ServisFirst Bancshares Inc (SFBS) 2016 Q3 法說會逐字稿

Welcome to the ServisFirst Bancshares third-quarter 2016 earnings conference call.

(Operator instructions)

Please note, this conference is being recorded. I would now like to turn the conference over to Davis Mange of Investor Relations. Please go ahead.

Thank you, Nicole. Good afternoon and welcome to our third-quarter earnings call. I am Davis Mange, Investor Relations Manager. Leading today's call is Tom Broughton, CEO, and Bud Foshee, CFO. They will open with a brief overview of the quarter and then take your questions. I will now cover our forward-looking statements disclosure and then we will 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 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 Bud Foshee.

I'm going to make just one comment before Tom starts. On the third page of the earnings release, at the top where we are talking about income tax expense, on the excess tax benefits, the $421,000. It should read third quarter of 2016 and the amount $1.2 million instead of $421,000.

The year-to-date number of $4.7 million is correct. So I just wanted to clarify that before we get started. Sorry.

Thank you, Bud This is Tom Broughton and good afternoon to all of you. Thanks for joining the call and I will try to, as always, if you have been on the call before, I won't read to you from the press release. Assuming everybody on the call can read, I will just try to hit a few highlights.

We were pleased with the quarter. Never satisfied, but we were pleased with where we ended up for the quarter. Talk about loan growth to begin with, it's probably a little bit lower than we expected. The loan growth was a little bit lower than we'd expected, for the quarter. The greatest percentage growth in loans came in Nashville, Atlanta, in Charleston. And the largest dollar volume growth came in Birmingham.

From a deposit growth standpoint, it was a really strong quarter. From deposit growth continues to drive new core relationships, in which were very -- we could not be more pleased with where we are from a deposit growth standpoint. The best growth from a percentage standpoint was in Nashville, Charleston, Atlanta and Birmingham. And, from a dollar standpoint the best growth was in Birmingham and Nashville.

From the loan pipeline standpoint, I will cover that,. The pipeline -- we hit an all-time record one year ago. And then it dropped at year end, of course, due to we have so many closings in the fourth quarter typically and then, we hit another record high in the loan pipeline at March 31 and then a little drop in June. But now we're -- again our loan pipeline is at a record level, June 30, 2016.

So, it's the highest. The loan pipeline is the highest it's ever been and again, I will say that I don't -- it's not a scientific calculation. I can't say that there's necessarily 100% correlation between high pipeline and when loans close.

But we see really good activity there and we are encouraged with the size of our pipeline today. From a production standpoint, we added four net-new loan production people in the quarter, typical for this time of year with 126.

We actually hired six new ones and two departed. So we are pleased with where we are. And again, we are focused on improving the productivity of all of our production people and the number of loans and deposits outstanding by officers is something we are striving to improve.

We have made good progress in the quarter but, outlined it in the press release, a comment about we have reached profitability in Nashville, and pretty good profitability. And our losses in our three new markets are declining pretty rapidly in Charleston, Atlanta and Tampa Bay. So we're pleased with that.

So, with that I'm going to turn it over to Bud to go over the financial highlights of the quarter.

Thank you, Tom. The margin, our excess liquidity, increased by $270 million in the third quarter because our margins decreased from 3.51% in the second quarter to 3.35% in the third quarter. Average growth in the third quarter, loans with $164 million, deposits, $394 million, and fed funds purchased, correspondence decreased by $69 million.

And net growth in the third quarter, loans was $118 million, deposits $416 million and fed funds decreased by $76 million. And on a year-to-date basis, loans have grown $441 million, deposits $819 million and fed funds have decreased $8 million. Excellent credit quality nonperforming loans to total loans was 0.14%, it increased slightly from June. June was 0.11%.

Nonperforming assets to total assets was 0.16%, and that was 0.17% at June 30. Third-quarter net charge-offs, annualized average loans was 13 basis points. We had a $1 million charge off related to a construction company credit that was already fully impaired. Tax rate was 28.1% for the third quarter, and without the stock option credit of $1.2 million that rate was 32.4%. Year-to-date, the rate is 27% and 32.9% without the year-to-date credit of $4.7 million.

