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Spirit of Texas Bancshares, Inc. (STXB)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Operator
Greetings and welcome to the Spirit of Texas Bancshares Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)
As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jerry Golemon, Executive Vice President and Chief Operating Officer for Spirit of Texas Bancshares. Thank you, Mr. Golemon, you may now begin.
Jerry D. Golemon -- Executive Vice President and Chief Operating Officer
Thank you, operator, and good morning, everyone. We appreciate you joining us with the Spirit of Texas Bancshares conference call and webcast to review 2018 fourth quarter results. With me today is Dean Bass, Chairman and Chief Executive Officer; David McGuire, President and Chief Lending Officer; and Jeff Powell, our Chief Financial Officer. Following my opening remarks, we will provide a high-level review and commentary on the financial details of the fourth quarter before opening up the call for Q&A.
Second, let me cover a few housekeeping items. There will be a replay of today's call and it will be available by webcast on our website at www.sotb.com. There will also be a telephonic replay available until February 7th, 2019, and more information on how to access these replay features was included in yesterday's earnings release.
Please note that the information reported on this call speaks only as of today, January 31, 2019, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management during this conference call may contain certain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of management. However, various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the Company's prospectus filed on May 4, 2018 or the most recent quarterly report on Form 10-Q to understand certain of those risks, uncertainties, and contingencies.
The comments today will also include certain non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in yesterday's earnings release, which can be found on the Spirit of Texas website.
Now, I would like to turn the call over to our Chairman and CEO, Mr. Dean Bass. Dean?
Dean O. Bass -- Chairman and Chief Executive Officer
Thanks, Jerry, and good morning. We started the Company over 10 years ago in November 2008, and this is our first year as a publicly traded company. We finished 2018 with both record quarterly earnings and annual earnings. We continued our trend of improved profitability, margins and organic growth, as well as acquiring additional assets in our target market regions.
As you know, we have closed our merger of Comanche National Bank in the fourth quarter of 2018, which has expanded our North Central Texas footprint and has strengthened our deposit and asset quality. This transaction is accretive to our bottom line and improves our future liquidity to fund loans, as well as diversified our loan portfolio. We are pleased to have Comanche's bankers, customers, shareholders and dedicated employees now part of the Spirit of Texas family. Their legacy lives on through the Spirit of Texas Bank.
After the closing of Comanche transaction, we also announced in the fourth quarter, a merger with the First National Bank of Beeville, which will be the second transaction since the Company's May 2018 initial public offering. Once completed, this transaction will increase Spirit's asset to approximately $1.9 billion, with over $1.4 billion in total loans. The First National Bank of Beeville also started in 1890 with another great legacy of management and customers. Once Beeville is closed, we will have four strong regions with successful banking groups poised for continued organic growth and additional potential M&A transactions. We look forward to the continued opportunities that are possible in Texas.
Now, I would like to turn it over to David McGuire, our President, Chief Lending Officer, to discuss some of our quarterly credit metrics.
David M. McGuire -- President and Chief Lending Officer
Thank you, Dean. During 2018, the loan portfolio, gross of allowance for loan losses, grew to $1.09 billion as of December 31st, 2018, an increase of 14.6% from $954 million as of September 30th, 2018, and 25.8% from $869 million as of December 31st, 2017. On a stand-alone basis, for the year 2018, the Spirit loan portfolio grew 14.3%. Loan growth during the fourth quarter of 2018 was primarily driven by the addition of $116 million in loans obtained through the Comanche National Bank transaction.
The annualized yield on loans increased from 5.84% at the end of the third quarter to 6% at the end of the fourth quarter of 2018. Interest and fees on loans increased by $1.9 million or 13.8% from the third quarter of 2018 due to growth in the loan portfolio. Asset quality remains a key emphasis for our lending culture. As of December 31st, 2018, net charge-offs to average loans were 22 basis points for the fourth quarter and 16 basis points for the full year. Non-performing loans were 46 basis points of total loans held for investment at 12/31/2018.
With that, I'll turn over the call to our Chief Operating Officer, Jerry Golemon, to provide a brief review of the funding side of the Company. Jerry?
Jerry D. Golemon -- Executive Vice President and Chief Operating Officer
Thank you, David. Total deposits at the end of Q4 were up $310 million to $1.2 billion. Noninterest-bearing deposits grew 23.6% over Q3 and now make up 22% of our deposit portfolio, up from 21% at December 31, 2017. The growth in deposits reflects the Comanche merger, in addition to legacy growth. Our cost of deposits decreased by 1 basis point over Q3, and the overall margin decreased 3 basis points. The loan to deposit ratio decreased to 92% from 110% on September 30, 2018.
I would now like to turn the call over to our CFO, Jeff Powell, to provide a financial overview of our fourth quarter. Jeff?
