ServisFirst Bancshares Inc (SFBS) 2016 Q4 法說會逐字稿

Good afternoon, and welcome to the ServisFirst Bancshares fourth-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.

Thanks, Needa. 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, CEO, and Bud Foshee, CFO. They will open with a brief overview of the quarter and will take your questions.

I'll 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 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.

Davis, thank you. And welcome to all on our conference call. If you're new to our conference call you will find out that we don't 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 the rearview mirror here pretty soon, we won't dwell a whole lot on 2016 but kind of talk about the highlights of how we finished the year in [hope of] we can answer any questions anybody might have when we get to that point. I will -- the third-quarter loan growth was a bit muted, and I know I went to a couple of either investor conferences or I went to visit with an analyst on the road to see investors.

Everybody was 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 worst 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 is when we booked all the loans, and they are still on the books today; they were not just for year end.

In any event, 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. We ended up really, really good shape from a loan growth standpoint.

Post-election we did -- have sensed a great deal of optimism among our business and corporate clients. And so that is certainly is 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 certainly been strong in our entire footprint. We had a fantastic year of positive growth year over year, and certainly for the quarter it was strong as well.

From the standpoint of where our pipeline is, we typically start with a very low pipeline this time of year. And I always try to caution you not to put too much into our pipeline being 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 hire a whole department and give you a scientific pipeline, but I think most investors would rather us be a little bit less scientific and have a little bit less overhead and try to drive down our efficiency ratio a bit more.

From the number of producers, year over year we went from 116 to 125 producers which is a net addition of 9, but we added 19. 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, to have greater loans and deposits outstanding by officer, and set goals for all of them to reach.

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 the 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.

Thank you, Tom. On our margin, our excess liquidity, increased an average by $25 million in the fourth quarter. The margin decreased at 3.3% (sic - see press release "3.30%") in the fourth quarter. It was 3.35% in the third quarter. We had a fully impaired loan that we placed on nonaccrual 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 bit of an increase in our ratios from the third quarter, but still very good totals, both nonperforming loans to total loans and nonperforming 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 an historic tax credit that we booked in the fourth quarter. Without the historic credit the rate was 32.7%.

Year-to date-rate is 26.5%, and 32.5% without the historic tax credit and our stock option credit. The historic credit and the stock option credit totaled to $6.7 million year-to-date.

ORE decreased slightly from December 2015. It was $5 million at December 2016. ORE expenses, $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. The 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. I guess because of our lack of record deposit and loan growth, certainly we had great deposit growth all year but we didn't think we would have a great loan growth until the very end of the year. We normally would have about $2 million pretax and incentive accrual that would be reversed out, but we did not. So that's about $0.03 a share that's not added.

It's typically been in the fourth quarter of the last several years from a apples-to-apples standpoint. And we always say, we'd rather pay the incentive and have the loans then have the incentive accrual reversal and not make the loans and deposits. So, that's a good thing. We will open it now for questions.

(Operator instructions)

Ted (sic) Fitzsimmons, Hovde Group.

Hey, guys. Good evening.

Hey, Kevin.

Just had a question regarding expenses. I noticed when I was looking at things that I might consider non-core, I saw there 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 would consider non-core that should be getting pulled out when we think of this as a run rate?

Yes. Kev, this is Bud. We had about $600,000 in legal-related items in the fourth quarter that are nonrecurring. Those are settlements. So that will not be and any future expense that we will incur on those. 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 did not have the benefit of the reversal that you typically have in (multiple speakers) quarter?

Right. There was one -- the stock options that were exercised in 2016, there were some payroll taxes related to that. That was $177,000 in the fourth quarter, but that -- just a small amount of nonrecurring.

Okay.

If I remember in the fourth quarter of last year we reversed $2 million for incentives. And then the (multiple speakers) of 2015. The expense associated -- historic tax credit, is it broken out separately?

Yes. There's $1.1 million write-down, Kevin, on the tax credit. And that is in other expenses. You have to show that above the line.

Why you can't (multiple speakers) that makes no sense to a normal, logical person, but that's the accounting rules. I think it's low income.

Low income credits you can net, but that's the only one. And I don't know the logic to that one.

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

Correct.

Okay. (Inaudible).

We had one a year ago.

Yes. We have one in the fourth quarter of last year I thought you meant in -- you mean in 2016? The only thing we've really had tax credit wise before the fourth quarter in 2016 was the stock options.