ORE. We were at $6 million in September of 2015. We're at $3 million at June 30 -- I mean 9/30/2016, so we have cut that in half. ORE expenses did increase some in the third quarter, $178,000 in the third quarter versus $41,000 in the second quarter. And then from pending litigation we had a total accrual of $400,000 in the third quarter for pending litigation.

And, that concludes my summary. Now we will take questions.

Thank you.

(Operator instructions)

Kevin Fitzsimmons, Hovde Group.

Good afternoon, guys.

Hi, Kevin.

Tom, I was just -- if I could go into the loan growth subject. You said on one hand it appeared to slow a little in the third quarter, but then you said, and we did see that the end of the period linked quarter growth was slower than average balances.

But at the same time, you say the pipelines are at a new record. So is it really just about the quarter-to-quarter timing of closings and not really -- you're not really seeing any kind of slowdown out there in the market orr any kind of deliberate pullback on your part?

No. We lost a couple of credits for -- on rate and terms that we are not willing to. We have got to have discipline on rate and terms of loans. So, we lost a couple of credits and that's okay. That's just part of the -- you don't how far we are the cycle. Nobody knows how far along we are in the cycle.

If you are far along in the cycle, you don't need to be giving on rate and terms because you'll be sorry, if you are the end of the cycle. So, we try to be careful about that and thoughtful about what we do and how we do it and that's a rambling comment, Kevin. But from the standpoint of -- our loan pipeline would not be at a record high if we probably had a lot of closings during the quarter. That's the thing. A lot of things just get pushed back, and I well remember in my early years at AmSouth Bank, I had a boss that thought we could turn loan demand on and off like a spigot.

He'd say, all right we need more. No, no, stop. Well, it's not that simple. It's not exactly -- it doesn't always happen in stair step. I'd love for loans to increase by a percentage -- a standard percentage increase each quarter. But, we don't, Kevin.

We don't see -- I don't know, everybody looks for a reason when sometimes there's just not a reason for things. I can't imagine a business person not making an investment because they are worried about the election or -- you hear that, but that just doesn't -- that sounds a bit illogical to me in terms of, if you're a manufacturer and you can sell what you make, why would you not make an investment today? That's a little bit illogical. Did I answer your question, Kevin? Or do you have a follow up to it?

Yes. That's perfect, Tom. Just one follow-up, the subject of regulatory CRE concentrations is getting a lot of attention, a lot of airplay these days.

You guys are mainly a C&I lender, so I'm just wondering how do you look at this issue? On one hand, I could see it being an opportunity if you all have low CRE concentrations and people are pulling back and the terms are better, you could, if you wanted to, dive in there a little more.

And on the other hand, if a lot of these CRE-heavy banks are now, as a necessity, getting more involved in C&I, it could drop down. It could hurt the pricing for you all. Some I'm just wondering how you all look at that threat and opportunity from that issue.

I think you are correct on both counts. You see people -- the regulators, usually if a bank is good at CRE they kind of need to stick to, in my opinion, they need to stick to CRE. You do what you're -- you play to your strengths.

But we are seeing it. We talked about our board meeting this morning at length of the subject, we see CRE. Was it last week, Clarence? We saw a deal where we're getting better pricing on a CRE deal because there are less people out there in the market. And we are looking for, like everybody else, good solid projects with good sponsorship.

But at the same time you see, on equipment financing deals pricing, on a good clean deal, the pricing is very, very thin in some cases. And we just pass on it.

So, I think you are correct on both of those things. Or, we see it as opportunity and we see it as threat. Both, Kevin. I couldn't disagree that there is a -- there's some truth in both of those possible outcomes there.

Okay, great. Thanks, Tom. Thanks, Bud.

You're welcome, Kevin.

Brad Milsaps, Sandler O'Neill.

Hey, guys.

Hi, Brad.

