ServisFirst Bancshares Inc
NYSE:SFBS
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ServisFirst Bancshares Inc
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Good day everyone, and welcome to the ServisFirst Bancshares’ Inc. Fourth Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] And please note that today’s event is being recorded.
I would now like to turn the conference over to Davis Mange of Investor Relations. Please go ahead.
Thanks Will. Good afternoon, and welcome to our fourth quarter earnings call. We’ll have Tom Broughton, our CEO and Bud Foshee, our CFO covering some highlights from the quarter and then we’ll take your questions. I will now cover our forward-looking statements disclosure and then we can get started.
Some of the discussions 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 will turn the call over to Tom.
Thank you, Davis and good afternoon and 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 advisors did an outstanding job of minimizing their DTA write-down, and Bud will go into more details 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 one loan. So, if we’d have one more loan in the pipeline it would have been even with the September 30th number and even with December 31, 2016 number. 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 of - again [129] [ph] people, again we are not it’s not a typical quarter where you see a lot of growth in personnel during the fourth quarter. Again, we are continuing to focus on all of our production personnel being more efficient and having larger loan and deposit portfolios.
I will say the loan and deposit growth for the quarter was strong throughout our footprint, there is almost no weakness in terms of loans – not every region had very strong loan and deposit growth but every region had either a 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 are pleased where we are starting the year, we don’t see any impediments to success at this point in time. And I’ll turn it over to Bud Foshee 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 so $225 million. From a deposit standpoint non-interest bearing DDAs increased $81 million. Total deposits $503 million.
Loan yield went up by two basis points in the fourth quarter, 4.68. Our deposit cost increased 5 basis points to 77 basis points in the fourth quarter. Just overall growth, loans grew $222 million in the fourth quarter, deposits $295 million and total assets $370 million.
From a non-interest expense standpoint, we’d moved into our new building in the fourth quarter, costs related to that move were $347,000. Our incentive we reversed $786,000 of 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 nonperforming assets to total assets 0.25% versus 0.28% at September.
Fourth quarter net charge-offs above normal they were at 56 basis points, fourth quarter charge-offs 70% of the charge-offs had to do with one industrial contractor and we also had five other charge-offs that were already fully impaired.
Nonperforming assets decreased, from September there were $17.5 million in the year versus $18.8 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 at interest only loan, so that did, we did add that in the fourth quarter.
From a tax standpoint, our tax rate for the fourth quarter was 41.25 without the deferred tax adjustment 32.76, if you also back out the stock option credit it was 33.73.
Year-to-date tax rate 32.2, at 30% without DTA 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. And then year over – just stock option credits year-over-year, the credits for $4.6 million in 2017, $7.2 million in 2016.
Going back to the deferred tax allowance adjustment different components, net charge-off are part of that equation from a tax standpoint, your net charge-offs or your actual deductions that your -- booked provision so that the fourth quarter charge-offs have 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 helping 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.
Well, we’ll open it up to questions.
Will, can we take the first question, please.
Yes sir. We will now begin the question-and-answer session. [Operator Instructions]. And our first questionnaire for today will be Brad Milsaps with Sandler O'Neill. Please go ahead.
Hey, guys. This is actually Peter Ruiz on for Brad.
Hi, Peter.
Yes. I just want to get a little bit of color maybe if you could on just charge-off this quarter. I know you still have tremendous and pristine asset quality here. Just wanted to get a little bit color on maybe the characteristics of it and kind of moving parts and maybe if you see anything systemic there?
Yes. Again it was really an aggressive charge-off strategy, Peter, worked well to minimize the deferred tax asset write-down. It was a good quarter to take a look and just say, okay, that we think we have a loss here and that’s a good time to write it off. So it was against 70% of it was one credit. There were five other credits total some $3 million. All of those credits had large impairments on them. So, that may make sense to go ahead and take the impairment write it off and charge-off the credit during the fourth quarter, 2017.
So, we don't see any -- you know there was no other than coincidentally, I guess our two biggest charge-offs in 2017 were both contractors, but I think that's it just -- that's coincidental rather than any other reason. And none of them were in the same industry as contractors that they were both completely different industries and is actually with an industrial contractor because they had a very large job with a very large international contractor and had a very large cost overrun, but just didn't work out in terms of our arbitration that didn't work out for them at all. So, best to cleaned up and put it behind us.
