ServisFirst Bancshares, Inc. (SFBS) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon. And welcome to the ServisFirst Bancshares Fourth Quarter 2016 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s opening statements, 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 of Investor Relations. Please go ahead.

Thanks, Medha. Good afternoon and welcome to our fourth 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 your questions. I’ll now cover our forward-looking statements disclosure and then we’ll 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.

Davis, thank you, and welcome to all on our conference call. If you’re new to our conference call, you’ll find out that we don’t try restate what we said in the earnings press release. We try to just address the highlights and try to answer questions. Since we will be looking at the year 2016 in rearview here pretty soon, we won’t dwell a whole lot on 2016. We’ll kind of talk about the highlights of how we finished the year and hope we can answer any questions you might have when we get to that point. The third quarter loan growth was a bit muted. I went to a couple of investor conferences and I went to visit with an analyst on the road to see investors. Everybody is looking for a reason why loan growth was a little bit muted. And people thought they might be waiting on the election, which none of that made sense to me, why would a business person wait to do something from a capital expenditure standpoint because of the election, but perhaps they were. And around the middle of December, I thought it was probably going to be the worse quarter for loan growth that we had ever experienced. Our loan growth was very poor right up through the middle of December, and we ended up having a record month, quarter and year in loan growth starting about the middle of December, it’s when we booked all the loans and they are still on the books today, they weren’t just for year-end. But anyway, we booked $220 million of loans in the month of December, most of that in the last two weeks of the month. For the quarter, we had $280 million in loan growth and it was a record year as well. So, we ended up really, really good shape from a loan growth standpoint. Post election, we did have sense the great deal of optimism among our business and corporate clients. And so that is certainly a positive going into 2017. From a loan growth standpoint, year-over-year, the leaders in terms of percentage growth were Nashville, Charleston, Mobile, Atlanta, Birmingham and Dothan. Our quarterly loan growth was led by Birmingham, Tampa, Nashville and Dothan. From a deposit growth standpoint, it’s certainly been strong in our entire footprint. We had a fantastic year of deposit growth year-over-year and certainly the quarter strong as well. From a standpoint where our pipeline is, we typically started with a very low pipeline this time of year. And I don’t always try to caution you not to put too much into our pipeline, be it either good or not as good, but our pipeline today is at a record high, after the huge month we had in December; it’s up 34% over a year ago at this time. So, we are entering the first quarter with a record pipeline, loan pipeline. So, we are certainly -- we expect that to translate into certainly -- again, we don’t produce a scientific pipeline. We could probably hire a whole department and give you a scientific pipeline, but I think most investors are rather us be a little bit less scientific and have a little bit less overhead and try to drop down our efficiency ratio a bit more. From a number of producers, year-over-year, we went from 116 to 125 producers, which is a net addition of 9, but we added 19; so, 10 people left, we added 19. Again, our goal really at this point is not to add a lot of bodies but to have greater efficiency among our loan officers, have greater loans and deposits outstanding by officer, and set goals for all of them to reach. So, we certainly feel good about where we ended up the year from a standpoint of talent and standpoint of our pipeline and from our loan growth for year 2016. I’m going to now turn it over to Bud Foshee, our Chief Financial Officer to make a few comments on the quarter.

Thanks, Tom. On our margin, our excess liquidity increased on average by $25 million in the fourth quarter. The margin decrease to 3.30% in the fourth quarter; it was 3.35% in the third quarter. We had a fully impaired loan that we placed on non-accrual in the fourth quarter and that had a 2 basis-point impact on the margin. Average growth in the fourth quarter, loans grew $126 million, deposits $292 million, and Fed funds purchased corresponding banks decreased by $93 million. Growth in the fourth quarter, loans grew $280 million, deposits $339 million, and Fed funds $12 million. And on a year-to-date basis, year-over-year loans grew $695 million, deposits $1.2 billion, and Fed funds $4 million. From a credit quality standpoint, we had a little of increase in our ratios from the third quarter, but still very good totals. Both non-performing loans to total loans and non-performing assets to total assets were 0.34%. Net charge-offs in the fourth quarter annualized to average loans very low at 9 basis points. No incentive reversal in the fourth quarter. Historically, we’ve had some amount of incentive reversal in the fourth quarter and there was none in the fourth quarter numbers this year. Tax rate for the fourth quarter was 25%. We had a historic tax credit that we booked in the fourth quarter; without the historic, credit rate was 32.7%. Year-to-date rate is 26.5% and 32.5% without the historic tax credit and by our stock option credit. The historic credit and the stock option credit totaled to $6.7 million by year-to-date. ORE decreased slightly from December 2015, it was $5 million at December 2016. ORE expense is $91,000 in the fourth quarter versus $178,000 in the third quarter. Our non-core items, two different components. Our main non-core items netted to $307,000, of income in the fourth quarter and then we had the net tax credit after the write-down of the credit that was $784,000 that comes to $1.1 million or $0.02 on a fully diluted basis. And one other item, future benefit, tax benefit on our unexercised options is now $21 million. And that’s the end of my summary.

