ServisFirst Bancshares Inc (SFBS) 2015 Q3 法說會逐字稿

Good day and welcome to the ServisFirst Bancshares third-quarter 2015 earnings conference call and webcast.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Mr. Davis Mange, Investor Relations. Mr. Mange, the floor is yours, sir.

Thank you. Good afternoon and welcome to our third-quarter earnings call.

I am 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 will 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 and 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 are made and ServisFirst assumes no duty to update forward-looking statements.

I will now turn the call over to Tom Broughton.

Thank you, Davis, and good afternoon. Welcome to our third-quarter conference call.

I'm going to cover -- again if you are new to our conference call we don't restate the obvious written words that are in our press release. We try to cover some things that you might have questions about so that that saves everyone 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 detail.

Sort of 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 Mobile followed by Pensacola, Florida.

From -- the loan growth is mirrors the type of loans we have on the books today. 50% of the loan growth was C&I and owner-occupied CRE. Other real estate was 28% which other is pretty much income CRE plus timberland. I think we had a couple of pretty good-sized timberland deals closed in the quarter.

From a deposit growth standpoint the best deposit growth was in Birmingham, Dothan and Huntsville, Alabama followed by Nashville. Typically our deposit growth is best in the second half of the year. This year has been a little bit of an anomaly in that we had -- usually have run off in the first quarter and this year we didn't have run out.

We actually had some slight growth. Second quarter had nice solid deposit growth by market, in all markets not concentrated in anyone 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 put the statistic in there, 29% growth in our production team. Some of that's by acquisition of Metro Bank in Atlanta but the overwhelming majority, over 20% growth in our production team year to date was all organic growth that we've added.

From the standpoint of our newer offices, Nashville we put out a press release saying that we were going to convert it to a full-service office. That office will not be open until January. It takes time to go through the approval process and get the office in place.

In Charleston we are 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 open 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've had two calls today from very good teams looking to -- in the Southeast looking to possibly join ServisFirst. So we've had good interest shown from a lot of new people.

Besides that, yes, I will point out these production people we've added you do have to add support staff to support them. So it is not just adding a production person and then 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. It's comparable to where it has been. In spite of the strong loan growth I keep thinking that the loan pipeline will drop but it has not.

The pipeline is strong and it's strong Company-wide in all of our markets. There's no weak area so it is a really good sign of where we are as a Company.

Again, caution 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 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 to quarter. No particular change there.

And again we're pleased with our credit quality for the quarter. We do have -- continue to have a little bit of ORE expense but it's more moderate levels. I keep thinking the ORE expense will end someday and someday has not come yet, so I'm looking forward to that day.

You know again we've added a production team in a number of the new markets, the largest number in Atlanta. Most of those have been added in the last really in the last 90 days in the Atlanta market. So they are just now starting.

It's too soon to tell, the production levels are just now getting their feet under them and followed by Charleston, Birmingham and Nashville as far as adding new production people. So it's been strong growth from a loan deposit standpoint.

I'm going to 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 the 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 benefits standpoint we're up $169,000. With the good loan growth we had in the third quarter our deferral on FASB 91 expense, the contra expense account, that increased $109,000 in the third quarter.

Net interest margin, excluding the mark-to-market accretion we're down 9 basis points from the second quarter to third quarter. And 5 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 $70 million increase in average Fed funds sold in the third quarter.

Loan yield is steady. We decreased 3 basis points from second quarter to third quarter. 2 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'd say a range would be 32.1 to 32.5 for future reference.

Efficiency ratio, on a total Company basis we 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 a potential rate increase if and when the Fed increases rates?

Yes. We've looked at that, if the Fed increased rates 25 basis points and we feel like that if that happens we would have an increase in the margin of about $130,000 on a monthly basis. From an EPS standpoint that would be about $0.01 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'm 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.

That's all I have. Do you want to open it up for some questions?

Would you like to proceed to questions, sir?

Please.

Yes sir. (Operator Instructions) Kevin Fitzsimmons, Hovde Group.

