ServisFirst Bancshares Inc (SFBS) 2017 Q3 法說會逐字稿

Good afternoon, and welcome to the ServisFirst Bancshares, Inc. Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

Good afternoon, and welcome to our third 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 today during this 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. We're pleased to have everyone on the call today, and we're most pleased with our quarter that we just finished.

ServisFirst continues to be an organic growth story. By -- just to remind you we were founded in the year 2005, and we've had over $7.3 billion of organic growth in the last 13 years, so we're very pleased with the quarter and all of our metrics that we'll cover with you today. I'm going to go over a few things, and then Bud Foshee will cover a few financial items, and we'll -- I'll come back after Bud covers those.

So -- and talking about our loan growth, we had a really nice solid loan growth during the year -- excuse me, during the quarter. With Dothan, Tampa Bay, Charleston and Nashville are having the best loan growth in the quarter. So we're very pleased there, and I'll talk about it in a minute a little bit more about loan demand in general.

From a deposit standpoint, obviously, it was outstanding growth for the quarter. It's probably one of the strongest growth quarters we've ever had. Almost every market had solid deposit growth in the quarter. We typically do see most of our deposit growth in the second half of the year.

This is a typical year so far as we had outstanding growth in the third quarter, and typically, the fourth quarter is our strongest quarter and from a deposit growth standpoint, but certainly, it'd be hard to top the third quarter, seeing it was really such a good solid quarter.

From a loan pipeline standpoint, as our loan pipeline was very solid. To remind you that the analysts that listen on the regular basis, our -- typically, our fourth quarter is usually our strongest quarter. In loan closings, typically, again too, we typically have most of our loan closings towards the end of the quarter, so it doesn't help the income in the quarter, it helps the income in the following quarter. So I'd probably would see that trend repeating itself again in the fourth quarter.

We realized that loan demand with investors is certainly on a national basis a question mark with investors, and we're often asked when we're meeting with investors and at investor conferences with the firms that cover us, about loan demand and what it's like, and we realized it's probably not the greatest on a national basis. But I'll answer by saying that we continue to see very strong, solid loan demand it is certainly at the point where we can continue to be very disciplined in terms and structure on all of our credits. I think the only time that we probably had to make a few allowances when loan demand was a little slow during the recession. We did some credits -- they weren't bad credit, but they were typically credits where we didn't have a full relationship, they were just deals to get some earning assets on the books, and we certainly don't like to do those and we don't have to do those at all now. We can think we can be -- we certainly are going to take care of our good clients, but we can pick and choose what we do. We continue to see very solid loan demand.

On the producer's front, we usually cover -- we added 8 new bankers during the quarter and 6 less, so we have -- today have 127 bankers or production people in our bank. We continue to get calls from great bankers and we -- our staff continues to get stronger. So we're certainly pleased with where we are from that standpoint.

So I'll turn it over to Bud now to cover a few of the financial items.

Thanks, Tom. Good afternoon. We continue to have phenomenal organic growth. Annualized loan growth for the quarter was 15%. As Tom mentioned, the fourth quarter is normally our strongest growth period in loans, so we're optimistic. Annualized deposit growth for the third quarter was 27%.

Funding cost related to this growth led to a slight decline in the net interest margin. We're optimistic for the fourth quarter net interest margin as the prime rate and 30-day LIBOR rate increased in the third quarter.

The deposit rate pressure seems to have moderated a bit, though it may increase if we see near certainty of another Fed rate increase.

Higher 10-year treasury rates are a positive for the future.

Regarding credit quality, year-to-date charge-offs are well in line with last year and we don't seem to have any large storm clouds on horizon. The charge in the third quarter was 1 C&I credit where fraud was involved, our asset quality continues to be strong.

And that concludes my section. I'll turn it back over to Tom.

Thank you, Bud. I'll kind of wrap it up and talk about we're aware of what investors are interested in. And today we'll try to cover some of that before questions. But we know that the investor focus today is on net interest margin, deposit betas and the yield curve. And what we're trying to do is follow what we think are the best strategies to grow earnings per share. Our focus is on new accounts and our focus is on serving clients and winning in the marketplace.

