ServisFirst Bancshares, Inc. (SFBS) Q1 2017 Earnings Report, Transcript and Summary

Good afternoon. And welcome to the ServisFirst Bancshares 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 Ed Woodie. Please go ahead.

Thank you, Anne. Hi everyone. Thank you for the time this afternoon and your interest in our company. Today we'll have Tom Broughton, our CEO, and Bud Foshee, our Chief Financial Officer reviewing the first quarter with us followed by an opportunity for you to ask questions. We may make forward-looking statements during the call giving our expectations of future financial performance. These forward-looking statements are subject to assumptions, risks and uncertainties which change over time. Actual results may differ materially due to factors that affect our business. We encourage you to review our description of these factors in our 10-K filed with the SEC in early March. With that, I’ll give the call to Tom for his opening comments. Tom?

Thank you, Ed. This is Tom Broughton. Good afternoon. Thank you for joining us for our conference call. We're pleased with the way the first quarter ended up and I'll give you a little bit more detail on it and then Bud Foshee will give a good bit of financial detail as well and again if you are new to our calls, we don't read anything from the press release to you. We assume you can read anything you want to read in the press release and we'll just talk about a few other little things. So, one, for the quarter [ph], loan growth was extremely strong in the first quarter. Typically, it is our weakest quarter of the year, but this year it was very strong with loan growth of $341 million in the quarter. The loan growth was strong across our entire footprint and really no weak regions. Most of our regions are reporting a very pronounced increase in loan activity since the first of the year. Great deal of optimism among the customer base in the southeast. So that's pretty much across the border, very optimistic and seeing more activity more increase. Now I'll say that the C&I growth was above average for the quarter. CRA was a little lower than our average mix has been and so I think C&I and owner-occupied commercial was over 70% of the growth in the first quarter. We'll probably sometime this year will have some paydowns in CRE on some multifamily that's going to permanent. So that could even -- the CRE could even drop as a percentage over the next couple of quarters by some small amounts. So, from a pipeline standpoint, we have sort of a new methodology for this quarter. Using the old methodology, the pipeline would be at an all-time high compared -- excuse me, the new method -- using the new methodology and using the old -- the new methodology for last quarter for year end 12/31/16, the pipeline is up a fair amount from yearend. So, using the new methodology. So, it's very strong. Again, we're seeing a good bit of activity there. We do expect some paydowns in the next couple of quarters that could tamper the strong growth there. So far so good. For a number of producers, we added seven and I think we put it in the release. We added seven new producers, a net increase of five in the quarter, those are five we added are in Tampa. Tampa moved in our new main office as obviously we've outlined in the release and so they have room and also, they're in a permanent office. So, they don't have to commute to Pasco County, Florida anymore with the non-competes expired and we also added one new lender in Nashville and one in Atlanta. From a deposit standpoint, we had some large temporary deposits we had taken at the end of last year. Over $150 million that we took as a favor to some clients. They knew it was going to run off and we knew it was going to runoff, but they took it as a favor, but it was not quite material and they wanted a little bump in the rate and we said no. So, they moved it to somebody. I guess that favored in the present [indiscernible], but that's okay. We're trying to control our cost of funds. If you exclude the temporary deposits, our deposits grew 8% annualized for the quarter. Again, typically we have runoff in the first quarter. We don't expect to have very strong growth in the first quarter of the year. The deposit growth was strongest in Birmingham, Pasco and Atlanta. So, it is difficult to have tax payments in the first quarter. Corporate tax payments usually are some of our biggest contributors to runoff. Bud Foshee is now going to cover some of our financial results.

