ServisFirst Bancshares Inc
NYSE:SFBS
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ServisFirst Bancshares Inc
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Good day and welcome to the ServisFirst Bancshares Incorporated Second Quarter Earnings Conference 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 Davis Mange. Please go ahead.
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 and welcome to our call. If you are new to our call, you will find that we don’t read the press release that we sent out earlier. We only cover other material, we assume everybody can read and we won’t review any of that material.
So to cover the quarter, pretty darn good quarter. All-in-all, it was eventful in terms of staffing. We added some significant new bankers in the quarter. We added 4 in Nashville. We added 4 in Sarasota Naples market and 2 in Birmingham and 1 in Mobile. Our total number of producers is up from 133 to 136 in the quarter, that included 2 retirements and 6 departed. We continue to focus on improving our loan and deposit portfolio sizes of our commercial bankers and we think we are the bank of choice for many good commercial bankers. We have never used a head-hunter. We find the people directly or they find us and we don’t just never had to use a recruiter. So, we think for several reasons we are the bank of choice for commercial bankers. So if you are a commercial banker and thinking about joining us and you are listening to the call that I have got a few things that I think are pertinent to say.
First of all, we are a customer-centric bank. We focus on service above all else that is important to our bankers. Also I think we are unique in that we are a founder-led company and I have the unique ability to fight bureaucracy that something that commercial bankers detest and our bankers they know if they call me and I can respond and help them in any way they need help including to cut through some red tape. And we certainly as a founder-led company we think we can respond to changing market conditions more quickly than many of our competitors. We are also are very responsive on credit needs in a very timely manner. Sometimes the answer is no, but we can make a decision very, very quickly. We think our regional CEO and Board model is unique and enables our bankers to serve clients better than our competitors.
And last, we also focus on core relationships rather than on transactions. Our hiring pace is greater than in recent years and we are talking to more bankers than probably ever in our history. We have hired larger number of trainees in the past year. I think I mentioned in the last call, but that we are hiring trainees we think those people certainly are not producers today, but they will be in the future and some of our very best production people started at the bank here as trainees some years ago. So we have ramped up hiring of trainees.
We have a new office open in Fairhope and we are also planning a new office in Fort Walton, Beach Florida. And we also have selected office space in Sarasota market. So, we are – hope to have been there in August. So all three of these offices are a little bit unique in that they were – received support from an adjacent region to reduce back office expense, typically on the credit side, they are receiving support we can elaborate as necessary. It’s pretty clear today that the stock markets are not rewarding growth, our PEs move pretty much in line with many others that don’t have our growth profile. However, we will continue to focus on high quality sound growth as we have for the past 14 years.
Also, if we had a growth rate at a much lower level like many of our competitors it’s easier to support that growth. It’s expensive to grow quickly. You have to have your back office staffed to support that level of growth. So you have to plan ahead. You have to hire ahead, you sort of have stair-step overhead increases to support that growth. And we would –it’s not cheap to support that growth. We do continue to build excess capital. I know many of our competitors have – are either buying back stock or have announced buybacks. And what I see doesn’t appear to be terribly accretive to earnings. We do plan to use the excess capital at the appropriate time; any acquisition that we make would need to be a good cultural fit for us and not just financial engineering as we see in many acquisitions today.
So we do plan to use the excess capital at the appropriate time. We think the true value of a bank is in core relationships. That’s why we avoid shared national credits, unless we have a direct relationship. And again that’s why we don’t have specialty lending areas because those are transactional rather than relationship-oriented.
We did have a nice bit of growth in the quarter. Our loans grew 19% annualized. The growth was led by the regions of Birmingham and Atlanta. On the deposit side, we grew 18% annualized with broad-based growth in most every region. It’s been very robust growth. From a pipeline standpoint, I know that analysts are increasingly are a little bit sarcastic about - I’ve seen some notes, about people announcing they have a solid pipeline but they don’t have loan growth. So I’m a little reluctant to keep covering the pipeline but I will. Compared to the last two quarters, our pipeline is up substantially, it’s up over 10% compared to the last two quarters.