Hey guys, good evening. A couple of just clarifying questions.

On expenses look essentially 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 -- is this 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, in the third quarter we had five production personnel and then three support staff related to that. The full impact of 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 from an employee standpoint.

Yes, Kevin, when I made 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 the next -- through the fourth quarter.

I doubt if people, the best production people don't usually leave in this time of year, not if they have any incentive -- waiting on a little incentive check. So I doubt that will happen. So that's probably a pretty good run rate on expenses.

Okay, all right, that's helpful. And maybe if you could just comment on provisioning. I noticed this quarter the allowance to loan ratio ticked up slightly and you guys continue to put up very good loan growth but just wondering if you're 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 you know just the few companies we've heard so far this earnings seasons, I have 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 at 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.

In the second quarter the provision was affected by some new impairments we had. Third quarter that was not as much of a factor. We look at 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 other way we could increase our provision other than what we're inputting through the model now. So I'm not real sure what other banks are doing but we feel like we have an adequate reserve based on how we've been doing the model for a long time.

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

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

Kevin, good afternoon. In terms of energy issues we only have one small loan that is energy-related but it's more of a private banking relationship to some wealthy credit -- extend to some wealthy sponsors. We still see a good bit of activity and 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 the healthcare industry. We are 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.

Tyler Stafford, Stephens.

Hey, good afternoon, guys. Congrats on a good quarter. 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 the dollar amount of mortgage volumes, the purchase mix and then the gain on sale margins and how those compare to 2Q levels? And I guess supplemented with any outlook on that on the mortgage business specifically as you kind of look into 2016?

Tyler, it's Bud. I don't have volume numbers with me in the meeting.

I guess they've been pretty consistent from quarter to quarter. I don't know -- I probably have to do some more research on your question to be honest with you just to give you a full answer on it from quarter to quarter.

That's fine.

I'd rather that than just try to guess at some of that.

No, that's fine. So I guess moving over to the margin and I appreciate the commentary on the margin with higher rates and it sounds like you guys are falling into the lower for longer interest rate camp.

And I know in the past you've talked about different options 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?

You know, 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 have 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 it.

We've managed to plough along 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 can. We are going to be mindful as rates do start going up. Every time there's 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 on and don't get to keep it. But our goal is to keep a good bit of it.

Okay. 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 embedded with that EPS and margin outlook with higher 25 basis points?

I don't understand -- you're saying do we lower the loan to deposit --

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

Well, I guess today the other side of the funding is Fed funds with correspondent banks. And we don't see any material changes, 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's still the other source of the funding would be the Fed funds with correspondents.

Okay, thanks guys. I appreciate it.

(Operator Instructions) Christopher Marinac, FIG Partners.

Thanks. Tom, I want 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 regulatory cost?

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 BSA area, staff in the compliance area, certainly additional staff in the mortgage area is required given the additional disclosures that we're all complying with in today's environment. So we are very much committed to provide the right compliance staff as we continue to grow the balance sheet and grow our geography.

But we need to do it prudently, we will do it prudently. So we really have had very few problems and we've had very good results from a regulatory review perspective.

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

Okay, great. That's helpful. And I guess as a follow-up separately, Tom, was just about the C&I pricing or I guess maybe loan pricing in general as you have fleshed out Atlanta and in Charleston.

Has the pricing been what you expected? It's more about expectations than a specific number question.

I think price -- I don't think there's any difference in any of our markets. I think they are all very competitive markets. And again I'd rather be in a market where there are banks that earn 15% return on equity than the banks that earn a 5% return on equity because they are the ones that do the dumb things.

That's why they have a 5% return on equity is they don't try to -- they will do very cheap loans. So Atlanta is not a bad market to be in nor is Charleston. Those are some pretty good competitors in those markets.

We feel pretty good about those. Again there is always somebody doing a low fixed rate, a low 10-year fixed rate in every market. It's just somebody -- we just go on to the next one.

That's just something -- we just can't compete on every piece of business there is and we've got to pick our 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.

At this time we're showing no further questions. We will 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.