Hey, Bud, sorry if I missed it in your prepared remarks, but just curious on the deposit growth, how much is coming from the correspondent bank channel and how big is that as a percentage of the total deposit base at September 30?

So you want to know the fed funds purchased and the [DAs]. Is that what you're --

That's right. Yes. From the correspondent group.

Okay. From a growth standpoint, deposits, correspondent went up $68 million, for the quarter and fed funds decreased by $76 million.

So it was basically a wash?

Yes.

Okay. And, can you just maybe expand on the deposit growth you did see? Where you're seeing success and what sources that's being -- any particular area that might be chunkier than another?

Brad, it's Tom. It's just all operating accounts for middle-market companies for the most part. And the growth came from -- the biggest dollar growth was, by far, Birmingham.

But from a percentage standpoint, Nashville, Charleston, Atlanta did really well along with Birmingham in terms of -- if you look at the Birmingham annualized growth rate for the third quarter was 46%, which is pretty strong since that's our largest market that we serve. So, I don't know if I answered your question.

Certainly it's not in CDs or certainly not in -- we don't have any purchased broker deposits on the balance sheet.

Got it, got it. No, that's helpful. And then just quickly on the income statement, I think you guys talk in the release about a new credit card product. Is that kind of the big driver of some of the other fee income line items this quarter?

Yes, definitely. That number continues to increase, purchase card has gone over real well because really the service charge income is pretty stable. So, it's credit cards more than anything that's driven that.

Okay, great. Thank you guys.

You've got three. You've got credit cards, purchase cards and we also do a program with the correspondent banks where they get part of the profit off that. So it's really three components that make up that credit card total.

Okay. Great, thank you.

Tyler Stafford, Stephens.

Hey, good afternoon, guys.

Hey, Todd.

First one for me, just a follow-up to Kevin's question around loan growth and the competition. You had mentioned earlier around rate and term, the C&I growth was fairly muted this quarter. Is that pressure more pronounced out of the C&I portfolio that you are seeing or is that just kind of way the chips fell at the end of the quarter, around the C&I growth?

Yes, the credits we've lost in the second, third quarter were C&I credits. And again, the banks that are heavy on real estate trying to please the regulators, doing some thin pricing and thin sponsorship, C&I credit so, the regulators -- be careful what you wish for. Your wishes may come true. So, that's the case.

Okay. And then, Bud, I know we tried to pin you down in the past around the liquidity going forward. And any outlook or color you could give us on the liquidity for 4Q?

No, because I would've probably been wrong in every quarter when I told you it might decrease and it went up $270 million this quarter. It's just been a very good -- we've had a good year, for the loan growth standpoint we're up $441 million, deposits is just almost double that. They're at $819 million. So it's hard to say when that will reverse.

We will need that liquidity one day. So, it's not a concern from our standpoint. Short-term margin compression but that's really all that relates to.

Yes, fair enough. And what about on a normalized tax rate we should expect to see?

I would still say 33% without any of the stock-option credits.

Okay. All right, that's it for me, thanks.

And adjust to add another comment. We've had a couple -- some C&I companies sell where we have had pretty good outstandings this year. So none in the quarter, but certainly on the year-to-date basis that's hurt a fair amount.

And we take a long view. All these people are selling companies and they get $50 million, $100 million, they're going to be back in business doing -- they're going to buy another company and so we'll be right back in business with them again. So we don't worry about it too much. It certainly hurts in the short term but that's just kind of part of the plan.

(Operator instructions)

William Wallace, Raymond James.

Good evening, guys. Maybe just piling on to the deposit questions some more. I mean the deposit growth is so strong. And looking at the average balances, your money market deposits are up about $0.5 billion or so on an average basis year-to-date. And the costs are coming up too. Are you running specials in that product to bring deposits in or -- just curious why the costs going up? It sounds like you are not chasing it.

We have some special -- I think we covered the second quarter. We have about $1.2 billion or so, they're what we consider special rate deposit accounts and we're paying 68 basis points on those funds so that does -- it drives up the total cost a little bit. But that's stable funding, just was some other things going on with the other banks. We had to raise the rates on certain accounts. Large accounts.