I would caution you though the – we do have a 90 – over 90 day bucket in the pipeline. There is usually nothing in there but it’s pretty large this quarter. So some of the growth, we would expect to have after the end of the quarter for the excess amount of the pipeline that we have. Bud is going to talk in a minute about rate cut and what it would do to us, where we think we are. We continued to be – to focus not on net margin – net [indiscernible] margin maintenance, but we are continuing to focus on growth and growth in net income. We think that’s the appropriate strategy. We continue to try to attract core relationships to the bank. We are being successful. We are getting more looks than ever before and we feel good about where we are. I will look at some metrics very few people would look at or have access to but the thing I will focus on is the number of new accounts we’re opening and we’re opening significant numbers of new accounts year-over-year. So I feel really good about where we are from a competitive standpoint. We certainly think we have done some – some work, and I’m looking at a rate cut, which appears reasonably certain at this point in the next couple of weeks. And we think, we can maintain and improve margins a bit.
So Bud I will turn it over to you now to cover the financials.
Thank you, Tom. Good afternoon. Our net interest margin decreased from 3.56% in the first quarter to 3.44% in the second quarter. One factor in this decline was an increase in our excess funds of $104 million along with a decline in the yield of 6 basis points. Another factor was the decrease in the 30-day LIBOR rate in the second quarter. So, we have $900 million in loans tied to this index. Tom mentioned the funding costs, funding our loan growth contributed to an increase in deposit cost of 9 basis points. On a comparative basis if excess funds for the second quarter of 2019 were at the same level as excess fund in the second quarter of 2018, our second quarter margin would have been 3.63%. Our net interest margin range for the second half of 2019 is 3.45% to 3.55%, and we have a plan to address deposit pricings when the Fed decreases the Fed funds rate. A reminder, we have no accretion income related to acquisitions.
I want to add a comment about our cost of interest-bearing deposits which was 1.74% at June 30. We performed an internal study to determine the total costs for our deposits. The study includes salaries and related overhead for producers and support staff. And it also includes our system costs. Based on the study, our total cost at interest bearing deposits would be 2.31% at June 30. We believe this total cost compares very favorably to our peers who have 100 plus offices. Salaries, our year-over-year increase is $2,450,000, we added a team in Sarasota which will be part of our West Florida market and we also added to our team in the Nashville market. Net increase in total producers year-over-year is 11. We added a Purchase Card and Merchant Services Director. Also we have two employees that are full time sales in the credit card area to accommodate referrals from the American Bankers Association endorsed agent credit card program. We have new production offices, Pensacola mortgage, Fort Walton LPO, which Tom mentioned will be a full-service office in the future. Net adds for credit analysts and portfolio managers were 14, this was needed based on our loan growth and to develop new lenders. Non-interest income, our credit card income continues to grow $701,000 year to date increase and $380,000 quarter-over-quarter 2019 versus 2018. And we have added 10 banks in 2019 to our agent credit card program.
A reminder, we do not sell any government guaranteed loans to generate non-interest income. Loan loss provision, our second quarter net charge offs were $3.7 million, $2.7 million were impaired loans, you'll get unimpaired charge offs of $1 million. In the second quarter, we had new impairments on two credits. Our tax rate our year to date tax rate 2019 is 20.2%, 21.2% without stock option credits of $958,000. For 2018, the year-to-date rate was 18.9%, 21.2% without stock option credits of $1.9 million. The quarter to date rate for 2019 was 20.7%, 21.2% without stock option credit of $186,000. Second quarter of 2018, the rate was 19.9% or 21% without stock option credits of $457,000. For the remainder of 2019, the projected tax rate is 21.3%.
I will now turn the call back over to Davis Mange.
Thank you. With that, we will open up the floor for any questions.
We will now begin the question- and-answer session. [Operator Instructions] The first question comes from Brad Milsaps from Sandler O’Neill. Please go ahead.
Hey good afternoon, guys.
Hey Brad.
Good afternoon, Brad.
I appreciate all the color. Just, Bud, I was going to see if you could talk a little bit more about your margin guidance of 3.45% to 3.55%. What are you guys assuming that the Fed does in terms of potentially reducing short term rates and then maybe just a little more around your plan to how quickly can you – do you think you can reduce funding costs?
Yes, I don’t – I think we’re like anybody else. We’re not going to drop all rates on special accounts, day one. But we feel like we can do that shortly after the Fed makes a decision at the end of July and really from a margin standpoint, we’re sitting here with $850 million or so in excess funds, which at this time of the year is just very high for us. We feel like that will decrease in the second half of the year just kind of how growth goes into second half of each year. So I can’t give you, I don’t know specific dates. We’ll have a ALCO meeting tomorrow to go over more in detail about customer, about region, and what we would do when Fed drops rates which we thinks will be end of July.
