ServisFirst Bancshares Inc (SFBS) 2018 Q2 法說會逐字稿

Good evening, and welcome to the ServisFirst Bancshares Second Quarter Earnings Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Investor Relations Manager, Davis Mange. Please go ahead.

Thanks, Austin. Good afternoon, and welcome to our second quarter earnings call. We'll have Tom Broughton, our CEO; and Bud Foshee, our CFO, covering some highlights from the quarter, and we'll then take your questions.

I'll now cover our forward-looking statements disclosure and then we can get started. Some of the discussion in today's earnings call may include forward-looking statements subject to assumptions, risks and uncertainties. Actual results may differ from any projections shared today due to factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made, and ServisFirst assumes no duty to update them.

With that, I'll turn the call over to Tom.

Thank you, Davis, and good afternoon to all. Thank you for joining us. First thing I'd like to do is cover, talk about loans and deposits. Our loan growth picked up nicely in the second quarter. We continued to see a large number of large loan closings at the very end of the quarter, literally in the last day or 2 of the quarter, which is I guess, when the people are buying and selling properties or buying and selling companies, the closings happen right at the end of the quarter, I guess. But in any event, it – we certainly would like to see them come earlier in the quarter, but that is the normal trend. The best growth in our loan portfolio was in Atlanta, Nashville and Dothan, Alabama.

On the deposit side, we saw some pretty good growth that picked up a little bit. Certainly, we usually see most of our deposit growth in the second half of the year, but we did see pretty decent growth in the second quarter. Our best growth was in Atlanta, Tampa and our correspondent division for the quarter.

We do -- I do mention the quarterly results because analysts are interested in that. We actually focus on year-over-year growth in loans and deposits. We don't really focus on quarterly results. At our Board of Directors level, that is -- we look at the annual change year-over-year, so -- but that is certainly something we note that since analysts are interested in it, we are interested in it.

From a loan pipeline standpoint, our pipeline was at a record level. At June 30, it far exceeded the March 31 and the December 31 levels. So the loan pipeline is very, very strong and we are pleased with that.

From a number of production people, we were down 1 for the quarter. We hired 5 really good -- really happy with the quality of the people we're bringing on. We've brought in 5 during the quarter and we had 2 retirements. We've been around long enough to have retirements now, and we had 4 production people to part the company. So we do continue to focus on the size of the loan and deposit books by officers and that's what something we're going to continue to try to do to strengthen that loan-to-deposit book by size of officers. We continue to grow that and continue to -- we think we can continue to be more efficient as a company.

So that covers sort of the highlights on the -- from the things I normally cover, and I'll turn it over to Bud Foshee, our CFO now.

Thanks, Tom. Good afternoon. Our net interest margin was 3.82% for the second quarter. It was 3.81% in the first quarter. Excess liquidity decreased by $12 million in the second quarter. Our loan yield increased by 13 basis points during the second quarter. We had the Fed rate increase on March 22 and June 14. When we have increases that weren't prime increases, $1.4 billion of our variable rate loans repriced immediately. And then during the quarter, a total of $2.4 billion repriced at different dates during the quarter.

Deposit cost increased by 17 basis points in the second quarter. We're like everyone else, we're adjusting rates whenever Fed increases or sometimes before, if there is almost a 100% certainty that the Fed is going to do a rate hike.

Expenses, salaries year-over-year increased $1.1 million, 6.2%. And then quarter-over-quarter, first -- for the second quarter 2018, they increased 2.9%. $131,000 of that increase related to new hires. We hired someone over at the merchant services area. Purchase card production had 6 new hires related to loan production. And then we had 2 adds in our loan operations area. So going forward, we had 12 staff openings at quarter end, 2 of those are adds to staff. So as those positions are filled in the third quarter, that will impact our salaries also. Incentive year-over-year increased $1.4 million. In the first quarter this year, we had an under accrual that we booked that was $331,000. In the first quarter of 2017, we had a reversal of $300,000. As for credit quality, still very good. Nonperforming loans, the total loans is 0.23%. It was 0.19% at March 31. And then nonperforming assets to total assets, 0.28% versus 0.22% at March 31. Second quarter net charge-offs, annualized average loans was 13 basis points and that was 10 basis points in the first quarter. Nonperforming assets did increase from $15.8 million at March to $19.9 million at June 30, and that increase is primarily related to 1 CRE non-owner occupied loan. ORE, essentially the same, $5.7 million at March, $5.9 million at June 30.