Wally, it's Tom. When these companies sell, they put the money in the bank. So, we end up with -- it's a flip from a loan -- a net loan amount to a big deposit amount, so we have some -- that's one thing that's driven our excess liquidity this year is companies selling out and they stick the money in the bank.

Which we are glad that they do. We are glad to have them. But, we're not doing any great specials or playing up at this time.

So the special rate funds are customers of the bank on the loan side that had a liquidity event that asked for a bit higher rate basically? Is that a fair characterization of what you are saying?

No. These are loans. These are deposit accounts that if we had known rates would stay so low for so long, we would've done something about them a long time ago. But we all keep thinking we will have a rate increase one day soon. But these are all just -- these are normal rate. I can't answer the question of why the cost is going up.

But it's not through paying up on when companies sell. They just putting it in at normal posted rates. We have no reason today to pay up at all for funds on any basis.

Okay. On the loan side you mention (multiple speakers).

Go ahead.

No. That's okay. On the loan side, you mentioned six total hires, four net on the production side. Were those focused in any specific market or are they spread around?

Spread around. We don't have a -- it's not a particular team. They were one in Birmingham, one Huntsville, correspondent banking, Tampa, Dothan and Nashville. So, it's spread around.

Yes. Okay. And then, maybe could you -- would you be willing to update us on when you expect you might breakeven in Atlanta and Charleston?

We got real close in September.

In both markets?

Yes. Certainly by year end I would think we would be pretty close to breakeven there. We've got to be very close.

Okay.

Just the way they've grown in the last couple of quarters I think that's a possibility.

Okay, great. And then, on the tax credits last quarter, you said there's -- I think you said $12 million that were future tax credit related to the stock compensation. So I take that $12 million and I just subtract the $1.2 million this quarter and that's how we keep track of what's left?

Right. I think we were assuming $50 stock price when we came out with that $12 million number.

Okay.

So if the price goes up, the amount goes up.

Yes.

That was -- I just wanted to clarify that was based on a $50 stock price.

Okay, right. And then, the other aspect is just the timing of when options are exercised, is that correct?

Right. Hard to tell. Sometimes you get to the end, you have to exercise and if there's ever a pullback we seem to have more, from a tax standpoint, people who exercise from a tax standpoint.

I think you could make an assumption that -- by a year you could make an assumption that 25%, 30% of that might be done for a year but you certainly can't do it by the quarter like you do your models. I realize that, that's not very helpful comment to you.

No, it is. It's just a question of whether or not to try to model it on a GAAP basis because it's so significant. Okay. And then, I would like to maybe -- my last question is just maybe talk a little bit about the legal accrual. Is that related to the Tampa lawsuit?

No. Wally, when we -- if somebody says, I intend to sue you, whether there's litigation or not, we try to immediately make a provision for what we expect to spend in legal fees, up to our deductible. So, that's where we go with that. And we'd had one with -- a pending, it was a threatened lawsuit that we agreed to settle.

We agreed to settle it for less than we had provided during the quarter. So we felt good about our -- but it's not a meaningful amount. We are not talking about a meaningful amount of litigation or resulting in any cost to the shareholders of any significance, Wally.

So there was one new potential threat of a lawsuit in the quarter. You accrued $400,000 and then settled it at less than that?

Well, one was a continuation we had made an accrual for $175,000 in the second quarter. Increase that by $100,000 and the other one a settlement. It did settle after the quarter closed. But of course, we don't have the legal expenses either so we feel like we made an adequate accrual based on settlement and pending legal.

Okay. I appreciate the color there. That's all I had. I appreciate the time, guys. Thank you.

Great. Well, thanks, everybody, for joining the call. This is Tom. I don't have any other comments. Bud, you have anything else?

I don't have anything else. Thank you all.

Thank you, everybody, for joining us. Good day.

Thank you for attending today's presentation. This concludes the conference. You may now disconnect.