If they were to do more beyond July, do you think, you could kind of hold the NIM, obviously the earning asset mix is a big part of it, if you could get the liquidity back down to 3% or 4% of earning assets like it was a year ago. But you know if the Fed were to do more than one how would you think about things playing out?
It’s a good question. I don’t know, it’s just hard to predict. Rates, everybody’s kind of cut back on all these special rates to a degree. I think that really depends on new competition. We can’t go dropping rates, and everybody else does the same. I don’t have a great answer for that right now, just not, because we just haven’t gone through that but the Fed decreased [lately] [ph].
But I mean, Brad, this is Tom. In this we just cannot allow the margin to go any lower, alright. So that’s your answer is we’re going to keep it at this level or work it back up a bit.
Got it. And then Tom, you talked a lot about growth and it being expensive to grow. Obviously, you’ve done a lot of hiring of late, would – or should I construe your comments more that you’re going to kind of maintain this kind of high single digit expense growth rate as you digest some of these new hires. It sounds like the pipeline for new hires is pretty strong. So is that – is that really what you were trying to continue to kind of reiterate that expenses probably, kind of continue to kind of run at this clip to the extent you would continue to expand?
No. I hope we will work it down. I mean, we’ve added significant resources especially on the loan operations and on the credit side in the past year. We hope we can, we are staffed at a level now that’ll carry us a good while, Brad. So we hope that in the future that the expense bulge we’ve had in the last year will come back down.
Great, that’s helpful. I’ll hop back in the queue. Thank you.
Thank you, Brad.
The next question comes from Tyler Stafford with Stephens. Please go ahead.
Hi, good afternoon, guys.
Tyler?
Hi, Tyler.
Maybe, I’ll start where Brad left off. Just thinking about expenses. If the Fed does cut and we are in a more challenging revenue backdrop, I guess, how much flexibility do you think you have on slowing expense growth more? I mean, is there any interest in doing that as kind of an offset to revenue pressures or it sounds like the hiring pipeline and the new branches that you’re going to be opening are still pretty active? So, if the revenue picture does get more challenging, would you expect, I guess incrementally slow expense growth or is it going to be more of the same like you mentioned?
Well we, we don’t play on our margin dropping any more. First of all. So that, if you’re asking, if it became an unprofitable business model, we want to continue with that, the answer would be, no, we wouldn’t. Look we had a lot better margins when rates were a lot lower than they are now. So, we think our margins can improve, not decline. So, we’re not looking at that as a realistic option to see margins decline farther. We do have the luxury of having a fair amount of excess funds on the balance sheet, we could absorb a fair amount of deposit runoff if necessary. But even the higher rate paying national type players I see them, you see them out there, you see, they are reducing rates, they are paying on Internet accounts, they’re reducing rates they are paying on CDs. So, we think there’s opportunity for us, but we see the opportunity to continue to expand our business, and do it profitably and we will look forward to growing the bank.
Okay. Just on the updated margin guidance, just to be clear, does that have any Fed cuts on it? I was unclear. For the back half of the year, is that just status quo putting some liquidity to work and...
Now, we’re assuming there is going to be a quarter cut in the end of July. You know that and this liquidity, the reduction in liquidity of the second half of the year.
Okay. I missed that, so it does include a quarter cut. Got it. Is there a normal level of liquidity we should think about that’s kind of implied in that updated margin outlook?
I would say, 5% to 7% of assets maybe in that range. I don’t know. I would say that but we’ve been probably over $800 million for most of the year. So that might not be a good estimate. I have underestimated our liquidity all year long, so it is a Champagne problem.
Okay.
Yes, this time, last year, we were $100 million in excess fund. So, we came out with a plan to grow deposits now. So, it’s work from that end maybe a little too well but we’ll take that.
Okay. Thanks for that. And then maybe Tom just going back to one of your prepared comments, I think I would agree that the market is not rewarding your growth right now. So, I guess just given the margin pressure this quarter and the lowered outlook on the margin. Is there any thoughts or interest in slowing that growth at all at this point to be a little bit more selective in terms of the margin that you’re putting on the balance sheet today? Given your comments that it doesn’t appear the market is rewarding that growth.
Well, I mean, we think, we think, we have a good business model, Tyler. We want to continue to doing it the way we’ve been doing it for the last 14 years and certainly; we’re not - we don’t think we’re compromising on anything in terms of future profitability. We think, margins have hit a low. And there’s only upside from here. We think, the second quarter will be the low point and it will improve in the third, fourth quarter and into the future.
