Simmons First National Corporation (SFNC) Q4 2017 Earnings Conference Call Transcript

Simmons First National Corporation (SFNC -0.17%)
Q4 2017 Earnings Conference Call
January 23, 2018, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Simmons First National Corporation's Fourth Quarter Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. If anyone should require operator assistance during the conference, please press "*" and then "0" on your telephone keypad. As a reminder, today's conference may be recorded.

I would now like to turn the call over to Mr. David Garner. Sir, you may begin.

David Garner -- Investor Relations Officer

Good morning everyone. My name is David Garner and I serve as Investor Relations Officer of Simmons First National Corporation. We welcome you to our Fourth Quarter Earnings Teleconference and Webcast. Joining me today are: George Makris, Chairman and Chief Executive Officer; Bob Fehlman, Chief Financial Officer; Marty Casteel, Chairman and CEO of Simmons Bank, one of our wholly owned bank subsidiaries; and Barry Ledbetter, Chief Banking Officer.

The purpose of this call is to discuss the information and data provided by our company in our Quarterly Earnings Release, issued yesterday, and to discuss our company's outlook for the future. We will begin our discussion with prepared comments, followed by a question-and-answer session. We have invited institutional investors and analysts from the equity firms that provide research on our company to participate in the Q&A session. All other guests in this conference call are in a listen-only mode. A transcript of today's call, including our prepared remarks and the Q&A session, will be posted on our website, www.simmonsbank.com, under the "Investor Relations" tab.

During today's call, and in other disclosures and presentations made by the company, we may make certain forward-looking statements about our plans, goals, expectations, estimates, and outlook. I remind you of the special precautionary notice regarding forward-looking statements and that certain matters discussed during this call may constitute forward-looking statements and may involve certain known and unknown risks, uncertainties, and other factors which may cause actual results to be materially different than our current expectations, performance, or estimates. For a list of certain risks associated with our business, please refer to the forward-looking information section of our Earnings press release and the description of certain risk factors contained in our most recent Annual Report on Form 10K, all as filed with the U.S. Securities and Exchange Commission.

Forward-looking statements made by the company and its management are based on estimates, projections, beliefs, and assumptions of management at the time of such statements and are not guarantees of future performance. The company undertakes no obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise.

Lastly, in this presentation, we will discuss certain GAAP and non-GAAP financial metrics. Please note that the reconciliations of these metrics are contained in our current report filed yesterday with the SEC and on Form 8K. Any references to non-GAAP core financial measures are intended to provide meaningful insight. These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

With that said, I will now turn the call over to Mr. George Makris.

George Makris -- Chairman and Chief Executive Officer

Thank you, David, and welcome to our Fourth Quarter Earnings Conference Call. 2017 was a momentous year. We created a stronger organization with assets exceeding $15 billion, expanded into new territories, welcomed new associates and customers, all while maintaining our "community first" approach and producing exceptional results.

In our press release issued yesterday, we reported net income of $18.9 million for the fourth quarter of 2017, a decrease of $8.1 million compared to the same quarter last year. Diluted earnings per share were $0.43. Included in the fourth quarter earnings were $14.2 million in merger-related and branch franchising costs. Also included was our one-time, non-cash charge to income of $11.5 million from the reevaluation of the deferred tax assets and liabilities as a result of the tax reform recently signed into law. In addition, we made a $5 million donation to the Simmons Foundation. Excluding the net after-tax impact of these items, the company's core earnings were $42 million for the fourth quarter of 2017, an increase of $13.3 million compared to the same period last year. Diluted core earnings per share were $0.97.

