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 Third Quarter Earnings Conference Call. All participants will be in a 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, Investor Relations for ServisFirst Bank. 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 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 day 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 everybody. Before I jump into numbers, I'd like to mention we elected a new Director today, Chris Mettler. Chris Mettler has been on our Charleston Board of Directors. He has a technology background and we're thrilled to have Chris as new Director of the company. So we think he'll be really a great asset for the Bank and the holding company as well. So we welcome to Chris and thank you for joining us.
In regards to the quarter, we were very pleased all-in-all, not anything we didn't like. We had a little bit of margin slippage, it was unexpected. And Bud is going to talk about our plans to bring it back up to the 350 basis point range. So that's something we're working on. And I'll mention that later the flexibility we have given our strong deposit growth.
The loan growth in the third quarter was modest. Our best growth was in Nashville and West Florida. The Birmingham region has some CRE pay downs that affected growth in the quarter, plus we didn't have any large loan closings in the quarter. The loans are up 10% year-over-year. We do tend to have lumpiness. Last quarter, we had tremendous loan growth. This quarter it's just lumpy.
And all I can tell you is, if you ask about the economic outlook and somebody always ask every call, it does seem that clients are more cautious given the trade war with China and the media focus on the economy and I thought about it. We really hadn't got many requests to finance new boats and airplanes likely. So that tends to be a sign that people are being a little bit on the cautious side.
Our pipeline is up a good bit over the last quarter. Even net of -- we have a much higher projected payoffs in the fourth quarter than normal, and it is around several projects. They're not CRE projects, they're C&I -- they're medical projects, they're going to bond financing. So the flip side of lower interest rates is that people can go to permanent market with some things that you can't do when rates are higher. So good for our clients though some of those projects will be back, most of those projects will be backfill when new project will start construction on.
So we typically have good closings in the fourth quarter, and we expect that there's no reason we don't expect the same this year. We did add 60 bankers in the third quarter. We had a great team in Charleston, three bankers and one each to the three Florida cities. So we hired 20 new bankers year-to-date, just an outstanding group of people of new bankers. We have -- excluding trainees we have 139 bankers total today.
We're really proud of the new people we've added this year. We've had some substantial upgrades in staff this year. But the numbers don't reflect the people that we've added this year. They certainly will in 2020 and 2021. And we've added significant new overhead for these new hires. I mentioned earlier, we do have a very strong deposit growth, it's 17% annualized for the quarter and 19% year-over-year. The growth was very broad based this quarter. Seven of our 10 regions have an outstanding deposit growth.
We do have a lot of flexibility to manage our margin. Unlike many other banks, we have -- we've never accepted broker deposits, or used soliciting service. And we have never had a Federal home loan bank advances. So we have substantial excess liquidity. We've been trying to manage it down, but it is a bit of a champagne problem, and that's the good thing to have.
One of the new initiatives, Bud's going to talk about for 2020, is the expense control. It's something we've never focused on, but we think it's a good time to do so. We'll limit hiring to revenue production personnel in 2020. So we're also going to look at expense control, the vendor costs and look at all of our fees and cost providing services through our clients.
So I'll now turn it over to Bud to get into more detail on the numbers.
Thanks, Tom and good afternoon. Net interest margin did decrease in the third quarter, and went from 3.44% in the second quarter to 3.36% in the third quarter. Couple of factors. Average excess funds increased by $269 million in the third quarter. Also, LIBOR, base loans 30 day LIBOR, we have $879 million in loans tied to that index. That rate is moving ahead of Fed rate cuts. It decreased 17 basis points from June 30th to August 1st, decreased 19 basis points from August 2nd to September 18th and so it's decreased by 15 basis points.
On a positive note, we've lowered deposit rates after the Fed cut rates in July and September. The cost of our interest bearing DDAs is 1.71 at July, decreased to 1.57 in August, lowered again to 1.49 in September, and our estimate for October is 1.32. For October, we see an improvement in margin of 250,000 to 275,000, that'll be 3 basis points to 4 basis points increase our margin. I have detail on the different components, if anyone would like for me email it to you.
Also just as we add $50 million in loans, that will add 2 basis points to our margin also. The ALCO committee will meet on October 23rd and will develop a plan to cut deposit rates, both with and without a Fed rate cut in the month. A reminder, we have no accretion income related to acquisitions.