Thank you, Tom. Good afternoon. First, I'll start with our net interest margin. Margin improved from 3.30% in the fourth quarter to 3.53% in the first quarter of 2017, that’s due to the fed rate hike in December 2016, mid-March 2017 and an improved balance sheet mix in the first quarter. Our excess liquidity decreased by $313 million on average. Loans, [indiscernible] loans average went up $300 million, investment securities $71 million and deposits $45 million. Excellent credit quality, our nonperforming assets to total assets was 0.34 in December and that decreased to 0.27 at March 31. Our elevated loan loss provision is due to, one, above-average loan growth for the first quarter. Loans grew $240 million, which is very good for us for the first quarter of the year, plus we had higher charge-offs. One charge-off in particular, it was fully charged off in the first quarter. That charge-off amount was $2.2 million and we had an impairment on that one credit $1.4 million. So, it was a net of $800,000 and we only have one credit in the industry. So, it was not an ongoing issue. That's just one C&I credit that's now fully charged off. Our tax rate in the first quarter was 26.1 versus 24.5 in the first quarter of last year. Stock option credits, we recorded 2.1 million in first quarter of this year, 2.3 million in the first quarter of 2016 and looking back by quarter, if you take the five quarters that we have recorded, those stock option credits on average just 1.4 million in credits each quarter. At the end of March, the unrealized stock option credits was $15.8 million based on the stock price at the end of March. Efficiency ratio we improved from 39.96% in the fourth quarter to 37.58% at March 31. That's primarily due to the increase in our margin. Our margin increased by $2.9 million for the quarter and that's the end of my summary. We would be glad to answer any questions anybody has.

[Operator instructions] The first question is from Kevin Fitzsimmons of Hovde Group.

Hey. Good evening, guys.

Hey Kevin.

I just want to ask a little bit of an outlook on the margin going forward, a big bump in that this quarter versus fourth quarter and I know you guys talked about last quarter's call being hopeful that that excess liquidity was going to work itself off. So, it seems like from your comments that it worked itself off a lot quicker than you might have thought, but when you look at where the percentage margin came out and looking forward, do you think this is kind of a more normalized for you guys or should we expect that [indiscernible] a little over the next few quarters?

Kevin, this is Bud. One, we've really controlled our deposit accounts. So, we don't have an increase that much, even with two fed increased that we know that we'll have to look at that over time. There will be from a loan side, there will be improvement in the second quarter. We went back and analyzed all of our floating rate loans. We had some loans that were tied to either prime or 30 day LIBOR where the next reset date would have been 1st of the month. So those loans did not reset on March 15. So, they’ll reset on April 1. That's about $450 million in loans that were repriced April 1. Then we have other loans that are at their floors now. It would take another fed increase for those to increase, but that's $576 million of the loans that didn't increase this last time, but would with the next fed increase.

Kevin, it's Tom. The margin is going to complicate. We got curious on why we didn't get more increase in the first quarter. Our loan yields were up, but not up what we thought they would be and then you start breaking it down and well there's still some floors that we just now are getting through and there's some that don't reset till the 15 of the month through the first of the month. They just all kind of - of course the Board [indiscernible] why and what we did with the customer loans for the loan to reset on the 15th through the 1st of the month that's when we do it. So, it's not quite as simple as it would seem.

Right, right understood. Okay. Great. That's helpful and then just one quick follow-up on loan growth. I know we talked about on last quarter's call the late of course surge we saw in loan growth and that definitely seemed to play through this quarter with average balances, but just one thing we're hearing a lot of banks talk about is this increased optimism, but a lot of banks have over the last few months, have been saying with the caveat that it's not necessarily translating into increased activity. So, do you think there's something different about your markets or is this not necessarily the kind of optimism they are talking about. In another words is it fair referring to just post-election optimism and that not necessarily translating to increased activity. Is this something different because you guys are definitely seeing increased activity, thanks?

Kevin, this is Tom. I think just in general, wealthy people in general, I am not making any political commentary, I don't get into politics, but they're generally just more optimistic after the election looking forward to tax relief. That I don't think that necessarily translates into economic activity but I think there's a little bit of it and I think they're certainly hopeful on tax rates decrease, but I just think in the Southeast it's probably, maybe a little bit different than most parts of the country. It's probably was more welcoming of a Republican President in our footprint here just in general, more so than certainly the Northeast or the West Coast or somewhere like that. So perhaps there is just more activity in the Southeast. I don't know if that's - and I read what you read that loan demand is down from last year in the first quarter it seems. But we just see a lot of activity in our markets and we see a lot of opportunities for us. So that's all we're -- and I guess we don't look at it too closely. We don't look the gift horse in the mouth. We're happy to see it.

And Tom, is this more real expansion activity or is it that you guys just being more successful taking market share or is it little of both?