Our loan balance at the end of the quarter was $10.8 billion, an increase of $4.5 billion from last quarter. During the quarter, our portfolio increased due to the following items: $4.2 billion increase from loans acquired on October 19; $193 million net increase in loans at Southwest Bank since the merger date; $54 million net increase in loans at Bank SNB since the merger date; and $118 million net increase in loans at Simmons Bank, which includes a $26 million decrease in our liquidating portfolios of indirect lending and consumer finance and a $65 million decrease from seasonal agricultural loan payoffs. We remain optimistic about our future loan growth. Our subsidiary banks' combined loan pipeline, which we define as loans approved and ready to close, was $633 million at the end of the quarter.

On a consolidated basis, our concentration of construction and development loans was 91% and our concentration of CRE loans was 321.1% at the end of the quarter. It's important to note that these ratios do not include the discount on loans. Including this discount, the concentration of C&D would be 85.6% and our concentration of CRE loans would be 302.3%. All banks are experiencing excellent loan growth.

The company's net interest income for the fourth quarter of 2017 was $126.9 million, a 70.8% increase from the same period last year. Accretion income from acquired loans during the quarter was $15.7 million, compared to $6.6 million in the same quarter last year. The accretion income in the fourth quarter was higher than our original estimates due to a larger loan discount than originally projected and accelerated cash flows of acquired loans. Based on our cash flow projections, we expect total accretion for 2018 to be approximately $25 million. Our net interest margin for the quarter was 4.21%, which was up from 4.12% in the same period last year. The company's core net interest margin, which excludes the accretion, was 3.70% for the fourth quarter of 2017, compared to 3.76% in the same quarter of 2016.

Deposit cost increases continue to offset gradual increases in rates on earning assets. We have experience non-time deposit growth of $3.7 billion over the last year related to acquisitions and internal growth. Cost of interest-bearing deposits increased 32 basis points from the prior year. This increase was driven by a higher cost of funds at the acquired banks. We continue to project that our cost of funding will increase as a result of the increased competition for deposits and the recent Fed Rate rate hikes.

Our non-interest income for the quarter was $36.6 million, an increase of $514,000.00 from the same quarter of 2016. We had increases in trust income, service charges, and in other fees due to our acquisitions during the quarter. These increases were offset by a $2.7 million decrease in gain on sales of securities and decreases in income from SBA loan sales and insurance income due to the sale of lines of business in the prior quarter. During the quarter, we sold approximately $100 million in lower yielding securities at a loss. We used the proceeds from that sale to reinvest in higher yielding investments with similar maturities, which will result in increased income during 2018 at a lower tax rate.

Non-interest expense for the quarter was $108.5 million, while core non-interest expense for the quarter was $89.3 million. Incremental increases in all non-interest expense categories over the same period in 2016 are the result of our acquisitions over the last year. In addition, we made a $5 million contribution during the fourth quarter to the Simmons Foundation, primarily to -provide CRA qualified community development grants throughout our entire geography. Our core efficiency ratio for the quarter was 51.4%.

As a result of the Tax Cuts and Jobs Act that was signed into law on December 22, 2017, the company was required to revalue its deferred tax assets and deferred tax liabilities to account for the future impact of lower corporate tax rates on these deferred amounts. The analysis resulted in a one-time, non-cash charge to the income statement of $11.5 million. We do estimate our effective tax rate going forward to be in the 23% to 24% range.

At December 31, 2017, the allowance for loan losses for legacy loans was $41.7 million, with an additional $418,000.00 allowance for acquired loans. The company's allowance for loan losses on legacy loans was 73 basis points of total loans. The loan discount credit mark was $89.3 million, for a total of $131.4 million of coverage. This equates to a total coverage ratio of 1.21% of gross loans.

At year end, non-performing assets were $79 million, down from $86.8 million at September 30. This balance is primarily made up of $46.2 million in non-performing loans and $31.1 million in other real estate owned. The decrease was related to charge-offs during the quarter on three problem loan relationships. The charge-offs were fully reserved and did not require additional provision expense. During the fourth quarter, our annualized net charge-offs, including credit card charge-offs, to total loans were 53 basis points. Excluding credit card charge-offs, our annualized net charge-offs to total loans were 51 basis points. The provision for loan loss during the quarter was $9.6 million, compared to $4.3 million during the same period last year. The larger provision was needed due to the increased loan migration during the quarter and the strong loan growth.

