Q3 2019 Earnings Call
Good day and welcome to the service first Bancshares incorporated third quarter earnings Conference call, all participants will be a listen only mode.
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Please note. This event is being recorded I would now like to turn the conference over to David change and Investor Relations for surface Erste Bank. Please go ahead.
Good afternoon, and welcome to our third quarter earnings call, we will have Tom Broughton, our CEO and blood doshi, 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 projection share 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 in Servisfirst assumes no duty.
To update them with that I'll turn call over to Tom.
Thank you. Thank you David and good afternoon, everybody before I jump into numbers I lied to.
Mentioned, we elected any director today, Chris Mettler, Chris Mettler has been on our Charleston.
Third of directors. He has a technology background and we're thrilled to have Christmas and new director of the company. So we think you'll be able really a great asset for the bike and in the holding company as well so.
You're welcome to Chris and thank you for Jonas.
Oh, regardless of the quarter, we were very pleased all in all.
Bowling, we didnt like we had a little bit of margin slippage. It was unexpected so and budget I'll 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 lighter the flexibility we handle given our strong deposit growth.
The loan growth in the third quarter was modest are our best growth was in Nashville, and West Florida.
The Birmingham region had some say already paydowns that affected.
Growth in the core plus we didnt have any large loan closings in the quarter.
They loans are up 10% year over year.
We do have tend to have lumpiness last quarter, we had tremendous loan growth. This quarter is known it's just it's just lumpy and that's all I can tell you is.
Okay.
Yeah.
If you ask about economic outlook and somebody always ask every call. It does seem that clients are more cautious.
Given the trade war with China, and the immediate focus on the economy and I've thought about it.
No we really hadn't got many requests to finance the 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 CRT projects, they're seeing their medical projects, they're going to bond financing. So you know the flipside of lower interest rates is that people can can go to permanent market with some things that you can't do it when rates are higher so a good for our clients that some of those projects will be back most of those projects will be back they all when new projects.
I'll start construction on.
So we typically have good closings in the fourth quarter and we expect that Theres No reason, we don't expect the saying.
This year.
We did add 60 bankers in the third quarter, we added a great team in Charleston, three of them pretty bankers and one agent.
Three Florida cities.
So we hired 20, you bikers year to date, just an outstanding group of people.
Of new bankers will you 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 substantial upgrades.
In staff this year that the numbers don't were flat the people that we've added this year. They certainly we all in 2020 in 2021, we've added significant new overhead.
These new hires.
I mentioned earlier, we do have.
Very strong deposit growth.
Is 17% annualized for the quarter and 19% year over year.
The growth it was very broad basis.
Quarter with seven seven of our 10 regions have an outstanding deposit growth.
You know, we do have a lot of flexibility to manage our margin. Unlike many other banks, we have a we've never exactly broker deposits are used to list in the 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.
It is a bit of a champagne problem and that's a good thing to have.
One new initiative, both going talk about for 2020.
It would be expense control is something we've never focused on but we think it's a good time to do so.
We will limit hiring to revenue production personnel in 2020. So we're also going to look at you know expense control of vendor cost and look at it at all of our fees and costs providing services.
To our clients. So I'll now turn it over to both to get into more detail on the numbers.
Thanks, John Good afternoon net interest margin.
Did decrease in the third quarter. It went from 3.44 and the second quarter to 3.36 in the third quarter.
Couple of factors average excess funds increased by 269 million as a third quarter.
Also LIBOR based loans 30 day LIBOR.
We have 879 may and loans tied to that index.
That rate is moving ahead of fed rate cuts it decreased 17 basis points from June Thirtyth.
August 1st.
Decreased 19 basis points from August 2nd to September 18th.
And as such decrease about 15 basis points.
The positive note, we've lowered deposit rates after the fed cut rates in July and September .
The cost of our interest bearing DDH was 1.71 in 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 to 275000 that'd be a three to four basis point increase our margin I have detailed on the different components, if anyone but like.
For me to email that to you.
Also just as we add 50 million in loans that will add two basis points higher margin also.
The Alco Committee will made.
October 23rd.
And we'll 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.
Noninterest income.
Credit card income continues to grow 1.2 million dollar a year to date increase AG quarter over quarter 29 team versus 28 team we increased 454000.
Earlier this year the by perceived door Smart for American Bankers Association.
Our correspondent Bank agent credit card program and we've added 16 banks to this program in 2019.