Okay. And then just lastly for me, the loans 90 days past due, have doubled. Any comments on what was in that if it was one credit, multiple credits, just curious on that and I’ll hop out. Thanks, guys.
Henry Abbott, our Chief Credit Officer, he is with us today.
Hi, we have historically, have one credit that was on there and we grew that by one other credit. So, we’ve got two credits that consist of that 90 day plus past due. One of those should clear up here in the next week and we’ll continue to carry the one that we have carried. But yes, that was just one large credit that was added and should be cleared up shortly.
Tyler, are you there?
No, he said, he was done.
[Operator Instructions] The next question comes from William Wallace with Raymond James. Please go ahead.
Thanks. Good afternoon, guys.
Hi, Wally.
Not to beat a dead horse, but on the NIM, Bud, in your prepared remarks, you made a comment about what the margin would have been, had you been running at the same levels of liquidity as of the last 2Q. Can you repeat that number?
Yes. If we are with same level, the NIM would have been at 3.63% in 2019.
And if you had – is last year that kind of first, second quarters, is that sort of the optimal level that you would prefer to run your liquidity at if you could control it?
No. But June of last year, we got down to about $100 million in funds, we were definitely too low from that standpoint.
Okay.
I would say optimal level will be about 5% of assets, just hard to say quarterly how that’s going to take place.
Understood, okay. So 3.63% is not, you wouldn’t have wanted to be there because it would have required you running a little bit lower on liquidity than you would feel comfortable at. So, it’s probably somewhere lower than that if you kind of think about “optimal liquidity” understanding that you can’t necessarily control that...
Yes, you are right.
Okay. So and you might have said, but your guide to 3.45% to 3.55%, can you quantify how much liquidity that includes deploying?
No, I didn’t really have a specific number like Tom was saying we feel like we have hit the low market 3.45%, 3.44% and that excess liquidity will decrease in the second half of the year. Exactly when I don’t know, but I mean, that’s just kind of a, we think that it will improve from that reduction in excess liquidity.
Okay. Yes, understood. I guess, if we look at the 10-Q, your model shows roughly 4 basis points of pressure per roughly 25 basis point Fed cut, I think we are all just trying to figure out what the NIM is understanding that low water – the low watermark today, a lot of that is because of all the liquidity…
Right.
So I was trying to get a sense maybe it would help us if you could quantify what the Fed impact would be if liquidity was the exact same as it is today. Are you able to quantify that?
We think it’s going to be slightly higher, Wally.
So the NIM will go up, with the Fed cut?
Yes.
If liquidity is still the same?
Not 15 bps, but will go up a few.
Okay. So we will see that in the Q when you guys file the new interest rate sensitivity, right now it shows down. And I am trying – I am not trying to push I am just trying to get the model, dig it out.
Tell me what you are looking at it would show us down?
Your interest rate sensitivity analysis where you show net interest income, percent change, if the Fed is up, I think it’s a shock if it’s up 100 or 200 or down and then down 100 or 200. That’s really...
We don’t think – if it goes down 100 we are going to get shocked, how about that?
Well, I agree, but we are trying to extrapolate that.
Okay, no, no, just looking at – that’s not just a good gauge based on how we have to do the immediate 100 shock.
Okay.
That’s a regulator’s job, yes. That would be his job.
Yes, okay. So you don’t change any betas or anything in the model, you just plug in down a 100 and that’s it, right, that’s what they require?
Alright. Yes, that’s just a regulator do.
Okay. And then moving on my last question just Tom, maybe if you could talk about if you are seeing any changes in any of your markets from a demand perspective whether it’s to the positive or the negative?
Yes, we see fairly robust loan demand right now, Wally. We feel good about where we are. I mean, I would say this national statistics. We are just – we don’t want to be a national – we don’t want to be the main on anything, at anything we do. We want to be at the high end of success level. So, we see good – our pipeline is robust of loans. We feel good about where we are. We see good quality loans. We don’t see – there are no – there are no industries that appear to be in a big decline that you don’t know about. One of our credits that we charge off was a rural hospital is in liquidation. We know what’s been happening to rural hospitals for quite some time and luckily, we don’t have much rural hospital credit. So they are kind of going away. They are sort of extinct.
You are feeling good about all your markets?
Yes, we do. We really do.
Okay. Thanks very much for the time. Appreciate it.
Thank you, Wally.
This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.