ServisFirst Bancshares Inc (SFBS) 2016 Q2 法說會逐字稿

Hello, and welcome to the ServisFirst Bancshares second-quarter 2016 earnings conference call.

(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.

Thank you, Amy. Good afternoon and welcome to our second-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 your questions.

I will now cover our forward-looking statement 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 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 afternoon to all. I will cover a few highlights of the quarter, and then turn it over to Bud to do a few financial highlights as well.

First of all, the loan growth was pretty good for the quarter at an annualized growth rate of 18% for the quarter. Loans were impacted by one of our top five borrowers, so we also had the sale of a couple of other companies as well that impacted our borrowings during the quarter. So those were lower than we would have seen otherwise, if not for the sale of the companies, but that is -- certainly the deposit growth was strong for the quarter at 26% annualized.

From a pipeline standpoint, we are I guess off a little bit from the peak at March 31, but still above, far above where we were at any time in previous history, except last September. Remember: September was very high, and then June was off a little bit. We had a fair amount of closings during the month of June from our pipeline, so we expect it to rebuild back from there.

From a loan growth standpoint, by market, it was pretty broad-based for many of our markets. From a dollar standpoint, the biggest growth was in Nashville, Birmingham, Mobile, Charleston, Dothan, Tampa and Pensacola. So you can see it covered a large number of markets. From a percentage growth standpoint, certainly we were led by Nashville, Charleston, Mobile and Birmingham.

From a deposit growth standpoint, again, it was pretty broad-based. But it was led by, from a dollar amount, by Birmingham, Nashville, Huntsville, Charleston and Mobile.

So we're seeing strong growth throughout our footprint. Bud will talk about asset quality in a minute, which is still strong. We had one -- primarily one credit we charged off -- the end of a credit in the second quarter -- was primarily one credit. Other than that, we had benign charge-offs.

From a production standpoint, we have the same number of producers at June 30 that we had at March 31. The composition is slightly different. Our production, number of producers, was up 18% year over year from that standpoint, and the same as the end of March 31.

We are focusing more now on banker productivity than we have certainly in the past, and we're taking a closer look at efficiency in every region and department. We're asking all of our regional CEOs to try to be more efficient and reach some minimum thresholds of outstandings in loans and deposits for each of our production personnel. So we're going to take a harder look at that as we go down the road in terms of efficiency with our Bank.

I'm going to turn it over to Bud now to -- you may have a question or two about our change in accounting treatment as well, so I will let Bud get started.

Thank you, Tom. Good afternoon.

Our net interest margin decreased by 6 basis points in the second quarter. Our excess liquidity increased by $116 million in the second quarter.

From an average growth standpoint, second-quarter loans grew $182 million, deposits $208 million, and fed funds purchased correspondence $64 million. And our net growth in the second quarter -- loans was $198 million, deposits $328 million, and fed funds purchased correspondence decreased by $77 million.

Very good credit quality -- non-performing loans to total loans of 0.11%. That was 0.15% in March. And non-performing assets to total assets was 0.17%, and that was 0.20% at March of 2016.

Second-quarter net charge-offs, annualized average loans was 18 basis points. Tom mentioned that most of that was one credit -- is $1.1 million that was already fully impaired.

Tax rate -- we had the early adoption of accounting standard 2016-09, which deals with the exercise of stock options. Previously, that had been recorded straight to equity. And with the new accounting standard, you record that to the income statement. So, we did an early adoption of that standard.

Part of that credit went back to the first quarter. That was $2.3 million, which reduced taxes. In the second quarter, we recorded $1.3 million.

So the tax rate in the second quarter was 28.6%, and year to date that is 26.3%. ORE expenses -- $41,000 in the second quarter, and they were $449,000 in the first quarter.

That is it for my summary.

From the standpoint of the stock option expense credit, most of you on the call know that a big part of our business model is -- [was hire the teams of bankers and extend in] stock options. So we have, over time, have had a fair amount of dilution from stock options. Most notably, since our IPO two years ago, we have had exercise of stock options that impact.

So this adoption of this new accounting standard is mandatory next year; it's optional this year. It certainly helps offset a little bit going forward of the stock option dilution that we have had because of our business model.

We have also -- I guess at current stock prices, we have some $12 million in future tax credits that will be -- we certainly can't -- it's like [loan offices]. You can't predict when those will occur. But over the next few years, we will have $12 million in future tax savings or tax credits that will come into play.

And certainly if the stock price goes up, the credits grow and the dollar amount goes up. So that is the amount that we have at current stock price today.

Typically, again, I said you can't predict. People exercise options either when they have money, or they might do it when -- if a stock price dips, or like it did certainly in the first quarter there was a fair amount -- there was a dip and then people exercised options. Also, people would exercise if they are running out of time or if they think the stock price will never go down again and will only go up.