This is Tom Broughton, again. Because of our record deposit and loan growth, certainly we had great deposit growth all the year, but we didn’t think we were going to have a great loan growth until the very end of the year. So, we normally would have about $2 million pretax in incentive accrual that would be reversed out, but it did not. So that’s about $0.03 a share that’s not added; it’s typically been in the fourth quarter over last several years from apples to apples stand point. And we always say we don’t -- we would rather pay the incentive and have loans than have incentive accrual reversal and not make the loans and deposits. So, that’s a good point. We’ll open it up now for questions.

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

I had a question regarding expenses. I noticed, like when I was looking at things that I might consider non-core, I saw that it was in fees, the $1.3 million gain on sale of fixed assets, but you had a big increase in expenses. Was there any -- particularly that other line, was there anything in there that you will consider non-core that should be getting pulled out when we think of this as kind of a run rate?

Yes. Kevin, this is Bud. We had about $600,000 in legal related items in the fourth quarter that are non-recurring. Those are settlements that will be not be any future expense that will incur on those. So, that’s right at $600,000 for those items.

Okay. And then, within the salaries and benefits, nothing really non-core in there; you just didn’t have the benefit of the reversal that would typically happen quarterly?

Right, there was one -- the stock options, there were exercised in 2016; there were some payroll taxes related to that, that was a $177,000 in the fourth quarter, but that’s just a small amount of non-recurring. If I remember, in the fourth quarter of last year, we reversed 2 million for incentives and then -- of 2015, the expanse associated to historic tax credit isn’t broken out separately.

Yes, there is $1.1 million, Kevin, on the tax credit and that’s in other expenses. You have to show that above line.

Why you can’t [multiple speakers]

That makes no sense to a normal logical person, but the that’s the accounting rules. I think it’s low income. The low income credits, you can net, but that’s the only one, and I don’t know the logic to that one. But…

And that’s something you haven’t had in the last few quarters, right?

Correct.

We had one a year ago.

We had one in the fourth quarter last year, I think you meant in 2016. The only thing we’ve really had tax credit wise before the fourth quarter in 2016 was the stock options.

Okay, but in terms of thinking it through for a run rate going forward, it sounds like this 600K of legal of this 177K of stock options exercised and this 1.1 million write down, which is another, driving up the bulk of that other. Right?

Right.

And then, I guess in first quarter, you get some seasonally higher payroll taxes or FICA that affects that?

We have accrued for all the payroll taxes related to incentives. So that won’t -- when we pay out incentives, we don’t -- that won’t be introduced for expense. They won’t spike up in February.

Okay. Just one follow-up on credit; you guys mentioned the loan getting put on non-accrual, and I noticed in the release, you have the loan 90 days past due that is paid -- subsequent to yearend. Anything -- any comment, thread between those or any industry more broadly, Tom, that you are feeling a little more concerned about going forward?

The only common thread is poor management. That’s a common thread with every loan that’s on our watch list pretty much, it’s just poor management. There is no specific industries or -- certainly the ones you expect to turn out first in a recession, we are seeing any of those on the watch list at all. Automotive there is doing great; that would be an early one sign to me is automotive and they are and they’re all percolating along very nicely.

Great. And one last one if I could just squeeze in here, any plans on the radar for any new market entries or hiring of teams to add to your list of new markets that you already have? Thanks.

Yes, I mean, we don’t know and no announcements; we are talking to people all the time, at once a week we talk to somebody. We are very selective. We passed on a number of potential new regions in 2016, actually 11, we passed on. So, we are very particular about where we go and who we associate with. And we think if we won’t -- when we think of team, we want it to be certainly a pretty a really good deal for the shareholders.

Our next call is from Brad Milsaps with Sandler O’Neill. Please go ahead.

