ServisFirst Bancshares Inc
NYSE:SFBS
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ServisFirst Bancshares Inc
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Good afternoon. And welcome to the ServisFirst Bancshares Incorporated Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [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 will 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. 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. Just to remind you we were founded in the year 2005 and we've had over $7.3 billion in 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 I'll come back after Bud covers those. So, in 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 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 was 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. Typically, the fourth quarter is our strongest quarter from a deposit growth standpoint, but it would certainly be hard to top the third quarter. It was really such a good solid quarter.
From a loan pipeline standpoint -- our loan pipeline is very solid. To remind you, the analysts that listen on a regular basis, our -- typically our fourth quarter is usually our strongest quarter and loan closings, typically -- again too, we typically have most of our loan closings towards the end of the quarter, so it doesn’t help in the income in the quarter, but it helps the income in the following quarter. So I 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 at investor conferences with the firms that cover us about loan demand and what it’s like and we realize this is 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 certainly is at a 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 the loan demand was a little slow during the recession, we did some credits -- they weren't bad credits, 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. We certainly don't like to do those and we don't have to do those at all now. We think we can be -- we certainly are going to take care of our good clients, but we can pick and choose what we’ll do. We'll continue to see very solid loan demand.
On the producer's front, we usually cover -- we added eight new bankers during the quarter and six less. So, we today have 127 bankers, production people in our bank. We continue to get calls from great bankers and 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 in the quarter was 15%. As Tom mentioned, the fourth quarter is normally our strongest growth period in loans. So, we are optimistic. Annualized deposit growth for the third quarter was 27%. Funding costs related to this growth led to a slight decline in 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 but may increase if we see near certainty of another fed rate increase. Higher tenure 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 the horizon. The charge in the third quarter was one C&I credit where fraud was involved. Our asset quality continues to be strong.
And that concludes my section. I will turn it back over to Tom.
Thank you, Bud. I’ll kind of wrap it up and talk about -- we are aware of what investors are interested in, and today we’ll try to cover some of that before questions. But you we know that 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, so our focus is on serving the clients and winning in the marketplaces. Our recent market share data came out from the FDIC -- year -- of June 30th data -- of June 30 of ‘18, year-over-year, we had really strong market share growth in nine out of our 10 markets.
The new account -- and that’s the only market we did have an outstanding growth, and it was a market that has a lot of excess deposits generated in that market. Our new account openers continue to show very impressive growth. We are very optimistic about the future of our 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’re winning in the marketplace, which is the best metric we think for future earnings growth.
So we will be glad to take any of your calls and questions now.
And I will turn it back over to you Davis.
Thanks, Tom. Yes, if we can please now open the floor for questions.
We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from William Wallace with Raymond James. Please go ahead.
Thanks. Good afternoon, guys. So, on the deposit growth, you mentioned it was strong across all 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 -- while we’re probably been emphasizing a little bit more than the normal, but we always emphasize it, we are seeing opportunity. We see an opportunity to grow the bank. We’ve -- our account -- deposit betas and NIM 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 just had pops, it’s just how it falls Wally. If you get some nice large accounts and they help a lot, like in the first quarter -- I know we had some companies that sold in the fourth quarter of last year, we had big deposits in the fourth quarter but they ran off a bit in the first quarter. It’s just kind of how it goes some times. So, you know a little bit of luck. But yes, we are emphasizing deposit growth as much as we have in a long time Wally.
So it 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 your end-of-period balance growth was stronger than the average balance, I'm wondering if you had an 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.
It's sort of two questions. It looks like 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 -- I don't know, are they relationship accounts or are you promoting in your markets to onboard new deposits?
Their 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 the best way to build a bank.
Okay.
And we don’t have, I’d 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 are not a member of the Federal Home Loan Bank, , so we don’t have any home bank advances. So, our balance sheet is clean as you’re going to ever find.