Our mortgage banking income grew 899000 year to date and quarter over quarter 2019 versus 28 tainted increased 656 down.
In early October the bank purchase 75 million.
Bank owned life insurance, the tax equivalent yield on that insurance is 4.77.
A reminder, we do not sell 80 government guaranteed loans to generate noninterest income.
Noninterest expense, we increased our third quarter.
Incentive accrual by 500000 based on anticipated year in payouts.
And maybe 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 you just by what expenses key.
Versus what to remove.
Second you consider activities that should be or shouldn't big form and how they should be perform.
One area that we see.
Improved efficiencies and as our wire processing area.
And last budgeting is not connected in prior years spending is based on necessary activities.
Loan loss provision.
Third quarter net charge offs for 8.8 million 6.2 million.
Impaired unimpaired charge house for 2.6 million, we've been proactive on our larger problem credits, our chief Credit Officer Hendry Abbott.
So I don't recall and can answer any credit related questions.
The bank participated in a state of Alabama operating loan guarantee program. This program was terminated in the third quarter.
Alabama State bank into car notified us that this was effective July 31st.
At time, we had 76 loans.
In ROE in the program positioning of roughly $53 million total loans.
Serves first is losing 22 million and loan guarantees in favor of a onetime payment of 7.4 million.
Management decided to book to 7.4 million to loan loss reserve and this was based on potential credit downgrades over the life of this loan portfolio.
In general loans that had a collateral shortfall and other enhanced risk award ROE in the program a required a 1% fee on the commitment. These for loans that would have otherwise not met banks lending criteria. Thus the credit enhancement it ties to bind to land in the situation.
Taxes year to date tax rate for 2019 is 20.2% 21.4 without stock option credits of 1.2 million tax rate for 2018 was 18.9 is 20.9% without stock option credits at 2.4 million.
Third quarter right 2019 was 20.2 20.7 will that stock option credits of 231000.
Third quarter or 28, taking the right was 19%.
20.3 without stock option credit so 539000.
For the remainder 20 not team projected tax rate is 21.3%.
Shareholder value.
Book value, excluding unrealized gain on a if has securities up 16% year over year and book value, including the unrealized gain is 19% year over year.
This concludes my comments and I will turn to program back over to Tom.
Thank you but.
We certainly from an economic outlook standpoint, we don't see a recession on horizon, but obviously, that's all that the focus is it seems to be from the certainly the media.
I thought if there's a recession common, whereas we're well prepared for a recession, we have very strong balance sheet, we have very strong profitability I've always.
I would argue with the regulators over the years regulators argue that capital is the best defense against losses, and I've always argue that's not true the best defense against losses that have across a strong stream of income to offset any potential losses.
Our nonperforming assets, our balance sheet credit quality as press thing in our.
Non performing assets or one half 1% of assets. So we like where we are if we see a recession theres recession common where we're is well prepared as any bike in United States. So what that will open up for questions.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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Our first question today will come from Tyler Stafford with Stephens. Please go ahead.
Hi, good afternoon guys.
Hi, John Hi, Tom maybe doing.
Good how are you guys.
Good Hey, maybe but oh, let's start on the margin so that the three to four basis point increase and you said the different components that you can email us can we just walk through that on on the line here and and how you expect to get that three to four basis point increase in margin, particularly given a fourth quarter that choose.
A seasonally high liquidity build and I appreciate the commentary on that on the deposit cost, but if you could just.
Over that I think you said a 132 interest bearing cost for October is what you expect.
Pretty sizable step down did I hear that correctly.
No thats interest bearing DDH does not include see days, but yet a big decrease.
It was 149 September and then after all the.
Right cuts were estimating 1.32 in October .
I mean, you've got.
Let's say you've got.
Prime loans that reprice immediate.
So that 1.35 billion.
Prime loans that reset once a month that's 488.
May and.
Excess you ever get our excess funds have decreased so far in October so that definitely has a positive.
Impact on earnings Fed funds purchase of course, we we lowered that rate when fit cut rates.
In September .
Don't how much detail you asked what the reach component and so what current.
One of the loans reset to hit early go through like on the prime loans that reset.
Once a month or 30 day, LIBOR or kind of going through one of those would reset.
October than calculated that impact.
On the margin right, but if we do get in October guide you, it's still expect that basis point improvement for the fourth quarter.