Taxes. Our tax rate for the second quarter was 19.9%. It was 21% without the stock option credit of $457,000. So the first quarter, it was 17.8% and 21.4% without the stock option credit of $1.452 million. Year-to-date, tax rate is 18.9%, 21.2% without the year-to-date credit which is $1.9 million. Then last year before the tax reform, our rate was 27.6% or 33.1% without the stock option credit of $3.5 million in 2017.

And that covers my part, I'll turn it back over to Tom.

Yes, why don't we take questions now? Thanks.

(Operator Instructions) And our first question will come from Brad Milsaps with Sandler O'Neill.

Bud, maybe I just wanted to start with the margin. I appreciate the color. If I kind of look at it over the last several quarters sort of ex your liquidity, it's kind of been in this mid-low 3.80s kind of range. Do you think we're sort of at the point where that's kind of where we are? And you kind of stabilize it there, the potential for going up is going to be offset by rising funding cost? Just kind of curious, your thoughts on how to approach the NIM going forward.

Yes, Brad, I think it will stay within that range because we'll have loans that will continue to reprice in the third quarter from the June rate -- from the June Fed rate hike prime increase. But we're still seeing the deposit cost going up. Now, I think as long as the potential is out there for future Fed increases, I think we'll still continue to see that. Hopefully, they will be about equal and we will gain something out of that. But that one's harder to predict. I think Fed was a little more aggressive in raising rates than we thought. So I think we're all trying to catch up from a deposit standpoint.

Brad, this is Tom. From a -- on the fixed-rate loan portfolio, obviously, we'd like to see some increase in the yield curve going up a bit. It would be helpful on that to improve. That is half of our loan portfolio, so we had a little bit longer -- higher longer rates obviously would help all of us in the industry. And if we will see those rates move up a bit, that would be hopeful. But obviously, we don't have any idea of when that's going to happen.

And Tom, if I remember, typically, you have the stronger loan growth -- you have strong growth throughout the year but deposits tend to come later. Is that sort of your expectation in the back half of the year to kind of ease the loan deposit ratio off 100% back into the high 90s?

Yes. And of course, the way we compute our loan to deposit ratio, we include Fed funds purchased from our -- we have several hundred downstream correspondent lines and we count those as core deposits and core funding for the buy-ins. So we are certainly different than most buy-ins in that regard. But yes, we typically see deposits flat to shrink in the first quarter and get some growth in the second quarter and then you get most of our growth in the third, fourth quarter on deposits. So we don't think we'll see any different trend this year.

Got it. And maybe just one final. Your capital ratios continue to march higher. I think they're probably at levels higher than they were, at the IPO even. What are your thoughts there? I mean, it sounds like the back half is -- the loan pipeline is set up really well. Just kind of curious, new markets, what were you kind of thinking about in terms of how you manage your capital? Maybe at this point, your thoughts if you think it's best to maybe harvest a little bit more. Just kind of curious what you're thinking.

I guess, we continue to evaluate new markets. And we've always said, if we found the right 3 teams in 3 different markets all at the same time, we do it because we might go 3 years without finding another team that meets our expectations. And we've talked to an awful lot of people and continue to be very selective in who we talk to and who we have join the company. And so yes, we don't think building the capital is -- as long as we can keep our return on equity over 20%, we don't feel too bad about building equity a little bit.

And our next question comes from Nancy Bush with NAB Research.

One of your larger regional competitors reported this morning and they reported in sort of a jump in deposit beta and they cited competitive factors in "several markets". I don't yet know what those markets are but my guess would be that Atlanta would be one of them. Could you just speak to the issue of your deposit beta and what you're seeing and how you're competing?

Yes. Nancy, this is Bud Foshee. I'm not sure how everybody competes that beta but what I was looking at, I'd say that our beta during the second quarter was 57%. I took an average of the 2 Fed increases that come up. The average Fed increase is 30 basis points. I'm not sure how everybody competes with that total, but that's kind of what I came up with ours. So I think -- I mean, you're right, Atlanta is a very competitive market not to -- all the roads down there neither. I mean, we just -- we see it in the different markets, you can see it down to public funds then -- I mean, it's competitive.

Nancy, this is Tom. It's competitive everywhere. And what's interesting is everybody says well, everybody else is doing it but us. Hey, everybody is doing it, Nancy. Let me go ahead and tell you the truth, everybody is guilty of it.

You must not be a Wells Fargo customer.

Well, that is pretty certain that these buy-ins aren't...