Tom, I just wanted to follow up on Kevin’s last question little bit. You mentioned, when you are running through your stats around the number of vendors you hired this year, it sounds like there is a gross number of 19. It sounds like you didn’t want to necessarily add a lot more bodies; you are just looking for greater efficiency. I am kind of curious where do you think your capacity of your 125 vendors would be at this point, kind of how much runway you have? It sounds like you talked to a lot of different groups last year, but didn’t get comfortable with any new region, just kind of what -- any additional color around kind of the runway that you’ve got with that group of 125?

So, I tell our people all the time, we disclose 10 million in loans and 10 million deposits per producer, thus $1 billion and $4 billion we grow a year. And we are not growing $1 billion or $4 billion a year. Why? So, we are not hitting our potential in terms of the numbers. Obviously, in terms of how that grew, you take the 125 and the top 25 probably do 80% of the production at this point in time. So, the point is we won’t the other 100 people to have certainly not -- they don’t need to be in the top 25, but just have some nice production. Brad, I won’t say that we’re not looking for; we’re looking for all the good people we can have. So, we’re looking all the time. I wouldn’t say, we weren’t looking in to expand in 2016. But we wanted the teams where we thought that it would be -- again, there is no guarantee but we want to suppose they’re guaranteed to the shareholders as we can possibly get; without it -- certainly it’s not a scientific industry. And we talked to people, a lot of potential new markets, there are probably 10 new markets that we’d like to be in, something around that number that we talked about at our Board meeting this morning and in terms of kind of profile of people we’re looking for. And we could add 50 right away. We have a number of people that are come join some of our newer regions in the very near future in terms of -- it’s not a huge team in any one given market, but two or three here and there in several markets. So, we’ll see some increase in that numbers we go forward in 2017, Brad. So, we will add the payroll in 2017, we hope to.

Sure. That’s helpful. And Bud, maybe on the margin, just maybe a little bit more color on kind of what you’re thinking there. Obviously, the excess liquidity is hurting you a little bit. But, I think you are down about 30 basis points or so, if I look at 2016 versus 2015. Are you starting to see any pressure on the deposit costs because you’ve held them pretty flat for last few quarters? Just kind of what you guys are thinking around the last Fed increase in December and kind of how the margins are going to respond in 2017?

Yes. I think like in the fourth quarter, loans grew $290 million and like Tom said, a lot of that went on in the last couple of weeks of the month. So, the full impact of that will show up in the first quarter. Liquidity just from month end September to December decrease, a lot of that decrease didn’t happen till the last two or three weeks of the quarter. So, it’s going to be the first quarter for -- I can say margin improving just based on loans improvement. That’s the biggest thing. And we had such big year -- I mean deposits grew $1.2 billion which is little bit above average from that standpoint. So, 2016 was just very good year from a liquidity standpoint. It’s hard to predict. I can’t tell you when the excess liquidity is coming out, but we can see positive trends coming, especially loan growth in the fourth quarter.

It has put pressure on deposit cost too.

Yes the deposit -- we really haven’t seen that. We have outcome meeting tomorrow; we’ve got to look at what we’re going to do with the next Fed rate increase on our special rate deposits. We do not do anything with those deposits at last Fed increase. I think that’s the key what we’ll do as rates go up. And I don’t have right answer today; we’ll have to just discuss that tomorrow and see what happens.

We’ve been very competitive though where our rates today, but our stated rates, we’re very competitive, we’re adding the market. Certainly, the big national banks, countrywide banks, they’ve not raised; we’re still very competitive with them. And so, the people that you see in the market that are moving the rates up a bit are some of the regional type banks, but not the big regional type banks.

Got it. And just maybe one final housekeeping question for Bud, back to Kevin’s original question on some of the non-recurring stuff. In your comments, you mentioned kind of a net number of 307,000, I guess to the bottom-line. Can you just run through kind of how you get to that number? I was having a hard time with some of the components that you’ve listed off in the expenses, less the gain you had on the asset sale?

Yes. The gain was $1.4 million; we had 600,000 in legal expenses or settlements in the fourth quarter. The loan that we placed on non-accrual that was $225,000 of interest reversal, the payroll taxes on stock options exercise was $177,000 and gross actually did about 460, which nets to 307.

Okay, perfect. And then, the other expense of 1.1 is kind of offset with the 784 tax credit down below, right?

That’s the net; that would be the tax credit minus the write-down. So that would be 784,000.

Is the benefit? Perfect.