Yeah, good like when we have our Alco meeting on Wednesday, we'll have a plan to cut rates, even with or without are fed right. It's just something we've got to address.
Like Tom said, we really didn't cut.
Back in July and we did a much taper cut in September .
After the fed cut on only 18.
Okay, It's really I mean, the excess funds it really the key I mean is.
That is decreasing and thats kind of whats when it goes up 269 million in third quarter, we didn't forecast and that has a big impact on your only margin right, but isn't seasonally fourth quarter pretty high from a liquidity standpoint, if I go back the last several years would you expect something different for this year.
Well I guess what were we would anticipate probably is higher loan growth I mean, I think that's traditionally our long and that's.
If you look at it where we are from a budget standpoint were.
Well behind alone. So I think we'll have a stronger.
Fourth quarter from alone loan growth standpoint, especially store I mean based on store.
Yes, we would need to loan growth.
Just last from me on the on the margin do you have what the 930 total or September Thirtyth total deposit cost was.
Yes.
Total was 1.12.
For total cost.
Okay.
Got it.
And maybe just shifting gears over to credit.
A couple of questions. There so the $14 million increase in the Nonaccruals can you just talk about.
How many loans what type of loans were included in that increase and then on the 22 million.
Loans that you lost a guaranteed what was the status of those loans from or from a credit rating standpoint at this point it at 930.
Yeah header hendry habits, our chief credit he's he's going to talk about those components, let's open yeah, and I'll hit the loan loss guarantee program question first in status of that who was as I mentioned those are typically I guess, I'd say collateral like loan but to date.
Loan law on that pool, and then they are minimal and.
All the lone worker.
In the well I guess, all but one relationship what occurred at the end of quarter, but.
All lines for current capital one relationship.
The.
Primary driver any increase in nonaccrual of the increase roughly $10 million was associated with one credit that is.
Grow hospital system out of our Nashville market.
The primary driver if they come from non accrual.
Okay.
And then just just lastly from me just on the FDIC credit just make sure Im clear so that the 1.7 million dollar credit you got this quarter would you expect the run rate of that to in the fourth quarter and go forward to to.
Flip back towards kind of your historical FDIC insurance expense right. It will yeah for what from what we gather that will be a.
Normal expense I guess, you would say in the fourth quarter pitch.
Tyler it's very confusing this is Tom.
We've gotten some.
No the indication we got from look really primarily from 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 want to stay and while they they can't be more specificity in around this number but but nevertheless.
Maybe you find out what we can't seem to bond at a whole lot. Some moving target yeah. Okay. Alright. Thanks. Thanks, guys. That's it for me it and you can we gave him we do have excess liquidity build in the fourth quarter, you can assume that margin standpoint, it it'll either add two were takeaway from aren't ngs it'll be it'll be revenue neutral.
So.
Hopefully.
Our next question will come from Brad Milsaps with Sandler O'neil. Please go ahead.
Hi, good evening guys.
Hi, Brad.
Good good.
But I appreciate all the color on the NAND, maybe just want to talk about the other side the balance sheet loan yields I guess were down.
Six basis points are so linked quarter.
I'm just kind of curious if that would be kind of what you might expect.
In the third quarter.
You know and then maybe if we also get in and October cut.
And you 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 four floors, how might that protect you.
Yeah.
Let me talk about floors burst.
We have 1.4.
Floated right, we've got 3.1 billion in floating rate loans variable rate loans.
1.4 million has floors.
Billion sorry billion.
46%.
Right floor, well, the or the loan rate.
Equaled the floor rate at end of September .
That increase to 518 may and it was 265 million at end of June so with two fed rate cuts that they had a big impact.
The let's say, let me look the went well yields.
Went down a little bit in September .
Some I had to do with a couple of.
Lower right.
Credits, there's had a lower loan yields because it was 516 in July 519 in August .
41.
In September but on a chef eyeq 510 to five fifteens, our our normal run rate on on new loans non accrual affected nonaccrual status on the rural healthcare credits primary reason for the drop in Longview, Yeah. We had a cut we had some non accrual reversals in the third quarter.
Got it got it and you said 46% of.
The loans that have floors or at the at the floor is that is that what I heard no.
46% of our variable right portfolio has a floor right. Okay got it and then it was 500 some odd million about 518 million is at the floor right at the end of September .
Okay, Alright, great and then just too.
