to continue ---+ we think our return on equity reflects it at this point, and we'll continue to do the same.
So we think there's opportunity to bring more money to bottom line for our shareholders and not ---+ and used in any other fashion or form, <UNK>.
(inaudible)
Okay.
I guess maybe kind of along that, are there any, I guess, market you think are more susceptible to competition.
Or kind of how does ---+ I mean you guys ---+ because some people are saying it could be some of the benefits competed away.
Maybe if there's any kind of color in how you think about the competition changing at all in your markets.
Yes.
There's competition.
It don't matter if you're a retail bank, there's ---+ or a commercial bank.
And we're certainly a commercial bank.
But if you're retail bank, you go find somebody advertising a huge rate to ---+ for retail money market accounts.
So there's always somebody out there like that.
And the disciplined players are the ones that are going ---+ I think that are going to be more successful.
But we don't see any ---+ we don't seek any ---+ foresee any changes with our competitive environment to date, <UNK>.
We don't think our competitors will try to reduce price and use ---+ reduce our profit margins to be more competitive.
I just can't imagine that they would do that at this point in time.
I know that the analyst community is concerned about it, I realize that and, certainly, it's a valid concern.
But we don't see that happening at this point in time.
Okay.
And then just last for me, I guess, maybe kind of ---+ the flattening of yield curve more kind of short-term rates rising than long-term rates coming down.
I guess, given kind of ---+ and I appreciate you guys saying that the credit ---+ the charges you guys have are more long-standing issues, and you guys took the opportunity.
But does the rate hikes feed into kind of your underwriting models in terms of credit loss potential.
And then maybe just kind of if there are continuing rate hikes, what level do you think would ---+ could lead to additional charge-offs and losses.
Yes.
We're a long way from rate hikes that will contribute to additional credit losses at this point in the cycle, <UNK>.
If you're assuming 3 or 4 rate hikes, 2018, that's 100 basis points.
We are not ---+ we are primarily a C&I bank.
We're not an income CRE bank.
Obviously, it would affect your cap rates on the income CRE if you have a 200 to 300 basis-point increase in loan rates.
Obviously, we don't see that happening anytime soon.
But if it does happen, we'll be less affected than our other competitors there, CRE banks, because we are a C&I bank, and we don't see any significant increase in charge-offs as a result of higher rates.
Obviously, we are like everybody else with ---+ half of our loans are fixed rates.
So if fixed rates go up, obviously, that helps us over time.
It won't help us first month but helps over a 2-year period of time.
We could average our rates up significantly on our fixed rate portfolio.
So we're like any other bank, we're certainly interested in seeing ---+ if fixed rates go up, that certainly would be accretive to our income.
