ServisFirst Bancshares, Inc. (SFBS) Q3 2015 Earnings Report, Transcript and Summary

Good day and welcome to the ServisFirst Bancshares' Third Quarter 2015 Earnings Conference Call and Webcast. 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 call over to Mr. Davis Mange, Investor Relations. Mr. Mange, the floor is your sir.

Thank you. Good afternoon and welcome to our third 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 and then 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 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're 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 afternoon and welcome to our third quarter conference call. I won't cover -- again, if you need our conference call, we don't restate the obvious written words that are in our press release. We try to cover some things that might -- you might have questions about, so that, that saves everyones time. We had a pretty good quarter. We had nice loan growth and deposit growth for the quarter and I'll cover a little bit more. To tell you, someone would have thought it was going to be one of those quarters where the loan growth was nothing spectacular, but right at the end of the quarter we had some pretty substantial growth in the quarter. The markets that had the best loan growth were a mix of new and old. It was Birmingham followed by Nashville, followed by Mobil, followed by Pensacola of Florida. The loan growth mirrors the type of loans we had on the books today. 50% of the loan growth was C&I and own occupied CRE. Other real estate was 28%, which others pretty much income CRE plus Timberline and I think we had couple of pretty good sized Timberline deals closed in the quarter. From a deposit growth standpoint, the best deposit growth was in Birmingham, Dolton and Huntsville, Alabama followed by Nashville. Typically, our deposit growth is best in the second half of the year. We -- this year has been a little bit of an anomaly and that we had easily have run off in the first quarter and this year we didn’t have run off. We actually had some slight growth in the second quarter. Had nice solid deposit growth by market and our market is not concentrated in any one market. So we've been pleased with our loan and deposit growth year-to-date. From a production team standpoint, we’ve added five new producers. As you can imagine, typically you add the most people in the first and second quarters and then it tails off in the third and then pretty small group in the fourth quarter. So we’ve had really nice growth year-to-date and we've put the statistic in their 29% growth in our production team. Some of that is by acquisition of Metro Bank in Atlanta, but an overwhelming majority over, over 20% growth in our production team year-to-date is all organic growth that we’ve added. From a standpoint of newer offices, Nashville, we put out a press release that said we don’t converted to the full service office. That office will not be opened until January. It takes time to go through the approval process and get the office in place. In Charleston, we’re still -- we’re going to be coming up on a year working out of a very small cramped temporary office space. Our permanent office will be opened in Charleston in December. Our North Atlanta office has been open 90 days now. Prior to that time all of our production people were working out of their homes and out of their cars and we continue to look for opportunities. Today has been one of those days we had two calls today. We've very good teams looking to grow in the Southeast, looking to possibly join service for us. So we’ve had good interest shown from the new -- lot of new people. Besides, we'll point always to production people we’ve added. You do have to ask support staff to support them. So it’s not just adding production person and they all need an office and they need support. So it’s not cheap to add all these people and it does impact earnings. Our pipeline is at the same strong levels we’ve had for the last three quarters, is comparable to where it has been. In spite of the strong loan growth we keep thinking that the loan pipeline will draw but it is not. The pipeline is strong and is strong companywide in all of our markets. There is no weak area. So it is a really good sign of where we are as a company. Again production in that we don’t predict -- we've not found the pipeline to be a great predictor of future loan bookings. We’re not smart enough to use it in that fashion as a predictive tool. We have noticed for each of the last -- through our history that the fourth quarter is traditionally our strongest loan growth because of we’ve had pretty good growth this quarter. I always wonder if some of our growth is -- if we book some of the fourth quarter in the third quarter and I just don't -- we just don't know. We're not able to predict where it will be in the fourth quarter. The line utilization was the same quarter on quarter. No particular change there and again we're pleased with our credit quality. For the quarter, we did have -- continue to have a little bit of a [worry] [ph] expense that is more moderate levels. I keep thinking that [worry] [ph] expense will end some day and some day has not come yet. So I am looking forward to that day. Again we've added our production team in a number of the new markets, the largest number in Atlanta, but most of those have been added in the last -- really in the last 90 days in the Atlanta market. So they're just now starting to just -- it's too soon to tell. The production levels are just not getting their feet on them and followed by Charleston, Birmingham and Nashville as far as adding the production people. So it has been strong growth from a loan deposit standpoint. I'll turn it over to Bud Foshee now, our CFO, to give you -- run through a few of the numbers.