Right.

[Operator Instructions] Our next question comes from William Wallace with Raymond James. Please go ahead.

Maybe talk a little bit more about margin if that’s okay. So, I’m curious, since the Fed moved in December, if you guys have changed your loan pricing at all; are seeing any changes competitively?

Prime went up. So, it’s certainly a LIBOR step up. And from a standpoint of -- from a loan pricing standpoint, there is a little bit less competition. We are light on CRE compared to the average competitor. So, we’ve got room there to do some CRE and we are seeing -- you go back from a year ago when probably loan pricing on some of that is probably 100 basis points better than it was one year ago for us. I hear about people that are getting tremendous pricing on CRE and getting 6%. We don’t have any of those kinds of loans at all. So, we wish we did. So, I don’t know if I’m answering your question, Wally.

Not very specifically, but I’m trying to figure out what kind of benefit could we see on the pricing side to margin, if liquidity holds the same? We had Fed move 25 basis points; we didn’t -- I can’t see, I don’t see any change really on the loan yields, given the move in LIBOR during the quarter. So, I wonder if we will start to see loan yields improving and maybe going up starting in the first quarter.

I think with -- the Fed increase was in December, so you wouldn’t really see the loan yield go up that much in the fourth quarter.

No, obviously, but I think based on LIBOR, LIBOR moved early in the quarter.

Right. I mean, I guess, we stated we kind of had a plan for the first 25 bp increase to try hold loans to the most of that, and we think we will; that will about $0.03 annually to net income. Any subsequent increases, we want it to be credit to net income certainly. Will it be $0.03? No, but we think there is something positive in it. If rates move fast, that could be a very accretive just because you tend to move loan pricing up more quickly than you do deposit pricing. So, I don’t -- what else, Wally, on that could we try to....

You have floors that are impacting the ability to get the benefits from rate hikes?

Yes. I guess they’d extend and it would be more than $0.03 per share per annum on that first 25...

Yes. We factored in the floor when we did the forecast with the Fed increase in December, we took into account all the floors. And it’s been a long time since we met a loan with the floor, so we still got stuff bleeding out from 2009, 2010 where we had some of the higher floors at that point.

Okay, great. That’s helpful. I appreciate that commentary. Most of my other questions have been asked, the only other question I really had is just thinking about the tax. I think you said, Bud, you got $21 million of unexercised options; is that correct, is it $21 million of tax benefit?

Right, based on the year-end stock price. Tax credit, yes.

Okay. So, how is the expiration of those options? Is that 20 -- are those options all expiring this year or next year? I mean, can you give us an idea of what the timeline we have to think about as to when that benefit is likely to be recognized, should the stock hold the way it is.

Yes, there is zero in 2017 that has to be exercised. But yes, probably, I would say over the next two years, you will see more of that. I don’t have a complete schedule in front me, but I know there is none in 2017 that expire where people have to exercise.

There is no way to exactly model it as you well know. But certainly over the next, 2017, 2018 and 2019, since most of that’s going to come into play but that’s bulk of just in terms of going back to the historical stock prices being a good bit. I guess we did our IPO in May of 2014, so three-year anniversary would be coming up here in May. Everything else, I mean like it hasn’t happened since the election but we had a big did in stock price; that’s normally when people jump on that with lower stock prices. Some people probably wait and see what happens to capital gains, tax, if there will be any relief there.

Okay, I appreciate that. And then, last question is just around capital, your TCE, I have it 8% at the quarter end, the leverage of 8.20. [Ph] Are guys at a point where you can self funds now or do you see more pressure on the capital ratios in 2017?

From a bank level, which is really what we focus on is on the leverage ratio where we have to keep of minimum of 8%; we were at 9.06 at the end of the year. And it’s staying 8.80% to 9% range and that’s our focus more from capital standpoint. And we don’t see any issues where we have to do anything in the immediate future for what we forecast.

Yes. Have you been pushing capital down from the holding company to support that ratio?

We did last year, we did 36 million. We had cash from the IPO that we pushed down to the bank, like mid 2016. With the new FDIC premium rules, it made sense to push down practically all of our cash to the bank level to lower those FDIC premiums, as much as possible. We’ve got ability to do some sub debt, we’ve got room to do and then we sell it ourselves when we need to do it, some sub debt.

As there are no further questions, this concludes our question-and-answer session. This also concludes the conference for today. Thank you for attending today’s presentation. You may now disconnect.