Our capital position remains very strong. At quarter-end, common stockholders' equity was $2.1 billion. Our book value per share was $45.30, an increase of 23.1% from the same period last year, while our tangible book value per share was $24.68, an increase of 3% from the same period last year. The integration of Southwest Bank and Bank SNB is going very well. The systems conversions are scheduled for February and May and we're excited about the opportunities of our newly combined market.

Late last week, we announced a two-for-one stock split which we believe will create investment opportunities for a wide variety of investors. Our retail ownership is approximately 50% and we believe it's a valuable dynamic to have owners as customers and vice versa. We also announced a 20% increase in our dividend. Note that financial statements, including our earnings per share as well as other share-related disclosures reported after the stock split record date of January 30, 2018, will include the impact of the stock split on all periods presented.

The effect of the tax law changes has allowed us the opportunity to consider an increased investment in our associates, which will include, among a variety of initiatives: an increase in the profit-sharing component of our 401(k) plan; an increased consideration for our high-performing associates; an investment in technology of up to $100 million over five years to improve our delivery of products and services to our customers; an investment in our communities, as evidence by our $5 million contribution to our Foundation to support CRA-qualified community development grants throughout our footprint; and, finally, a strategy to provide return on the investment of our shareholders through the retention and deployment of additional capital to grow our business while at the same time increasing the dividend we distribute to our shareholders.

These investments reflect our optimism for Simmons and we believe will help us achieve the growth potential we envision for our company. This concludes our prepared comments. We will now take questions from our research analysts and institutional investors. I'll ask the operator to please come back on the line and review the instructions and open the call for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the "*" and then the "1" key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the "#" key. To prevent any background noise, we do ask that you please place your line on mute once your question has been stated. Thank you.

And our first question comes from the line of Brady Gailey with KBW. Your line is open.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thank you. Good morning, guys.

George Makris -- Chairman and Chief Executive Officer

Hey, Brady.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

You know, George, in your prepared comments, you talked a lot about some of the things you're doing with the lower tax rate. One thing that caught my eye was $100 million investment in technology. That's a big number, even if it's spread out over five years. So I was just wondering, when you take a step back, how much do you think, of the benefit you guys are getting from tax reform, how much of that will actually drop to the bottom line?

George Makris -- Chairman and Chief Executive Officer

Well, that's a good question. We've estimated that -- Bob, help me with the number. About 20 --

Robert Fehlman -- Senior Executive Vice President and Chief Financial Officer

Well, I would tell you, first off, for next year and what we're budgeting, we have about $3 million to $4 million in the budget on a go-forward basis for -- whether it's employees, whether it's communities, and so forth -- that, in our mind, relates to the bottom line of the tax increase. When you look at the $100 million investment we've mentioned in there, this includes major upgrades in our systems over the next five years. Of that, some of it is replacement of costs that already have. It could be in head count, it could be in systems, it could be in new technology. So it won't all hit the bottom line when we go through. But our incremental cost for the IT next year that we have budgeted is in the $6 million to $7 million range. So.

George Makris -- Chairman and Chief Executive Officer

Yeah. So, Brady, let me touch a little more on some of those items Bob mentioned. I feel like 70% to 80% of the benefit of a lower tax rate will flow to the bottom line, based on our current estimates. The rest of it we're going to invest in these certain areas that we've already talked about. Let me talk specifically about the technology investment. If you think back, the largest bank, stand-alone bank in our current system, was a $3 billion bank in Pine Bluff, Arkansas. All of us were operating on systems appropriate to our size then. That is not the case today. At $15 billion, we're afforded the luxury of going to the market and picking out applications that are best of class that will take us to whatever size we choose to grow.