Non-interest income. Our credit card income continues to grow, $1.2 million year-to-date increase and quarter-over-quarter 2019 versus 2018, we increased $454,000. Earlier this year, the bank received an endorsement for American Bankers Association for correspondent bank agent credit card program, and we've added 16 banks to this program in 2019.
Our mortgage banking income grew $899,000 year-to-date. And quarter-over-quarter of 2019 versus 2018, it increased $656,000. In early October, the Bank purchase 75 million of bank owned life insurance. The tax equivalent yield on that insurance is 4.77. A reminder, if we do not sell any government guaranteed loans to generate non-interest income.
Non-interest expense. We increased our third quarter incentive accrual by $500,000 based on anticipated year end payouts to new lending teams we've added in 2019. And Tom mentioned, we would have a new budgeting plan for 2020, zero based budgeting plan. This is not a traditional cost cutting plan; first, to justify what expense is to key versus what to remove; second you consider activities that should be, or shouldn't be performed and how they should be performed; one area that we see improved efficiencies in is our [wired] processing area; and last budgeting is not connected to prior year spending, it's based on necessary activities.
Loan loss provision. Our third quarter net charge offs were $8.8 million, $6.2 million when paired and unimpaired charge offs were $2.6 million. We've been proactive on our larger problem credits. Our Chief Credit Officer, Henry Abbott, is on the call and can answer your credit related questions.
The Bank participated in the State of Alabama operated loan guaranteed program. This program was terminated in the third quarter. Alabama State Banking Department notified us that this is effective July 31st. At that time, we had 76 loans and wrote in the program consisting of roughly $53 million in total loans. Service starts is losing $22 million and loan guarantees in favor of a onetime payment is $7.4 million. Management decided the book this $7.4 million to loan loss reserve, and this was based on potential credit downgrades over the life of this loan portfolio.
General loans had collateral shortfall and other enhanced risk, when rolled in the program, it required 1% fee on the commitment. These were loans that will have otherwise not met the Bank's lending criteria. Thus, the credit enhanced monetized the Bank to land in this situation.
Taxes, year-to-date tax rate for 2019 is 20.2%, 21.04% without stock option credits of $1.2 million. The tax rate for 2018 was 18.9%. It's 20.9% without stock option credits of $2.4 million. Third quarter 2019 was 20.2%, 20.7% without stock option credits at $231,000. Third quarter of 2018, the rate was 19%, 20.3% without stock option credits of $539,000. For the remainder of 2019, projected tax rate is 21.3%.
Shareholder value. Book value, excluding unrealized gain on AFS securities is up 16% year-over-year, and book value including the unrealized gain, is up 19% year-over-year.
This concludes my comments. And I'll turn the program back over to Tom.
Thank you, Bud. We certainly, from an economic outlook standpoint, we don't see a recession on the horizon but obviously, that followed -- the focus is it seems to be certainly in the media. Our thought is if there's a recession coming, we're well prepared for a recession. We have very strong balance sheet. We have very strong profitability. I've always -- talking with the regulators over the years, regulators argue you that capital is the best defense against losses, and I've always argued that's not true. The best defense against loss is to have a strong stream of income to offset any potential losses.
Our non-performing assets, our balance sheet, our credit quality is pristine. Our non-performing assets are one half to one percent of assets. So we like where we are if we see a recession. If there's recession coming, we're as well prepared as anybody in the United States.
So with that, we'll open it up for questions.
Thank you. We will now begin the question-and-answer session [Operator Instructions]. Our first question today will come from Tyler Stafford with Stephens. Please go ahead.
Maybe Bud, let's start on the margin. So the 3 basis points to 4 basis points increase, and you said the different components that you can email us. Could we just walk through that on the line here? And how you expect to get that 3 basis points to 4 basis points increase in margin, particularly given fourth quarter that's usually a seasonally high liquidity build. And I appreciate the commentary on the on the deposit costs, but if you could just go over that. I think you said 1.32 interest bearing cost for October is what you expect, so pretty sizable step down. Did I hear that correctly?
That's interest bearing DDAs, it does not include CDs. But yes, a big decrease. It was 1.49 September and then after all the rate cuts, we're estimating 1.32 in October. I mean, you've got, let's say -- you've got prime loans that reprice immediate that $1.35 billion prime loans that reset once a month, that's $488 million, excess we're get -- our excess funds have decreased so far in October. So that definitely has a positive impact on earnings.
Fed Funds purchase course we lowered that rate when Fed cut rates in September. Don't know how much detail you went through to reach component, and so what current -- when the loans reset. The trajectory we go through, like on the prime loans that reset once a month or 30 day LIBOR kind of going through when those would reset in October, and then calculating that impact on the margin.