Good afternoon. For the quarter, salaries were up $255,000. $95,000 of that is due to new hires in the third quarter that was five production people, three support employees. The majority of the remainder of increase is due to people that were hired at various points in the second quarter and then the full impact of their salaries in the third quarter. So that was the remainder of that increase. From a total salary and benefit standpoint, we're up $169,000. With the good loan growth we had in the third quarter, our deferral and FASB 91 expense to contract expense account that increased to $109,000 in the third quarter. Net interest margin excluding the mark-to-market accretion were down nine basis points from second quarter to third quarter and five basis points of that is due to the sub debt that was issued in the third quarter. We had a little under $35 million that we issued in sub debt in the third quarter and really the remainder we had a $70 million increase in average fed funds in the third quarter. Loan yield is steady. We decreased three basis points from second quarter to third quarter. Two basis points of that is caused by a decrease in the mark-to-market accretion from second to third quarter and year-to-date we adjusted our year-to-date tax rate. The year-to-date tax rate is 32.43%. For the future, I would say a range would be 32.1% to 32.5% for future reference. Efficiency ratio on a total company basis were a little over 40% for the third quarter. We were at 40.13%. From a bank level we were under 40%. We were at 39.5% for the third quarter, which is a good improvement. We were at 41.2% in the second quarter and that's the end of my highlights.

Bud, do you want to mention anything on the potential rate increase if and when the Fed increase…

Yes, we've looked at that if Fed increase rates 25 basis points and we feel like that if that happens that we would have an increase in the margin of about $130,000. From a monthly basis from an EPS standpoint, that will be about a penny a quarter. If we had another increase sometime down the road, I don't really know how to predict -- rates have been so low for so long, I am just not sure what other banks are going to do or what customers are going to do from that standpoint. So we've really only looked at it from that initial Fed increase. But we would have from what we've looked at, we think we will have an increase in the margin when that happens.

Sola, do you want to just open it up for some questions?

You would like to proceed to questions sir?

Please

Yes sir. At this time, we will begin the question-and-answer session. [Operator instructions] The first question we have comes from Kevin Fitzsimmons of Hovde Group. Please go ahead.

Hey guys. Good evening.

Hey Kevin.

How are you, Kevin

Couple of just clarifying questions; on expenses, look essentially or effectively stable here linked quarter, good cost control, but a few of the comments you made about the need to add support folks when you add production folks and just trying to look out over the next few quarters, should we think of this expense run -- is it a decent run rate what we see in third quarter or should we expect it to lift a little bit as you add infrastructure and support for some of these production folks? Thanks.

Well, Kevin, the third quarter we had five production personnel and then three support staff. Related to that the full impact of their -- that increase will hit in the fourth quarter because they came in at various times in the third quarter. I don’t know of any other production staff that we have. That’s all we have at this time committed to from an employee standpoint.

Yeah, Kevin when I made in my reference to I meant for the year-to-date basis. It impacts the year-to-date results. From a quarterly standpoint, I would think we're in pretty good shape going forward at least in the next, through the fourth quarter about if people, the best production people don't usually leave this time of the year -- haven't seen the -- quite normal little incentive check. So I doubt that that will happen. So it's probably a pretty good run rate on expenses.

Okay. All right, that’s helpful. And maybe if you could just comment on provisioning this, I noticed this quarter the allowance of loan ratio ticked up slightly and you guys continue to put up very good loan growth, but just wondering if you’re kind of leaning toward more of a posture to expand that allowance ratio? I know there are a lot of different inputs that go into that model, but just a few companies we’ve heard so far this earning season, I’ve heard a few of them note a bit of caution about the economy and about certain segments. And while it may not lead to credit issues, it may add a minimum lead to an end to this very low pace of credit cost that the industry has been enjoying for the last year or two, just wondering your thoughts on that?

Kevin, in the second quarter, the provision was affected by some new impairments we had. Third quarter that was not a factor not as much of a factor. We look at the -- there are a lot of different factors that go into the provision calculation, unemployment rate. There are a lot of general factors that go into that. I really don’t know any way, other way we could increase our provision other than what we’re inputting to the model now. So I’m not really sure what other banks are doing, but we feel like we've adequate reserve based on how we’ve been doing the model for a long time.

Are there any sectors out there that you just incrementally more worried about or you're tightening your standards on getting a little more selective on lending to based on what you’re seeing over the last 90 days?

I think Clarence Pouncey is in the room with us Kevin. Clarence, do you want to take a stab at that question?

Kevin, good afternoon. We're really -- in terms of energy issues, we don’t -- we only have one small loan that is energy related, but it’s more of a private banking relationship to some wealthy credit incentives and wealth sponsors. We still see good bit of activity in income CRE, that we are very disciplined about our underwriting and sponsorship, but we really don’t see a lot of softness out there. We see continued consolidation in the trucking industry. Continued robust activity in healthcare industry. We're not exposed to the southeast at least to a lot of energy. So, we feel pretty good about asset quality of our portfolio and the trends, the financial trends of our specific client base.

Okay. Great. Thanks guys

Next we have Tyler Stafford of Stephens.