So there are so many variables in there, you really can't predict. Other than you know that if a stock price dips, that people will exercise some stock options. That is probably a fair assumption to make. So it is sort of nice to say -- if our stock price goes down, we're going to have -- our earnings will be higher in the quarter following the lower stock price.

I don't know from a credit quality standpoint if there any questions there. Again, I mentioned last quarter, we see no trends in terms of industries on our watchlist. If you look at our watchlist, there is probably no trend there.

We have one energy credit; this is a $5 million total credit that's on there -- this quarter on a special mention, not on the substandard list. But otherwise, there are certainly no other -- and that is not a serious problem at all. It is certainly something that is going to be fixed.

We do not see anything on the horizon in our southeastern footprint that leads us to believe there is a serious economic slowdown. Certainly, none of our manufacturers are -- we don't really see the impact from any of our manufacturers.

That is a summary in 10 minutes or so of where we think we are. If you are new to our call, we don't read the release to you, like many companies do. We assume everybody on the call can read the release for themselves, and we'll be glad to answer any questions.

We want to start, Davis?

Amy, if you could please open the floor?

(Operator Instructions)

Brad Milsaps, Sandler O'Neill.

Tom, maybe back to your comments around efficiency. Obviously, you guys run a very efficient shop. It sounds like most of what you are talking about is aimed at getting more out of your existing producers. I'd be curious if you can expand on that a little bit

And then secondly, I know one of your big challenges this year was getting the new markets up and running as those would provide a little bit of headwind out of the gate. Curious where you are, are you where you thought you would be at the halfway point in terms of how much money you are either losing or making? Or just any update on your progress there, and when you expect to turn a corner in any of those markets if that has changed.

Probably from a loss standpoint, we are probably under where we projected. Bud, I do not want to misstate, but I feel certain that we're (multiple speakers).

I agree, a little under.

In probably every market, we're probably a little bit better than where we thought we were, Brad. I think a lot of our efficiency comes because we do not have many branches. It is not that we are fabulously efficient in the back office because we are probably pretty average in that respect. So it is purely because we only have 19 offices and we are on $5.78 billion banks.

So that is one thing. But from a standpoint of efficiency of our -- we had a directors meeting in May, and we have got a goal to get all of our production people up to a minimum size of their loan and deposit portfolio. We have got a long way to go to get there.

It is not just in our new markets. It is certainly, probably Birmingham, we have as much potential and improvement in Birmingham as any of our other markets. We have a couple of our smaller markets are the most efficient that we have. So that is what we mean by that.

In terms of, it is time to, people focus on production, Brad, I think is -- we do not necessarily -- we continue to look for new people. I don't want to say that we're not adverse to hiring new people, because we certainly continue to look at the hiring new people. We just want to get everybody as productive as possible in the Company.

How much capacity, if you can put a number to it, do you think you have with your existing base producers?

Bud, the number in May, it was around -- if we got everybody up to a minimum number that we are talking about, we'd be some $600 million larger than we are today. But look at it in real simple terms, we have 122 producers and they all brought in $10 million in loans and $15 million in deposits. That is $1.2 billion in growth annually.

So that is not asking a whole lot. The potential is there. That is something we are focused on, is trying to help everybody be more productive, and give them all the tools to be more productive as we go forward.

Okay, no, that's helpful. And then just one follow up. Bud, where would you -- I know it sounds like there's going to be a lot of movement with the tax rate. But short of a core number, would you still expect to be in that low 30%s type tax rate going forward, 33% or so?

33% is a good number, yes, without any additional credits it would be 33%.

Okay, great. Thank you, guys.

To add another variable there, Brad, is when we buy a store tax credit, that also can have a large effect on our tax rate is it did in the fourth quarter of last year. I think our tax rate dropped significantly because of the historical tax credits, but that is just another complexity that we add to the equation here.

Tyler Stafford, Stephens.

Congrats on a good quarter. I wanted to start on loan growth, and it looks like the C&I book was up pretty strong this quarter, north of 20% annualized. I was wondering if you guys were seeing any material change in the utilization rates out of the C&I book, or is that just fairly steady and the growth is still primarily from new credits and relationships?

From a utilization standpoint, it's staying pretty steady. It was 46.8% at June and 46.9% at the end of March, so it is staying right in that range.

That is an interesting question, Tyler, because I saw JPMorgan had substantial loan growth in their C&I book in the quarter. And you would tend to think that is in the committed lines, higher line utilization that, but ours has been steady. It improved as the recession ended, and it has been pretty static for the last few quarters (multiple speakers).

Okay. And then, Tom, can you frame up for us just in terms of the size of that top five borrower that paid off for that credit that paid off during the quarter?

It varied between $20 million and $25 million, the borrowings on a consistent basis. It was a seasonal borrower, but that is why we have to have new customers all the time. And the sale of that company, he'll own another company next year so he will be back at it.