Appreciate. That’s really great. Maybe just touching on the net interest margin a little bit, obviously you have an influx of liquidity this quarter. You have said that and obviously deposit growth was really strong. Can you talk about the moving parts here going forward how much -- can your remind us one of the seasonality in the deposit and maybe kind of what it looks like in terms of deploying this over the next couple of quarters?
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 pick up in the second quarter and keeps building to the fourth quarter. Fourth quarter is always a strongest quarter. I think we’re like everyone else were looking at deposit costs just make sure that we're trying to control that. We did December month or December the margin had an improvement from loans that repriced in December. 84% of our loans that have a floor are now above the floor, but we also had 152,000 and interest income we had to reverse on that one credit that we’re talking about.
Then there’s also loans that we’ll reprice at 1st of January to mid-January some of our loans don't reprice immediately that is usually in the next month. It usually takes 60, 90 days to get all loans repriced; they're tied to a floating rate.
Peter, this is Tom Broughton. What we saw in December is I think many banks anticipated the Fed rate increase in December and when they had an increase deposit rates either on a special -- on a one-off basis for specials and probably a little bit less on posted rates but that’s pretty typical in our industry I think to see the rate increases in December on the money market side especially.
Okay. That’s great. Appreciate it. I’ll step back for now.
Thank you.
And our next questionnaire today will be Tyler Stafford with Stephens. Please go ahead.
Hey. Good afternoon, guys.
Hi, Tom.
Hi, Tom.
Hi, Tom, maybe just to start on that last point, you just made about pricing pressure or one-offs you seen across the industry? I’m just curious what you guys have done kind of thus far after the December hike? Or is it more still kind of on a one-off basis or have you guys taken up your posted deposit rates on a few products yet?
Yes. We’ve increased our posted rate, Tyler, we [want to] [ph] aggressively grow the bank and again we say, we’re at this point grow the company and we plan to continue to grow the company, and so we’re starting to try to pay comparative rates out there, and we think there’s enough -- if we get some more Fed rate increases this year there's more room for us to pass some of that on to customers and us to enjoy some of the margin as well. So, yes, we have increased posted rates, Tyler.
Okay. Bud, also maybe just come back to the one of the prior comments you made about your loan portfolio and how much taking 60 to 90 days to reprice all the loans. Can you quantify how much of the loan portfolio should reprice within that first or initial 60 to 90 days after a rate hike?
I did not - I think we’ve covered that in the third quarter where it broke that down. I don't have that with me. The only thing I had was what actually repriced in the month of December.
That’s fine. Maybe switching over to fee income, Tom or Bud, I’m just curious as you guys think about and are planning for 2018, what you're expecting to see out of the mortgage banking division and just any comments you have there?
Go ahead, Bud.
We didn't really make any -- I know when we did the budget. No real major changes from an income standpoint. I think if you look at mortgage rates they’re still pretty low. Every time we think refinancing or something along that line just 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.
Okay. So relatively flattish with 2017 would be a good approximation?
I think that will be good estimate.
Okay. Maybe just lastly from me on the margin, I know you touched on earlier, Bud I’m curious in terms of the timing of bringing down that liquidity, any expectations or comments you could share with us about the timing of bringing down liquidity?
Historically, it happens in the first quarter. It could change but I could see that happening in the first quarter.
Okay. Congratulations guys. Thanks.
Thank you.
Thank you, Tyler.
[Operator Instructions]. And our next question for today will be Nancy Bush with NAB Research. Please go ahead.
Good afternoon gentlemen, how are you?
Hey, Nancy.
Couple of questions here. Number one, you mentioned $1.3 million in asset sales that were contained fee income. Can you just give us a little color on that? And were any particular offsets and expenses?
You’re telling about fourth of 2016?
Yes.
That was a one-time event. Tell me again what your – was it offset or anything, is that what you were saying?
Yes, exactly. I’m trying to sort of do apples-and-apples comparison. I’m just wondering if that $1.3 million got any offset anywhere?
Not in fourth quarter of last year, no, because that was -- we had incentives over accruals or some other positive income adjustments also the one along with that in 2016.
