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ServisFirst Bancshares, Inc. (NASDAQ:SFBS)
Q4 2017 Earnings Conference Call
Jan. 22, 2018, 5:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the ServisFirst Bancshares, Inc. Fourth Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your touchtone phone and to withdraw your question, please press * then 2. 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.

Davis Mange -- Director of Investor Relations

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 different 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.

Thomas Broughton -- Chief Executive Officer

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 in a little bit.

I will say that Bud and our tax advisors did an outstanding job of minimizing their DTA writedown and Bud will go into more detail on earning and our DTA writedown in a few minutes. Just I'll cover a few normal metrics that I cover 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 had one more loan in the pipeline, it would have been even with the September 30th number and even with December 31, 2016 number. So, again, we don't see any decline in loan demand -- still a very robust pipeline from that standpoint.

From our production standpoint, we have the same number of production people at the end of the quarter as the beginning, 129 people. Again, it's not a typical quarter where you see a lot of growth in personnel during the fourth quarter but, again, we continue to focus on all of our production 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's almost no weakness in terms of loan... 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're 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 Foshee now to talk more about specific numbers for the quarter.

William Foshee -- Chief Financial Officer

Thank you, 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 the fourth quarter, deposits $295 million, and total assets $370 million. From a non-interest expense standpoint, we moved into our new building in the fourth quarter. Costs related to that move were $347,000.00. Let's see, our incentive, we reversed $786,000.00 over accruals in the fourth quarter and our efficiency ratio improved -- we were at 32.05% in the fourth quarter and 34% in the third quarter. Credit, still excellent for credit quality. Nonperforming loans to total loans is 0.19 -- it was 0.26 in September -- and nonperforming assets to total assets 0.25 versus 0.28 in 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. They were at $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 30th. ORE expenses were up a little bit for the fourth quarter but still very low. They were under $60,000.00 in the fourth quarter. We did add TDR -- we added one TDR for $4.2 million that was changed to interest-only loan so 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% and, if you also back out the stock option credit, it was 33.73%. Year-to-date, tax rate, 32.2, 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%. Let's see. And then, just stock option credit, just year-over-year, the credits were $4.6 million in 2017, $7.2 million in 2016.

Going back, the deferred tax allowance adjustment, the different components, net charge-offs are part of that equation. From a tax standpoint, your net charge-offs are your actual deductions instead of your book 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 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, right now.

Thomas Broughton -- Chief Executive Officer

Why don't we open it up to questions, Davis? I'm sure we have a few.

Davis Mange -- Director of Investor Relations

Well, can we take the first question, please?

Questions and Answers:

Operator

Yes, sir. We will now begin the question and answer session. To ask a question, you may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2.

And our first questioner today will be Brad Milsaps with Sandler O'Neill. Please go ahead.

Brad Milsaps -- Sandler O'Neill -- Managing Director

Hey guys, this is actually Peter Reese on for Brad. I just wanted to get a little bit of color, maybe, if we could on just the charge-off this quarter. You still have tremendous and pristine asset quality here -- just wanted to get a little bit of color on maybe the characteristics of it and the moving parts, and maybe if you see anything systemic there?

Thomas Broughton -- Chief Executive Officer

Yeah, again, it was really an aggressive charge-off strategy, Peter. It worked well to minimize the deferred tax asset writedown. It was a good quarter to take a look and just say, "Okay, do we think we have a loss here and this is a good time to write it off." So, again, 70% of it was one credit. There were five other credits total, some $3 million. All those credits had large impairments on them so it makes sense to go ahead and take the impairment, write it off, and charge-off the credit during the fourth quarter of 2017.

So, we don't see any... there was no -- other than it, coincidentally, I guess our biggest charge-offs in 2017 were both contractors but I think that's coincidental rather than any other reason. None of them were in the same industry as contractors. They were both completely industries. And it actually was an industrial contractor that had a very large job with a very large international contractor and had a very large cost overrun. It just didn't work out -- in terms of arbitration, it didn't work out for them at all so best to clean it up and put it behind us.

Brad Milsaps -- Sandler O'Neill -- Managing Director

Alright. 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 have a sub-debt and, obviously, deposit growth was really strong. You still have lots of moving parts here going forward -- can you remind us, one, of the seasonality of the deposits and maybe what it looks like in terms of deployments over the next couple of quarters?