Jeffrey A. Powell -- Executive Vice President and Chief Financial Officer
Thanks, Jerry, and good morning, everyone. Per usual, we've provided detailed financial tables in yesterday's earning release. Highlighting some operational results, we ended the fourth quarter with $1.5 billion in assets. Most of the increase in assets came from the Comanche merger. Fourth quarter 2018 net income increased to $2.5 million with an EPS of $0.22, compared to $523,000 and an EPS of $0.07 in the fourth quarter of 2017. Excluding the $1.3 million of after-tax merger expenses related to Comanche National Bank and the First National Bank of Beeville transactions, adjusted net income in the fourth quarter 2018 was $3.8 million for an adjusted EPS of $0.33. Sequentially, fourth quarter adjusted net income was up 27% or $800,000 over the third quarter of 2018.
Our tax-equivalent margin in the fourth quarter came in at 4.62% against a third quarter margin of 4.65% for a 3 basis point decrease. The slight decrease from the third quarter was due to the increase in average balance of the lower-yielding investment securities portfolio obtained through the Comanche National Bank merger. Legacy Spirit before inclusion of Comanche actually experienced expansion in tax-equivalent margin of 11 basis points due to stronger loan yields. Increase in average loans outstanding, coupled with enhanced loan yields, together with higher balances in noninterest-bearing deposits were the key contributors. Our balance sheet continues to be slightly asset sensitive, and projected rate increases should continue to help us in this area.
Our SBA group finished the year in fine fashion. We were able to sell loans with an average premium of around 6.5% to 7%. While the premium has slipped from the beginning of the year, our group has managed to increase volumes to make up for the difference.
I'd give some foreshadowing into 2019. The government shutdown impacts both the SBA and the USDA (ph). They were closed in January, and we were unable to secure new SBA guarantees. This will also affect our ability to sell loans into the capital markets. It has not affected our production of loans, as our group continues to work the loan pipeline and get loans ready to sell. If the government shuts down again in February, our SBA gain on sale will be impacted for as long as the SBA is closed. If anything, this government shutdown further reinforces our decision to diversify our origination mix and decrease reliance on gain on sale.
When we announced the Comanche transaction, we said that there should be 25% cost savings attached to the transaction. We have identified approximately 95% of those cost savings. The system conversion is scheduled for February, and the cost savings will start to stage in after that.
Our average diluted share count increased to 11.5 million shares in the fourth quarter, primarily driven by shares issued in the Comanche merger. ROA improved to 78 basis points compared to 20 basis points in the fourth quarter of 2017. Excluding merger-related expense, ROA would be 1.18%, and ROE was 5.71% compared to 2.07% in the fourth quarter of 2017. Again, excluding merger-related expense ROE would be 8.66%.
The reported efficiency ratio was 80.36% when compared to 79% in the fourth quarter of 2017. Adjusted efficiency ratio, excluding merger-related expenses, was 72.68% in the fourth quarter of 2018. At December 31, 2018, book value continues to improve to $16.42 a share compared to $15.38 per share at September 30, 2018.
Tangible book value at December 31, 2018 was $14.12 per share compared to $14.62 at September 30, 2018. This reflects a 3.4% dilution due to the Comanche acquisition.
I'd now like to turn the call back over to Dean. Dean?
Dean O. Bass -- Chairman and Chief Executive Officer
Thanks, Jeff. In closing, I am honored, humbled and proud to be associated with the professionals that we have assembled. I'd like to thank everyone involved with Spirit of Texas Bancshares' success, especially the Bank's directors, management, investors and employees. While we are extremely proud of our past accomplishments, we're even more excited about the future of Spirit of Texas Bank.
Our focus continues to be on positioning ourselves to take advantage of opportunities in our market and serving our strong and expansive customer base. In addition, we will continue to base our decision making on sound value-creation principles. We continue focusing on new growth opportunities and are constantly looking for innovative and efficient ways to expand on our scope of services on a regional and statewide scale.
And finally, we expect to continue to benefit from favorable economic conditions in Texas. More specifically, we are well positioned to grow our diversified loan portfolio, based on our strategic market locations. And our market diversification should help us seize opportunities to achieve a competitive advantage. We will continue to change the banking landscape in Texas with continued organic growth and with one strategic merger partner at a time.
This concludes our prepared remarks. I would now like to turn the call back to the operator to begin the question-and-answer session. Operator?
Questions and Answers:
Operator
Thank you. We will now be conducting a question-and-answer session. (Operator Instructions)
Our first question comes from the line of Matt Olney with Stephens. Please proceed with your question.
Adam Freyaldenhoven -- Stephens Inc. -- Analyst
Good morning, guys. This is Adam Freyaldenhoven on for Matt.
Dean O. Bass -- Chairman and Chief Executive Officer
Good morning.
Jeffrey A. Powell -- Executive Vice President and Chief Financial Officer
Good morning, Adam. How are you?
Adam Freyaldenhoven -- Stephens Inc. -- Analyst
Doing well. So, with the excess liquidity coming in from the two acquisitions, could you help give us an idea of the benefit you expect to receive when you deploy that liquidity in 2019?