They're not doing it, by the way.

No, they are not. But certainly, all the people we see as primary competitors are doing it, but -- and yes, I think our focus is on -- like in the second quarter, we raised our posted deposit rates twice. We're trying to be fair to the customer. And a lot of times, we're doing it without customers asking because we're trying to take a long view of building our company and being fair to our customers and attracting new customers to the buy-in by being fair with them and not trying to say, "Okay, how long can we hold back deposit rates, so that we can increase our margin this quarter?" So that's -- and obviously, we're growing our balance sheet year in and year out. So obviously, we'd have a whole different strategy if we had a very low growth situation like some of the larger banks do when they can't grow a whole lot. So, that's more of our strategy, is we're trying to grow earnings per share and we think the way we're doing it is the best way to do it for us.

Are you seeing a need to have any kind of new deposit products, maybe some kind of bump-up products or something like that? Or are you just kind of sticking with what you've got and just repricing?

Yes. Nancy, people are doing some of kind of the things that you and I both know that probably aren't the best idea for the bank in the long run, and we aren't doing any of those. So yes, you're seeing people get creative on doing it. We're not a -- we have a very small funding from -- particularly from the deposits as compared to almost any banks you would find. So that doesn't really affect us and we don't have our -- certainly, our retail component is the larger retail type customers, not professionals or what have you, rather than just the mass market retail customer base. So that leaves us out a little bit.

(Operator Instructions) Your next question comes from Kevin Swanson with Hovde Group.

Just a quick question on the NPAs you guys mentioned. Maybe any additional color you can give on the 1 CRE loan and then maybe just kind of your general credit outlook going forward.

I'm sorry, I didn't hear your question.

Sorry. The NPAs you guys mentioned and then the 1 CRE loan, just any additional color on that and then just your general credit outlook going forward.

Well, it is a participation on purchase, it is a very well secured loan. There are problems between the management group of the entity that owns it. And the investors, all, I think, are foreign -- the investors are all foreign nationals. And they probably feel like there on the ground, management team has not treated them fairly, and that would be the allegation on their part, so -- and we're caught at the crossfire a bit between the two. But we're just a well-secured loan and we don't feel like we have any exposure to loss or whatsoever. It's just timing of making the -- the judge to order them to make the payments. So we are taking a more aggressive collection effort at this point in time than we've taken in the past. I have clearance pass here, (inaudible) and Bud, did I -- is that a generally good summary of what -- did I leave anything?

No, that was accurate. The loan to value clearance is about 40%, loan to value.

Your cash flow coverage for the project is about 3 to 1, so it's a well-secured CRE asset with no exposure.

And they are making payments that just the judge in the first ruling didn't make them catch up in payment when they had stopped. And so we had gone back and as you said, they're more aggressive. So it is making payments but it is past due and we took the conservative approach and included it in the NPA.

Yes, it's sort of an unusual situation, Kevin, but we did it with a good correspondent. We're working through it, but this is not going to be an issue.

And then just one last one. So there's a change in kind of regulation and the outlook from Washington. Kind of -- does it change your outlook or perspective on the future of the bank, given you guys are quickly approaching the $10 billion threshold?

Yes. I mean, we see a lot of relief there from the standpoint that we won't have to. Our deadline to start preparing for DFAST -- our internal deadline was July of this -- this month because on our timeline, we thought we needed certainly, a pretty good runway to get ready for DFAST. And so this was going to be the month we started staffing up and hiring and looking at software and identifying software programs that we were going to purchase to do that. So certainly, that's a cost avoidance that we see that will be helpful to us over the next couple of years. We have -- we now see there are -- the appointments that President Trump has made to the FDIC, certainly, the Fed Reserve Board and the OCC could last well beyond his term, the benefits. And obviously, the new FDIC chair, she just took the job in the last couple of months. So that shift is slow to turn, the regulatory shift is very slow to turn. But certainly, we see there might be some positives over the next couple of years that might have a tailwind that lasts well into the next President's term or even longer from that standpoint because they all tend to work together, the OCC, the Fed Reserve and the FDIC. So we are generally optimistic. We don't expect any short-term results. Certainly, the regulatory -- that regulatory shift is very slow to turn and certainly, we have to -- we are very responsive to their request, how about that? Because we know who the -- we know who the boss is.

And at this time, I am showing no further questions. I would like to conclude today's question-and-answer session as well as the conference. We thank you for attending today's presentation and you may now disconnect.