Follow the on expenses I know you guys are probably you know in the budget process right. Now last couple of years, you guys have kind of been up high single digits.
Chuck and maybe you know closer to double digits. This year.
I know it's early but is this you know 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 I see is or is there much room to cut so to speak or or pull back.
Yes, Brad we're.
We're going to look hard at every expense and you know we're looking hard at our vendors.
Well go ask every vendor to.
Partner with Us and help us drive to try to pair expenses. So we think.
We think it's an achievable.
Very capable go Brad.
Certainly we're you know continue 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 worsen.
And next year 2020, so we.
We'd like to draw the line.
On overhead and.
Try to try to have really good year.
Because if we're not satisfied with where we are this year. This is not.
This is.
This is not our standard of performance.
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 personality.
I mean, it sounds like you've got a pretty full accrual in the third quarter does that does that take a step back in the fourth as you kind of true things up.
Yes.
Well, we hope we hope we pay out you know more than we've got a crude Brad that'll be good news, if we do but certainly.
Management accrued bonus accruals are going to be down from last year I tell you that.
Because we just had to kind of year that that we.
Wont Hale.
Got it okay. Thank you guys.
But.
Our next question will come from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.
Hey, guys good evening.
Hi, Kevin Kevin.
Just to follow up on Brad's question I, just wanted to make sure I heard it right My 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 but then I thought I. Just heard you say you were going to continue with hiring of revenue producers just wanted to clarify that number one yes, I mean, we'll continue to our revenue production people, Kevin, but certainly there are only to be.
Yes.
They're not they're going to be slammed dogs.
Only to pay for themselves very quickly how about that.
And Tom what what is that.
That focus say about your willingness to look at new markets and is it to make it less likely you would be entering a new market by entering into hiring a team or is it just depends what falls in your lab. Yeah. I mean, we we look we talk to people all the time and when we talk to people you know at least monthly <unk> Gulf.
Optigrid somewhere so we're certainly not a rule out expansion to a new market at all you know they're not.
There to the point they're not.
They don't have a big bet almost in terms of.
The most bar, we opened the market our startup losses are going be.
You know over an 18 month period about $2 million I don't think thats still make or break us I don't need to minimize $10 million, but.
That certainly we're open to new opportunities as we always have been but we're certainly.
More of a laser focus on we need immediate profitability or more quickly and we want our managers to make to rationalize their resources. So you know they need to do with what they've got if they want to bring on somebody new that night, we need to rationalize that the resources, we had one on hand today.
Okay. That's great. Thank you and then just on on the whole decision process of looking at cost cuts.
Oh.
Uh huh.
With this increased focus is it more due to the lower margin environment, we're dealing or is it more looking ahead I 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 above.
No I, we're we're not getting ready for recession in that respect. It's just the call its reaction to the kind of year. We've had was just you know was.
This year has not been a double digit earnings increase and thus the county year, we expect in world.
Second is bright probably since pretty good message to everybody that you know this is not a this is not acceptable. This is not except for performance then that's purely reaction to that yet.
Got it great. Okay. That's all I had thanks guys. Thank thank you.
Our next question will come from William Wallace with Raymond James. Please go ahead.
Thanks, Thanks for taking my call guys.
I was hoping maybe digging a little bit more on credit.
So first off on the the you mentioned there was a 10 million dollar.
Hospital facility I believe you said in Nashville, and that drives the third quarter increase.
Yes, Tim is out of our national longer get the primary driver nonaccrual. If the same credit we've been talking about for a while it was the the.
Yeah, It was going to be a liquidation aux sable assets and.
Than we've gotten into its great with unsecured creditors, who are large new Jersey.
Represent them. So we're fighting over the money or you know, there's a pot of money.
We just can't get to it until we have some final resolution the visit the bankruptcy good.
Go ahead.
Go ahead, Wally was was there a charge offs associated with this last year in the third quarter.
Last year and the third quarter.
Yeah, I mean no no.
We had a charter school.
Okay. So what was the charge this quarter.
For that credit.
So charge charge associated with that this credit this quarter was roughly 2 million dollar.
And then last year.
In the fourth quarter. Your your non accruals jumped up a little over $10 million and then they kind of set so it just feels like you're kind of coming in it than sitting <unk> was that one core one credit last quarter or was that a couple of credits and.
Can you talk about.
Why it feels like there, they're setting or is it just that they've moved off and others have come on.