Okay. Moving on to the expense side of the equation, it’s impressive that you have been able to hold the line, and actually the expenses declined in this quarter with that kind of loan growth. I'm just curious how you are 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 the 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 Wally, this is Bud. The fourth quarter is usually when we make 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 calculate a 32% efficiency ratio in the third quarter. Where do you think that could go?
Yes, I think we are going to stay 32% to 34% for a range, somewhere, I think that’s a good target.
And then lastly just if there is 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 opportunities would be that we see today is we’re certainly interested in adding people in 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 -- 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've been a little bit more interested in going to, Wally, we’re probably being a little bit more choosy today than we had been in the past.
Okay, that’s helpful.
From an expense standpoint, Wally I would tell you, we talk about regulatory relief but we had spent a lot of -- and we continue to -- 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 of the people we’ve added in last year are the back office people. So we have to try to be more efficient in other areas to drive our efficiency ratio lower which is to go, 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 would be prudent to stick around the range that you’re in now?
Yes. That’s like I said, yes.
[Operator Instructions]. The next question comes from Tyler Stafford with Stephens Inc. Please go ahead.
Hi, I just wanted to I guess start on the loan growth. I’m just wondering about your coastal markets that you’re in and just what impact I think you saw from the hurricane this quarter and what impacts that might have on business activity or loan closings or any of the fee income, mortgage banking or anything like that?
We’re not aware -- we are really not in markets that have been deeply affected by the storm. We’re not on the -- in the area of sort of 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 of our exposure that remain in the Panama City market, it would be on the west side of Panama City where it has been certainly a lot much less hammering. So we don’t think that we will have any exposure from the storm that would be significant. Clarence Pouncey is here in the room, our Chief Operating Officer. I will 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 a little damage with some institutional farmers in South Georgia with cotton, but all of which had crop insurance, rain and hail insurance, so should be that.
Okay, 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 or/and where does that stand today?
It’s been remarkably steady since we came out of the -- remarkably -- I think surprisingly steady since we came out of the recession. We hadn’t seen a big variance there, Tyler. And I think you will have but we have not seen a big change there, it’s slightly higher but it’s not dramatically higher. We saw a pickup as we came out of the recession, I mean it’s been, generally it’s pretty steady 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 beta release in the near-term to subside a little bit? What's the moving kind of puts and takes there?
Yes, right. Prime increased like it was September 27th and we have about 1.4 billion beta reprices, so we will get the benefit of that in the fourth quarter. Let’s say 30 day LIBOR we have about 820 million of loans tied to 30 day LIBOR. That rate didn’t really increase in the third quarter until September. I think it went up 15 basis points in September. So we will get the benefit of that also in the fourth quarter.
From a deposit rate standpoint, I think we feel like that’s stabilized some, probably still depends on what happens with the fed in the fourth quarter but we feel like that’s stabilized some compared to what we’ve spent in the first and second quarter.
Okay, got it.
I mean I would say if you need a range obviously 3.80 to 3.85 would be a good range from fourth quarter for NIM.
Okay, that’s very helpful. Maybe just lastly, the FDIC insurance premiums, those were down pretty substantially this quarter. Is this now a better run rate for those?
They have -- some of the multipliers have decreased, especially the FICO multiplier and it’s also look back. It’s always the prior quarter when they’re basing the premium on. So we had an adjustment of -- a little over probably about 395,000 and we made that adjustment in the third quarter.
Got it. Okay.
Yes, it looks like the fund is getting close. I think the fund was at 1.32 at the end of June and I think 1.35 is our goal, so I guess we’ll see what happens when they reset the goal for that.
I’m sorry what did you say the goal was?
1.35 when I read -- I’m sorry it’s 1.33. They are very close to their goal and I keep thinking we’re going to get there the next quarter, we never have. I thought we'd get there a long time ago. So -- but -- as long as the losses in the insurance fund are -- pretty much become non-existent, we should get there very quickly I think. That will be good news for all the banks.
This concludes our question-and-answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.