Oct 16, 2017
Executives
Davis Mange - Director, Investor Relations Thomas Broughton - Chief Executive Officer William Foshee - Chief Financial Officer Clarence Pouncey - EVP & Chief Operating Officer
Analysts
Brad Milsaps - Sandler O’Neill Tyler Stafford - Stephens Inc. Nancy Bush - NAB Research William Wallace - Raymond James Kevin Swanson - Hovde
Operator
Good evening, and welcome to the ServisFirst Bancshares’ Third Quarter Earnings 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 Investor Relations Manager, Davis Mange. Please go ahead.
Davis Mange
Thanks, Brian. Good afternoon and thank you for joining our third quarter earnings call.
I am Davis Mange, Investor Relations Manager. Leading today’s call will be Tom Broughton, our CEO and Bud Foshee, our CFO.
They will open with some third quarter highlights and we’ll then open the floor for few questions. I will now cover our forward-looking statements disclosure and then we can get started.
Some of the discussions in today’s earnings call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, giving our expectations and predictions of future financial or business performance or conditions. These forward-looking statements are subject to numerous assumptions, risks and uncertainties which change over time.
Actual results may differ materially from any projections shared today. So, please refer to our most recent 10-K and 10-Q filings for a more complete description of factors which could influence such projections.
Forward-looking statements speak only as of the date they are made and ServisFirst assumes no duty to update forward-looking statements. I will now turn the call over to Tom Broughton.
Thomas Broughton
Thank you, Davis and good afternoon. I'm happy to cover highlights from our third quarter press release that was released earlier this afternoon.
First of all I'd like to say we are very pleased with the quarter from our loan and deposit growth is certainly from a net income standpoint as well. It was kind of one of those quarters where we think went kind of our way so I don’t really can't complain about a whole lot.
One thing I'll cover - start with the loan growth. It was very strong throughout our entire footprint not just in our near regions; on a year-to-date basis eight of our ten regions have very strong growth rates.
I will say the [loan] [ph] utilization ticked up in the quarter, didn’t sound like from 44% to 45.5% but that's pretty good amount of money outstanding from the standpoint of [loan drawers] [ph]. Also in the quarter we have some growth in commercial construction loans primarily multifamily which ticked up the growth rate above normal level to some extent.
Normally, the fourth quarter is our strongest booking in terms of loans in the year. I don't know about this year.
The pipeline is down a little bit, it is down about $50 million from the second quarter to the third quarter at the end of the quarter, so and which is hardly surprising given the strong growth that we had in the third quarter. So, on the deposit growth standpoint we were very pleased.
We had very strong growth – deposit growth throughout our footprint for the quarter, eight out of ten of the regions had very strong very high growth rate. On a year-to-date basis seven out of our ten regions have had very high growth rate.
From the standpoint of our production people at the end of the quarter we added a net of one person, but we actually added four new producers in the third quarter and three exited so it was a net growth of one. So from the standpoint of needing additional production people certainly we are always looking in our existent not only new region potential regions, but also existing markets we're always constantly talking to people.
From the standpoint of we had made some progress we've had a goal to – a goal we will never reach, a goal that had every production person to be a $50 million in loans and $50 million in deposits. From the standpoint of progress we've made on the deposit side we had 90.
You know below that that goal at year end 2016 and we only have 66 now, so about half of our people and from the loan side we had 72 that were below that $50 million threshold at the end of 2016 and as of the end of the third quarter we only had 59. So we are making progress in that regard and there is still a good bit more progress to make it is not a little bit out of a date number, but I think, you know if everybody got to 50 and 50 we would grow by about $2 billion without adding any additional new production personnel at all.
So from that standpoint we are pleased with where the growth in the quarter and I'm going to turn it over to Bud to cover some of the financial numbers.
William Foshee
Thanks Tom, good afternoon. Net interest margin for the third quarter was 3.77 which is exactly what we had in the second quarter it was 3.77; excess liquidity, we increased by $21 million in the third quarter; average growth loans $207 million, noninterest bearing DDAs $25 million, total deposits $260 million and total assets increased by $230 million.
