ServisFirst Bancshares Inc
NYSE:SFBS
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ServisFirst Bancshares Inc
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Good evening and welcome to the ServisFirst Bancshares Second Quarter Earnings Call. All participants will be in listen-only mode. [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 will have Tom Broughton, our CEO and Bud Foshee, our CFO covering some highlights from the quarter and we will then take your questions. I will 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 will turn the call over to Tom.
Thank you, Davis and good afternoon to all. Thank you for joining us. First thing, I would like to do is cover, talk about loans and deposits. Our loan growth picked up nicely in the second quarter. We continued to see large number of loan closings at the very end of the quarter literally in the last day or two of the quarter, which is I guess when their people are buying, selling properties or buying, selling companies, the closings happen right through the end of the quarter, I guess, but in any event, certainly we 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 Dalton, 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. I do mention the quarterly results, because analysts are interested in that. We actually focus on year-over-year growth in loans and deposits, where you don’t really focus on quarterly results at our Board of Directors level that is we you look at the annual change year-over-year. So that is certainly something we know 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 are bringing on, we brought in 5 during the quarter. We had two retirements. We have 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 officer and that’s something we are going to continue to try to do is strengthen that loan deposit book by size of officers. We continue to grow that. We continue to – we think we can continue to be more efficient as a company.
So that covers all of the highlights, from the things I normally cover and I will turn it over to Bud Foshee, our CFO now.
Thanks, Tom. Good afternoon. Our net interest margin was 3.82 from 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 the increases – there were prime increases, $1.4 billion of our variable rate loans re-priced immediately. And then during the quarter, a total of $2.4 billion re-priced at different dates during the quarter. Deposit counts increased by 17 basis points in the second quarter. We are like everyone else we are adjusting rates whenever Fed increases or sometimes before there is almost a 100% circa if Fed is going to do rate hike.
Expenses, salaries year-over-year increased $1.1 million, 6.2% and then quarter-over-quarter for second quarter 2018, they increased 2.9%, $131,000 of that increase related to new hires. We hired someone over the merchant services area, purchase card production has 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 a under accrual that we booked that was $331,000 in the first quarter of 2017, we had a reversal of $300,000.
Let’s say, credit quality, still very good, nonperforming loans to total loans is 0.23, it was 0.19 at March 31 and then non-performing 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. Non-performing assets did increase from $15.8 million at March to $19.9 million at June 30 and that increase is primarily related to one 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. Let’s say 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 million, $21.2 million without the year-to-date credit, which is $1.9 million. Last year before the tax reform, our rate was 27.6% or $33.1 million without the stock option credit of $3.5 million in 2017.
And that covers my part. I will 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. Please go ahead.
Hey, good afternoon Tom and Bud.
Hi, Brad.
Hey, Bud, maybe 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 are sort of at the point where that’s kind of where we are, you can kind of stabilize it there, the potential for going up is going to be offset by rising funding costs, 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 will have loans that will continue to re-price in the third quarter from June Fed rate hike prime increase, but we are still seeing the deposit cost going up. I think as long as the potentials out there for future that increase I think we will still continue to see that. Hopefully, they will be about equal and we will gain something out of that, but that one is harder to predict, I think say it was a little more aggressive in rising rates than we thought. So, I think we are all trying to catch up from a deposit standpoint.
Brian, this is Tom. From a – on the fixed rate loan portfolio, obviously we would like to see some increase in the yield curve going up a bit 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 have all of us in the industry and we would see those rates move up a bit, that would be helpful, 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, we have strong growth throughout the year, but deposit 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 a 100 back into the high 90s?
Yes. And of course, the way we compute our loan deposit ratio, we include Fed Funds purchased from our – we have several hundred downstream correspondent lines and we can have those as core deposits and core funding for the buying. So, we are certainly different than most volumes 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, but we don’t think we will see any different trend this year.
Got it. And maybe just one final your capital ratios continued to march higher, I think they are 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 that the loan pipeline is set up really well. Just kind of curious new markets, what were your kind of thinking about in terms of how you manage your capital maybe at this point of the cycle, we think it’s best to maybe harvest a little bit, just kind of curious of what you are thinking?
I guess, we continue to evaluate new markets and we have always said if we found the right three teams in three different markets all at the same time we do, because we might go 3 years without finding another team that meets our expectations and we have talked with an awful lot of people and continue to be very selective in who we talk to and who we have joined the company and we don’t think building the capital as long as we can keep our return on equity over 20%, we don’t feel too bad about building equity a little bit.