But if we do get an October cut, you would still expect that basis point improvement for the fourth quarter?
Yes. Because like when we have our outcome, as you know, once we'll have a plan to cut rates even with or without Fed rate cuts, it's just something we've got to address. Like Tom said, we really didn't cut enough back in July. And we did a much steeper cut in September after the Fed cut on the '18.
Okay…
It's real -- I mean, the excess funds is really the key. I mean, that is decreasing and that's kind of what's -- when it goes up $269 million in third quarter, we didn't forecast that, and that has a big impact on your margin.
But isn't seasonally fourth quarter pretty high from a liquidity standpoint, if I go back to last several years. Would you expect something different for this year?
Well, I guess what we would anticipate is higher loan growth, I mean I think that's traditionally higher. And that's -- if you look at where we are from a budget standpoint or we're behind the loan, so I think we'll have a stronger fourth quarter from a loan growth standpoint. This is for -- I mean based on historical data we…
Yes.
…we think the loan growth.
Just last from me on the margin. Do you have the 9/30 total, or September 30th total deposit cost was?
Total was 1.12 for total cost.
And then maybe just shifting gears over to credit. A couple of questions there. So the $14 million increase in the non-accruals. Can you just talk about how many loans, what type of loans, were included in that increase? And then on the $22 million of loans that you lost the guarantee. What was the status of those loans from a credit rating standpoint at this point, at 9/30?
Henry Abbott is our Chief Credit -- he's going to talk about those components.
And I'll hit the loan loss guarantee program question first. Status of that pool was as Bud mentioned, those were typically, I guess, I'd say collateral light loans. But today, our loan loss on that pool have been very minimal. And all the loans were current at the end of -- well, I guess all but one relationship was current at the end of the quarter, but and that all loans were current except but one relationship. The primary driver in the increase in non-accrual of the increase roughly $10 million was associated with one credit that has rural hospital systems out of our Nashville market, I mean that was the primary driver of the jump in non-accruals.
And then just lastly from me just on the FDIC credit, just to make sure I'm clear. So the $1.7 million credit you got this quarter. Would you expect the run rate of that to in the fourth quarter and go forward to flip back towards kind of your historical FDIC insurance expense?
Right, it will. Yes, from what we gathered that will be a normal expense, I guess, you could say in the fourth quarter.
Tyler, it's very confusing, this is Tom. We've gotten some -- the indication we got really primarily for the American Bankers' Association, is that you can expect a credit for the fourth quarter equal to half of what you got in the third quarter. So that's -- I don't understand why there can't be more specificity around this number. But nevertheless that's -- maybe you found out but we can't seem to find out a whole lot, it's a moving target.
Okay, all right. Thanks guys. That's it for me.
And if we do have excess liquidity to build in the fourth quarter, you can assume that, from a margin standpoint it'll neither add to or take away from earnings it'll be revenue neutral, so hopefully…
Our next question will come from Brad Milsaps with Sandler O'Neill. Please go ahead.
I appreciate all the color on the NIM, maybe just want to talk about the other side of the balance sheet. Loan yields, I guess, were down 6 basis points or so linked quarter. Just kind of curious if that would be kind of what you might expect in the third quarter and then maybe if we also get an October cut. And just kind of how that compares to kind of what new loan yields are as they come on the books. And then to the extent you guys have loan floors, how might that protect you?
Yes, let me talk about floors first. We have 1.4 of floating rate -- we got 3.1 billion in floating rate loans [indiscernible] loans. $1.4 million has floors [Multiple Speakers] 46%. Rate floor, well -- or the loan rate equal to floor rate at the end of September, that increased to $518 million. It was $265 million at the end of June. So with two Fed rate cuts, that had a big impact.
The -- let's just say -- let me look at the loan yields. Loan yields went down a little bit in September. Some of it had to do with a couple of lower rate credits, just had lower loan yield, because it was $516 million in July, $519 million in August, $481 million in September. But I've said like $510 million to $515 million is our normal run rate on the loans….
Non-accrual status on the rural healthcare credit is the primary reason for the drop in loan yield.
Yes, we had a cut -- we had some non-accrual reversals in the third quarter.
And you said 46% of the loans that have floors are at the floor. Is that what I heard?
No, 46% of our variable rate portfolio has a floor rate.
Okay, got it. And then it was 500 some odd million…
Yes, 518 million is at the floor rate at the end of September.