I don't remember specifically the fourth quarter on follow up on that you know I think it's a combination of both I mean, we we are being proactive and and removing credit to name for instance.
One of the drivers of the increase in net charge offs worth we sold alone that had been on non accrual for quite some time than we did we did take a law conifer we had.
Very compared to almost what our lost work, but we just felt like we need to Dallas that were roughly 30% of or net charge off for the core something I do think we're we're actively working to do that type of best with your your question. One there's a say an accurate that is.
Pretty good. The next next largest one is to say an accurate that'll be we should have some resolution on the starting this week, so but it's been going through bankruptcy process, which I you know these things filed bankruptcy you take forever Wally.
Understood I guess the reason I'm just thinking that it's because last year third quarter. Your non accrual loans were just over 9 billion.
And now we're approaching 36 million and I understand that you're you're npis are still relatively low but that's a.
All right, that's a pretty big jump in four quarters. So I'm, just trying to get a sense as to.
You know, whether we're seeing any increase in inflows or anything outside of just a couple of one offs or larger credits that are that are going bad. So I know your commentary is always that that you're not seeing any signs of stress in the system.
So I'm just trying to get a sense is why the big.
Jump over fourth quarter.
Yeah, I mean like you said you have roughly $10 million that was was one credit we moved this quarter.
You know on and Tom mentioned, our second largest and he had one we're hoping to get some additional resolution through bankruptcy that we.
More yet get some pay downs on that credit.
Okay.
All right and so.
And you mentioned Tom that there was one that moved off in the third quarter as well.
Hi, This is Henrietta and yes, I did mention we sold we told the credit until it and reduce non accrual.
Currently the and the third quarter.
Hi. This is listed live it was assisted living facility well.
Roughly it was a 5 million dollar credit and we had it roughly impaired by half an hour close to what we told the debt.
So that said that reduced to that we're just not close by two and a half millions that is that what you're saying.
Net yet.
Okay, Yeah, we had perhaps.
Okay.
All right.
And then you had if I understand correctly you.
You received a $7.4 million payment to end a a guarantee program and you applied that entire $7.4 million to the resorts balance through the provision expense.
Yes, correct.
So.
Actually one of our non accrual loans is isn't that isn't that who.
I was just the one credit that did have some some some.
Pretty serious issues with it but as we've obviously been a father and I'm looking at I'm looking at the nonperforming asset list at September Thirtyth and.
You know I don't see anything on here that was on non accrual last you Wally.
Okay. There is this small, but what I'm, saying they might be there might be something for 250000 offsetting.
No there's not anything we move.
The good thing about seeing across when they get they get in trouble fast I get out of trouble. They they resolve themselves fairly quickly you know we we found out during the recession that some of those real estate deals just type they just like Qatar by they just stay forever only books, you may get rid off yet.
Yeah. Okay. Thank you, yes. That's helpful. So on the provision expense had you not hedging not moves that payment into your reserve you would've had a negative provision expense you would have been releasing reserves pretty substantially.
Yeah, we would have.
So what would have been driving that release.
The change in your any assumptions in that.
Fast five mile where we got this time you know.
I'm also not not completely a bad thing.
Yes.
$1.4 million Lucy.
Okay. So there's no change is there anything on the assumptions in the underlying model.
No I mean, you had lower loan growth. So it's you mean.
I have to provide that much for longer stuff like that.
Yeah, I'm, just kind of heaters and says yes.
That would definitely.
Had an impact and what we put in the reserve for core.
Okay, Okay, 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 for now or do you not now.
HM we've heard different stores were world, we're going to waste.
Yeah I used to happen once you got in the third quarter, you're getting the fourth quarter and that should be a according to them, but I've heard a yes there's.
Why such a mystery I don't know wallet is wrong, it's usually when the finally gets to a certain level what they do I just well wait till we get it no then we'll book.
Frankly, I don't know won't I don't want to have a credit I'd, rather just people keep paying at a reduced right. You know you think about of the bikes that.
Yeah, I don't want to have people not have made payments the people that.
The mikes, they could fail or home lending, we make it a payment all the way up to one they fail you know so I'd rather solve this big by you and at a reduced rate.
But I didnt that FDIC did not ask my opinion.
[laughter] fair enough fair enough I, taking your time up I appreciate it thanks for the commentary in color on on some of the moving parts of the non accrual bucket I appreciate it.
Thank you all.
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