Our recent market share data came out from the FDIC, year -- of June 30 data -- of June 30, '18 year-over-year, we had really strong market share growth in 9 out of our 10 markets. The new account -- in fact the only market we didn't have outstanding growth in, it was a market that has a lot of excess deposits generated in that market. Our new account opened has continued to show very impressive growth. We are very optimistic about the future there at the bank based on the talent that we have, which we think is second to none in the industry. Everything we see tells us that we are winning in the marketplace, which is the best metric we think for future earnings growth. So we'll be glad to take any of your calls and questions now.

And I'll turn it back over to you, Davis.

Thanks, Tom. Yes, so would you please now open the floor for questions.

(Operator Instructions) The first question comes from William Wallace with Raymond James.

So on the deposit growth, you mentioned it was strong across all our markets. Are you doing anything different that would explain the growth? Are you promoting? Are you incenting the lenders more on deposits? Can you talk a little bit about what might be driving that growth?

Yes. I mean, probably -- Wally we've probably been emphasizing a little bit more than normal but we always emphasize. We just see an opportunity. We see an opportunity to grow the bank. We -- we are -- our kind of deposit betas and -- they may move around, but we earn a 190 ROA and a 20% return on equity and we grow the balance sheet consistently. I think the shareholders are going to come out okay on the whole deal. So -- but yes, we probably -- it's just -- but sometimes it's just how it pops, it's just how it falls, Wally, if you get some nice large accounts and they help a lot or -- in the first quarter, I know, we had some companies that sold in the fourth quarter of last year and then we had big deposits in the fourth quarter and they ran off a bit in the first quarter. That's just kind of how it goes sometimes. So -- but little bit of luck. But yes, we are emphasizing deposit growth as much as we have in a long time, Wally.

So looks like a significant portion of the growth on an average balance basis is coming out of the money market account. So are you promoting across all of your markets or you're in the period balances were -- growth was stronger than the average balance. So I'm wondering if you had a influx of transaction accounts or anything at the end of the quarter that will show different trends in the fourth quarter.

I'm not sure I understood the question, Wally.

Well, it's sort of 2 questions. So it looks like you're -- on an average balance basis, which is where we break out line item detail, I see almost $300 million in growth in the money market deposits, which I'm assuming aren't -- I don't know, are they relationship accounts? Or are you promoting in your markets to bring -- to onboard new deposits?

They are relationship -- we've never advertised -- we've never done any advertising in 13 years at the bank and don't intend to. So everything is one-on-one relationships. We don't do consumer advertising. We don't do commercial advertising. We don't do any kind of advertising. So it's all just building relationships, and we think that's how the best way to build a bank. But we -- and we don't have to remind -- I think you know this, Wally, but we don't have any broker deposits. We don't have any -- use any internet listing service or any other means of -- and we certainly have no -- we're not a member of the Federal Home Loan Bank, so we don't have any home loan bank advances. So our balance sheet is as clean as you're going to ever find.

Okay. Moving on to the expense side of the equation. It's impressive that you've been able to hold the line, it actually -- the expense has declined in this quarter. With that kind of loan growth, I'm just curious how you're holding the line? How you see expenses moving going forward if you, I don't know, maybe, if you want to talk about an efficiency ratio or just a dollar basis. Anything that kind of help us think about how you think you can leverage the operations that you have now from an expense perspective?

Yes, hi, Wallace, Bud, the fourth quarter is usually when we make all of our -- a lot of our adjustments, incentive accrual being one of the primary things, but we look at everything, marketing accruals, anything of that nature. It's really too early to judge that, especially based on historical fourth quarter growth as to what incentives might be, so I can't really give you a great number just based on historical adjustments for fourth quarter.

Okay. Well, maybe just bigger picture. I have calculated the 32% efficiency ratio in the third quarter. Where do you think that could go over a couple year period?

I think we're going to stay 32% to 34% for a range. Somewhere -- I think that's a good target.

Okay. And then, lastly, just if there's any commentary as to how you guys might be thinking about any desire to enter a new market versus the opportunity that you see in your existing markets and if you're not interested in anything new?

Yes, Wally, we continue to be interested in -- we talk to people in a lot of different places on a regular basis. And probably most of the opportunities would be that we see today is we're certainly interested in adding people and some of our larger markets that we are already in. And that certainly is extremely efficient, as you well know to add people in market, and those markets are typically Nashville, Atlanta, Birmingham, Tampa Bay and Charleston. So those are the markets that are larger that we -- where we can add people and be effective. But we continue to talk to people, and certainly, we probably have shied away from some smaller markets that at one time we probably would have been a little bit more interested in going to, Wally. We've probably been a little bit more choosy today than we have been in the past.