I think it's real new activity. It's not just taking market share. And again, we're known as a commercial lender and so I think that's where we add expertise in many cases as to a company comes to us because we can add value to their company and want us to be their commercial bankers. So, we think that adds value for our customer base. So yes, certainly we're taking -- trying to take business from competitors as well and we're really just kind of getting cranked. We're in so many fairly new markets that have very strong activity - where there's Nashville and we're just getting started in Tampa and so there's lot of activity -- lot of activity there.

Right. You're growing off a low base in those markets, right?

Right, but there is a lot of activity and when you add seven or eight new lenders in a new market and it didn't take much of a pipeline to get relevant pretty well.

Got it. Okay guys. That's all I had. Thanks again.

Thanks Kevin.

Thank you, Kevin.

The next question is from Tyler Stafford at Stephens.

Hey. Good afternoon, guys.

Hey Tyler.

Good afternoon, Tyler.

I wanted to first follow-up maybe on Kevin's margin outlook and ask a sensitivity question. Can you share with us just what you guys are assuming on the deposit beta side for - embedded within your interest rate outlook?

Tyler, this is Bud. We're looking at -- we're probably focused more on the special rate accounts. So far, we've not really had to increase those rates with the two Fed increases. This is just something we're watching just to - what's going to happen from that. It's hard to predict -- I guess we would assume what the deposit beta around 60% on this last rate increase and it may still happen, but to date we've not had to increase rates significantly, we certainly in any major form. So, I'd say it's going to be -- certainly there will be some increases over time. I think you know bankers being bankers, we know what we've chosen to do is just like those special rate, the temporary deposits we've taken, they are asking can we bump up the rates, the temporary deposit, no, take it or leave it, and so they left. The money is going to run off any way. So, I don't really, I am not giving you a good answer. I don't think we -- we don't know what other bank's behavior is going to be at this point in time and I think deposit beta is a little bit of gibberish in that regard because we don't really know things could change tomorrow what customers do. But we think that there's probably another Fed rate increase or two before you see a lot of significant movement. So hopefully we'll be able to hold on to at least 50% of any rate increase over the next couple of rate increases and Bud, would you? We have a plan for each rate increase. We have a plan for what our next rate increase will be. Rate hike what we think will happen and what our officers should expect to see from us.

Yeah. No, that's helpful Tom. It just seems like based on your balance sheet mix that you guys should see and realize more of benefit with rates up than what your current disclosures are. So, I didn't know if you are maybe being overly conservative on the deposit side but that's fine. Maybe just going back to one of the -- also the earlier comments about the $576 million of loans that will reprice for the next fed increase, is there a chunk of loans beyond that, that are still at the floor that would need I guess the second incremental rent increase from here or will that last this next increase fully move that $576 million off?

Let's see. Let me add these what I've got here. That's going to be -- there's some -- there's some out there, there is a greater loans that will take to like the third or fourth fed increase just based on where the floor is, but this is not, I didn't even factor that in when I did this because overall in fact it's -- that's significant amount of money.

It's small amount of money, when we have a floor of six or something like that or five.

Yeah. Okay. And then maybe Tom going back to your earlier opening commentary about the CRE balances in the pipeline, is that intentional on your part? Are you pulling back on CRE? Is that more just a reflection of other banks and maybe in the market being more aggressive in that product?

No, if you would ask me where we had the growth in the quarter, I would have told you, it was not being CRE. I would have just given you the wrong answer, if I just -- because we're seeing a little bit -- we're seeing better pricing on CRE today than we saw a year ago and up 100 basis points better, still probable a little thin by our standards, but it's better than it has been. And sometimes what we're seeing an increased competition on, is equipment packages in certain industries that prices get beaten down. People just are willing to take pretty low yields on a fixed basis for five years or so.

Okay. And maybe just last one for me, just M&A Tom, can you update us on your current M&A thoughts? Obviously, you guys have a strong currency that you could put to work, kind of how are you thinking about M&A environment right now and options for you?

Yeah, if we can keep growing organically at the rate we're doing, again we're instead buying a bank if they can grow more quickly than we can, we're interested in talking to them and they don't have a lot of legacy large branch network that certainly. So, when you have those two requirements, it really cuts down on banks that we might buy and we're not seeing better growth. They need to have better organic growth rate than we have Tyler. To double back on the margin, question a little bit, we would expect to see still some incremental increase in the margin as we get more rate increase and we expect to see more in April. I don't know how many basis points that translate to Bud, it's not a huge number is to.