Okay. Okay. But in terms of thinking it through for a run rate going forward it sounds like this $600,000 of legal, this $177,000 of stock options exercised and this $1.1 million write-down, which is another, driving up the bulk of that other, right? And then I guess in first quarter you get some seasonally higher payroll taxes, or FICA, right that affect that?

Well now, we have accrued for all the payroll taxes related to incentives. So that won't -- when we payout incentives, that won't be an additional expense. It won't spike up in February.

Okay. Okay. I just wanted to follow-up on credit. You guys mentioned the loan getting put on nonaccrual. And I noticed in the release you have the loan 90 days past due that is paid current subsequent to year end. Anything, any common thread between those, or any industry more broadly, Tom, that you're feeling a little concerned about going forward?

No. The only common thread is poor management, Kevin, that's the common thread with every loan that's on our watchlist pretty much. It's just poor management.

There is no specific industries or -- certainly the ones you expect to turn down first in a recession, we're not seeing any of those on the watchlist at all. Automotive [theater] doing great. That would be an early warning sign to me, is automotive, and they're all percolating along very nicely.

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

Yes. We don't -- no imminent announcements. We talking to people all the time, at least once a week we talked to somebody.

We are very selective. We've passed on a number of potential new regions in 2016, actually 11 we passed on. We are very particular about where we go and who we associate with. And we when we pick a team we want it to be, certainly pretty much a really good deal for the shareholders.

Okay. All right, great guys. Thanks.

Thanks, Kevin.

Thank you, Kevin.

Brad Milsaps, Sandler O'Neill.

Hey, guys.

H, Brad.

Tom, just wanted to follow up on Kevin's last question a little bit. You mentioned when you are running through your stats around the number of lenders you hired this year, it sounds like that's a gross number of 19. Sounds like you didn't want to necessarily add a lot more bodies, you're just looking for greater efficiency.

I'm kind of curious what do you think your capacity of your 125 lenders would be at this point, how much runway you have? It sounds like you talk to a lot of different groups last year but did not get comfortable with any new regions. Any additional color around the runway there you got the with that group of 125.

As I tell our people all the time, we just closed $10 million in loans and $10 million in deposits per producer. That's $1.25 billion we grow a year. We're not growing $1.25 billion a year, so obviously we're not hitting our potential in terms of the numbers.

Obviously, in terms of how that grew, if you think that $1.25 billion and the top 25 probably do 80% of the production at this point in time. The point is, we want the other 100 to have, certainly not -- they don't certainly need to be in the top 25, just have some ice production.

Brad, I won't say that we're not looking for -- we're looking for all the good people we can hire. So we are looking all the time. I wouldn't say we weren't looking to expand in 2016, but we wanted teams where we thought that it would be, again, there's no guarantees but we want as close to a guarantee for the shareholders as we can possibly get without it -- certainly it's not a scientific industry.

And we talked to people in 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 the profile of people who we are looking for. And we could add 50 right away.

We have a number of people that are going to 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. We will see some increase in that number as we go forward in 2017, Brad. We will add to payroll in 2017, we hope to.

Sure. That's helpful. And, Bud, maybe on the margin, maybe a little bit more color on what you are thinking there. Obviously the excess liquidity is hurting 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 deposit calls?

Looks like you've held them pretty flat for the last few quarters. Just what you guys are thinking around the last, the Fed increase in December and how the margin is going to respond in 2017?

Yes. I think, like in the fourth quarter, loans grew $280 million. And like Tom said, a lot of that went on the last couple of weeks of the month so that the full impact of that will show up in the first quarter.

Liquidity, just from month end, September to December, decreased. A lot of that decrease did not happen until the last two or three weeks of the quarter. It's going to be the first quarter for it to impact.

I can see margin improving, just based on loans improving. That's the biggest thing.

And we had such a big year. Deposits grew $1.2 billion, which is a little bit above average from that standpoint. So 2016 was just very good your from a liquidity standpoint. Hard to predict. I can't tell you when the excess liquidity is going to run out, but we can see positive trends come, especially with the loan growth in the fourth quarter.

He asked about pressure on deposit cost, too.

We really haven't seen that. We have outcome meeting tomorrow.

We've got to look at what were going to do with the next Fed rate increase on our special rate deposits. We did not do anything with those deposits at the last Fed increase. I think that's the key, what we will do as rates go up.