Great, thank you.
And our next question comes from Nancy Bush with NAB Research. Please go ahead.
Good afternoon, gentlemen. 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 and several markets. So I don’t yet know what those markets are, but my guess would be that Atlanta would be one of them. Can you just speak to the issue of your deposit beta in what you are seeing and how you are competing?
Yes, Nancy, this is Bud Foshee. I am not sure how everybody competes that, but what I was looking at, I’d say, that our beta during the second quarter was 57%, I took an average of the two Fed increases to come up with that. The average Fed increased 30 basis points. I am not sure how everybody competes that total, but that’s kind of what I came up with ours. But I think I mean, you are right, Atlanta is a very competitive market, not that I will rest them on either. I mean, we see it in the different markets, you can see it down to public funds. I mean, it’s competitive.
Nancy, this is Tom and its competitive everywhere. And what’s interested, everybody feels well, everybody else is doing it with us. Everybody is doing it, Nancy. Let me go ahead and tell you the truth, everybody is guilty of it. So, it’s…
You must not be a Wells Fargo customer. They are not doing it by the way.
No, they are not, but certainly, the people we see is the primary competitors are doing it, but yes, I think our focus is like in the second quarter we raised our posted deposit rates twice. We are trying to be fair to the customer. And a lot of times we are doing it without customers I ask in, because we are trying to take a long view by building our company and being fair to our customers and attracting new customers to the buy in about 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 are growing our balance sheet year-in and year-out. So obviously we would have a whole different strategy. We had a very low growth situation like some of the larger binds do, where they can’t grow a whole lot, but that’s what more of our strategy is where we are trying to grow earnings per share and we think why we are doing this 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 have got and just re-pricing?
Yes, Nancy, people are doing some of the kind of things that you and I both know that probably aren’t the best idea for the bank in long run and we are doing any of those. So yes, you are seeing people get creative on to it and we are not – we have a very small funded from deposits compared to almost anybody you would try, so that doesn’t really affect us and we don’t have certainly our retail component is the larger retail type customers not professionals of what have you rather than just the mass-market retail customer price, so that leaves us out a little bit.
Okay, alright. Thank you.
You are welcome.
[Operator Instructions] Our next question comes from Kevin Swanson with Hovde Group. Please go ahead.
Good afternoon. Just a quick question on the NPAs you guys mentioned maybe any additional color you can give on the one CRE loan and then maybe just kind of your general credit outlook going forward?
I am sorry I didn’t hear your question.
Sorry, the NPAs you guys mentioned and then the one CRE loan, just any additional color on that and then just your general credit outlook going forward?
Well, it is 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 of whom are foreign – the investors are all foreign nationals. And they probably feel like their own the ground management team has not treated them fairly and that would be the allegation on their part. So, we are caught crossfire a bit between the two, but we are just a well secured loan and we don’t feel like that we have any exposure to loss or whatsoever. It’s just timing of making the judgment we are in the there to make the payments. So we are taking a more aggressive collection effort at this point in time than we have taken in the past. I have clearance pass here [indiscernible] and Bud. Did I – is that a general good summary of what I – did I leave anything?
That was accurate. The loan to value clearance is about 40%, loan to value.
Yes, your cash flow coverage from the project is about 31. So, it’s a well secured CRE asset
And they are making payments that just judge in the first really we didn’t make them catch up in payment. We may have stopped and so we had gone back and as you have said been more aggressive. So it is just making famous, but it is past due. We took the conservative approach and included it in the MDA.
Yes, it is sort of an unusual situation, Kevin, is we did with a good correspondent. We are working through, but it’s not going to be an issue.
Okay, thanks. I appreciate it. And then just one last one, so does the change in kind of regulation and 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 if we won’t have to. Our deadline to start preparing for DFAST, our internal deadline was July of this month, because on our timeline, we thought we needed sort of a pretty good runway to get ready for DFAST. And this was going to be the month we have started staffing up and hiring and looking at software, identify software programs that we were going to purchase to do that. So, certainly, that’s a cost avoidance that we have. We see that will be helpful to us over the next couple of years. We now see – there are the appointments that President Trump has made to the FDIC certainly the Federal Reserve board and 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 was 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 last well into the next President’s term or even longer from the standpoint, because they all tend to work together, they obviously see the Federal Reserve and the FDIC. So, we are generally optimistic, we don’t expect any short time 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 policy is.
Okay, fair enough. Thanks, guys. Appreciate it.
Thanks.
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.