Jeffrey A. Powell -- Executive Vice President and Chief Financial Officer
Yeah. That excess liquidity is going to be moving from either, say, on the investment side or the cash side, David is going to be redeploying that into additional loan volume, and then, it's also good to have a little cash when you're in the acquisition mode as well too.
Adam Freyaldenhoven -- Stephens Inc. -- Analyst
So just a couple basis points of margin, and let's say (ph), every quarter, you would expect that runs off or...
Jeffrey A. Powell -- Executive Vice President and Chief Financial Officer
Actually, we think -- where we're at as far as margin goes -- Comanche's investment portfolio is about half the rate of what we're doing loans right now. So as those cash flows come off, they'll be reinvested in higher yielding assets on the loan side. So we expect and believe that we'll continue to see some margin expansion.
Adam Freyaldenhoven -- Stephens Inc. -- Analyst
Okay, thank you. That's very helpful. So could you give us an update on the cost saves? You said you've identified 95%. Are any of those out of the run rate this quarter?
Jeffrey A. Powell -- Executive Vice President and Chief Financial Officer
Actually, since we haven't done the conversion yet, you don't start seeing those cost saves until you get through the targeted date. As we said, when we announced the Comanche transaction, 75% of those cost savings would occur in 2018 and then the other remaining 25% occur in 2019. So you'll start seeing them along those lines through this year.
Adam Freyaldenhoven -- Stephens Inc. -- Analyst
Okay. Thank you. And that's it from me. Thank you, guys.
Dean O. Bass -- Chairman and Chief Executive Officer
Thanks, Adam.
Operator
(Operator Instructions)
Our next question comes from the line of Brady Gailey with KBW. Please proceed with your question.
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
Hi, good morning, guys.
Jeffrey A. Powell -- Executive Vice President and Chief Financial Officer
Hi, how are you, Brady?
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
Good. Maybe just to follow up on the margin question, I think with Comanche only really being cutting (ph) in half of the quarter, as we look to 1Q '19 where there will be -- for the full quarter, the NIM should come down a little bit more just on that deal. And then from that new base, it should start to grow throughout the rest of '19. Is that the right way to think about the NIM?
Jeffrey A. Powell -- Executive Vice President and Chief Financial Officer
Yes, Brady, that's exactly how I would model it and how we'd model it as well.
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
Okay. And then loan growth, I know in the past, we've talked about kind of a low-to-mid teens level. If you look at period-end loan growth, you're at about 9% this quarter. Is double-digit loan growth still the right way to think about you guys once you have Comanche and then eventually have Beeville in the mix?
David M. McGuire -- President and Chief Lending Officer
Brady, this is David. Right now, our thinking is that our pipelines are just as robust as they have been in this past year, and the originations that we are seeing coming through the pipeline right now are strong. So we're comfortable at still targeting that low-to-mid teen growth.
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
Okay. Then just one last one from me. On the SBA side, outside of any sort of government shutdown impact, the SBA line had a nice 4Q. It was a little over $1 million. Outside of any government shutdown impact, is that number run ratable or was that just a really good 4Q number?
David M. McGuire -- President and Chief Lending Officer
Well, I'll take that Brady. This is David. Our pipeline is as strong as it's ever been in the SBA world so that we've gone on approvals there. We feel very good about the volumes and we'll able to maintain them. So if the premiums stay elevated or they're moving up a little bit, we're feeling that, that's a good target.
Dean O. Bass -- Chairman and Chief Executive Officer
And I think that's what we said to the Street early is that it's a cumulative thing quarter by quarter, those improvements.
Jeffrey A. Powell -- Executive Vice President and Chief Financial Officer
Well -- and SBA, as we've always talked about, is -- its run rate is kind of bumpy as you move along, and it varies from quarter to quarter. But a good way to look at it, Brady, I'd go back and look at last year, just on a quarterly basis, how it kind of trended, and I think it will trend along those same lines as well too.
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
Okay, great. Thanks guys.
Jeffrey A. Powell -- Executive Vice President and Chief Financial Officer
And I need to clarify something. When I was talking to Adam a minute ago, I said 75% in '18 and 25% in '19. I forgot we're in 2019 already. It's 75% in '19 and 25% in '20.
Operator
There are no further questions in the queue, I'd like to hand the call back to management for closing comments.
Dean O. Bass -- Chairman and Chief Executive Officer
I'd just like to thank everyone for being a part of this today and appreciate your input and your interest in Spirit of Texas Bank. Thank you very much. Have a good day.
Operator
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Duration: 21 minutes
Call participants:
Jerry D. Golemon -- Executive Vice President and Chief Operating Officer
Dean O. Bass -- Chairman and Chief Executive Officer
David M. McGuire -- President and Chief Lending Officer
Jeffrey A. Powell -- Executive Vice President and Chief Financial Officer
Adam Freyaldenhoven -- Stephens Inc. -- Analyst
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
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