And then just to follow-up on expenses, I know you guys are probably in the budget process right now. Last couple years, you guys have kind of been up high single digits tracking maybe closer to double digits this year. I know it's early. But is this something that you think you can kind of hold to kind of mid-single digit growth in 2020, or you guys are really efficient? So is there much room to cut, so to speak, or pull back?
Yes, Brad, we're going to look hard at every expense. And we're looking hard at our vendors. We're going to ask every vendor to partner with us and help us drive the pair expenses. So we think it's an achievable, very achievable goal, Brad. Certainly, we're continuing to look at adding revenue production personnel like we always have. We added a lot this year. We've added, in the 20 people we've added, significant new overhead but we think they'll pay off for us in next year, 2020. So we would like to draw the line and try have a really good yield, if we're not satisfied with where we are this year, that was not -- this is not this is not our standard of performance. So we're certainly not satisfied and we're sending the message throughout our company that this is not satisfactory performance.
And typically you guys have an adjustment in the fourth quarter, particularly on personnel. I mean, it sounds like you got a pretty full accrual in the third quarter. Does that take a step back into fourth as you kind of true things up?
Well, we hope we'll pay out more than we've got accrued, Brad, and that'll be good news if we do. But certainly, management accrual -- bonus accruals are going to be down from last year, I can tell you that, because we just haven't had the kind of year that we want to have.
Our next question will come from Kevin Fitzsimmons with D.A. Davidson.
Just to follow-up on Brad's question, I just wanted to make sure I heard it right. I thought when you were initially describing the cost cutting focus was that you were going to hold off on new hires, you were going to -- but then I thought I just heard you say you were going to continue with hiring of revenue producers. I just wanted to clarify that. Number one.
Yes. I mean we'll continue to hire revenue production people, Kevin. But certainly, they don't need be slam dunks, they don't need to pay for themselves very quickly.
And Tom, what is that focus, say about your willingness to look at new markets? And is it, does it make it less likely you would be entering a new market by entering -- hiring a team? Or is it -- it just depends what falls in your lap?
Yes. I mean, we look -- we talk to people all the time. I mean, we talk to people, at least monthly, to -- talk to a group somewhere. So we're certainly not going to rule out the expansion to a new market at all. They're not -- they're not -- they're -- don't have a big effect in terms of the most part we open new market, our startup losses are going to be over an 18 month period about $2 million, and I don't think they'll make us or break us. I don't mean to minimize $2 million.
But certainly we're open to new opportunities as we always have been. But we're certainly, have more of a laser focus on winning to meeting profitability more quickly. And we want our managers to make -- to rationalize their resources. So they need to do with what they've got. If they want to bring on somebody new, then they -- we need to rationalize the resources we have on hand today.
And then just on the whole decision process of looking at cost cuts, and with this increased focus. Is it more due to the lower margin environment we're dealing or is it more looking ahead at potentially -- I know, you said you feel very good about credit. But is it more to be prepared if we have a downturn, or is it a little of both?
No, we're not getting ready for recession in that respect, it's just to call -- it's a reaction to the kind of year we've had. We just -- this year has not been a double-digit earnings increase, and that's the kind of year we expect. And we're going to -- since -- this probably sends a pretty good message to everybody that this is not a -- this is not acceptable, this is not acceptable performance. And that's purely a reaction to that, Kevin.
Our next question will come from William Wallace with Raymond James.
I was hoping maybe to dig in a little bit more on credit. So first off on the mission, there was a $10 million hospital facility, I believe you said in Nashville that drove the third quarter increase?
Yes, it's out of our national office. Yes, that's primary driver in non-accrual.
It's the same credit we've been talking about for a while, and it was going to be a liquidation sale of assets. And then we've gotten in on [indiscernible] with unsecured creditor who hired [indiscernible] from New Jersey to represent them, but we're fighting over the money. There's a part of money, we just can't get to it until we have some final resolution through the bankruptcy judge. But we'll have -- go ahead, Wally.
Was there a charge off associated with this last year in the third quarter?
Last year in the third quarter?
Yes.
No. We had a tough fiscal…
Okay. So what was the charge this quarter for that credit?
Charge associated with that -- this credit this quarter was roughly $2 million.
And then last year in the fourth quarter, your non-accruals jumped up a little over $10 million, and then they kind of sat. So just feels like they're kind of coming in and just sitting. Was that one quarter -- one credit last quarter, or was that a couple of credits? And can you talk about why it feels like they're sitting, or it's just that they've moved off and others have come on.