So this is really a one-time redo of all our applications. Everything is on the table. In addition to that, as you know, the trend is moving away from bricks and mortar and more to digital. So we have two initiatives that are in that $100 million number. One is what's our branch of the future? And we actually have outside consultants and teams working on that with us today. And a big part of that branch of the future is going to be what technology do we deploy in that branch. But even more important is what's our digital bank gonna look like going forward? We already have some pretty good digital applications but we need to put them all together so that we can take care of our customers' needs digitally, wherever they choose to be.

So we've got some big initiatives on the table. And the benefit of the tax cut is going to allow us probably to accelerate what may have been a 7 to 10 year program into a five-year program. I will tell you this. Of the $100 million, we have $25 million of it budgeted for 2018.

Robert Fehlman -- Senior Executive Vice President and Chief Financial Officer

Which is capital expenditures and other costs.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

Alright. That's helpful. And then on M&A, you don't have any pending deals anymore with the two that closed in the fourth quarter. Maybe just an update on how you're thinking about M&A as we head into 2018?

George Makris -- Chairman and Chief Executive Officer

Well, we're still very interested and we're still having very productive discussions. You know, Brady, we're totally focused on the two integrations, the one at Southwest Bank in February and the one at Bank SNB in May. And sort of dissimilarly to other integrations, we've got some reverse integration that's going on that affects our entire Simmons organization. So particularly at Southwest Bank, they had some things that they were doing there that we're deploying across the entire company. So it's not just necessarily converting Southwest Bank's systems but, in certain cases, it's converting Simmons legacy systems. So these are big deals and we're totally focused on that.

That said, we still believe that the M&A market will be active throughout 2018. We see some real opportunities to establish relationships with excellent merger partners, particularly in our current geography, which is a little different than the approach we've taken in the past. So I would expect toward the end of the year, for us to be back in the M&A ballgame and probably a little more precise in our direction.

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

Alright, great, thanks for the color.

George Makris -- Chairman and Chief Executive Officer

Sure.

Operator

Thank you. And our next question comes from the line of David Feaster with Raymond James. Your line is open.

David Feaster -- Raymond James -- Analyst

Hey, good morning, guys.

George Makris -- Chairman and Chief Executive Officer

Hello, David.

David Feaster -- Raymond James -- Analyst

So loan growth was pretty impressive in the quarter, especially when a lot of your peers have had payoffs and paydowns that have really impacted net loan growth. It looks like Southwest Bank was especially strong. I was just wondering if you could give us, at a high level, your outlook for loan growth next year and maybe what you're seeing across your markets.

George Makris -- Chairman and Chief Executive Officer

Sure. Well, let me just say this, and I think I mentioned this before. The job that was done by Vernon Bryant and his team and Mark Funke and his team was exceptional during the year. You know, when you announce an acquisition, you hope to keep everything that you had when you announced it. Both of those banks grew tremendously during 2017. I think that's a real testament to the leadership of Vernon and Mark and the quality of their associates who understood very early on the benefits of a larger organization. Southwest Bank, particularly, grew their portfolio by over 30% during 2017 and you see the results in the fourth quarter. We expect those results to continue in 2018. Probably not at that same pace, but overall we would expect double digit growth. 10% to 12%, I think, is a safe range for 2018. And I base that on two numbers. One I've already given you is that our loan pipeline is over $600 million of loans approved and ready to close. But even more significant is our unfunded construction loans at $1.36 billion today.

So we have a lot teed up and ready to go right now and we really don't see backing off of that. And let me just expand that a little bit into our strategy for funding those loans. We have a tremendous amount of short-term funding available to us so funding the loans is not going to be a problem. However, we believe that now is a time for us to be aggressive in our pursuit of core deposits. And that will be a real focus for us in 2018. We believe if we're successful in that strategy, we will be in a position to fund this kind of loan growth for several years to come. So one feeds off the other and, as we said before, we expect the rising costs of deposits in our strategy to partially offset any increases we may see in our marginal loans. We think that's a good strategy for 2018 and we would expect that to continue throughout the year.