William Foshee -- Chief Financial Officer

Yeah, Peter, this is Bud. Historically, first quarter, slower growth. Historically, really, from the 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's always the strongest quarter. I think we're like everyone else -- we're looking at deposit costs, just making sure those work. We're trying to control that.

We did, 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 $150,000.00, $2,000.00 in interest income, which we had to reverse on that one credit that we were talking about. And there's also loans that will reprice at the first 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 that are tied to floating rates.

Thomas Broughton -- Chief Executive Officer

Peter, this is Tom Broughton. 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 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.

Brad Milsaps -- Sandler O'Neill -- Managing Director

Okay. That's great. Appreciate it. I'll step back for now.

Operator

And our next questioner today will be Tyler Stafford with Stephens. Please go ahead.

Tyler Stafford -- Stephens, Inc. -- Managing Director

Hey, good afternoon, guys. Hey, Tom, maybe just to start on that last point you just made about pricing pressure or one-offs you've seen across the industry, I'm just curious what you guys have done thus far after the December hike? Is it more still on a one-off basis or have you guys taken up your posted deposit rates on a few products yet?

Thomas Broughton -- Chief Executive Officer

Yeah, we've increased our posted rates, Tyler. We want to aggressively grow the bank and, again, we say we're a disciplined-growth company and we plan to continue to grow the company and so we're certainly trying to take competitive rates out there. We think there's enough... if we get some better rate increases this year, that's more room for us to pass some of that on to the customers and us to enjoy some of the margin as well. So, yeah, we have increased posted rates, Tyler.

Tyler Stafford -- Stephens, Inc. -- Managing Director

Okay. Bud, and then also, maybe, just coming back to one of the prior comments you made about your loan portfolio and 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?

William Foshee -- Chief Financial Officer

No, I did not bring... I think we covered that in the third quarter where it broke that down. I don't have that with me. The only thing I have is what actually repriced in the month of December.

Tyler Stafford -- Stephens, Inc. -- Managing Director

That's fine. 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 '18, what you're expecting to see out of the mortgage banking division and just any comments you have there?

Thomas Broughton -- Chief Executive Officer

Go ahead, Bud.

William Foshee -- Chief Financial Officer

It didn't really make any... I know, when we did the budgets, no real major changes from an income standpoint. I don't know. I think, if you look at mortgage rates, they're still pretty low. Every time we think refinancing or something along that lines finished, that doesn't seem to happen so... Yeah, but we did not make any major changes to what we're projecting for fee income for 2018.

Tyler Stafford -- Stephens, Inc. -- Managing Director

Okay. So, relatively flattish with '17 would be a good approximation?

William Foshee -- Chief Financial Officer

Yeah, I think that'd be a good estimate.

Tyler Stafford -- Stephens, Inc. -- Managing Director

Okay. Maybe just, lastly for me, on the margin -- I know you touched on it earlier but I'm just 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 that liquidity?

Thomas Broughton -- Chief Executive Officer

Historically, it happens in the first quarter. Yeah, it could change, but I could see that happening in the first quarter.

Tyler Stafford -- Stephens, Inc. -- Managing Director

Okay. Okay. Congratulations, guys. Thanks.

Operator

And, once again, if you would like to ask a question, please press * then 1 on your touchtone phone. And our next questioner today will be Nancy Bush with NAB Research. Please go ahead.

Nancy Bush -- NAB Research -- Owner

Good afternoon, gentlemen. How are you? A couple of questions here. No. 1, you mentioned $1.3 million in asset sales that were contained in fee income. Can you just give us a little color on that and were there any particular offsets and expenses?

Thomas Broughton -- Chief Executive Officer

You're talking about Fourth Quarter 2016?

Nancy Bush -- NAB Research -- Owner

Yes.

Thomas Broughton -- Chief Executive Officer

That was a one-time event. Now, do you want details...? Tell me again, was it offset by anything -- was that what you were saying?

Nancy Bush -- NAB Research -- Owner

Yeah, exactly. I'm trying to do apples and apples and am just wondering if that $1.3 million got any offset anywhere?

Thomas Broughton -- Chief Executive Officer

Not in fourth quarter of last year, no, because that was... We had an incentive over accruals. There were some other positive income adjustments, also, that went along with that in 2016.

Nancy Bush -- NAB Research -- Owner

Okay. Secondly, you brought up the issue of deposit pricing, etc. Could you just tell us a little bit of what your betas are right now and where you see betas going in the near-term?