Hey good afternoon, guys. Congrats on a good quarter.

Thanks Tom.

Hey, I wanted to start on fee income and obviously the mortgage business had a good quarter. I was hoping you could provide some commentary and numbers around I guess the dollar amount of mortgage volumes, the purchase mix and then the gain on sale margins and how those kind of compare to 2Q levels? And I guess supplement with any outlook on that, on the mortgage business specifically as you kind of look into '16.

Tyler it's Bud. I don’t have volume numbers with me in the meeting. Mortgage, I guess they did pretty consistent from quarter to quarter. I don’t know of any -- I probably had pretty small research on the question to be honest with you, just to give you a full answer around it from quarter to quarter.

Have fun.

Yes, I’d rather do that and just try to guess at some of that.

Yes, no, that’s fine. So I guess moving over to the margin, then I appreciate the commentary on the margin with higher rates and it sound like you guys are following into the lower for longer interest camp. And I know in the past you've talked about different options that you have at your disposal to reduce deposit cost if rates do remain low for a while. Do you think at this point you could begin to pull some of those triggers to bring down deposit costs?

Tyler, this is Tom. I’m not sure -- it seems we’ve seen some deposit rates go up in most of our markets probably in the last 60 days. People are maybe anticipating higher rates. As organic loan demand has picked up, I think people are paying up higher rates than they were. So we could do some things that are one time things, but again we don’t feel the need to do. We managed to plough loan okay without doing anything that we can hold in reserve if we need to increase. Again fees are the number one thing we can do. We have no idea. We just want to keep our margin hanging on until we do get a rate increase. We want to keep it from having any significant deterioration. And we think -- we think we can. We’re going to be mindful as rates do start going up. Every time there is a quarter increase, we want to make a little bit more money out of it. We know there will be some rate increases where we have to pass most of it own and don’t get to keep it, but our goal is to keep a good bit of it.

Okay. And I guess a part B to that, with a 100% loan-to-deposit ratio, any commentary on what deposit beta assumptions you guys are making kind of embedded with that EPS and margin outlook with higher 25 basis points?

Let me -- I don’t understand, you’re saying would we lower the loan to deposit?

No, no, just with the 100% loan-to-deposit ratio, just curious what you guys are assuming on the deposit side of the balance sheet embedded with kind of your higher rate forecast?

Well I guess today the other side of the funding is Fed funds with corresponded banks and we don’t see them materially changes from then. There was some seasonality in that in the third quarter, but we anticipate those levels to increase in the fourth quarter. So I think that still they are the source of the funding would be the Fed funds with correspondence.

Okay. Thanks guys. I appreciate it.

[Operator instructions] Next we have Christopher Marinac of FIG Partners. Please go ahead.

Thanks. Tom, I wanted to ask about regulatory cost and to what extent you see these changing as the size of the balance sheet continues to expand?

That's a good question, Chris. Clarence, do you want to take a stab at the…

Sure. Good afternoon, Chris. This is Clarence Pouncey. How are you?

Good. Thank you.

As we continue to grow geographically and grow the scale of the balance sheet, we will obviously have to continue adding to the staff in the VSA areas, staff in the compliance area. Certainly additional staff in the mortgage area is required given the additional exposures that we're all complying with in today's environment. So we're very much committed to provide the right compliant staff as we continue to grow the balance sheet, grow our geography, but we need to do it pretty well in the business. So we really have had -- there were some problems that we had very good results from a regulatory review perspective.

We don't see any particular increase from a call standpoint, we don't see it being material to affect earnings. Chris, on a -- I don't think we see that at all in our future.

Okay. Great. That's all for it and I guess as a follow-up separately Tom was just about the C&I pricing or just maybe loan pricing in general as you have flushed out Atlanta and in Charleston and they have their pricing being kind of what you expected. It's more about expectations than a specific number question.

No, I think for us I don't think there is any difference in any of our markets. I think they're all very competitive markets and you know again I would rather be in a market where there are banks that earn 15% return on equity than the banks that are on a 5% return on equity because they're the very cheap loans [dump dunning] [ph]. That's why they have a 5% return on equity as they don't try to -- they’ll do very cheap loans. So the Atlanta is not a bad market to be in and nor was Charleston. Those are just pretty good competitors in those markets. So we feel pretty good about those. And there is always somebody doing a low fixed rate, a low 10-year fixed rate in every market and there is just somebody just -- we just go on in the next one. That's just something we just can't compete on every piece of business. The reason we got to pick up battles and if pricing is an issue, we just go on to the next company down the road so -- and try to build a relationship.

Very good tom. Thanks for the additional color.

Thank you, Chris.

Well, at this time, we're showing no further question. We'll go ahead and conclude today's conference call. We would like to thank the management team for their time today and we thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you and take care and have a great day everyone.