David Feaster -- Raymond James -- Analyst

Okay. That's great color. And I appreciate the accretion guidance. I'd like to just kind of get your thoughts on the core NIM. We're sitting here at about 3.70%, which was kind of, if I remember correctly, the floor for what you thought the core NIM was going to be. I just kind of wanted to get your thoughts on the core NIM next year and your ability to control the rising deposit costs, like you've talked about, and maybe just remind us of your asset sensitivity, pro forma for the two deal now.

George Makris -- Chairman and Chief Executive Officer

I'm going to let Bob tackle that question first.

Robert Fehlman -- Senior Executive Vice President and Chief Financial Officer

Well, I'll tell you first off, the NIM for core Simmons legacy was probably about 3.73% to 3.74%, so we were right in the middle of that range. When you put all the deals together, we're at about 3.70%. Our guidance going into 2018 is we still intend to be and expect to be in that 3.70% to 3.80% range for our core NIM. Keep in mind, Q1 will be at the low end of that. So we could drop below 3.70% for Q1 with some of our seasonality that we have. So I would expect that we are very -- on the sensitivity, on the balance sheet side, we are moving more and more asset sensitive on the balance sheet side. So we are positioned well for continued rate increases. So I don't have that number right in front of me, but we're positioned well.

Let me give you, David, a little more granularity on the accretion for next year. We gave you guidance of $25 million but that number will be front-end loaded during the course of the year. So I'll give you the quarterly scheduled numbers. Keep in mind, these will change based on actual payoffs that come in and how accretion works. So we've got $8.5 million in Q1, $6.4 million in Q2, $5.4 million in Q3, and $4.7 million in Q4. That is our scheduled numbers right now and it'll be $25 million for the year is what we're budgeting and scheduling for next year. So that kind of helps everybody on the quarterly numbers also.

George Makris -- Chairman and Chief Executive Officer

Excuse me, David, go ahead.

David Feaster -- Raymond James -- Analyst

That's terrific. I appreciate that color. And I guess last one from me. Back to expenses. Maybe -- you've got the deals closed and I suspect some of the synergies have been saved already. But a big part of that is the systems conversion. Could you maybe just talk about the timing of the remaining cost saves and how much synergies are already in the run rate? And I guess maybe, too, just remind us of the seasonal FICA expenses given the inclusion of the two banks that you're expecting in the first quarter.

George Makris -- Chairman and Chief Executive Officer

Well, I'll touch that generally. That is our expense run rate. You know, we believe Q3 this year will be the first quarter where we will achieve full cost saves. And we believe that run rate, beginning in Q3, ought to be in the $92 million to $93 million range. It will be a little higher than that, especially in the first quarter as you've mentioned, the early payroll tax hit that we usually take then. I'll also remind you that in the first quarter, Bob's already mentioned this, our agri portfolio is at its lowest level and the rates that we charge on agri loans are more flexible with regards to interest rate changes than some of our fixed rate loans that we have on the books today. So that will have a negative impact on our net interest margin during the first quarter. But we believe that $92 million to $93 million is a good run rate once we hit on all cylinders in the third quarter.

Robert Fehlman -- Senior Executive Vice President and Chief Financial Officer

Also, David, I'd point out, too, keep in mind the NSF income, just like every other bank, but it tends to be down significantly in the first quarter of the year. So that does have an impact on seasonality.

David Feaster -- Raymond James -- Analyst

Okay. Thanks, guys.

George Makris -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Matt Olney with Stephens. Your line is open.

Matt Olney -- Stephens -- Analyst

Hey, thanks. Good morning, guys. I want to start with the loan growth commentary and the 10% to 12%. I just want to confirm, one, that that's a net number because it sounds like it's improved relative to the last time we talked about the loan growth outlook. And, if so, can you tell us what's changed that would make this stronger than our previous discussion?