Sure, okay. Then, Bud, just a question on the margin and the liquidity balance we should be expecting to see in 3Q. Could we see a slight NIM expansion next quarter from lower liquidity?

I wish I could predict that, because we talked about that in the first quarter, and we increased even more in the second quarter. It is not like we are not growing loans. Loans grew $200 million for the quarter, and for the year, loans have grown $323 million.

We just had a very good year so far from a deposit standpoint. I always hope it is going to improve, but liquidity is hard to forecast right now. Just very good deposit growth.

Maybe in that same vein, just one last one for me. The security balances, those have been coming down the last two quarters. Should that continue to come down in terms of the dollar amount of the securities book?

Yes, we would be lucky to stay. Rates have dropped so much, you really do not see that many muni deals, mortgage backs or full extensive. We're just trying to see if there might be a little bit of a market pullback before we jump in and buy a lot of securities. I would say at best, we will probably keep that balance about even.

Okay. Thanks, guys, I appreciate it.

(Operator Instructions)

William Wallace, Raymond James.

Maybe a quick follow up on the liquidity question. Understand when your deposits are going as they are, it is a good problem to have. But your fed funds purchase are up a couple hundred million year to date. Is there any strategy that you could utilize to maybe use some excess liabilities to take some liquidity off of the balance sheet, or do you need the fed funds?

From a net growth standpoint, fed funds purchase for the correspondence actually decreased second quarter on average.

The average balances, sorry.

Yes, they decreased $77 million for the quarter. So again, that is why it is so hard to gauge liquidity. You have got all of these different components and it is hard to tell which one is going to significantly drop or increase on a quarterly basis.

But, Wally, if we were stretched for capital at all, yes, we would start rationalizing some decision making from that standpoint. But we're not stretched for -- we have still got very ample capital to support the balance sheet. And we keep thinking, one of these days, rates go up, maybe the regulators are right, maybe there'll be some runoff in deposits, I don't think so, but they might be right.

I cannot say they are not going to be right. Certainly we'd never disagree with a regulator. To that point, we continue to build excess liquidity and we do not think it hurts anything, we think it gives us a lot of flexibility in planning for the future.

Okay, thanks. You mentioned in the press release, professional fees were up because of an accrual rate that's illegal. I assume that is related to Tampa. Are you fully accrued now for that lawsuit, and could you give us an update on the lawsuit if possible?

From an accrual standpoint, yes, we have accrued up to our insurance coverage limits. So there will be no more expense from our standpoint. Tom, I don't -- we really can't -- .

Wally, I cannot comment on pending litigation, it is not a smart thing to do. But we do have another lawsuit, something we inherited. But our policy is, if somebody says we're going to accrue, we're going to have to pay $100 in legal fees in the next year. My thoughts is go ahead and accrue that $100 right now.

If we know we're going to spend it and we need to accrue an account for it, so there were a couple of lawsuits, a couple of matters within the litigation that we've fully accrued. We think we have fully accrued for anything we might have to pay or settle or in any fashion thereof, if that makes any sense.

What was the dollar amount in the quarter what was referred to, what was that reserve?

For both loans, about $290,000.

Okay. and then my last question is maybe if you could give an update on growth in your newest markets, are you on track, ahead or behind? And I'm approaching it from the soft point of when you guys might think about the next market?

We've got a pretty long runway in the markets we are in right now. And we think -- we've had some opportunities recently, and we have decided to pass on a couple of opportunities just because we feel like we were pretty busy. We're getting great growth now in Nashville, this is our third year in Nashville.

You tend to hit your stride in your third year in a market. Mobile is hitting their stride, they are doing very well from that standpoint. And then of course, the newest markets are Atlanta, Charleston and Tampa Bay, and we think typically they lose money in the first year, they break even the second year, and they make some money -- they don't make a 2% return on asset in the third year, but they make a little bit of money, 0.5 ROA the third year is what our model is.

We are completely on track and probably slightly ahead of budget in most of those markets, and we feel good about where we are. But we think these new markets we've entered, they're big markets, it is not easy. If it was easy, everybody would do it.

I'm not suggesting it is easy to go to some of these large markets. It is a lot different than going to -- we opened in Dothan, Alabama, and pretty much a couple of months everybody knows who we are. That is not the same in Tampa Bay, Florida. Certainly, it's a longer runway to be successful in a bigger market.

So in a couple of prior conference calls, you have suggested that you're not -- you would like to continue to invest and grow in the markets that you are in. You're not really aggressively looking to enter a new market this year. Is that still a fair characterization, or are you guys actively looking into new markets?

I think it is, Wally. We're not dying to enter a new market this year. We certainly would, but we would not rule it out. But we're not dying to. That is a fair way to put it.

Okay, thanks, Tom, I appreciate it. That's all I had.

Thank you, Wally.

(Operator Instructions)

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