No, not for the quarter, no. But it will -- that will improve over time. It's just based in -- you get higher rates on what's going on with this new production going on with the two rate increases. Loan growth keeps up, margin should gradually increase.

But do you have what those new production yields were this quarter?

I have. I remember March. March was 4.45% for total for new loans.

Okay. Thanks guys. I appreciate it.

Thank you, Tyler.

The next question comes from Brad Milsaps with Sandler O’Neill.

Hey, good afternoon, guys.

Hi Brad.

Hey Brad.

Hey Bud, you did mention in your prepared comments, but just curious were there any kind of nonrecurring items in expenses this quarter, it was pretty straightforward, but always like to check with you to see if there was anything you would take out or add back as you kind of think about the expense run rate?

No not really. ORE expense was roll out for the quarter from any kind of accruals when it was really was adjust out for the fourth quarter. That is just based on how we budget it. So, I can't remember anything Brad that just stands out as would be a nonrecurring income or expense item. That lumpy charge-off -- the commercial charge-off tend to be unlike assume or they're very lumpy or was elevated for the quarter.

Got it. Tom as you think about this year, are there any initiatives kind of related to deposits that you plan to put out that you approach the market differently? Do you continue to press on with that corresponded bank deposits or your other things you're looking at as you think about funding the strong loan growth you're seeing?

Yeah. We feel pretty good about our deposit growth keeping up with the loan growth Brad and we've not had to do anything from a standpoint of certainly no right concessions to generate deposits. Again, we are won is transactional deposit. That's what we focus on, excuse me, relationship not transactional account. So, we won't full relationships and that's what we base our -- we want real core deposit growth and we'll continue to with a correspondence space add new settlement accounts in the correspondent space every month. We certainly -- we push that every month. So, we have correspondent some accounts today running.

We have little over 80 base that are fulsome with us and then what we call threesome. You add the two together and stride out plunging a third of our 303 banks.

So, there is pretty good prospect list there banks would like to confirm to full settlement customers.

Sure.

Got it. And then just final question, I know you kind of hand the one-off credit situation this quarter that you dealt with. Any other areas of C&I books that give you any concern? I've see a couple banks, worth a few healthcare credits that have caused some problems here and there? Any thoughts on that sector or any others that you're not feeling maybe as rosy about at this point?

No. We don't see anything Brad on the horizon that Clarence Pouncey is in the room and I can ask Clarence, but Clarence you respond to that.

No, nothing in particular Brad. The credit -- I've seen our credit that we dealt with in the first quarter simply was the case of core management. The company recognized our exposure and got behind us in the first quarter, but in terms of anytime industry sector that is problematic within our portfolio, we're not seeing anything.

Don Owens is our Chief Credit Officer. Clarence work with him every day and they're looking for trends. Well, we can't find any trend yet Brad. Couple of things to think would slow down first would be maybe automobile theaters. We don't -- prices are pretty healthy there for dealership. We don't see any slowdown there in the automotive dealers yet. So, they're still doing quite well. We don't -- again as Clarence just said, all of our problem loan on our watch list are most of all of our substandard credits are just poor management, some fashion.

All right. Thank you, guys. I appreciate it.

Thank you.

The next question comes from William Wallace at Raymond James.

Good afternoon, guys.

Hey William.

Good afternoon, William.

If I look at your earning assets mix you kind of flick here at the optimal mix now with loans around 83% or so of earning assets or do you think there is opportunity to continue to deploy liquidity into the loan portfolio?

We're at fed funds sold or stay around $400 million today. So, we're 6.5% to 7% of assets and we can go lower than that, still be fine from a liquidity standpoint. So just from a liquidity, I think would be fine.

Okay. Are you strategically, is your desire to run the fed funds loans down to a lower portion of the mix?

Well, that's just part of the -- I guess that depends on what we're trying on the loan, the deposit pipeline to see how that shakes out. We're not going to let it get down to a critical stage and redo the emphasis on loans and deposits. I don't…

Yeah, we think we're okay. We think we could be a little bit -- have a little bit higher mix of loans to total assets there. We don't see a need to do anything differently yet.

And then if I look at your loans to deposits ratio, what do you think about as the optimal run rate there. You've been at 100% in the past. Would you prefer to be lower or is that totally fine level for you to run that? What are your thoughts there?