George Makris -- Chairman and Chief Executive Officer

Well, I would tell you that, as we take a look at really our three divisions, what I would call legacy Simmons and then Southwest Bank and Bank SNB, I think that in our legacy Simmons footprint, we would consider 7% to 9% growth to be very adequate. But based on last year's performance and this year's outlook, we expect both the Southwest Bank and Bank SNB territories to be up significantly more than 10%. I'm sitting here looking at our Chief Lending Officer Matt Reddin and his head's nodding up and down. So I feel good about what I just said. Now it's up to Matt to produce. So when we put all this together, Matt, we're very optimistic about our new markets.

And if you recall, when we showed the growth in both population and per capita income in all the markets that we serve, all the ones that were on the left side of the graph that had the biggest potential were in the new markets serviced by Southwest Bank and Bank SNB. So it's really not a surprise to us. What is a little bit of a surprise from when we originally project it, is their excellent success in 2017 of taking advantage of our bigger size early on in the process. If you recall, Simmons Bank bought -- I don't know what the number was. A little short of $100 million of participations from both Southwest Bank and Bank SNB during 2017 to allow them to go ahead and establish those bigger relationships in their markets. So we're pretty optimistic about what they've done and their potential.

Matt Olney -- Stephens -- Analyst

And sticking with the loan growth, George, I think in previous years we've talked about seasonality at Simmons. But now with some of these new markets, do you still expect seasonality to create some volatility of the loan growth or do you think it will be more even in 2018 versus previous years?

George Makris -- Chairman and Chief Executive Officer

Just the math alone, Matt, will make it less significant. Our agri portfolio peaked at, I think, $240 million this year. Our credit card portfolio is $185 million. Those used to be big numbers in relation to our total loan portfolio. They're much smaller now. I guess what I will tell you is it won't affect our net loan growth as much as it will chip away at the net interest margin, because both of those, on a relative basis, are high yielding portfolios. So when they are at their lowest, they will chip away at that NIM a little bit.

Matt Olney -- Stephens -- Analyst

Got it. That's helpful, George. Thank you. And then on credit quality, I heard you mentioned the elevated charge-off I think you said were from three commercial loans. Is there anything else you can share with us on those three specific loans?

George Makris -- Chairman and Chief Executive Officer

Well, those three loans were the ones that we've mentioned for two or three quarters now, in the Wichita market. We have fully reserved what we thought was our exposure. We've taken a good, hard look at it and decided that that probably is a realistic loss expectation. So we just charged those off. But they were fully reserved and none of our allowance was related to an additional provision based on those charge-offs.

Robert Fehlman -- Senior Executive Vice President and Chief Financial Officer

In fact, Matt, all of the provision increase, the $5.5 million increase to $9.5 million on a late quarter was $4 million, all of that was related to acquired loans or new loans in our new banks that we acquired.

Matt Olney -- Stephens -- Analyst

Okay. That's helpful. And then I guess the next question would be, as far as the provision expense in 2018, how should we be looking at that?

George Makris -- Chairman and Chief Executive Officer

Well, I can tell you based on our budget projections, we expect our provision expense to be $28 million to $30 million for the year, pretty evenly divided between all four quarters. It may vary a tad from quarter to quarter but we think $28 million to $30 million is an adequate expense number.

Robert Fehlman -- Senior Executive Vice President and Chief Financial Officer

And, Matt, as we've talked about before, as that accretion is done in the first year and it's rolling off, those loans migrate over so we have to fund up the allowance, the provision on those migrated loans. So a lot of that is an offset from the accretion income as we're migrating over.

Matt Olney -- Stephens -- Analyst

Understood. Thank you, guys.

Operator

Thank you. And as a reminder, ladies and gentlemen, if you'd like to ask a question at this time, please press the "*" and "1" key on your telephone keypad. Once again, that is "*1" to ask a question. And our next question comes from the line of Stephen Scouten with Sandler O'Neill. Your line is open.