Okay. Secondly that you brought up the issue of deposit pricing etcetera, could you just tell us a little better what your betas are right now and where you see betas going in that the near-term?
Betas we’ve looked – we’ve hired growing [ph] consulting group to help us with our system, our asset liability management. Deposit betas really haven't met a whole lot I guess in the last few years, I think we’re like a lot of people were doing one off special.
Right.
We haven’t really – we just now increases our posted rates. So its kind of hard to say when we’re going to do x based on the x fed increase.
Right.
Yes, that kind's of one - out the window when rates got so low in 2009 and forward. So we look at it but just not -- just had been really any change since the Fed increases from December of 2016 forward.
Do you expect that there will be sort of more emphasis on that competitively going forward here and now that you're getting some asset liability management coaching I guess or whatever you call it?
Yes. We really haven't seen that in our markets where people are changing posted rates and like Tom’s talking about people are still doing specials or anticipating futures fed increases so we really haven't seen the just overall posted rates increase.
Right. And third, I guess the NIM impact from the lessening of FTE. Do you have any idea what that might be? I mean that everybody is saying our FTE adjustment is going down and the impact to the NIM will be X. What is X for you guys? Is it big, large, small whatever?
That I don't have with me, but I will look at that.
Okay, great. If Davis could just shoot me a message on that, I very much appreciate it. Thank you.
Thank you, Nancy.
Thank you.
And our next questioner will be Kevin Swanson with Hovde Group. Please go ahead.
Hi, guys. Good afternoon.
Hi. Kevin.
So given sort of the I guess once from the lifetime benefits from tax reform, is there kind of a skew to how you guys are feeling about strategically, using that benefit people, platforms, clients one more than the other maybe just of any color on that?
Yes. Kevin, this is Tom. We're going to use it for the shareholders, 100% of it – what we tell you is we’re discipline growth company. I realize there's some competitors or -- do some different things. What most of the people that 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 just when – we think our return on equity reflects at this point it will continue to do the same. So, we think there is opportunity to bring more money in the bottom line for our shareholders and not and use it in any other fashion or form, Kevin.
Okay and I guess maybe....
Future orders.
And I guess maybe -- on that, are there any I guess margins that you think are more susceptible to competition or kind of how does I mean, you guys some people are saying it could be some of the benefits can be either way, maybe just any kind of color on how you think about the competition changing at all in your markets?
Yes, there is competition in the [Indiscernible] you know retail bank – there it’s our commercial bank. And we are certainly a commercial bank, but you know if you are a retail bank, you know you go find some of the advertising on huge rate for retail money market accounts. So there is always somebody out there like that and the disciplined players are the ones that are going, I think they were going to be successful, but we don’t seek any or see any changes without our competitive environment.
Today, it came in, we don’t think our competitors will try to reduce price and reduce their profit margins to be more competitive. I just can’t imagine that they would do that at this point of time. I know that the analyst community is concerned about it, I realize that and certainly it’s about a concern, but we don’t see that happening at this point of time.
Okay, thanks. And then just last from me. I guess maybe kind of the flattening and the yield curve more kind of short term rates rising and the long term rates coming down. I guess during kind of -- I appreciate you are saying that the credit, the charge-offs you guys you had more long standing issues and guessed at 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 levels do you think would could lead to additional charge-offs or losses?
Yes, we are a long way from rate hikes that will contribute to addition of credit losses at this point in the cycle. Kevin, you know with if you assume in three or four rate hikes, you know 2018 that’s a 100 basis points. We are not – we are primarily seeing our buying, we are not an income CRE buying, obviously it would affect your cap rates on income CRE if you had about 200 basis points 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 other competitors that are in CRE buyings, because we are a C&I bank and we don't see significant increase in charge-offs as a result of higher rates.
And obviously we are like everybody else, with high FFR loans or fixed rates, so if fixed rates go up obviously that helps us overtime, you know first month that helps over two year period of time we could average our rates up significantly own our fixed rate portfolio, so we are like any other bank, we are certainly interested in seeing -- if fixed rates go up, that certainly will be accretive to our income.
Okay, thanks for taking my questions.
Thank you, Kevin.
And there look to be no further questions. So this will conclude the question and answer session and today’s conference call. Thank you all for attending today’s presentation. Have a great day, and you may now disconnect your lines.