ServisFirst Bancshares, Inc. (SFBS) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the ServisFirst Bancshares' Second Quarter 2015 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. Please go ahead.

Thanks Gary. Good morning and welcome to our second quarter earnings call. I'm Davis Mange, Investor Relations Manager. Leading today's call will be Tom Broughton, our CEO, and Bud Foshee, our CFO. They will open with a brief overview of the quarter and then take questions. I'll now cover our forward-looking statements disclosure. We'll then get started. Some of the discussion 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 or predictions of future financial or business performance or conditions. These forward-looking statements are subject to numerous assumptions, risks and uncertainties, which may 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'll now turn the call over to Tom Broughton.

Thank you, Davis, and good morning and welcome to everyone. Again, I feel the people on the call this morning are new and I'll point out that we don't read from our press release. We assume everybody can read just fine, so you can read for yourselves and we'll just point out some highlights. I'll cover a few things and will turn it over to Bud Foshee. I'm sure he has some key questions this morning about our increasing overhead for the quarter. First of all, I'd like to say we are very pleased wher4e we are for the quarter. We had very strong loan growth, probably larger than we expected and also not larger than we expected because we pointed out at the conference call last quarter that our loan pipeline was very, very strong for the time of the year at the end of the first quarter. The growth in loans was pretty broad-based for the quarter led by Nashville, Birmingham, Dothan and Charleston. From a deposit standpoint, second quarter is not traditionally strong time, but the first quarter is the weakest followed by the second quarter. May and June were very strong deposit growth months after we got past April and tax time. Deposit growth was led by Birmingham, Nashville and Huntsville, pretty well broad-based. Our loan pipeline continues to be strong. It's not as strong as it was during the first quarter after the sort of bookings we had in the second quarter. We are entering the traditionally strong time of the year for deposit growth in the second half of the year, so this time of the year we look forward to build core deposits. A little bit about where we are in different markets. Nashville, we are in the process of – we will soon apply for a branch application with our regulators to open a full-service office hopefully in the third quarter in Nashville. During the quarter we added a number of – again, in the first six months of the year, we had the largest growth in new producers we've had in our history. We pointed out at the end of the first quarter that it was very, very strong growth in new production people. In this quarter, second quarter, we added new producers in all markets, three in Atlanta, two in Nashville, and one each in Birmingham and Pensacola. I'll also point out that Charleston is the largest startup we've ever had. In terms of production people, it is bigger by far than anything we've ever done and we are pleased with where we are. We think it's a great market and we have tremendous people there. We are well-positioned in Nashville. We have a pretty good-sized team there in Nashville today, and in Atlanta we are positioned to triple in size with the staff we have in place in the next couple of years. Also I'll say on credit quality we are pleased with not only the absolute level of problem assets but we are pleased with the trend and the trend of asset quality is we think as of right now is very good and we are positioned as well as we've been in some years to be on offense and not be on defense and inviting problems. So the absolute level of credit problems always leads to a bank being on defense if you have large levels or any significant amount of problem assets. So we think we are in good shape from that standpoint. I will now turn it over to Bud to cover the financial highlights.

Thanks Tom. Good morning. Tom alluded to our strong loan growth in the quarter that also led to additional loan loss provision for the quarter with that growth. From the first quarter to the second quarter our salaries were up $820,000. We had new production and support staff in four markets, Charleston, Birmingham, Atlanta and Nashville. We'll break that down. Atlanta, they were only in our financials for two months in the first quarter, three months second quarter. That increased salaries $240,000 in the quarter by having an additional month. From a production standpoint, we looked at the new hires in the second quarter plus the impact of people that were hired during the first quarter. They weren't there the whole quarter but were there the whole time of the second quarter. That increased salaries $415,000. Plus we added support staff in different areas and that increased salaries about $100,000 from quarter to quarter. For Metro, the shares that were issued, those were issued February 1st, so the average shares for fully diluted increased from quarter to quarter and that had a $0.01 per share impact on fully diluted in the second quarter. The efficiency ratio, we had a couple of quarters over 40%. We expect that to trend down a little bit, probably in the 39% range in the third quarter and hopefully that will decrease a little bit more in the fourth quarter. So we expect that to improve. Our net interest margin in the first quarter, the mark-to-market adjustment for the Metro loans, it had a 4 basis point impact in the first quarter, 8 basis point impact in the second quarter. And that's loan highlights and I'll turn back over to Tom, we can take some questions.