Our loan yield increased by 6 basis points on the quarter 4.66. Our deposit cost increased by 8 basis points in the third quarter it went from 0.64 to 0.72.
Growth, very good growth in the third quarter. Our loans grew $285 million, deposits $402 million.
Efficiency ratio we have improvement in that area, also 34% in the third quarter we are 36.2 in the second quarter. Credits, excellent credit quality.
Nonperforming loans to total loans was 0.26 up slightly from 0.21 at June and nonperforming assets to total assets was 0.28 versus 0.23 at June. Third quarter net charge-offs to average loans was 10 basis points and that was 25 basis points in the second quarter, so a good improvement in the quarter.
Nonperforming assets $18.8 million at September $14.8 at June 30; ORE stayed the same from June were at $3.9 million very low ORE remember and ORE expenses are minimal $31,000 in the third quarter and $57,000 in the second quarter. Our tax rate for the third quarter was 31.5%.
Without the stock option credit it was 33.6% and the stock option credit for the quarter was 757,000 and in the second quarter the rate was 28.1% and 32.3% without the stock option credit in the second quarter. And year-to-date our tax rate is 29% or 33.3% without the stock option credit and year-to-date the stock option credit is $4.3 million.
Last year in 2016 the year-to-date rate was 27%, it is 32.6% without the stock option credit which was $4.8 million for 2016. And I'll turn it back over to Tom.
Thomas Broughton
Thank you, Bud. I think we're ready to take questions now unless [indiscernible]wants to jump in anything we leave out.
Davis Mange
Brian if you could please open the floor for the questions?
Operator
Yes, absolutely. [Operator Instructions] Looks like the first question comes from Brad Milsaps with Sandler O’Neill.
Please go ahead.
Brad Milsaps
Hey, good evening guys.
Thomas Broughton
Hey Brad.
William Foshee
Hey Brad.
Brad Milsaps
Hey Tom, I appreciate the color around the loan growth this quarter end as well as the pipeline. I understand it might be down, the pipeline might be down a bit but still sounds really strong.
Just kind of curious anything changing kind of with how your borrowers are kind of looking at the world that would sort of give you any pause around, the loan growth rates that you've been seeing sort of fourth quarter aside, just kind of any additional color there, you know, kind of maybe around the loan growth, you know, kind of looking out into next year?
Thomas Broughton
I mean, you know from a national press standpoint, I mean I read the same things you read, Brad, I mean we all read and but we see more positives than the negatives. I don't think we see any you know clouds on the horizon in terms of potential loan growth.
We still see a fair amount of optimism out there among the borrower base. I don’t think – you know I think people - you know sometimes I look for reasons why things are either going really good or not going so well and sometimes there is just not a reason.
And of course most of us don't look for reasons when things are going well, we're just kind of happy about it. But you know, we – from our client base we don’t hear anything from a negative perspective in terms of – I think people tend to –ignore politics, I don’t think that has a bearing and people like to quote politics for some reason for things happening or not happening and I just don’t think in the business world is that much really bearing on what happens in Washington to the customer base in the southeast United States.
Brad Milsaps
Got it and just kind of curious, I know you guys were always looking at new markets. You talked about always looking for teams, any additional update there on kind of anything you might be looking at opportunities for expansion into other markets?
Thomas Broughton
You know Brad, there's nothing imminent, but when things happen they don't take months you know to develop. When they happen they happen very, very quickly.
So we constantly are talking to people and probably at least every couple of weeks talking to somebody somewhere. So we continue to look at [Indiscernible] areas of the southeast and are confident that we'll find the right people at the right time and again we have a really high bar for what we expect and a lot of people self eliminate themselves from when we explain what our criteria what we're looking for and what the results we expect.
So there are very few that can meet our needs. So we constantly are looking Brad, but there is nothing imminent right now.
Brad Milsaps
Okay and maybe just final question from Bud. Do you think the NIM has kind of plateaued around this I know it could be heavily influenced by liquidity flows but it looks like a lot of your deposit growth came in the money market area, are you kind of comfortable sort of at this level plus or minus barring no huge change in the shape of the curve?