Stephen Scouten -- Sandler O'Neill -- Analyst

Hey, thanks. How are you doing this morning, guys?

George Makris -- Chairman and Chief Executive Officer

Hi, Stephen. How are you?

Stephen Scouten -- Sandler O'Neill -- Analyst

Good, good. Hey, I just wanted to first just go back to the expense guidance and get some clarification there. At first I thought I heard Bob say maybe $6 million to $7 million budgeted for 2018 and then, George, I thought I heard you say $25 million. So I just, I'm trying to make sure I have the number right of that $100 million that you're expecting to see in 2018.

George Makris -- Chairman and Chief Executive Officer

Well, Stephen, the $25 million is the total capital expenditures. So that is, of the $100 million, $25 million of that would be in the first year already. And the expense increase for this first year is about $7 million, $6 million to $7 million in IT-related expenses. But part of what I was trying to explain earlier is some of the additional -- when we get to the other $50 million to $75 million we spend in the next couple of years, part of the expense on an ongoing expense will be replacing expenses that we have on the books already. So, for example, we may have $10 million in total IT expense in one area and that number may grow to $12 million or $13 million. So part of it will be replacing the expense with new technology.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay. And with the $92 million to $93 million guidance for 3Q '18 run rate, does that already encapsulate kind of that $6 million to $7 million in annualized technology spend or will that kind of ramp up in the bank half of the year once you get the cost saves done from the acquisitions?

George Makris -- Chairman and Chief Executive Officer

No, it's in there. And, in fact, most of that $25 million is going to be spent in the first half of the year.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay. Great. And then just thinking about loan growth for the full year, I know you kind of said $10 million to $12 million. On a dollar basis, last year, at one point, I think you were targeting $500 million and blew well through that, which is great. With $600 million in the pipeline, is north of $1 billion a pretty achievable number? I mean, that seems almost too low for the year if you've already got $633 million or what have you in the pipeline ready to close.

George Makris -- Chairman and Chief Executive Officer

Well, we certainly think $1 billion is sort of the baseline we ought to be taking a look at. You know, of the $633 million, some of it is construction. So of it won't be funded until all of the sponsors' money is in the project. So it's not going to all come in early in the year. It's going to be deferred into the end of the year or maybe even some in 2019, just depending on how new that project is. So it's really hard to time out, Stephen, how some of this will actually hit the books. But we think that our net growth on the books would be north of $1 billion for the year.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay. That's helpful. And in terms of the composition of growth that you guys are seeing, especially with Bank SNB and Southwest Bank, is that still largely CRE-weighted? And as a result, do you have any concerns about the CRE to risk-based capital level, even kind of as you talk about it being lower "x" the credit mark? Is that a number you expect to increase from here and does that create any limitations, I guess?

George Makris -- Chairman and Chief Executive Officer

Well, we don't think it creates any limitations and we think we have several options, including converting some non-qualified Tier 2 debt to Tier 2 debt, which would really help. So we're investigating several options during 2018 that would help us shore that up. You know, we do see a lot of CRE opportunities but we're seeing increases in all our lines of business. Unfortunately, it takes a lot of SBA loans to make up for one big hotel loan. So we've got to really have our foot on the gas in all of the other areas to make up for the CRE opportunities we see in the market. We've enhanced our monitoring of CRE, which is expected at the levels that we have, and we're going to further enhance that monitoring going forward. So we really don't have any concerns now. We're well aware of the planning that is necessary to keep this growth going and we're prepared to do that.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay, great. And then one last one for me, kind of around the NIM, I guess. First, was that $100 million in securities already redeployed before quarter end or is that expected to happen in 1Q? And then kind of more holistically, Bob, you talked about being a little bit more rate sensitive moving forward. Are there specific changes, composition changes, that you're targeting? Doing more variable rate loans? Or what's kind of driving that? Because you've been pretty neutral, at best, here previously, based on the numbers. So I'm just curious as to what's really changing there in terms of a composition dynamic. Thanks.