And I don't have a great answer today. We have to just have to discuss that tomorrow and see what happens.

We've been very competitive, though, on where our rates today. Our stated rates, we are very competitive, Brad, in the market. Certainly the big national banks, countrywide banks, are not -- they've not raised.

We are still very competitive with them. The people you see in the market that are moving rates up a bit are some of the regional type of banks, but not the big regional type banks.

Got it. And maybe one final housekeeping question for Bud. Back to Kevin's original question on some of the nonrecurring stuff. In your comments you mentioned a net number of $307,000 I guess to the bottom line. Can you run through 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 pledged on nonaccrual, that was $225,000 of interest reversal. The payroll taxes on stock options exercise was $177,000. And gross, that should be about $460,000 which nets to $307,000.

Okay, perfect. And then the other expense of $1.1 million is offset with the $784,000 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.

Okay. Thank you very much.

Thanks, Brad.

(Operator Instructions)

William Wallace, Raymond James.

Good evening, gentlemen.

Hi, Wally.

Maybe talk a little bit more about margin, if that's okay. I'm curious if since the Fed moved in December if you guys have changed your loan pricing at all, (inaudible) the change competitively?

Well, prime went up. So it certainly LIBOR has crept up, and from a standpoint -- from of a loan pricing standpoint, there's 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, Wally, 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. We wish we did. I don't know if I'm answering your question, Wally.

Not very specifically. 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 the Fed move 25 basis points. I can't see -- I don't see any change, really, on the loan yields given the move in LIBOR during the quarter. I'm wondering if we will start to see loan yields improving and maybe going up starting in the first quarter?

The Fed increase was in December. You wouldn't really see the loan yield go up that much in the fourth quarter.

No, obviously, but anything priced on LIBOR. LIBOR moved early in the quarter.

Right. As we've stated, we kind of had a plan to, with that first 25 bp increase, to try to hold onto most of that. We think we will. That will at about $0.03 annually to net income, and any subsequent increases we want it to be accretive to net income, certainly. Will it be $0.03? No, but we think there 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, what else, Wally, on that could we try to -- ?

I guess, then, do you have floors that are impacting the ability to get the benefit from rate hikes?

I guess to an extent. It would be more than $0.03 per share per annum on that first 25 bp, but more specifically -- .

Yes. We factored in the -- when we did the forecasts with the Fed increase in December we took into account all the floors. And also -- it's been a long time since we made a loan with a floor, so we still got stuff bleeding off from like 2009 and 2010 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 was around sticking about the tax. I believe you said you had $21 million of unexercised options. In fact, there was a $21 million of tax benefit.

Right, based on the year-and stock price. Right, tax (multiple speakers).

Thanks, okay. All right.

Tax credit, yes.

How is the expiration of those options -- are those options all expiring this year or next year? 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 stocks hold where it is?

There is a zero in 2017 that has to be exercised. But yes, I would say over the next two years you would see more of that. I don't have a complete schedule in front of me, but I know there's not in 2017 that expire where people have to exercise.

There's no way to exactly model it, as you well know, but certainly over the next 2017, 2018, 2019 is when most of that's going to come into play, the vast bulk of it, just in terms of going back to historical stock prices being a good bit lower. I guess we did our IPO in May 2014, so use that for your anniversary will be coming up here in May.

Everything else, Wally, it hadn't happened since the election, but if you had a big dip in the stock price, that's normally when people jump on it and get the lower stock basis. Some people'll probably wait and see what happens to capital gains tax, if there's going to be any relief there.

Okay. Appreciate that. And then the last question is just around capital. Your PCE, I have at 8% in third quarter and the leverage at 8.2%.

Are you guys at a point where you can self-fund now? Do you see more pressure on the capital shares in 2017?

From a bank level, which is really where we focus on, is on the leverage ratio where we have to keep a minimum of 8%. We were at 9.06% at the end of the year. And it's staying 8.8% to 9% range. And that's really our focus more from a capital standpoint. We don't see any issues where we have to do anything in the immediate future to 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. And we got the ability to do some sub-debt. We've got room to do it and also we sell it ourselves when we need to do it, some sub-debt.

Okay, yes. Right, right. Okay, good. That's helpful.

All right, guys. I appreciate your time. Thank you.

Thanks, Wally.

If 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.