We'll be happy to answer any questions at this time.

[Operator Instructions] Our first question comes from Kevin Fitzsimmons with the Hovde Group. Please go ahead.

Just wanted to ask about the provisioning, I know that reflected somewhat the strong pace of loan growth and I guess you had a few loans, commercial loans that migrated downward and you needed some provisioning, but just how should we think about that pace going forward, like when you look at it now was it – do you view that as elevated versus what you consider a more run rate pace or do you think this is what we probably have to model in over the next few quarters this kind of level?

It is hard to say. I mean like the two loan issues, one charge-offs that was impaired in the first quarter, credit turned south, it had to be a charge-off. The impairment was something that kind of came out of the blue. So those were unexpected losses. I don't know how to really project going forward. I mean we don't – it's hard to anticipate what you don't have from credit – those weren't something that we [indiscernible]. If you'd add them to the first quarter, we wouldn't have thought those would be an issue. They came up during the quarter and we had to address them.

Kevin, this is Tom, let me interject. We like for the charge-offs to be zero, okay, but that's probably not realistic, and the charge-offs in the quarter were at a run rate of 15 basis points which is below what we budget. We budget more than that because that's probably not – we like them to be a lot better than 15 basis points but probably not realistic day in and day out. So I don't know that I can answer your question either but we budget more than 15 basis points. We hope for zero, that goes to reach zero, but the absolute level of 15 basis points, if you could – if a bank could lock in that level of charge-offs, I would think that most banks would sign a contract on that.

Got it, got it, and let me ask just a different angle on the allowance ratio, I think you're at 1.04 at this point. Do you guys view that as slightly staying stable or is it something that could bleed lower depending on loan growth?

If you only had loan growths, like Tom said, you have no charge-offs, it would bleed lower because you don't put the percentage which you put in just [indiscernible] it's not 1.04. So it really depends on impairments and charge-offs and things of that nature that have lower terms. The model is what it is and we've been around 1.04 to 1.08 about the last year, so I don't…

Okay. Just one quick follow-up on that subject in the margin, can you just, I didn't hear that Bud when you gave the – I guess it was the first and second quarter contributions from accretion income to the margin, if you could repeat that and just give what your outlook generally for the margin is going forward ex [accretion] [ph] income, do you view it as stable or compressing due to yield pressure, what you guys think?

Kevin, in the first quarter it was 4 basis points, in the second quarter it was 8 basis points. We trended that for several quarters at I would say would be in the 3.85 to 3.90 range, just guessing.

Kevin, this is Tom. We see organic loan demand is strong enough today that hopefully we think we can protect our margin and that we can take a [indiscernible] from the standpoint. During the recession if we got an RFP, we might look at it. We probably didn't respond to it. But now we get our RFP, we [indiscernible] trash. So we can't make anybody rich with RFPs – any of our shareholders rich with RFPs.

Got it, that's helpful, very helpful. Thank you, guys.

From the standpoint of the purchase accounting, we do have additional reserves from the Atlanta loans that [indiscernible] our total reserve up to [111] [ph] if you include those reserves [indiscernible].

Got it. Okay, thanks guys.

The next question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.

Bud, I appreciate the guidance on the trend and the efficiency ratio, maybe more on absolute basis could you talk about [expense] [ph] coming from Metro? I know that conversion has happened or will happen soon. Just curious kind of what you're seeing maybe in absolute dollar level in terms of [indiscernible] expenses or if that could be overshadowed by all the new hires you've been talking about potentially could make?

The [indiscernible] conversion took place in the May, everything went fine from that standpoint. Really all the cuts have been made and they are hiring production and support staff. They have three offices announced out of two they had at the acquisition time. So the production staff will kind of override the [indiscernible], but they had to staff up. They had to add lending and support staff to grow in that market. I mean they were $175 million or so in assets and they had to beef up their staff to grow to where they'd be in four to five years.

Got it. And just back to the credit discussion, I think you alluded to this a little bit that these were a couple of loans kind of came out of the blue, they weren't related to the couple of credits you disclosed in the Q last quarter that went classified or criticized, it sounds like they were separate from that.