William Foshee
Yes, I would say so. I think it would take another Fed increase to significantly for it to go up.
I guess what we look at more than anything is deposit cost, I think banks are paying up in anticipation of rates going up because that's all I think we can figure out based on some of the rates that we see and what we're having to match at times. So, I think probably we’re like everybody else; we're more worried about deposit side than the loan side right now from controlling that cost.
Thomas Broughton
I think what - we didn't have any growth in noninterest bearing, the noninterest bearing demand dropped as a percentage of our funding in the third quarter which didn’t, does not help but obviously hurts the niche margin a bit. We hope that will pick back up of course.
Brad Milsaps
Sure, thanks guys. Take it easy out this weekend Tom.
I appreciate it.
Thomas Broughton
Yes, [indiscernible] Brad.
Operator
All right. The next question comes from Tyler Stafford with Stephens, Inc.
Please go ahead.
Tyler Stafford
Hey, good afternoon guys.
Thomas Broughton
Hi Tyler.
William Foshee
Hi Tyler.
Tyler Stafford
Got to love some SEC football talk during October earnings. Hey I wanted to start on maybe Brad's first question just around borrowers sentiment and I appreciate your comment about nothing negative from their perspective on the horizon, but what about on the other side of the coin just from a positive side that the uptick and the utilization rate, I mean anything to point to there in terms of borrower sentiment; I mean was that more seasonal in aspect or do you get the sense that borrowers are feeling maybe better perhaps and incrementally was ready to get off the sidelines?
Thomas Broughton
It's going back more to - it's been much higher than it is today. At the end of 2015 it was 47.5 and then it dropped it's been dropping, it dropped to 44 at the end of the last quarter, so it's back to 45.5 so, I don’t - I think it just - I can't give you any reason Tyler that just drops or goes back up I don't think there's any - it was broad based, it was not, we don't absolutely, we have pretty limited exposure part credit in terms of how slim it is.
So it was five or six credits I think the total, some pretty good sized [indiscernible] on five or six credits. Go ahead I’m sorry.
Tyler Stafford
No, no, no, that’s fine. Maybe Bud just going back to your last comment about deposit pricing pressure, did you guys run perhaps any promotions or specials this quarter across any of the deposit products?
William Foshee
No, we don’t really do that, but we really haven’t checked our posted rates and we just don’t do that.
Tyler Stafford
Yes, okay.
Thomas Broughton
You know, Tyler what you scratch your head about is when you see banks that are, you know and you know how to know they are because they have a pretty low return on their equity might be below 10 or below, but they're paying up on municipal deposits. So where they got to provide collateral, so that makes you kind of scratch your head a little bit to wonder why, but anyway all we can do is try to manage our bank as best we can and not worry about what everybody else is doing.
So you can see that there in the marketplace the security deposits, seems odd to me.
Tyler Stafford
Okay, maybe switching to capital, you guys have a pretty healthy TCE, but I was just curious on the total risk based side, do you guys foresee any need for sub debt at any point in the near term, feel good around 11.5% total risk base?
William Foshee
I think risk base, we haven’t had any concern from the regulators, so I think we’re okay at that level.
Tyler Stafford
Okay.
Thomas Broughton
Tyler, we have a sub-debt that we will refinance in the month of November and we will do a, we can call it in November and we’ll do a press release on that I guess in about probably a month, a little less than a month or so. We’re not prepared to talk about it today but it’s not a material thing, but I mean all - but your projections – talk about your projections in terms of capital levels.
Thomas Broughton
Yes I mean, we’re 9.74 I think on our – we're really focused on the Tier 1 leverage with the state regulators, we had 8% [ph] so we’re at 9.70 something today and that’s really one of our focuses and we see that holding steady even growing 12% to 15%, so that’s really our focus is the leverage ratio.
Tyler Stafford
Okay. Thanks for that Bud.
And then...
Thomas Broughton
Obviously yes, I don’t see issues with that one in the future.
Tyler Stafford
Okay. And then last one from me just a question I get quite a bit from investors just given your currency, I know you guys haven’t done a lot over the years on the M&A side but just given where you guys trade relative to other banks out there, how are you thinking about M&A right now or has there been a change there at all?