I don't remember specifically the fourth quarter. I'll follow up on that. I think it's a combination of both. I mean we are being proactive in removing credits. I mean for instance, one of the drivers of the increase in net charge offs was we sold the loan that had been on non-accrual for quite some time. And we did take a loss on it. So we had very impaired to almost what our loss was. But we just felt like we need to sell it and that was roughly 30% of our net charge offs for that quarter. So I mean I do think we're actively working on through the cycle, if that's what your question was…
There's a C&I credit that is pretty good. The next largest one is a C&I credit that will be -- we should have some resolution on the starting this week. But it's been going through the bankruptcy process. Only Things filed with bankruptcy, it takes forever, Wally.
I guess, the reason I'm just digging in is because last year third quarter your non-accrual loans were just over $9 million, and now we're approaching $36 million. And I understand that your NPAs are still relatively low but that's a pretty big jump in four quarters. So I'm just trying to get a sense as to whether we're seeing any increase in inflows, or anything outside of just the couple of one offs, or larger credits that are going bad? So I know your commentary is always that you're not seeing any signs of stress in the system. So I'm just trying to get a sense of why the big jump over fourth quarter?
Yes, I mean, like we said, roughly $10 million of that was one credit we move this quarter.
And Tom mentioned, our second largest NPA is one we're hoping to get some additional resolution through bankruptcy, thus we get some pay downs on that credit.
And you mentioned, Tom, that there was one that moved off in the third quarter as well?
This is Henry Abbott. And yes, I did mention we sold a credit and so it reduced non-accrual in the third quarter.
It was assisted living facility…
Roughly, it was $5 million credit and we had it roughly impaired by half. And that was close to what we sold the debt for.
So that reduced non-accruals by $2.5 million. Is that what you're saying?
Net, yes.
We had impaired for half…
And then you had, if I understand correctly, you received $7.4 million payment to end a guaranteed program and you applied that entire $7.4 million to the reserves balance through the provision expense?
Yes, correct.
Okay. So…
And actually one of our non-accrual loan is in that pool, is the one credit that has some pretty serious issues with it, but we obviously identify that. And I'm looking at the non-performing asset list of September 30th, and I don't see anything on here that was in the non-accrual last year, Wally. Yes, there're small, what I'm saying it might be -- there might be something for $250,000…
But things are not…?
No, there's not anything. We move -- the good thing about C&I [credits], they get in trouble fast and they get out of trouble -- they resolve themselves fairly quickly. We found out here in the recession that some of those real estate deals just take ages, they're like a [34.39] [tar bag], they just stay forever on your books. You can't get rid of them.
So, on the provision expense, had you not moved that payment into your reserves, you would have had a [negligible] provisioning expense, you would have been releasing reserves pretty substantially?
Yes, we would have.
So what would have been driving that really -- I mean, changing your -- any assumptions in the [FAS 5] model?
Well, we've got this payment. This payment was a -- not completely a bad thing. It's $7.4 million that we received.
So there's no changes or anything on the assumptions in the underlying model?
No. I mean, you had lower loan growth. So you don't have to provide that much for loan growth, something like that.
Yes, I'm just trying to get sense of…
Yes, that would definitely have had an impact on what we put in the reserve pool.
And one last question on the FDIC reimbursement. Do you -- some banks have told us that they think there's going to be some addition -- some reimbursement in the first quarter as well. Is that consistent with what you heard or no -- or do not know?
We've heard different stories. We're going to wait [Multiple Speakers] half of what you got in the third quarter you get in the fourth quarter, and that should be, according to them. But I've heard -- yes, there's quite such a mystery, I don't know, Wally.
Yes, it's real confusing when the fund gets to certain level what they do. I'd just -- we'll wait till we get it and then we'll book it.
Frankly, I don't want to have a credit. I'd rather just people keep paying at a reduced rate. As you think about it, the banks -- I don't want to have people not have made payments, what people do. The banks they could pay or don't. They need to be making a payment all the way up to when they fail. So I'd rather solve this, pay it at a reduced rate. But if they didn't -- the [indiscernible] did not ask my opinion.
Fair enough. I've taken your time up. I appreciate it. Thanks for the commentary and color on some of the moving parts of the non-accrual bucket. I appreciate it.
[Operator Instructions] At this time, there are no further questions in the question queue. And this will conclude today's question-and-answer session, as well as today's conference. Thank you for attending today's presentation and you may now disconnect.