William Foshee -- Chief Financial Officer

Betas, we've hired Darling Consulting Group to help us assist on our asset liability management. Yeah, our 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 just now increased our posted rates so it's hard to say, "We're going to do X based on the next net increase." Yeah, that went out of the window when rates got so low in '09 and forward so... We look at it, it just hasn't been any change since fed increases from December 2016 forward.

Nancy Bush -- NAB Research -- Owner

Right. Do you expect that there will be 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?

William Foshee -- Chief Financial Officer

Yeah, we really haven't seen that in our markets where people are changing posted rates. I think what Tom's talking about -- people are still doing specials or anticipating future fed increases so we really haven't seen the overall posted rates increase.

Nancy Bush -- NAB Research -- Owner

Right. And, third, I guess the NIM impact from the lessening of FTE, do you have any idea what that might be? Everybody's 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?

William Foshee -- Chief Financial Officer

That, I don't have with me, but I will look.

Nancy Bush -- NAB Research -- Owner

Okay. Great. If Davis could just shoot me a message on that, I'd very much appreciate it. Thank you.

William Foshee -- Chief Financial Officer

Okay.

Operator

And our next questioner today will be Kevin Swanson with Hovde Group. Please go ahead.

Kevin Swanson -- Hovde Group -- Vice President

Hey, guys. Good afternoon. So, given the, I guess, once in a lifetime benefit from tax reform, is there a skew to how you guys are feeling about strategically using that benefit -- people, platforms, clients, one more than the other? Maybe just any color on that?

Thomas Broughton -- Chief Executive Officer

Yeah, Kevin -- this is Tom -- we're going to use it for the shareholders, 100% of it. What we say is we're a disciplined growth company. I realize there's some competitors or there's some different things -- 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. I think we do have discipline and we're going to continue to... We think our return on equity reflects that discipline and we'll continue to do the same. So, we think of this opportunity to bring more money, the bottom line for our shareholders, and not use it any other fashion or form, Kevin.

Kevin Swanson -- Hovde Group -- Vice President

Okay. Just, maybe, on that, are there any, I guess, markets that you think are more susceptible to competition? I guess some people are saying it could be some of the benefits competed away. Can you give us any color on how you think about the competition changing at all in your markets?

Thomas Broughton -- Chief Executive Officer

Yeah, there's competition -- it doesn't matter if you're a retail bank or a commercial bank. We're certainly a commercial bank, but if you're a retail bank, you go find somebody advertising a huge rate for a retail money market account. So, there's always somebody out there like that and the disciplined players are the ones that I think are going to be successful. But we don't foresee any changes with our competitive environment today, Kevin. We don't think our competitors will try to reduce price or reduce their 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.

Kevin Swanson -- Hovde Group -- Vice President

Okay. Thanks. And then, just last from me, I guess, maybe, the flattening of your yield curve more short-term rates rising than long-term rates coming down, given the... I appreciate you guys saying that the charge-offs, you guys are having more long-standing issues and you guys took the opportunity, but does the rate hikes feed into your underwriting models in terms of perthink could lead to additional charge-offs or losses?

Thomas Broughton -- Chief Executive Officer

Yeah, we're a long way from rate hikes that will contribute to additional credit losses at this point in the cycle, Kevin. If you're assuming three or four rate hikes -- 2018, that's 100 basis points. We are primarily CNI bank -- we're not an income CRE bank. Obviously, it would affect your cap rates on income CRE if you have a 200-300 basis point increase in long-rates. Obviously, we don't see that happening any time but, if it does happen, we'll be less affected than our other competitors that are CRE banks because we are a CNI bank and we don't see any significant increase in charge-offs as a result of higher rates.

Now, obviously, we're like everybody else -- half of our loans are fixed rate so, if fixed rates go up, obviously, that helps us over time. It won't help us the first month, but over a two-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'd certainly be a credit to our income.

Kevin Swanson -- Hovde Group -- Vice President

Okay. Thanks for taking my questions.

Operator

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.

Duration: 27 minutes

Call participants:

Davis Mange -- Director of Investor Relations

Thomas Broughton -- Chief Executive Officer

William Foshee -- Chief Financial Officer

Brad Milsaps -- Sandler O'Neill -- Managing Director

Tyler Stafford -- Stephens, Inc. -- Managing Director

Nancy Bush -- NAB Research -- Owner

Kevin Swanson -- Hovde Group -- Vice President

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