Thomas Broughton
Tyler we’re growing pretty well without making acquisitions and we think we tend to think that there is much risk in doing an acquisition as anything else you can do from a bank standpoint, from your long time culture and future of the banks. So we really we look, I mean we talk to obviously we have a lot of friends in the investment banking world and we will talk and we’ll listen and we had to just be the right stars would have to line up to be a place where we wanted to be where there was really good management, we thought that bank could grow faster than we can grow and it does not having a large branch network because we don’t think of buying or the big net branch network would be a good fit with our buying today.
Tyler Stafford
Okay. Yes I know clearly things are going very well for you guys.
I’ll hop out, congrats on a very nice quarter guys.
Thomas Broughton
Thanks Tyler.
William Foshee
Thanks, Tyler.
Operator
The next question comes from Nancy Bush with NAB Research. Please go ahead.
Nancy Bush
Good afternoon. A quick question, you said that you had strong growth in multifamily, you had a very large percentage sequential increase in real estate construction, I believe you said that was in multifamily, could you just give us a little color on that because that’s been an area that some banks have been warning about and I’m curious to see why you feel differently?
Thomas Broughton
Well, I thought for four years that we were overbuilt, so obviously I’ve been wrong for a good part of the last four years Nancy, it’s Tom speaking. Clarence Pouncey is in the room, our Chief Operating Officer and he might can give a little bit better answer than I can.
Clarence Pouncey
Nancy, good afternoon, it’s Clarence Pouncey. We reported multifamily for the quarter around $3 million and our multifamily exposure is really we’re providing funding for relational series developers, these are people that put money in our bank, their core deposits in our banks.
So we’re not doing transactional CRE or transactional multifamily funding.
Thomas Broughton
Yes we are doing some other commercial construction as well to certainly not, I don’t think hardly any retail but from standpoint of income CRE we’re doing some of that and it’s broad based. The price has gotten better Nancy on one reason in the past, we passed on certain things, we just didn’t feel like the risk award was appropriate and so we see better pricing today on our construction loan it might be 100 basis points better than it was one year ago.
So we see that as being very attractive in terms of at least we can look at some things again and still our exposure is lower, much lower than the industry average if you look at our numbers. We have very modest exposure in the construction and certainly also in ABC, we have very modest exposure compared to the rest of our industry.
Nancy Bush
Is there any one particular region of your franchise that's seeing stronger growth than the others? What I’m trying to get at is one of the multifamily categories that people have been a little bit concerned about is in college towns where there has been a lot of apartment building et cetera, if you could just speak to that I'd appreciate it?
Thomas Broughton
Clarence?
Clarence Pouncey
Nancy, we’ve got a multifamily project in Tampa that’s doing very well, we’ve got one at Chattanooga that just got paid off earlier this year, we have one in Knoxville that is performing well and one in Nashville.
Nancy Bush
Okay.
Clarence Pouncey
We really haven’t had any issues in terms of concessions, rent concessions. So the market receiving its products, the one in Tampa is just getting off the ground but it’s terrific location, great spots for here in Birmingham.
Nancy Bush
Okay. And if I could just use the occasion of that question also if you could update us on your 100, 300 exposure I'd appreciate it?
Clarence Pouncey
Sure. CRE not including owner occupied is 190, in A, B, and C 68% of capital.
Nancy Bush
Great, all right. Thank you very much.
Thomas Broughton
Nancy, I think you’re right at, we hear a lot about college towns and you see more and more college towns put the moratorium on multifamily growth near the campuses because I think it is we’ve had longstanding relationships with some student housing developers and they are, they’ve got way back from what they were doing 10 years ago in terms of the growth of their products today.
Nancy Bush
Yes, some of them here in Georgia just getting so overbuilt it’s ridiculous, but I guess time will tell. Thank you.
Thomas Broughton
Thanks Nancy.
Operator
Next question comes from William Wallace with Raymond James. Please go ahead.
William Wallace
Thank you. Good afternoon.