Okay. That's helpful. And...

From the expense standpoint, Wally, I tell you, the -- they talk -- we talk about regulatory relief, but we hadn't seen a lot of it yet and we continued -- we've added a lot of back-office people to -- for BSA compliance and all those sort of things over the last year. If we look at our trend of employment, almost all the people we've added in the last year have been the back-office people. So we had to try to be more efficient in other areas to drive our efficiency ratio lower, which is the goal. I mean, our goal is to continue to drive it lower. We don't want to promise that but we certainly want to try.

Okay. But it'd be prudent to stick around the range that you're in now?

Yes, I think so, yes.

(Operator Instructions) The next question comes from Tyler Stafford with Stephens Inc.

I just wanted to just, I guess, start on the loan growth. I'm just wondering about your coastal markets that you're in. And just what impacts, if any, you saw from the hurricane this quarter, and what impacts that might have had on business activity or loan closings or any of the fee income, mortgage banking or anything like that?

Yes, we're not aware -- we're really not in markets that have been deeply affected by the storm. We're not on the -- in the area of certainly Panama City or -- from Panama City down to Tallahassee. We have no operations at all there, and we took a look at -- we don't have any -- any of our exposure that would be in the Panama City market, would be on the west side of Panama City, where there's been certainly a lot much less damage. So we don't think that we'll have any exposure from the storm to -- of any significance. Clarence Pouncey is here in the room, our Chief Operating Officer, I'll ask Clarence to speak on, if you have any other...

Thank you, Tom. No, we did not have any significant real estate property damage. We have little damage with some institutional farmers in South Georgia with cotton, but all of which had crop insurance. Wind and hail insurance, so should be fine.

Okay. I'm glad to hear it. Tom, I was just wondering, or Clarence, just your C&I utilization rate today, have you seen an improvement there at all yet? And where does that stand today?

It's been remarkably static since we came out of the -- remarkably, I think, surprisingly static since we came out of the recession. We hadn't seen a big variance there, Tyler. And you would think you would but we would have not seen a big change there. It's slightly higher but it's not dramatically higher. We saw it pick up as we came out of the recession and then it's been generally pretty static since that time.

Okay. Maybe -- Bud just on the margin. I'm just trying to better understand the dynamics of how the margin is going to be up in the fourth quarter? Is that just a reflection of a better move in LIBOR and prime on the asset side? Are you expecting deposit betas at least in the near term to subside a little bit? What's the moving kind of puts and takes there?

Yes, like prime increased, I believe it's September 27. And we have about $1.4 billion that are made of reprices, so we're -- that -- we'll get the benefit of that in the fourth quarter. Let's see on 30-day LIBOR, we have about $820 million of loans tied to 30-day LIBOR. That rate didn't really increase through the third quarter until September, I think it went up 15 basis points in September. So we'll get the benefit of that also in the fourth quarter. From a deposit rate standpoint, I think, we feel like that's stabilized some, I don't know, probably still depends on what happens with the Fed in the fourth quarter, but we feel like that's stabilized some compared to what it's been in the first and second quarter. I mean, if I had to give a -- I'd say, if you need a range, I would say 3.80% to 3.85% would be a good range for the fourth quarter for NIM.

Okay, that's very helpful. Maybe just lastly, the FDIC insurance premiums, those are down pretty substantially this quarter, is this now a better run rate for those?

They have -- some of the multipliers have decreased especially the FICA multiplier, and it's also a look back, it's always the prior quarter where they're basing the premium on. So we had an adjustment of $395,000, we were over accrued by $395,000. And we made that adjustment in the third quarter. Yes, looks like the funds are getting close, I think the fund was at 1.32% at the end of June, and I think 1.35% is their goal, so I guess we'll see what happens when they reach that -- the goal for that.

I'm sorry, what you said the goal was?

1.35%, what I've read -- I'm sorry, it's 1.33%. That's building up, they're very close to the goal. I keep thinking we're going to get there the next quarter. We never have, it's taken -- I thought we'd get there a long time ago so, but as long as the losses and the -- for the insurance fund are pretty much become nonexistent for -- we should get there very quickly I'm thinking, that would be good news for all the banks.

This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.