Robert Fehlman -- Senior Executive Vice President and Chief Financial Officer

So on rate composition, one is our security portfolio is shortening. We've shortened that over a period of time. So that's helped us a little bit on the asset sensitivity. And I believe on the rates, we have moved some more to the variable rate loans and some more to shorter duration loans on those as we move forward. So it's just been a tweaking of our earning asset side that we increased the sensitivity on the asset side.

George Makris -- Chairman and Chief Executive Officer

You know, Stephen, as we convert fixed rate loans to some index rate loan, those are typically started at a little lower rate than the fixed rate loans are. So that has just an increased pressure on our NIM today but we think it's a great strategy for the future, so that we will be able to take advantage of rate increases which we believe are very likely to happen over the next 12 to 18 months.

Stephen Scouten -- Sandler O'Neill -- Analyst

Yeah, no, that makes a lot of sense.

Robert Fehlman -- Senior Executive Vice President and Chief Financial Officer

And, Stephen, the other question you had was on the securities sales. We looked at the end of the year and really took advantage of an opportunity. We had about $100 million in low-yield securities. We were able to sell at $1.2 million loss. We did recognize that loss obviously in the 2017 tax year, so that was a benefit. We are in the process of reinvesting that. We did a little bit at the end of the year and will in the first quarter reinvest that back into the portfolio. Our look on that is, we have an earn-back on that investment is about a one and a half year duration. We're not extending much but we basically will have an earn-back in less than seven months. And over that year and a half period, make probably about almost $2 million more than we would have made. So to us, there was an analytical piece that we looked at. What could we do at the end of the year to clear out some of the lower yielding securities? And the best break on that was $100 million.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay, great. That's really helpful, guys. Thanks so much for the color.

George Makris -- Chairman and Chief Executive Officer

Hey, Stephen, before you get off, I would like to discuss one item, is our loan discount that we booked for this quarter. It was about $20 million to $25 million higher than our original estimates. None of it was related to credit side. It was all related to the interest rate component of it. So, one, the accretion obviously will be higher as we gave guidance and where it was in the fourth quarter. And what that really comes down to is where the interest rate movement is from when we did our initial valuation and what the move has been over the last year in that period of time, as the valuation experts have come in and put that. So when you look at the balance sheet side, you will see the loan discount higher than we expected. None of it was related to the credit mark. That really came in right on with our expectations. It all came to the interest rate component. And as you know how GAAP works, you have an interest rate and a credit mark component on Day 1. And effectively for Day 2, they become one as your loan discount you accreted over the life of those loans.

Stephen Scouten -- Sandler O'Neill -- Analyst

Right, right. So that's all encapsulated in the $25 million for '18?

Robert Fehlman -- Senior Executive Vice President and Chief Financial Officer

That's exactly right.

Stephen Scouten -- Sandler O'Neill -- Analyst

Perfect. Yeah, thanks, guys. Appreciate that.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Mr. George Makris for closing remarks.

George Makris -- Chairman and Chief Executive Officer

Well, I'd like to thank all of you for joining us this morning. The fourth quarter was certainly eventful. We think it was very successful and we're awfully excited about starting 2018 off with a bang. I will say that the tax law changes have helped us identify several investment opportunities which we've outlined today that we believe were certainly shareholder friendly, and going forward, we look forward to taking advantage of those. Thanks again for joining us and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 45 minutes

Call participants:

David Garner -- Investor Relations Officer 

George Makris -- Chairman and Chief Executive Officer

Robert Fehlman -- Senior Executive Vice President and Chief Financial Officer

Brady Gailey -- Keefe, Bruyette & Woods, Inc. -- Analyst

David Feaster -- Raymond James -- Analyst

Matt Olney -- Stephens -- Analyst

Stephen Scouten -- Sandler O'Neill -- Analyst

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