On the loan growth Tom you mentioned a couple of times, you’ve got the eight of ten markets that are performing very well. What are the two markets that are lagging the other eight and could you talk a little bit about why and if there is anything that?
Thomas Broughton
Probably they’re just smaller markets Wally and just didn’t have the opportunities and a couple of our markets just could never had the robust loan growth but they have really good deposit growth and that's certainly an area that we need as well. So they don’t focus on - if loan opportunities aren’t there, they focus on deposit growth rather than focus in loan growth.
William Wallace
Okay. All right.
And then it might be this is my last question, it might be a little bit early to ask this, but look at your efficiency ratio and it’s clearly one of the best in the industry. You've got the branch light model at $6.7 billion with the growth that you guys are putting on your balance sheet every year, you’re going to be getting closer and closer to 10%.
I’m just curious if you have started to talk about that at the board level and if you started to think about how that efficiency ratio might change as you prepare to cross over that $10 billion threshold?
Thomas Broughton
That’s a good question. Certainly we started preparing really about the middle of last year, we will need to start in earnest preparing for the divest [ph] assuming there has been no regulatory reform and again I don’t think there are a lot of Congressmen laid in bed at night worrying about Americas commercial banks.
So I’m not, I’m certainly not assuming we will get any regulatory relief. We've started making preparations though to cross, we have added some significant people this year in terms of to ensure our regulatory compliance, we’ve added a number of resources.
In fact probably over the last 12 months we've had the largest growth in non-production personnel that we've ever had as a percentage of the total Wally. So they sort, I know Bud was looking into doing a projection model and to do the just the cost to do the divest [ph] projections is software is $300,000 a year, like they kind of see you are coming on some of this stuff, so we hope by the time that we - there will be more competition among the vendors by the time we need to prepare for it and then we certainly think we’ll cross the line somewhere in either 2019 or 2020 as we’ll cross, which is another good reason not to make significant acquisition because that puts you all the closer to make, doing those preparations.
So, we think, you know the debit card income is not a big, is not a big component for us, so that's not going to be a big hurdle to - we could probably do a service charge reprice and cover that at one time. So, from that standpoint we don't see that.
From revenue we don't see a big negative from that standpoint. And we're trying to start adding the resources as we go Wally to be prepared to cross to do the divest [ph].
William Wallace
Okay, Thanks for that color. I appreciate it.
Thanks guys.
Thomas Broughton
Yes, sir.
Operator
The last question comes from Kevin Swanson with Hovde. Please go ahead.
Kevin Swanson
Thanks. Maybe just in terms of the loan yields, it looks like it ticked up slightly this quarter, could you just maybe help me understand is it more mechanics of the time when the rate hike is coming in or is it element of pricing?
Thomas Broughton
Yes, we had the rate hike in mid June, so you had half that impact in June and the full impact in July. Loan pricing I would say were the loans that went on in the third quarter when the 465 to 470 range for new loan production.
The good thing is what the right increase in June, the majority of our floating rate loans have slower are now above that full rights, so we’ll get the full effect going forward with any other Fed increases.
Kevin Swanson
Okay, thanks and then maybe just kind of a more general question kind of in light of the Equifax breach, have you guys seen any changes in that in terms of expenditures to prevent fraud, have you guys maybe just any color around that kind of topic?
Thomas Broughton
What we continue to see in the banking industry is where the customer's e-mail is hacked from a large standpoint and they don’t know it. We're really seeing it more from the customer side.
We feel good about what we have in place for our systems as far as those being hacked. The hackers go after the quickest way.
They don’t want to spend a lot of time hacking into a bank system if I could sit there and hack an e-mail and get you know $40,000 to $50,000 out of wire transfer. So that’s just takes customer which had to continue to inform our customers what's going on and that's really where our focus from a fraud standpoint we see that probably eight or ten cases a month people trying to get money from wire transfer.
Kevin Swanson
Okay, thanks. I appreciate the color.
That’s it from me. Thanks guys.
Thomas Broughton
Thank you very much Kevin.
Operator
This concludes our question and answer session. Thank you for attending today's presentation, you may now disconnect.