100% I think 95% to 100% would be fine. We've gone through the -- we had a concern from a regulatory standpoint at one time thinking that they would have an issue with that, but they told us there is no issues even that we're 100% and I think really they look at the fed funds purchased correspondents and see how stable that is. And we really at some considered part of our -- we consider that part of our deposit and I think really, it's because it is. So, it is some stable and so yes, I think 95% to 100% would be find from that ratio.

I think what the regulators look at is we are a relationship-based bank. We don't have transactional deposits and we don't have any brokered deposits. We don't do anything or any form of brokered deposits. We don't accept -- we've never accepted a broker deposit and don't plan to. So, I think what they see is a bank with good core deposit growth and they're comfortable. I think they're comfortable to this point with our loan to deposit ratio at a elevated level. And then these are only 10% of our deposit mix. So, you don't really have -- see the run off ratio efforts. So that helps also.

All right. And Tom you mentioned that your CRE pricing has improved just off time and I am just curious, you guys have always grown significantly better than the industry. I am curious if you're seeing any change in the competition? Presumably you have the competition's loan pricing is up as well on the CRE loans. But I am just curious if you're seeing any change in behavior maybe some of the guys who are more aggressive are stepping back or any kind of commentary that you can speak to in your markets?

Yeah, we don't know, I'm sure there's a lot there may be some significant changes in the transactional CRE business, but we're not in that. We don't do transactional business and a lot of CRE world is transactional while as you will know. But we are seeing better yields available. So that tells me somebody's pullback from where they were a year ago, they're gotten full in terms of CRE exposure.

Okay. You hired seven lenders, five net, you mentioned one in Nashville, one is Atlanta and then Tampa. Was Tampa, was that three net in Tampa or was that five net in Tampa?

That's four net…

Maybe said another ways, where were the two that are no longer with you, what markets were they in?

I don't know the answer to that question William. I think one was in Atlanta and one was in Tampa, which is my best…

Okay.

Does that sound right Clarence?

So, Tampa, so you've really picked up in Tampa.

Right, right. We just opened our office in March down there two weeks ago. So, we didn't have a place to put anybody. So, we had some people that were scheduled to come on, but we just couldn’t take them until we had a place to put on.

Okay. In the past, you've mentioned some other markets in the Southeast that are of interest to you. I'm curious if you've gotten to a point now with maybe Tampa coming online a little bit better or are you getting closer to entering a new market organically?

We don't have any plans today Wally to enter new markets. One of the reasons we've been really picky on our growth is because we pay good growth where we are today. We're growing quite well in our existing markets and it is clearly more probable than not add a whole new regional overhead -- regions overhead obviously. So, we certainly would prefer to grow in the markets where we are today. We do through our Birmingham office we cover a fair number of other markets in the Southeast that are within a few hundred miles. We think we cover some of those effectively today. So, we continue the same plan we have today, but now we're always talking to people. We just don't have any plans today.

Okay. Okay. And then just my last question is what did you change about your pipeline methodologies just out of curiosity?

Trying to drill down our own -- better percentage a better probability of whether they're going to close or not and when they're going to close. We're trying to scrub it better. Producers like to have a big pipeline. It makes them feel good about themselves. Adds a little swagger to their step and we're offer them having a lot of swagger in their step, but we won't -- our pipeline is highly accurate as well and I've said, it's not scientific and I'm sure we can make it scientific if we had a department of overhead to make it a scientific. And I don't think that's -- at the end of the day it's not going to change the actual result. It's just going to change forecast of the result 90 days out. So, we think this will be a little bit more accurate. It shows a lower pipeline then the old methodology, but we think it will be much more accurate over time.

And when did you -- when is the change going to affect internally.

This quarter -- just this quarter, but we've back-tested last quarter and it shows that our pipeline is up this quarter over last quarter.

Right. Right. Under the new methodology.

Right. Some 7% over last quarter.

Right. Right. Okay. That's -- you covered anything that I had. So, appreciate the time guys. Thank you.

Thank you, Wally.

Not having anything else, that will wrap this up. Thank you, everybody for joining our call. We appreciate your participation and interest in ServisFirst Banc.

Thank you for attending. You may now disconnect.

Thank you.