That's correct. Those were kind of larger loans, to use that word 'large'. These weren't large loans. The credit we charged off was 100% loss. Now we think they are substantial, recovery is substantial but when you have to see somebody to get your money that look like a debt recovery, that's not something you leave on the books, I mean you pursue litigation. So these were smaller credits and that was the two loans that we added last quarter [indiscernible] significant improvement during the quarter. So this addressed those.

Got it. And Tom, just a bigger picture question as it relates to interest rates, if we do get a 25 basis point increase from the Fed between now and the end of the year, I know you guys have held your prime, ServisFirst prime, how does the move from the Fed change your thinking in how you might price loans, what would it do to your margin guidance, just any color about how you guys are kind of thinking about positioning for what could be higher short term rates, at least one increase over the near term?

This is Bud. I don't know if we do anything short-term. I guess we have to just do what other banks are doing on that. Our top tier money market rate will only pay [10 times] [ph] and we're paying 40 basis points now. I really don't see the first move having that big of an impact on us unless competition does something we are not anticipating. I don't expect any improvement. It will be unrealistic I think to expect a big improvement or any improvement at all in our net interest margin from a 25 bps increase. What I hope that happens is that some silliness in the marketplace will end when you see some rate increase or two that people will be a little bit smarter about price and long-term fixed assets on the books.

Great, thank you, guys.

[Operator Instructions] The next question comes from Michael Rose with Raymond James. Please go ahead.

Just on the hires, I'm sorry if I missed this, but can you give a little color on where they came from, from bigger banks, what markets they are in and then kind of the outlook for hiring in the back half of the year?

Mike, Bud and I gave two different answers. It might've been a little bit confusing [indiscernible] answers because nobody asked us a question we gave the statement of fact. In the second quarter, we added three new producers in Atlanta, two in Nashville and one each in Birmingham and Pensacola. Bud gave the impact in overhead in the second quarter by market which is a little bit different because Charleston had an outsized impact in the second quarter on our expenses but we didn't have any actual new hires in the second quarter. We had a lot of new hires in the first quarter in Charleston. So in the second half of the year, and we don't have a list today that says we need to hire X new people in any of these markets. We have been out actively looking in obviously Nashville, Atlanta, Charleston, Birmingham, last six months we've had five new hires in Birmingham that was a team that came to us and we didn't expect. So you never say you won't talk to those people but from this point forward in the year, Michael, my answer to you would be that we're probably going to be a little pickier, not that we hired anybody bad in the first half of the year but I'm just saying that from a standpoint of – we've got a lot of people onboard and everybody – it's an opportunity now thereby to produce and we're looking hard at that and if we have an opportunity to hire new teams we'll certainly do it if it's in the best interest of the shareholders. So we are talking to teams in three different markets as we speak. There's nothing on the board to happen in the next 90 days though there is one group that might happen. But anyway we are looking – I don't know if I answered your question, Michael.

No, that's helpful. And then you guys just closed the deal a couple of months ago. Has that changed your view around given the duration everything, has that changed your views at all around potential M&A, I mean would you still consider additional acquisitions at this point?

Yes, we'd certainly consider but we are not actively in the market looking today. We're just holding our hands full right now trying to work on all our organic loan and deposit growth opportunities that we have in all these new markets and we think we love these new markets, we're also proud the Birmingham continues to produce half our growth. Birmingham is half the bank, it continues to do half our growth. So it's not like we are – our same-store sales are really good in our existing markets and we are proud of that. We're as proud of that as we are of the fact that [indiscernible] great new markets with lot of potential.

Okay, that's helpful. And then your loan to deposit ratio is getting a little bit up there. Is there any thought to maybe ramp-up deposit growth here over the next few quarters to bring that down?

We'll like a bigger push, I don't know if we're always pushing for deposits. It ticked up in the second quarter. Second half of the year is always strong from a deposit standpoint. We talked about the first quarter, first quarter is just not good from a deposit standpoint. So we're seeing that inch up. I think it will improve in the second half of the year. That ratio will go down.

All right, great. Thanks for taking my questions.

As there are no further questions, this concludes our question-and-answer session, and the conference is now concluded as well. Thank you for attending today's presentation. You may now disconnect.